Good morning, ladies and gentlemen. Welcome to the Extendicare Inc. fourth quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Jillian Fountain. Please go ahead, Ms. Fountain.
Thanks, Lorie. Good morning, everyone, and welcome to Extendicare's 2018 fourth quarter and year-end results conference call. With me today is your President and CEO, Michael Guerriere, and Elaine Everson, your Vice President and CFO. Our 2018 year-end results were disseminated yesterday and are available on our website, along with the supplemental information package. The audio webcast of today's call is also available on our website, along with an accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available from noon today until midnight on March 15th. The replay numbers and passcodes have been provided in our press release. An archived recording of this call will also be available on our website. Before we get started, please be reminded that today's call may include forward-looking statements regarding our future operations.
Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the Securities Commission and suggest that you refer to those filings. As we discuss our performance, please bear in mind that all figures are in Canadian dollars, unless otherwise noted. With that, I'll turn the call over to Michael.
Thank you, Jillian, and good morning, everyone. As you know, Extendicare operates across the spectrum of seniors care in Canada to meet the needs of the growing seniors population. On slide three, you can see each of our brands that together span the continuum of seniors care. We won't be able to meet their needs by using the same approaches we always have. The recent announcements in Ontario make this clear. We're moving toward a world where integrated care centered on the needs of the patient is the new standard. Integrated service providers like Extendicare will have a distinct advantage in meeting these new requirements. A one-stop shop for care across the continuum is increasingly what our customers want. We will need some innovative approaches that leverage new technology to help seniors thrive in their own homes longer before needing assisted living or long-term care.
I believe Extendicare is uniquely positioned to bring those innovative solutions to market to cover the full spectrum, from home care to retirement to long-term care. Combined with the steady expansion in this market, driven by demographic fundamentals, there is a substantial opportunity to build shareholder value. Since our last call, our Bolton Retirement Home has opened, and we added 6,000 third-party residents to our Silver Group Purchasing customer base, which you are going to see across the bottom of the slide. If you move to slide four, you can see that our results in the quarter continue to show the impact of our technology implementation in the home care division. While revenue growth was higher than average for the year, NOI was dragged down by expenses in our home care division. That, and higher maintenance CapEx, was responsible for the notable reduction in AFFO for the quarter.
Growth in long-term care, retirement, contract management, and group purchasing were all strong, tempered by flat revenue in the home healthcare operations. Moving to slide five, we can see the home care details. Revenue was flat from the year earlier quarter. This is consistent with the stall in growth that we have experienced in this business over the past two years. In order to address this situation, we are upgrading our technology across the business. In the last call, I reported that we were 20% complete in that effort. Progress since the last call has resulted in branches delivering 53% of our care volume are now using the new system. In response to your questions about the cost of the implementation, we have disclosed the system cost as well as the budget for 2019 on the project.
We spent CAD 3.3 million at the EBITDA level in 2018 and plan to spend CAD 5 million this year to finish the job. These costs will drop off in 2020, helping to boost margins. More importantly, we will be able to leverage the system to capture more revenue, improve efficiency, and drive higher margins. Better scheduling will also allow us to offer more hours to our workers, thus increasing their weekly wages. We believe this is key to continuing the reduction in turnover that we have been experiencing in recent months. I note that total hours of care delivered in Q4, although they are down year-over-year, have increased by 1.5% over Q3. That is the first quarter-over-quarter increase in volume that we have experienced in two years. As our reforms take root in more offices, we will see increasing volume gains, followed later in the year by margin expansion.
Note also that our current executive leadership team at ParaMed is leaving at the end of the month. We are in the midst of recruiting new leadership for the division to continue the retooling of the business. It will take most of fiscal 2019 to complete the implementation. This work is disruptive, causing a transient slowdown in activity in each office that we implement. Taken together, these factors will result in profitability headwinds for the next three quarters. Let's turn to long-term care on slide six. We were pleased with our long-term care performance in Q4, with revenue growth of 3.8% and NOI up 2.5% year-over-year. Occupancy experienced some pressure due to a variety of local factors that have resolved since the end of December. On the redevelopment front, as previously announced, we are proceeding with the redevelopment of Stittsville, near Ottawa, and Sudbury. Both are 256-bed centers.
We plan to break ground on both of them early in 2019. We were granted 158 new long-term care beds in connection with the redevelopment of three of our other projects in Sault Ste. Marie, Sudbury, and in Peterborough, which are all still in the government's review process. We continue to be encouraged by the emphasis the new Ontario government has put on new long-term care beds to reduce ALC pressure in acute care hospitals. We will continue to apply for allocations of new beds to leverage the redevelopment of our older centers and to initiate new campus of care opportunities. In all, we have 21 long-term care centers in Ontario to redevelop, and we continue to work collaboratively with the Ministry of Health to move all our projects through the approval process.
Each project is unique. Therefore, the costs associated with redevelopment can vary widely, influenced by factors such as size, location, local development fees, market demand, construction cost, and availability of land. At this time, a number of projects in our queue are not meeting our internal thresholds. We will continue to explore options to improve the economics. We will exercise discipline in launching these projects, ensuring that each meets our investment return criteria before we proceed. Turning to our Esprit Lifestyle division on slide seven, revenue is up 48.2% over the prior year quarter, and NOI is up 126% due to higher occupancy in both our existing properties and our new communities.
Our stabilized properties maintained 94.8% occupancy at the end of the quarter and our lease-up properties, of which there are four, Yorkton Crossing, Westpark Crossing in Saskatchewan, Cedar Crossing, and Douglas Crossing in Ontario, reached 80.6% occupancy by the end of the quarter. We've been very pleased with the performance, fill-up pace, and yields for our Ontario retirement communities. However, our Saskatchewan acquisitions have not met our expectations, as they have been impacted by local market factors, including new competition. There have been pressure on monthly rates, as well as challenges achieving stabilized occupancy levels. Given their current performance and considering the market and its likely impact on future performance, we've determined that it is appropriate to record an impairment charge on Riverbend, Westpark, and Yorkton. We took a charge of just under CAD 16 million to reflect our changed expectations of these investments.
We are very pleased with the continued growth of our retirement operations through acquisition and development. After year-end, our Bolton site opened with an additional 112 beds for lease-up. Barrieview's opening is delayed a few months but will open in Q4 this year. Bolton and Barrie are anticipated to deliver NOI yields of 7.8% and 8.2%, respectively. You can see these on slide eight. Following completion of these two communities, our Esprit platform, which we launched two and a half years ago, will have 11 communities with 1,052 suites. We are using the Barrieview Retirement Community to develop a smart retirement home concept, which we intend to be a prototype for future projects.
We are exploring technologies that will enable independence by helping connect our residents with the information they need to stay well longer, as well as offering them technologies that will help them to connect more effectively with their healthcare providers. We anticipate we will be able to use the same technology platform in our home care division to support seniors in their own homes as well. We are working on additional projects, two of which are expansions of existing communities. We are planning to double the size of Empire Crossing in Port Hope. If all goes well, we will begin construction on the expansion this year. We are also pursuing expansion of Lynde Creek, which features 3.7 acres of surplus land ideal for an independent living development.
On the next slide, you can see that revenue from our Extendicare Assist management and consulting services team and our Silver Group Purchasing Partner Network increased 12.8% over the prior year quarter. NOI growth of 20.5% resulted from margins of 61.7%. SGP continued to sign new contracts after the quarter end, bringing the total to 57,000 residents by the end of February. We continue to experience increased demand for our day-to-day management services, and clients are contracting with us for assistance with their redevelopment efforts, where we provide analysis, application support, and development services. With the recent announcement by the Ontario government that it plans to add 30,000 long-term care beds over 10 years, we see tremendous growth potential in this side of the business. With that, I will turn it over to Elaine to provide more details on the financial side. Elaine?
Thank you, Michael. Good morning, everyone. I will provide you with an overview of our consolidated results, beginning with the NOI contributions of each of our business segments. Turning to slide 11, our NOI generated from Canadian operations this quarter was CAD 32.6 million, down CAD 700,000 or 2.2% over the same period in 2017. As you can see, we benefited from CAD 1.3 million incremental NOI from our retirement living operations this quarter, resulting from the improved occupancy as well as the contribution from the acquisition of Lynde Creek that we completed earlier this year. Our long-term care division and our management consulting and group purchasing operations together contributed an additional CAD 1.1 million resulting from LTC funding increases and the increase in the number of clients served in our Assist and SGP business. Our home health operations contributed CAD 7.9 million of NOI, a reduction of CAD 3.1 million over the same period last year.
As Michael just indicated, we have been experiencing a decline in volumes compared to last year, this quarter saw a reduction of 2.4% from the same quarter last year. Despite the lower volume, we experienced increased labor costs this quarter. Similar factors impacted the NOI from Canadian operations for the year. We experienced a CAD 3 million or 2.3% increase in NOI despite the CAD 5.8 million full-year shortfall in our home care operations. Finally, our NOI margin for Canadian operations was 11.3% for the quarter, but finished the year at 11.9% compared to the 12% for the 2018 year. Turning to slide 12 and our consolidated revenue, NOI, EBITDA, and AFFO. As I just outlined on slide 11, NOI from Canadian operations for the quarter was lower by CAD 700,000, on a consolidated basis, the NOI reflected a total decline of CAD 2.7 million.
Consolidated NOI includes income and costs related to the runoff of our remaining self-insured liabilities in our captive. The lower level of investment income realized in 2018 versus 2017 was the other significant driver to the NOI reduction quarter-over-quarter. The investments that are held in the captive to settle self-insured liabilities and as a result of the earnings of the captive, do not impact AFFO as settled claims are funded by its cash or investments. Increases in our administrative and lease costs resulted in our adjusted EBITDA of CAD 22.5 million for the quarter, compared to CAD 27.5 million in the prior year, and included costs in support of the ParaMed operational system rollout, a prior year favorable premium adjustment, as well as higher compensation and professional fees.
For the full year, the consolidated NOI of CAD 134 million was similarly impacted by the lower captive income of CAD 4.8 million, which offset the increase in the Canadian NOI of CAD 3 million I just spoke about. Higher administrative and lease costs of CAD 1.6 million year-over-year were largely impacted by approximately CAD 1 million in support of our system implementation, bringing the consolidated change in adjusted EBITDA to CAD 3.4 million and a margin of 8.4%, down from 8.9% last year. AFFO this quarter was CAD 12.6 million or CAD 0.142 per share, and for the year was CAD 57.8 million or CAD 0.653 per share. In comparison to Q4 of 2017, AFFO was down CAD 3.1 million, reflecting the lower adjusted EBITDA, excluding the impact of the captive and non-cash share-based compensation, plus an increase in our maintenance CapEx and current income taxes.
For the 2018 full year, AFFO declined by CAD 700,000 and was primarily impacted again by the improvement in adjusted EBITDA, lower current income taxes, but higher maintenance CapEx. We expect our effective tax rate on AFFO will be in the range of 17%-19% for the 2019 year. Our maintenance CapEx was CAD 12.7 million this year, which was about 1.1% of revenue, and we expect CapEx to be in the range of CAD 10 million-CAD 12 million next year. Our payout ratio for the year was 73%, unchanged from 2017. Turning to our financial position on slide 13. Our total long-term debt at the end of the year was CAD 544 million, relatively unchanged from December of 2017, with debt repayments offset by construction loan draws and a new mortgage on one of our retirement communities.
At December 31st, our weighted average interest rate was 4.9%, and the weighted average term to maturity on our debt was seven years. Our debt to gross book value was 48%, EBIT to interest coverage, relatively unchanged at 3.2 times. We ended the year with cash on hand of CAD 66 million, representing a decrease of CAD 60 million from the end of last year, primarily attributable to the acquisition of Lynde Creek in the second quarter, from gross capital expenditures, purchase of common shares under our issuer bid, and costs incurred in connection with the refinancing of our convertible debenture earlier this year.
As Michael mentioned, one of our priorities is the redevelopment of our long-term care centers over the next number of years, which will necessitate raising funds through debt financing or capital markets. We expect to get some of our projects underway during 2019. We'll share more details as plans and timing is firmed up. Finally, with respect to our captives, our provisions for self-insured liabilities was $27 million at the end of December, down from $48 million at the beginning of the year. We have $50 million of investments held to service those liabilities. Since the exit from the U.S. in 2015, we've repatriated a total of $28 million of cash from the captive. The runoff of claims in the captive continues as expected, and based on our year-end actuarial review, we expect further repatriations during 2019.
With that, I'd like to turn it back over to Michael for his concluding remarks.
Thanks, Elaine. In summary, we had strong results from Esprit, Assist, and SGP, steady performance from long-term care, and continuing weakness in the ParaMed division. Although we are optimistic about where we are going with our home care operations, we are not at all happy with the level of performance today. With new leadership and new systems, we are hitting the reset button on the home care business. We are determined to drive better performance by the second half of 2019. This will be apparent first in volume growth, followed by margin expansion. I'm looking forward to welcoming David Bacon as our new Senior Vice President and Chief Financial Officer, effective April 1. David has a wealth of experience that he will bring to the Extendicare management team. He's worked as a senior executive in a number of industries, including environmental services, logistics, renewable energy, and telecommunications.
His 25 years of business experience in public markets, equity and debt financings, mergers and acquisitions will be invaluable as we chart our growth trajectory. David will play a key strategic role in driving Extendicare's growth across all four business lines. I'm also delighted to announce that Elaine is moving into the newly created position of Vice President, Corporate Development. Elaine will provide much needed leadership for our capital projects portfolio, especially the long-term care redevelopment program and our retirement community builds. Elaine is going to focus on building up our project development capacity to accelerate our redevelopment projects and capitalize on the growth opportunities that exist in the market. She will also leverage her deep experience in the seniors care market to identify new initiatives to build our pipeline of development opportunities. Providing seniors with services across the spectrum of care is the key to our strategy.
At Extendicare, we are unique in having the foundational building blocks in place to deliver that vision. With the investments we are making now in technology, platforms, and leadership, we will be well positioned to meet the growing needs of seniors, whether or not they reside in one of our communities. In closing, I want to pay tribute to each one of our more than 23,000 staff at Extendicare, who work hard every day to make a difference for seniors. The passion they have for our mission is nothing short of inspiring. The quality of care we provide and the quality of lives that our residents and clients enjoy is our number one priority and gives purpose to everything we do. I feel fortunate to be part of this team that is pursuing a mission so vital for Canadian society.
That concludes our formal remarks, and we'll now be happy to take any questions you may have.
Thank you, Mr. Guerriere. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Good morning.
First question, I guess, on ParaMed. Overall volumes were up a little bit versus Q3.
How does that sort of segment down between the branches where you have the new technology versus where you're still doing the implementation?
Well, paradoxically, we've had some initial reductions. We see a little bit of a reduction in volume in each of the branches where we implement initially because the change in systems and all the training that goes on and the process of retraining people on the processes that are required for the new system actually causes a transient reduction in their performance. We see then the performance starts to pick up after that, but there's probably a four to six week initial period where there's a decline in performance. We're really starting to see, at this point, volume increases in the implementations that we did back in the summer and fall of last year.
The first 20% or so?
Yeah. There's definitely a lag of two, three months before you start to see the volume picking up. We're seeing that play out as we look branch by branch at the volume improvement. The other thing, Jonathan, that has an impact is that some of our offices have been better able to meet demand than others. The backlog of demand is different in different regions of the province. That also has a bit of an impact.
Okay.
The other thing that you didn't ask but that's a factor in all of this is the turnover in the staff. The difficulty that a lot of home care workers have is if they don't get enough hours from us of work to do then their total paycheck is just not sufficient, and they look elsewhere. I think that was a big driver of our turnover. In our scheduling agenda, we're really focused on giving people more hours, trying to give people close to full-time hours, which we think is the key to improving retention. In fact, we're seeing that bear out. Our turnover has dropped off quite significantly since we've been paying more attention to this aspect. The system is really helping us in a number of ways to improve our performance and drive volume up.
Okay. Then I guess the CAD 5 million you're going to spend, that would be over the first three quarters this year where you think you'll have headwinds?
Yeah. I think one of our offices might lag into Q4. From a budget perspective, we've distributed it pretty equally over the course of the year. We've got a little bit of flex in there for a little bit of a delay, but so far things have been proceeding on course. As we reported over the last three months, we've been able to add really a third of our volume onto the system. It's perking along quite quickly.
Okay. Just last question on it. Given all the puts and takes, would you expect your ParaMed NOI to be relatively flat to 2018 for 2019 or plus a little bit or minus a little bit?
Yeah, I think relatively flat is probably a starting point, although I would say by Q4 we'll be starting to see some expansion in those margins. I think what you'll see first is the revenue growth picking up again. That'll probably be the headline story for 2019, although I would expect some margin growth to start to show up in Q4.
Okay. Just one question on the G&A. It was a little elevated this quarter. What's a good run rate for 2019?
Jonathan, it's Elaine. I think a good run rate would be between 3% and 3.2%, I think is once you carve out no. If you include in those one-time costs, because some of those are sitting in G&A, you're probably closer to 3.3% to 3.4%, but on a more normalized level, 3.25% is a reasonable run rate, I think.
Okay, thanks. I'll turn it back.
Thank you, Mr. Kelcher. The next question is from Chris Couprie from CIBC. Please go ahead.
Good morning. I just wanted to kind of follow up on some of the questions that Jonathan was asking with respect to the home care. In terms of the centers that you mentioned that two to three months after performance starts to pick up, what type of volume increase are you seeing in those centers relative to where they were before? Kind of what I'm thinking about is you did 11.3 million hours in 2017. Once everything is kind of the IT is all rolled out, what type of relative volume growth to that level do you think you could see?
I guess there's 2 answers to this question. The underlying growth in the market is about 4%. We should be getting back to an annual growth rate of about 4% just by keeping pace with the market. As you know, we turned away a lot of referrals last year that were part of our contractual commitments with the LHINs. There's a catch-up opportunity there as well. The challenge with the catch-up opportunity, of course, is being sure that there's staff available. We've looked at that very carefully, just to carry on with the comments I was making earlier in terms of providing our team members with full-time hours.
We're experimenting using the system with some very different scheduling algorithms to try to spread the demand out over the day so that people have a full roster of scheduled visits over the course of a day. If we were successful in smoothing out that demand in a lot of those offices, we have the people to add about 25% volume without hiring anybody else. In those offices that have been challenged, in some of them, we turned down upwards of 40% of the volume that was being referred to us. All that said, I think if you net it out across the entire business, we should be able to pick up, on top of the baseline growth, another 2 percentage points.
I don't think we're going to get to those types of growth rates until we're fully implemented and all of our operations settle down. We're talking about 2020 for that to happen.
Just with respect to the new Ontario Health organization, what's your understanding in terms of do you need to rebid on contracts because your existing ones, I presume, are with the LHINs?
The majority of our business is with the LHINs. It's very early days to comment on what's going to happen specifically in Ontario. The announcement that came this week clearly indicates that big changes are afoot. The whole host of health agencies, including the LHINs, will be merged into this new agency they're calling Ontario Health, it's obviously a very big undertaking. I think it's fair to say that we expect that the contracts that are with the LHINs today will have to be transferred, assigned, or reissued either to Ontario Health or its assigns at some point. We don't expect that transition to happen quickly. Bill 74 isn't even through the legislature yet, there's a long way to go before this transition happens. More fundamentally, the need for home care services is not going down.
In fact, there's a backlog of unmet home care in many parts of the province. However this shakes out, the demand for our services is going to continue to experience healthy growth. We'll have to navigate this along with everybody else, it's not the first time we've navigated these kinds of reorganizations. You may remember that we used to contract with the Community Care Access Centres, which were merged into the LHINs a few years ago, that really didn't result in any change in our business trajectory. We don't expect this to change it substantially either.
Just in terms of the profitability of the segment, revenue per hour, call it, was up just under 3% for the year. Your labor costs excluding the impact of the IT or the implementation, just over 4%. Are you going to see any kind of pickup? Is any of that labor cost increase going to be flowed through potentially or what are we seeing in terms of continued cost pressures on the labor side?
A lot of our labor cost escalation has been in increased FTEs as opposed to increased hourly wages. We've added a lot of people, particularly as our retention efforts have worked. We've added a lot of people in terms of anticipating the volume growth that's coming as a result of the system. We're a little out of balance. You can see that in our margins this quarter. I think we're going to be a little out of balance for Q1 as well with hiring people before you see the productivity. We will get that back into balance. I don't think that escalation in labor cost is driven by a rate compression issue.
Okay. In Q4, how much of the labor cost would it be tied to the IT-I'm assuming that's where the expense is being put through?
Well, no. We haven't put any of the labor cost in the home care branches through the IT project. The only labor costs in the IT project are actual IT implementation people and trainers that are dropping off at the end of the project. We were very careful about just putting one-time costs into the IT costing. The cost of people in the branch to deliver the service, particularly schedulers and coordinators in the back office, have also been added. We haven't included that as a one-time cost because the intention is that those people are needed to address the volume expansion that will result.
Okay. Just so I understand it, so when I'm looking at the expenses of the home care business, and you say that 98% is labor, so whatever the balance is, that's where the IT implementation costs are being put through?
Let me try it another way, Chris, and see if this answers your question, because we called out those one-time type costs or system implementation related costs for Procura. In the 2018 year, we indicated there was about CAD 3.3 million of incremental costs, some of which are sitting in our G&A and some of which are sitting in the NOI of ParaMed.
Right.
Of the CAD 2.3 million that's sitting in the NOI of ParaMed, that's about maybe CAD half a million related to implementation staffing, and the rest of it is more IT related costs. It's a small component of the overall labor cost. The bulk of it is the stuff that Michael was speaking about, us staffing up outside of those direct field staff. Does that help?
Yes. I think that helps.
Okay.
Okay. All right. I'll get back in line. Thanks, guys.
Thank you.
Thank you, Mr. Couprie. The next question is from Michael Smith. Please go ahead.
Thank you. Good morning.
Good morning, Michael.
Just a couple of quick questions. First, just on the long-term care rebuild. Michael, I think you mentioned that some of the projects are not really meeting your return threshold. I'm just wondering, have you increased your return threshold, or is there just a reevaluation and maybe cost inflation?
The latter. We haven't changed our thresholds in any way. There's a few things happening. One is that the whole portfolio in terms of moving forward with redevelopment has been slower than we've expected. The approvals coming out of the ministry have been slow, and we've been meeting with them to look for ways to try to speed that up. That, of course, is being met with construction cost inflation in many regions of the province that frankly, have been impressive. Projects that three years ago looked very viable, today aren't. Same with land costs in situations. We have land for a number of our projects, but for those that we don't, it's looking untenable at the current construction subsidy rates provided by the government that these projects will go forward.
I do note that this is the case for everyone in the long-term care sector. It's not just us. Projects and new approvals have really diminished to a trickle. You can see that with the other players as well. I think that one of several things is going to have to happen. One is the government will have to reconsider its subsidy rates, or the way it subsidizes. Two, there's going to have to be some changes that allow us to get either a higher return on capital, a higher efficiency in their operations, or just a lower cost of building them. That might be, we've seen some municipalities be willing to provide us with land or to waive local development costs, development fees from the municipality. Those types of things help.
The other thing is that increasingly we're looking at is taking homes that are more in the 150-bed range and topping them up with new licenses to push them into the 256-bed range, which just gives us far better economies of scale, particularly when you think about the land costs. It's not a coincidence that the two projects we're going forward with at Stittsville and Sudbury are 256-bed groups. The Sudbury one, as an example, has.
54
54 new beds, new licenses to get it to a more efficient size. We're really looking at all the ways that we need to work to optimize those projects. As I just said, we're going to be very disciplined about which projects we led forward. They need to meet a return threshold before we're going to pull the trigger.
Okay. That makes total sense. Thank you. Just a last question. Do you have a range of how much capital do you think you'll repatriate from the captive this year?
Michael, I think a safe assumption is probably US$10 million. I think it could be higher than that based on performance over the first six months of the year. I think a US$10 is a safe assumption.
Great. Thank you. That's it for me.
Thank you, Mr. Smith. The next question is from Tal Woolley from National Bank. Please go ahead.
Hi, good morning.
Hi.
I just wanted to talk again a bit about the LHINs, and what's going on there. It does seem like the Doug Ford government's moving towards a more centralized theory of management, so to speak. I'm wondering if, as one of the largest providers in the province, if a push towards more centralized service delivery is something you think will really benefit you under a new regime because you are one of the largest providers, both in long-term care and in home health care.
Tal, I'd love to say yes to that. The honest truth is we're parsing the tea leaves just like everyone else.
Yep.
It's hard to discern exactly how this will play out. Just going back to what I said in my prepared remarks, we talked about transfer, assignment, or reissue of our contracts with the LHINs to Ontario Health or its assigns. In thinking about what its assigns could mean, there's also been this announcement about the concept of local Ontario Health Teams.
Yep.
These are, at this point, highly ill-defined. They're aspirational constructs at this point. If I were speculating, they're meant to provide integrated care between the hospital, the community, long-term care, et cetera. It is likely that most of these will be centered around a hospital, just because of the strength of hospitals in many communities. In terms of numbers, people are throwing around numbers like 20 to 30 across the province. What this could mean is that we need to develop relationships with hospitals to provide home care that's very closely integrated with their programs. That could mean that rather than having 14 customers like we do today, we could have closer to double that in terms of working with our hospitals.
This is where some of the integrated aspect comes in terms of what Extendicare can do, because we already have contracts with many hospitals, where we're running their long-term care facilities that are attached to them. They already look to us for service provision. We're exploring whether we can work with those same customers of ours to create these Ontario Health Teams. The problem is nobody knows what the criteria are for an Ontario Health Team, how it gets funded. I suspect that the system's going to be very focused on combining these health agencies and LHINs into this agency, Ontario Health, which could take one or two years. We really don't know how fast this is going to happen. We're going to make sure that we're exploiting our advantages.
I think our advantage is more about the fact that we operate from home care, long-term care. We have the Assist group that has these hospital contracts, as opposed to our size. Who knows? Perhaps it'll be both. Perhaps there'll be some province-wide contracts to backstop these Ontario Health Teams. We're just not sure how that's going to play out.
There's only a couple of minor details then.
I'm afraid so. We're following it closely.
Okay. I guess my next question, just on the work you're doing inside ParaMed. As this sort of reformatting in Ontario takes place over the next couple of years, none of the benefits that you expect to accrue from the technology work would get derailed by any of the changes you think that are going to happen in Ontario, right? This is all mostly internal work, you think that you'll retain the benefits regardless of the regulatory regime?
Yeah. I think our ability to be agile.
With work assignments. Our system also has clinical record capability, which we've interfaced now with several of the LHINs, so we can provide electronic clinical reports that the nurses actually compile right in the patient's home, because they're using a tablet format that they're carrying with them. They're entering that information. It's automatically uploaded into the LHIN. It will provide us with a lot of versatility in terms of meeting the needs of these integrated health teams as they're being described. The other thing that I think gives us some protection, is that this system is used by 70% of the home care providers in Canada.
I think that gives all of us that are using it a certain amount of protection because there's a de facto standard in the market which any hospital or other care provider could integrate with. I think we're very well protected by being in good company with others across the market using the same platform.
Okay. Then just finally, any discussion or in terms of when you've been speaking with the government, or concerns around sort of the annual accommodation rate review? I think that normally happens, I think it's July, if I recall correctly. That you're sort of anticipating that should pass as it normally has, despite some of the changes that are going on right now?
I'd say the short answer is yes. I don't think there's been any dialogue, concern raised. We would expect that to happen normally in due course, July 1.
Okay, perfect. Thank you very much.
Thanks, Tal.
Thank you. The next question is from Yash Sankpal from Laurentian Bank. Please go ahead.
Good morning.
Hi, Yash.
On your home care margins, I just want to focus for this quarter, Q4. If you removed the IT expenses and other one-time items, what would be the margin?
Yash, it's Elaine. For the quarter, if you remove those items that we isolated as related to the implementation, it would take the margin from 7.3% to 7.7%.
Got it. Okay. It was not a big impact. It was mainly from the turnover, I guess.
It was mainly from the incremental staffing comments that Michael shared with you earlier. Yes.
Got it. Okay. Just want to focus, again, on the development yields. What is your threshold right now when you are considering a project? Generally, what is the range you want to achieve?
We'd like to see them, at a minimum, exceeding our cost of capital. As long as they are in excess of cost of capital, we'll bring them forward, and we'll look at them for consideration.
May I ask how you guys define your cost of capital?
It's in the range of 6%-6.5%.
Okay. Anything above that would be at least in the first
It would pass the first test, I think is a fair way to look at it, Yash. Yeah. That's not to say that we wouldn't look at others for specific reasons, but that's generally our view, greater than our cost of capital.
All right. Just one more question on your impairment charge. When I look at your leasing portfolio, the lease-up portfolio, the occupancy seems to be going up at a good, comfortable rate. I was a little bit surprised to see that you took that charge. I would like to understand what was the rationale, and how big is the charge in terms of the original purchase price? If you could provide some color around that would be great.
Sure. Excuse me. When you look at the full lease-up portfolio, there's a mixture of communities in there, and that's why you're seeing some good progress because it has our Douglas Crossing Uxbridge community in there. The Saskatchewan portfolio that the charge relates to, two of those communities, have had some growth in occupancy. I think we are of the view that the growth rate on those is limited beyond where it is today. When we look at the portfolio that we've taken the charge on, three of the four Saskatchewan communities, it's about 27% of the original cost, I think was the question that you were asking, is what's driven the impairment charge.
Got it. Okay. That's all for me. Thank you.
Thanks, Yash.
Thank you. The next question is from Chris Couprie from CIBC. Please go ahead.
Hi again. I'm just following up on what Yash was saying. How should we think about the margin profile of Saskatchewan versus your Ontario properties?
The NOI margins?
Yes.
Just one sec. Not the yields, you want the actual margins?
Yeah.
Let me just pull it out for you, Chris, if you've got another question. I don't have those right in front of me, but I'll pull them up.
Yeah. I guess, basically, the direction I'm going in with the same property NOI margin has not really picked up yet to the degree I thought it would.
Yeah. I've got it, Chris. The NOI margin of those three communities in Saskatchewan that the charge relates to was at about 21% NOI margin.
Okay. Great.
Compared to the rest of our retirement community portfolio, which in aggregate is closer to between 35% and 40%.
Okay. Got it. Turning to some of the development questions. You've given growth CapEx guidance of CAD 50 million-CAD 55 million this year. I'm guessing CAD 25 of that is related to completing the Barrie development. Just can you talk to what the other spending is on? With respect to the Lynde Creek property, I think you said 3.7 acres, how many suites do you think you could potentially build on that property?
I can take the first part of that question right now. The rest of our growth CapEx spending is us getting started on some of those long-term care developments. There's an expectation that we'll get in the ground on Sudbury, Stittsville, and there'll be some little bit of pre-spending on some of the other priority ones. That's where the bulk of the rest of it is. As far as suite count on the Lynde community, I'm not sure. We can get back to you on that. We're very early on in the planning of that. I think it's yet to be determined.
I think that's why we're talking about acres as opposed to suites. We're as much driven in that situation by what's our market assessment as to what's the available land. We haven't made a determination yet as to what size of development we're going to pursue there.
Just maybe last question to you, in terms of the labor force on the ParaMed side, just get an idea of sequentially, how many more hires were there on the FTE side?
I can say that on the back office front, schedulers, et cetera, that between Q4 of 2017 and Q4 of 2018, we added 120 people across our different offices. It was a significant addition in scheduling capability. We'll grow into that and optimize that over the next, I'd say, four or five quarters.
Okay. Thanks a lot.
Thank you. The next question is from Douglas Loe from Echelon Wealth Partners. Please go ahead.
Yeah. Thanks very much, good morning, all. Just a quick follow-up question from me, focusing on home care as everybody else is. Just wondering if one of the ways that you could grow the business would be to sort of develop expertise in higher acuity services, say, infusion services or respiratory care or pain management, just to pick three off the top of my head. Just wondered if there might be a trend in the industry or within your business to perhaps look at a way to expand margins through providing higher acuity services, and if that's something that the industry or you are thinking about longer term.
I love the question, Doug. I'm smiling from ear to ear because that's something that we've been talking about quite a bit. I'll say that it was our very deliberate decision to get the basics right first, before we start kind of moving into more complex services, because the more we specialize, the more you create more complex scheduling challenges in this kind of space. Having said that, Extendicare has already done some of this. This would not be new for us. We've done things like specialization in palliative care, specialized in certain areas of diabetes care. This also applies in long-term care, where we've created the ability to handle dialysis in long-term care. It is an opportunity, for sure, to offer higher-end services at higher per diems or per hour rates and expand margins.
We see this as being a very important part of our future in terms of developing new lines of business and differentiating ourselves from, let's call it, the rest of the commodity market.
Good. Any feedback from government payers or clients just in terms of whether the payer reimbursement market is receptive to that shift?
They're very receptive. I've had numerous conversations with government and LHINs on this. Probably, and just tying together some of the things we've talked about this morning, probably, the most interested party are the hospitals. A lot of the people that are blocking hospital beds, these patients that are referred to as alternate level of care, because they don't need the acute care hospital anymore, but nobody is capable of taking them on. That they have special needs that can't be managed in your standard long-term care or home care environment. That's people who need dialysis, who need oxygen, who need IV therapy on a regular basis. Palliative care is another example. The hospitals are very interested in developing these kinds of specialized services.
I'm anticipating as we move to Ontario Health Teams, that that will be the opportunity to introduce these specialized services in partnership with the hospitals.
Great. Great feedback. Thanks, Michael.
Thank you, Mr. Loe. The next question is from Tal Woolley from National Bank. Please go ahead.
Hi. Just one quick follow-up. I'm sorry if I missed this earlier in the presentation, but on page seven, where you're showing your occupancy for retirement living. You're showing in the lease-up portfolio, a decline into January 31st, 2019, the occupancy rate. Is that correct or?
Yeah, that is correct. That's coming in because Bolton opened in January.
Okay.
You add 112 suites to the denominator, and all of a sudden it falls off. The remaining properties in lease-up are continuing to rise, it's just because we added in essentially an empty facility early on. Lease up in Bolton is actually going very well. You'll see that coming back up again. Every time we add volume, like what'll happen in future quarters now, you'll see that number rising steadily until we open Barrie, then it'll take a big sawtooth down again.
Okay.
Okay?
Got it. Thank you very much.
Okay.
Thank you, Mr. Woolley. The last question is from Yash Sankhe from Laurentian Bank. Please go ahead.
Yeah. Thank you. I just wanted to follow up on the third-party management business growth that you talked about. Just wanted to see if you could add some more color around that, like what opportunities you're seeing and, where you think you can be, say, over the next two years?
Sure. We've got two businesses there, essentially. One is that other owners pay us to run their facilities, either retirement or long-term care homes, or, the group purchasing, which we purchase, as you can see, now on behalf of closing on 60,000 different beds. Given the regulatory environment in Canada that is making it harder and harder to be an independent operator in this space because you have to meet so many requirements. You have to demonstrate things like medication safety. You have to provide statistics, et cetera. You have to have the right information systems. You have to pass accreditation. You have to have all the right policy documents, training capabilities. That's very hard to do as an independent facility. We're seeing more and more homes coming to us to manage their operations.
When you become part of Extendicare Assist, you get access to our information systems, our training, our management capabilities, et cetera. We're seeing a lot of opportunity there. The other thing that's just new, we just signed our first contract, is to help people with doing a new long-term care development or an expansion or a C bed redevelopment, where again, it takes a lot to navigate the regulatory and licensing process to get those things done, not to mention economies of scale on design and that sort of thing. We've got a contract with University Health Network to help them with their redevelopment and we see more opportunities like that coming along. That's why it's so significant that Elaine is taking on this new portfolio in corporate development, is we just see huge growth opportunity in this space.
If the government's serious about, in Ontario alone, building 30,000 beds in the next 10 years, we think the services business is going to be a real growth opportunity.
Okay. That's good color. Thank you.
Thanks, Yash.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Jillian Fountain.
Thank you, Lorie. That concludes our call for today. This presentation is available on our website, as are the call-in numbers for an archived recording. Please don't hesitate to give us a call if you have any further questions. Thank you again for joining us, and goodbye. Have a good weekend.