All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the Extendicare Inc. First 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.
Thank you, Patrick. Good morning, everyone, and welcome to Extendicare's 2018 first quarter results conference call. With me today is Tim Lukenda, Extendicare's President and CEO. Unfortunately, Elaine Everson, our VP and CFO, was unable to join us today as she's attending a funeral. Our 2018 first quarter 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 May 25th. The replay numbers and passcode have been provided in our press release, and 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 Tim.
Thanks, Jillian, and good morning, everyone. Extendicare operates across the spectrum of seniors care and across the country to meet the needs of a growing seniors population in Canada. As you can see on slide three, our services are provided under various brands that together cover the continuum of seniors care. We are a unique investment opportunity in the Canadian market, positioned to meet the needs of the Canadian senior when and where they need us. Turning to our Q1 financial results on Slide four. First, I will highlight our Canadian and divisional operations and then speak to our consolidated results later in the presentation.
I'd like to point out that the comparability of our results this quarter was impacted by the timing of Good Friday, causing an increase in our labor costs of CAD 1.4 million and the receipt in the first quarter of 2017 of prior period funding of CAD 800,000. Including these factors, revenue reported this quarter was up 1.5% to CAD 271.4 million. NOI reported this quarter was down by 2.7% to CAD 29.3 million. At the EBITDA level, lower administrative costs largely offset the reported decline in NOI. Absent the one-time items, EBITDA improved by CAD 2 million or 10%, with a margin of 8% compared to 7.4%. Our reported AFFO of CAD 14.7 million improved by CAD 2 million or 15.4% this quarter, having benefited from lower current income taxes. Turning to our home healthcare business on Slide five.
The major factor affecting the performance this quarter was a 3.9% decline in hours of care delivered. Approximately 60% of the decline in volumes was in Ontario, where the competition for personal support workers, and to a lesser extent, nurses, has intensified. This has contributed to a capacity shortage in many areas across the province and impacted our ability to continue to meet the growing demand in services that began in the latter half of 2016. We have taken steps to build the capacity required to take advantage of the significant growth opportunity that exists in the province today. The balance of the shortfall this quarter was primarily experienced in British Columbia, largely attributable to declines in provincial funding related to fiscal year-end constraints.
In addition, the quarter-over-quarter comparability of the home healthcare operations was impacted by the timing of the Stat holiday, resulting in increased labor costs of CAD 900,000 this quarter. Turning to our Esprit Lifestyle division on Slide five. We continue to make solid progress with growth in revenue, NOI, and occupancy in all communities, notwithstanding some occupancy attrition through the winter months. During the quarter, we had 8 retirement communities in operation, 7 of which are classified as same store. The improved contribution for the year from our same store communities, 3 of which have achieved stabilized occupancy, was CAD 1.4 million. Our Douglas Crossing retirement community that opened last fall is classified as non-same store. In addition, we have 2 communities under construction. Net, these operations contributed CAD 0.3 million this quarter. Occupancy at our 3 stabilized communities was 90.2% at the end of March 2018.
This is down from the end of December due to attrition experienced during the winter. We have seen an improvement in April to 92.7%. The communities still in lease-up saw an improvement in occupancy from 68.6% at the end of 2017 to 75.3% at the end of March. In April, they improved to 77.4%. We are very pleased with the continued growth in our retirement operations. As previously mentioned, our new 103-suite Douglas Crossing welcomed its first resident in October of 2017. We're extremely pleased with the level of interest in this community, currently at 83% occupancy after 6 months, significantly ahead of schedule. As a result, we are well underway with the construction of a 47-suite addition, anticipated to open in November 2018. The total retirement community of 150 suites will have an estimated adjusted development cost of CAD 40.3 million and an expected NOI yield of 8.6%.
In addition, we have two development projects under construction in attractive markets, one in Bolton, Ontario, with 112 suites, and another in Barrie with 124 suites. We anticipate accepting residents in Bolton late in 2018 and Barrie in Q2 of 2019. These development projects are expected to deliver NOI yields of 7.6% and 8%, respectively. As previously announced, we completed the acquisition of Lynde Creek Retirement Community on April 11, 2018, for a cash purchase price of CAD 34.5 million. Located in Whitby, Ontario, the Lynde Creek Retirement Community consists of The Manor, a private pay retirement residence with 93 suites offering independent supportive living and assisted living, a life lease village, and a parcel of excess developable land. The Manor is a high-end retirement residence with very high occupancy due to its strong reputation and inviting environment.
Adjacent to The Manor is a 3.7-acre surplus plot of land overlooking the ravine of Lynde Creek, creating an ideal opportunity to expand the service offering of the community with a potential independent living development. In addition, the village is a 113-unit townhome development in the form of a life lease, a unique model for the Canadian retirement marketplace. We expect this part of the development to not only provide a potential feeder source for The Manor as residents age and their needs increase, but to also provide us with the ability to offer ParaMed home healthcare services to the occupants, enabling them to remain in their homes longer. Finally, the townhomes provide an expected cash flow stream equal to 10% of the resale value on change of ownership of the units. We're very pleased with the addition of this unique and desirable community to our growing retirement portfolio.
Following the completion of the two communities under construction, our Esprit retirement platform, which we launched a mere two and a half years ago, will be up to 11 communities with 1,052 suites. Turning to our long-term care operations on slide 10, NOI for the quarter appears as a decrease of CAD 1 million, or 5.7%. However, adjusting for the one-time items affecting the comparability of the quarters, NOI improved by CAD 300,000, or 2.2%. We experienced a decline in our average occupancy this quarter to 96.4%, largely due to an intense flu season and in part due to the fill-up of our new 24-bed addition in Alberta. In February, we completed a 24-bed addition at our LTC center in Edmonton. This addition reached stabilized occupancy in April and is expected to contribute approximately CAD 600,000 of NOI annually.
On the LTC redevelopment front, to date, we have submitted applications to the Ministry for 16 of our redevelopment projects and are pleased to announce that the licensing applications for two of these projects have now been approved. Both are 256-bed centers, one in Stittsville, a growing suburb of Ottawa, and the other in Sudbury. We are optimistic that we will be breaking ground on these two projects later this year. In addition, under the Ministry's initiative to award LTC beds, we submitted requests for new beds to leverage the opportunity to increase the size of our LTC centers under redevelopment. Thus far, we've received confirmation that three of these requests in Sudbury, Sault Ste. Marie, and Peterborough, totaling 158 new LTC beds, have been allocated to us subject to the approval of the respective redevelopment projects.
To the extent applications for new beds have not advanced in this round, we expect they will be considered in future rounds. We continue to work collaboratively with the Ministry to move all of our projects through the approval process. Our other Canadian operations consist of our Extendicare Assist management and consulting services and SGP Purchasing Partner Network. These business units continue to see growth with the addition of three managed centers, 416 beds this quarter. NOI was up CAD 800,000, or 36.2%, over the first quarter of 2017. We continue to experience increased demand for our day-to-day management services, and clients are turning to us for assistance with their redevelopment efforts, where we provide analysis, application support, and development services. As for SGP, the volume growth continues with the number of third-party residents served increasing by 12% from a year ago to 45,700 at the end of March.
In April, SGP added a further 4,200 residents. With that, I will now review our consolidated results on Slide 13. Our consolidated NOI in comparison to the first quarter of 2017 reflects a decline this quarter of CAD 2.3 million, with an NOI margin of 10.8% compared to 11.8%. Adjusted EBITDA reported a decline of CAD 1.4 million, having benefited from G&A savings. In addition to the timing of the stat holiday and one-time funding received in the first quarter of 2017, our consolidated results were also impacted by a decline in revenue from our remaining U.S. operations, with nominal investment income this quarter compared to CAD 1.5 million in the first quarter of 2017, due to timing of gains realized on liquidation of investments during the wind-down of these operations. The earnings of the captive do not impact our AFFO, as they are funded by its investments.
The stat holiday this quarter and the one-time funding from last year impacted the comparability of our AFFO by about CAD 1.6 million after tax. Absent these items, our AFFO improved by CAD 3.6 million over Q1 of last year, reflecting lower current income taxes of CAD 2.2 million and growth in overall earnings. Our current income taxes benefited this quarter from favorable timing differences and the utilization of tax loss carryforwards. We anticipate our effective tax rate on FFO will be in the range of 17%-20% for the 2018 year. Our payout ratio was 72% of Canadian AFFO, compared to 84% in Q1 of 2017. Turning to our financial position on Slide 14, our total long-term debt at March 31st was CAD 540 million and relatively unchanged from year-end, with scheduled repayments partially offset by construction loan draws.
At March 31st, our weighted average interest rate was 5%, and the weighted average term to maturity on the debt was seven years. Our debt to gross book value was 46.9%, and EBITDA interest coverage was unchanged at 3.3 times. We ended the quarter with cash on hand of CAD 118 million, representing a decrease of CAD 10 million from the end of last year, primarily attributable to purchases of common shares under our Normal Course Issuer Bid and growth capital expenditures. Subsequent to March, we utilized cash on hand of CAD 34.5 million to complete the Lynde Creek acquisition. In conclusion, this quarter reflected positive results in all but our home healthcare division, where we are actively addressing the underlying capacity challenges. We will continue to work diligently throughout the year to execute on our strategy and build shareholder value. We look forward to reporting on our progress as the year unfolds.
I would like to close by saying our mission is helping people live better. The quality of our care and quality of life of our residents and clients is our number one priority and gives purpose to everything that we do. That concludes our remarks for today. We'd be happy to take any questions that you may have.
Thank you. We'll now take questions from the telephone lines. If you have a question and you are using a speakerphone, please mute 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 the question, you may 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, Jonathan.
First question is really on the home healthcare business. Is the issue there, is it just difficult to find qualified workers?
Jonathan, I think what we're seeing is a bit of an industry-wide shortage of PSWs, largely, more than nurses. PSWs are a certified personal support worker, which requires training through an educational institution to get certification. We're seeing through, for various industry dynamics and the economy overall, we're seeing a shortage in PSWs. It's a thing that we are working on both as a company but also as an industry and with government to try to get more people to come into the caregiving careers in order that we can support what we're seeing as an overall growth in the demand for kind of services provided by home care, for which we need PSWs.
Now, do you think you'll see any pressure on wages in order to get more people in?
Yeah, I do think, Jonathan, that as we try to address the shortage of PSWs, we'll be looking at, and we are looking at, different forms of revisions to our compensation model to make sure that we're being competitive with an environment where there's a higher minimum wage. Other career options or other job options become relatively attractive, and even though we're higher than the minimum wage in all places, there's now more competition, if you will. We're looking at various ways, both monetary and non-monetary, to make sure that we're an employer of choice and that we can attract people who are inclined to be caregivers and are of the right personality to choose ParaMed as a career choice and to want to work for us.
There will be wage pressure, but there's also other factors to try to make sure that we're doing things to accommodate, to attract, to support, and to retain the staff that we have.
Okay. Would you consider that the biggest challenge in your overall business right now?
Yeah, I think it's fundamentals on the home healthcare side in that, again, we're seeing overall growth in volumes being offered to us by the local health networks throughout the province, and we're unable to deliver as much volume as is being offered to us. It's an upside opportunity as we can increase the number of PSWs that we have available on a daily basis. We see a significant opportunity to grow the volumes of care that we deliver. That's a pretty fundamental issue, and we're working hard on trying to address it.
Okay. Secondly, a week or so ago, there was some press about a lawsuit against you guys and others. Do you care to give us your thoughts on that?
Sure, Jonathan. Yeah. We believe the proposed class action lawsuit and the damages that they are seeking do not have any merit. It's an unfortunate part of the business that we're in, that from time to time, we have dissatisfied customers or families, and sometimes aggressive lawyers that decide to pursue legal remedies despite our best efforts in caring for what is a frail, medically complex, elderly clientele. The particular action that was in the media last week is a proposed class action. In reality, there's one underlying claim and family that's being brought forward by this law firm, and they're hoping to develop what they're calling a class action against not only us, but others in the industry. We're aware of the approach. We don't believe it has any merit.
We also note the timing of the publicity related to an advance of the provincial election, which gave the activity a little more media. Our full intention is to defend ourselves vigorously against the claim. We don't believe it has any merit, and we don't believe that ultimately it will have any material adverse effect on our company. We're proud of our reputation and effort to provide quality care.
Okay. Now, what sort of liability does your captive, does that cover the Canadian business as well?
In Canada, we have third-party insurance to cover liability claims of this nature or any other nature that arise from time to time.
Okay. Just, this is more out of curiosity than anything, the investment income from your captive was down. What sort of investments does that hold?
The captive in the U.S. holds assets to match off the liabilities that remain in the U.S., it's a captive that's based in Bermuda, there's very specific and conservative investment guidelines. They're largely money market funds, some very low risk type investments. There's strict guidelines, the difference in the earnings from quarter to quarter was more a reflection of just trades that happened in that particular quarter rather than an indication of overall difference in performance, if you will. It's just kind of relates to the portfolio as it's being liquidated.
Okay. Thanks. I'll turn it back.
Thanks, Jonathan.
Thank you. The next question is from Chris Couprie from CIBC. Please go ahead.
Hi, guys. Yeah, I just want to.
Hi, Chris.
flesh out this home care situation a little more.
Sure.
Would you say that industry volume is down year-over-year, or is it just you guys? I mean, are people essentially going without home care?
It's hard for us to know that. We don't have timely stats coming out of the local health network. What happens is that the hours are offered, and they're offered, kind of provider by provider, from the LHINs to the providers, according to some market shares that have been gained over the years that go back to the RFPs from a number of years ago. On a case-by-case basis, each provider says, "I'm able to match up a resource I have with that particular client's need at that time and day," or, "I'm not." If I'm not, it goes on to the next person. We believe that the relative shortage of PSWs is an industry-wide problem. We can't speak to overall what happens to those volumes when we don't accept them. In some cases, they are picked up by others.
I don't believe en masse there are a lot of people that are going without care, if you will. How that volume gets redistributed is a little unknown to us. Again, it varies from jurisdiction to jurisdiction and day to day who's picking up those hours. We may be picking them up more in one place, and somebody else might be picking them up more in another, depending on the actual availability of staff in that locale.
In terms of the labor shortage, are PSWs leaving the industry? Is your workforce shrinking?
What we're seeing is we are on a daily basis recruiting new people into the career. We have other people leaving the field. The turnover is quite high. It's one of the things for us and for everybody. Again, as the minimum wage increase, sometimes other career alternatives look relatively attractive. What we're seeing is some churn in the sector. We're bringing in as many people as we're losing, but the volumes that are being offered are increasing. On a net basis, I think we're not growing as much as we need to be growing to meet the demand, would be probably the best way of characterizing it.
Yeah. I guess I'm still trying to reconcile, if your labor force is roughly net constant, why would hours decline?
Well, there's a lot of factors that go into it. It depends on the time of day that the staff is available and the hours are offered. Just as an example, if all of the off hours offered are between 7:00 A.M. and 9:00 A.M. in the morning or 5:00 P.M. and 7:00 P.M., which happens to be the peak demand periods, and your staff is available at other parts in the day, you have issues with meeting up, the matching up the capacity with the demand, to ensure as high a utilization as the staff that you have. The total number of staff, and whether they're full-time, part-time, and when they're available relative to the hours being offered, are all factors in the equation in determining whether we can meet more hours or not.
Okay. In terms of building capacity, can you talk to us about what exactly that means? I guess margins were under pressure partly on the Easter shift, or the Good Friday shift. Maybe some guidance as to what you think home care margins could look like for the rest of this year and going forward with this investment in capacity.
We're spending a lot of time and effort on trying to improve our recruiting approach. We've beefed up our corporate recruiting resources. We've increased our use of social media and other means to try to attract staff. We've reviewed our salary and compensation grid, and how we pay for different levels of experience. All of those are going to be factors that are going to help us address this issue, amongst many other issues that are non-monetary in nature, to try to make sure that ParaMed is a desirable place to work. In terms of the impact on our margin and the time to see the benefit of that, it's really something that I can't predict at this stage.
We're going to be reporting on a quarterly basis. We're putting an all-out effort to try to improve the volume of staff we have to get back and to be able to increase the number of hours that we're receiving. I can't give any specific guidance on margin through the balance of this year. It's something that we'll be disclosing and talking about as the year proceeds and the results of our efforts are able to be demonstrated.
Just one last question on home care before I turn it back. In terms of the private home care opportunity, would you say that it's tough to go there right now given the industry-wide labor shortage? Or maybe talk a little bit about what your thoughts are on private home care in terms of what type of investment you might be willing to make to get more into this business and, as a percentage of your total mix, what that might look like one day.
Sure. I still believe firmly in the opportunity in private home care. What we've been doing is trying to make sure that our government-funded base is solid and able to grow to meet what is a growing publicly funded demand for services. Beyond that, I don't believe government funding will be able to keep up with the surge in demand and the growing demand and expectations of Canadian families. We think that opportunity is there and will continue to grow. For us, it's a question of figuring out the right business model for attacking that market and how we leverage our capabilities within the existing structure and what we might want to do separately or differently. It's something that we are still evolving in our thinking of how we're going to approach it.
I think over time, it will be a growing portion of our potential, of our NOI in the ParaMed business, but it's not something that will be a meaningful contribution, certainly this year, to the overall scheme of things. Our primary bread and butter will continue to be the government-funded business and trying to make sure that we're optimizing our ability to deliver on that.
Okay, thanks.
Thank you, Chris.
Thank you. As a reminder, you may press star one if you have a question. The next question is from Michael Smith from RBC Capital Markets. Please go ahead.
Thank you, and good morning.
Good morning, Michael.
Just one more on home health care. I hate to beat a dead horse, so to speak.
That's okay.
how does the government respond to shortages? Are they cooperative, so to speak, or open to increasing wages? How are they responding to this?
Yeah, that's a good question. We're working through our associations in cooperation with the government, who does recognize this as a sector-wide challenge that's only going to become more acute as the demands increase if we don't address it en masse. There's a number of things. One is trying to make sure that the educational institutions that offer these types of programs are open and available and attracting the students into the front end of the funnel, if you will, to also looking at ways to make sure that the wages that we are able to pay are competitive. There was some enhancement to the funding for PSW wages last year. There's a talk about some funding enhancements to nursing wages that we'll be able to pass on to that staff to try to make sure that we remain competitive relative to other industries.
It is something that we do want to and need to work cooperatively as a sector with the government to try to increase the number of caregivers. The other thing that is an area that we're working on is to see if we can't leverage some non-PSW resources for services that don't require licensed caregivers. In other words, things that might be homemaking in nature and other things like that to increase the pool of available talent and get greater leverage out of the registered resources for the activities that require such a certification. It's going to take all of those things, Michael, to try to address this and make sure that we're growing the pool of labor.
Okay, good. Just switching gears to your retirement living. Your stabilized retirement properties, I think I heard you say that the occupancy has picked up to 92.7% post-quarter. I'm just wondering, what will be the normalized rate that you would expect over time once they're fully stabilized, I guess, or they're at their normalized occupancy?
Well, those buildings were up in the 95 range. They dipped down with the flu season and some move-outs and other things, and they're back up to 92. I think we look at 93-95 as kind of where we would expect those buildings to be on a steady state basis.
Okay, perfect. Thank you. That's it for me.
Thanks, Michael.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Ms. Fountain.
Thank you, Patrick. That concludes our call for today. This presentation is available on our website, as are the call-in numbers for an archived recording. Also, I'd like to remind everyone that our annual shareholders meeting will be held on Thursday, May 24th at 10:30 A.M. at the TSX Gallery. We hope you can join us there. Thank you again for joining us today. Please do not hesitate to give us a call if you have any further questions. Thanks and goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.