Thank you for standing by. This is the conference operator. Welcome to the Extendicare Inc. First Quarter 2022 analyst conference call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star one on your telephone keypad. Should you need assistance during the call, you may signal an operator by pressing star zero. I will now turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.
Thank you operator and good morning everyone. Welcome to Extendicare's first quarter 2022 results conference call. With me today are Extendicare's President and CEO, Michael Guerriere, and Senior Vice President and CFO, David Bacon. Our Q1 results were disseminated yesterday and are available on our website. The audio webcast of today's call is also available on our website, along with a company slide presentation which viewers may advance themselves.
A replay of the call will be available later this afternoon until May 27th. The replay numbers and passcodes have been provided in our press release, and an archive recording of this call will also be available on the website. Before we get started, please be reminded that today's call may include forward-looking statements. 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 regulators and suggest that you refer to those filings. With that, I'll turn the call over to Michael.
Thank you, Jillian, and good morning. Once again, we start the call with a pandemic update, marking the ninth consecutive quarter that's been impacted by COVID-19. The dramatic run up in Omicron cases in the community resulted in an increase in outbreaks in our homes and staffing challenges across the organization, setting back the positive trajectory of our occupancy levels and home healthcare volumes in the previous few quarters.
Thanks to vaccinations and boosters, the virus has manifest as a mild illness for the vast majority of our residents and staff. We continue to remain vigilant and focused on prevention and control measures to minimize the spread of the virus as it can still pose a serious risk to the most vulnerable members of our community.
Despite milder symptoms, high levels of staff absenteeism due to illness or isolation led to increased labor costs in the quarter through higher sick leave, overtime, and agency use. This was particularly impactful in our home healthcare segment, where it also affected our ability to meet the demand for services and resulted in a significant drop in our average daily volumes as compared to Q4 2021.
While we are continuing to experience an elevated level of new cases within our homes and among our staff in the second quarter, there's been no impact on the demand for our services. Currently, 24 of our 58 long-term care homes are in outbreak. However, the number of new cases, both among our staff and residents, has leveled off in recent weeks, suggesting we may be experiencing the same seasonal drop-off in viral transmission we've seen over the past two years.
In the first quarter, we benefited from CAD 13.3 million in COVID funding for our Ontario long-term care operations related to costs incurred last year. This narrowed the cumulative unfunded costs since the beginning of the pandemic to CAD 33.1 million. Subsequent to the quarter, the Government of Ontario announced additional COVID prevention and containment funding of CAD 278 million for the 12 months ending March 31, 2023.
CAD 130 million of which will flow in Q2, helping to mitigate the costs we continue to incur. The Alberta and Manitoba governments have also indicated their intention to continue funding support on a retroactive basis for COVID costs incurred through to March 31, 2023. We are encouraged by these announcements and grateful for the continuing support.
We will continue to experience volatility in our operating and financial results until the effects of the pandemic are behind us. Turning to slide four, as previously announced, we took important steps in the first quarter to execute on our strategy to focus on the long-term care and home healthcare segments using a less capital-intensive business model.
Through a series of transactions, we are repositioning Extendicare to focus growth on operating and building new long-term care homes while substantially reducing our ownership stake in the properties we operate. This will allow us to deploy capital more efficiently and to provide greater flexibility to fund growth initiatives, including acquisitions. The sale of our Esprit Retirement operations is expected to close on Monday, May sixteenth.
The sale to the Sienna/Sabra partnership for CAD 307.5 million is expected to result in net proceeds to Extendicare of approximately CAD 125 million. The transaction unlocks the value of our retirement segment at an implied cap rate of approximately 6%. Thus focusing Extendicare on its two core segments, long-term care and home health care, where we can leverage our deep expertise and scale to drive improved performance and high-quality care for seniors across Canada. The retirement segment represented approximately CAD 7.1 million in AFFO contribution or CAD 0.08 per share based on our 2021 results. Slide five summarizes the two transactions with Revera and Axium Infrastructure that we announced in March that take the next step in our strategic shift.
These arrangements will add 56 long-term care homes to the Extendicare Assist portfolio of managed homes, bringing the total we own or manage to 164. These homes will also add approximately 7,500 beds to the SGP Purchasing Partner Network, bringing the total participating beds to over 100,000. In addition, we are acquiring Revera's 15% interest in the 24 long-term care homes they own in partnership with Axium, along with an opportunity to purchase future Revera redevelopment projects. An important element of these transactions is the addition of Revera's long-term care operations group and a number of head office staff to the Extendicare team. They will continue to support the ongoing delivery of high-quality care and services to ensure a seamless transition into Extendicare for the Revera homes, the care staff and the residents and families.
We will also enter into a joint venture with Axium for the redevelopment of our own Class C homes. The joint venture provides us with capital to support our redevelopment agenda, as well as a platform to expand our long-term care operations through acquisitions and greenfield development. Total aggregate consideration to be paid on closing of these transactions is approximately CAD 70 million, subject to customary adjustments consisting of cash and debt assumed through our 15% ownership stake in the joint venture. Based on the anticipated revenue of the management agreements to operate Revera's 56 long-term care homes, net of our incremental costs, management services could generate AFFO of CAD 0.04 for basic share.
Distributions in respect of our 15% interest in the 26 long-term care homes to be jointly owned with Axium could generate AFFO of $0.01 per basic share for a combined $0.05 per share or CAD 5.3 million. Closing of these transactions is subject to customary closing conditions, including receipt of regulatory approvals from the provincial health authorities in Ontario and Manitoba, which are underway. It is difficult to predict when the regulatory process for the transactions will be complete and the subsequent closing date. We're actively working on integration planning with Revera and Axium to ensure that we're in the best position possible to integrate Revera's long-term care operations team, the homes under management, and the JV interest into Extendicare expeditiously after close. Slide 6 summarizes the strategic benefits of the Revera and Axium transactions.
They provide Extendicare the ability to focus on our two core segments, long-term care and home care, where our depth of experience and scale will enable us to capitalize on the growing demand for these services. A less capital-intensive business model, coupled with the proceeds from the sale of the retirement operations, will provide the flexibility to allocate capital strategically, including priority investments in our people, technology, and our long-term care redevelopment program.
The JV platform created by these transactions provides a foundation to expand beyond our own redevelopment agenda and allows us to consider acquisitions both within long-term care and home health care, greenfield long-term care new builds, and redevelopment of homes outside of Ontario. In addition, these transactions expand the customer base for our Extendicare Assist managed services and SGP group purchasing, driving growth in our higher-margin other operations segment.
The preferential rights to acquire Revera Class C-bed redevelopment projects also provides us with a pipeline of new long-term care homes in Ontario to further grow the JV and extend related management fees. Overall, these transactions are estimated to contribute approximately CAD 0.05 of AFFO per share, replacing a significant portion of the CAD 0.08 per share of AFFO lost with the sale of the retirement operations. Using on an enterprise value basis, approximately CAD 70 million of the CAD 307.5 million generated from the sale of the retirement portfolio. Moving to slide seven, we continue to advance our redevelopment strategy to replace our older Class C beds in Ontario.
In total, we have been awarded 4,248 new and replacement beds across 20 redevelopment projects, which would replace all of our 3,285 existing Class C beds, including the three projects currently under construction. We are pleased to contribute to expanding much needed long-term care capacity in the province. Our new homes will be constructed exclusively with single resident bedrooms to maximize privacy, safety, and resident comfort. We're actively engaged with industry partners and the government to obtain the necessary enhancements to the government's capital development funding program to make projects in all markets economically feasible, given the considerable widespread inflation being experienced across the construction industry today.
We continue to work through the Ontario Ministry of Long-Term Care and municipal approval processes for all of our projects and are targeting to have six ready for construction before the end of 2023. Now, let's turn to a few operational highlights on slide eight. As you can see in the table, while we experienced year-over-year improvements in long-term care occupancy and home health care volumes, the impact of the Omicron variant resulted in a decline in long-term care occupancy, which was 120 basis points lower than in Q4, and a drop in home health care average daily volumes, which were down 4.8% on a sequential basis. We did continue to see growth in our SGP customer base in Q1, up 6% from Q4 and 21.9% year-over-year.
While our pandemic-related spending began to decline in the second half of last year, it increased in December and continued to be elevated through the first quarter due to the Omicron surge. Pandemic-related spending increased to CAD 42.2 million in the first quarter, up CAD 10 million from Q4. Additional COVID funding I mentioned earlier resulted in a net recovery of COVID costs of CAD 8.5 million for the quarter. With that, I'll turn it over to our CFO, David Bacon, to provide commentary on our consolidated and segmented financial results for the first quarter. David?
Thanks, Michael. I'll start by providing an overview of our consolidated results for the quarter, followed by some financial highlights of our individual business segments and liquidity position. Before I begin, I should note that as a result of the agreement to sell our retirement living operations, we have classified this segment as discontinued and held for sale in Q1 of 2022.
As you'll recall, in Q4, we did the same with our Saskatchewan long-term care operations, pending their transition to the Saskatchewan Health Authority, which we continue to work towards completing in 2022. As such, these operations are excluded from our results from continuing operations in our financial statements and MD&A and in our review of our financial results today, unless otherwise indicated.
We've included a slide in the appendix of this presentation illustrating the contribution to revenue, NOI, and AFFO of our discontinued operations, and further details can be found in our Q1 MD&A and Note 14 of our interim financial statements. The retirement living operations contributed CAD 1.3 million to AFFO in Q1 of 2022 and CAD 7.1 million or approximately CAD 0.08 per share for the year-end of December 31, 2021. The Saskatchewan long-term care operations generated an AFFO loss of approximately CAD 1.4 million in each of Q1 of 2022 and for the 2021 year, or approximately a loss of CAD 0.015 per share. As Michael mentioned, we're scheduled to close the sale of the retirement operations this coming Monday.
Settlement of the estimated purchase price will be in cash of approximately CAD 254.1 million, and assumption of mortgages by the buyer on certain of the communities of CAD 53.4 million. Cash proceeds will be used to repay all remaining outstanding debt related to the retirement operations of approximately CAD 117.1 million. Net proceeds are estimated to be approximately CAD 125 million, subject to customary post-closing working capital adjustments. The net book value of the property and assets related to the retirement living operations is approximately CAD 220 million at closing, resulting in an estimated gain of CAD 75 million that will be recognized in our second quarter results through discontinued operations. Turning now to slide ten on our consolidated results.
As in prior quarters, we have included a detailed schedule of the impact of COVID-19 on our revenues, operating expenses, NOI and EBITDA on slide 18 in the presentation. We continued to receive funding support under various provincial programs, which included an additional CAD 13.3 million in the quarter from the government of Ontario related to unfunded COVID costs in our long-term care segment incurred in 2021.
As a result, we reported a net recovery of COVID costs positively impacting our consolidated adjusted EBITDA from continuing operations of CAD 8.5 million for the quarter and an estimated after-tax impact on AFFO of approximately CAD 6.3 million or CAD 0.07 per share. Our consolidated revenue in the first quarter increased 3.7% or CAD 10.8 million - CAD 305.7 million for the first quarter of 2021.
This increase was driven primarily by long-term care funding enhancements, including CAD 2.9 million in retroactive long-term care funding in Manitoba. Home healthcare billing rate increases, partially offset by reduced COVID-19 funding of CAD 3.9 million and the impact of the timing on our long-term care flow through funding. NOI decreased by CAD 3.3 million from CAD 36.3 million in Q1 2021 due to the CAD 9.7 million of Canada Emergency Wage Subsidy received by ParaMed in Q1 of 2021. Excluding this impact, our Q1 2022 NOI would have decreased by CAD 6.4 million to CAD 33 million, with a consolidated NOI margin of 10.8%, up from CAD 26.6 million at a margin of 9% in Q1 of 2021.
NOI improvements were driven by higher net COVID-19 recoveries of CAD 7.9 million and retroactive long-term care funding of CAD 2.9 million, partially offset by higher operating costs and the impact of the loss of occupancy protection for Ontario long-term care homes. Our consolidated adjusted EBITDA decreased CAD 4.2 million from Q1 of 2021 to CAD 19.6 million due to the factors impacting NOI just noted, including higher administrative costs, primarily attributable to higher transaction-related professional fees and increased IT costs, offset by lower COVID-related administrative costs. Excluding the impact of the wage subsidy received by ParaMed in Q1 of 2021, our consolidated adjusted EBITDA increased by CAD 5.5 million as compared to Q1 of 2021. AFFO per share was CAD 0.13 in Q1, down 38.4% from the prior period.
Excluding the impact of the wage subsidy received by ParaMed in the prior year, the year-over-year decline in AFFO per share is CAD 0.01. Turning to our individual business segments on slide 11. Our long-term care operations saw revenue increase by CAD 10 million or 5.3% in Q1, driven by funding enhancements, including the CAD 2.9 million in retroactive funding in Manitoba and CAD 9.1 million in Ontario flow-through funding, partially offset by reduced funding for COVID-19 of CAD 2.7 million and the impact of the loss of occupancy protection.
NOI increased by CAD 10.8 million for the same period last year to CAD 26.6 million and represented 13.3% of revenue, largely due to the net COVID recovery of CAD 9.9 million, driven by the CAD 13.3 million of COVID funding received in the first quarter related to 2021 costs. These increases were offset by higher labor, utilities, and the impact of the occupancy protection. We believe the improving trend we experienced in occupancy levels in 2021 will return as the impacts of the Omicron wave moderate and subside. In Q1, our occupancy declined 120 basis points from Q4.
Occupancy protection in Ontario long-term care homes expired at the end of January, and we are required to achieve 97% occupancy over the remainder of 2022 to receive full funding, excluding ward-style beds no longer in use. Our average adjusted occupancy for the two months ended March 31 was 94.9%.
We are tracking a small number of homes in Ontario that are currently tracking below the 97% requirement for full funding and have targeted plans in place to attempt to recover the occupancy shortfall over the balance of 2022. Turning to slide 12 in our home healthcare segment. Revenue grew CAD 1 million or 1% in Q1, driven by billing rate increases and a 0.8% volume increase, partially offset by reduced COVID-19 and pandemic pay funding of CAD 1.2 million.
Excluding the wage subsidy received in Q1 of 2021, ParaMed's NOI declined by CAD 3.6 million to CAD 2.7 million, with an NOI margin of 2.7% from CAD 6.3 million and 6.4% margin in the same period last year. The decline in NOI reflects an increase in unfunded COVID-19 costs of approximately CAD 2 million and higher costs to address our staffing capacity challenges, which resulted in higher wages and benefits, recruitment, travel, and training costs, as well as higher IT costs in the quarter. The surge in COVID-19 cases among ParaMed staff had a significant impact on our workforce capacity in the quarter, leading to a sequential decline in volumes of 4.8% and a narrowing of our NOI margins.
Staffing shortages across the entire health sector, including both nurses and PSWs, continues to be a challenge and was further exacerbated by the prevalence of community transmission caused by the Omicron variant. In the first quarter, more than 2,100 ParaMed staff took some amount of COVID-related sick leave, peaking at more than 900 staff absent in the last week of January of 2022.
We continue to focus on supporting the safe return of our staff who are on leave, building capacity through our large-scale recruiting efforts and hiring through our internal training programs. Our PSW college partnerships and in-house training programs graduated and hired more than 170 caregivers in Q1, and we are on track with our target of an additional 600 staff from these programs for all of 2022.
On a sequential basis, excluding the impact of the net COVID costs and adjusted for the retroactive billing rates recorded in Q4 of 2021, the NOI margin in Q1 was 5.5%, down from 8.8% in Q4. This decrease in NOI margins in the quarter was largely due to the staffing capacity challenge impacting volumes and higher related operating costs, as noted earlier.
Consistent with our experience in 2021, we do anticipate that we will resume our recovery in our home health care volumes as the effects of the pandemic recede and our staffing capacity recovers. We're also encouraged by the recent announcements from the Ontario government of an additional CAD 1 billion in funding for the home health care segment over the next three years, included in the April 2022 budget, and the making of the CAD 3 an hour PSW wage enhancement permanent.
We believe these are important investments by the government and will help us drive the recovery needed in staffing across the sector to address the existing and growing demand for home health care. Turning now to slide 13 and our other operations, Extendicare Assist and SGP segments. The underlying demand for our services continues to be strong, and SGP now supports over 98,800 third-party residents, an increase of 21.9% from Q1 of 2021 and up 6% from Q4 of last year.
Q1 2022 revenues declined 2.1%, largely due to lower management services revenue, and NOI decreased by CAD 900,000 to CAD 3.7 million due to increased staff and IT costs to support the growth initiatives in this segment. Finally, turning to our overall financial position.
At the end of Q1, we remain well-positioned with consolidated cash of CAD 118 million and CAD 73 million in undrawn credit facilities. In addition, we have closed construction financing facilities for our three long-term care redevelopment projects under construction and have an aggregate of CAD 151 million in available undrawn construction financing available on these facilities. The estimated CAD 125 million in net proceeds to be realized on closing of the retirement living sale will provide added flexibility to allocate capital strategically, including in our long-term care redevelopment program to fund the Revera transactions, consider other potential acquisitions, as well as capital structure initiatives.
Excluding the impact of the retirement living debt, which is being fully repaid or assumed on the closing of the sale, our maturity profile's improved with only modest debt maturities coming due over the next two years remaining and our pro forma debt to gross book value at 34.6%. With that, I'll pass the call back to Michael for his closing remarks.
Thanks, David. Before we turn to your questions, I just wanna highlight the commitment of our team members and the incredible dedication they display every day in caring for our clients, residents, and their families. Throughout the pandemic, now entering its third year, our team members have remained steadfast in their commitment to protect the health of the most vulnerable in our society.
For this, we are extremely grateful. We are optimistic about the opportunities for growth in our long-term care and home health care segments. The combination of the sale of our retirement operations and the Revera and Axium transactions focuses the organization on those areas where we have the greatest expertise and scale. As we are faced with the demographic reality of relentlessly increasing demand, we are dedicated to advancing the delivery of much-needed, high-quality home health care and long-term care.
Thank you for your continued interest and support. With that, we'd be happy to take any questions you might have. Operator?
Thank you. We will now begin the question and answer session. To join the question queue, you may press star one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the star key. To withdraw your question, please press star two. We will pause for a moment as callers join the queue. Thank you. Our first question is from Scott Thompson with CIBC.
Just a quick question on inflation. How are you thinking of it, besides staffing, and agency costs? How are you thinking of its impact, on future cost structure?
Yeah, I think, Scott, I mean, from an inflation perspective, you know, on our cost structure, it's always been a bit of a challenge in the sense that over the long term, the historical trend has been that the inflation impacts do work their way through the different lines of business, ultimately, you know, funding changes and rate increases that address things. It does tend to happen, you know, over longer periods of time. Obviously, in the short term, we're seeing some acute increases in some of our costs. I think on the operating side of things, you know, we are generally seeing support starting to come into the sector from the various provincial governments, acknowledging that.
We are seeing rate increases coming through on the LTC side or continued funding on COVID. The announcement included in the budget for CAD 1 billion over three years in the home care side, you know, details still to come on that. We do expect that some component of that CAD 1 billion in funding will go into rate increases that will help us address the increases in our labor costs.
That we've been experiencing. We have to wait for the full details on that to come out. On the construction redevelopment front, it is a concern. At the current moment, I think that just the magnitude of kind of the increases that the sector is seeing broadly, not just in seniors care obviously, but broadly in construction, does leave us in a situation where, you know, the construction and our projects, we are needing to work with our partners and the government on looking at the capital funding program, which at the moment doesn't have an inflation component or an indexation component in it. Obviously, there's some work to be done there to continue to progress on the construction side, on the redevelopment.
Do you have any concern that the focus on seniors and long-term care will sort of wane after the election in Ontario?
Well, it's always a consideration, but I think the government with its new legislation has enshrined in that legislation the move to four hours of care per resident day by 2025. The bed allocations for the capital program over the next five to seven years have all been made now. All those letters have been issued. None of that is a guarantee, but certainly the program has been laid out over the next number of years, and it would take a government deciding to actively roll that back to you know to see us kind of step away from these historic investments.
The other thing that hasn't really worked its way through the system is the federal commitment to long-term care. We've seen a couple of smaller provinces come to an agreement with the federal government on the spending of some of those funds, but there's more to come on that front as well. There's some federal support coming. Yes, I think it's a risk given all of the competing needs for government support in healthcare and outside of the healthcare sector. They certainly have made an effort to enshrine the capital and the staff programs on a multi-year basis.
Great. That's excellent color. Thanks, gentlemen. I'll turn it back.
Thank you. Our next question comes from Jonathan Kelcher with TD Securities. Please proceed with your question.
Thanks. First question, just on the home healthcare business. I guess Omicron slowed it down in the first quarter. Are you still seeing staff shortages as we go through Q2 here? How was April versus last year?
Yeah. I think Q2 is continuing to have some challenges, not as bad as Q1, in terms of the severity of the Omicron infection rates. We're certainly seeing elevated absenteeism as we go into Q2. We're also seeing significant kind of post-pandemic turnover that I think we're seeing quite broadly throughout the labor market. That, you know, that's been a challenge. It's hard to know how long that, you know, will continue. You know, I think we put in three pretty good kind of sequential quarters of growth in both volumes and margins last year when the pandemic was at a relative low point.
We feel that we've got the systems in place to return to that kind of a cadence as soon as you know as soon as the pandemic recedes. As I mentioned in my remarks, I mean, the last two years in mid-May, we've seen, you know, the pandemic go quiescent, just on a seasonal basis. We're certainly hopeful that that will happen again.
Okay. For just in that business, the home healthcare workers, I'm assuming they're responsible for their own, like, getting from home to home, so they pay their own gas.
Well, there's a series of. Yeah. We reimburse our staff for travel costs. That's, you know, that's built into our agreements with them. They are responsible for paying those costs, but then, you know, we reimburse them.
Okay. That's something that should be obviously a little bit more expensive this year than last year.
Yes.
Okay. Just, you guys talked a little bit about capital initiatives with some of the proceeds you're gonna get. Would share buybacks, sort of be in the bucket you're looking at?
We're considering everything at the moment. I think our focus right now is closing the transaction on Monday, on the regulatory approval process for the other transactions. Of course, we're you know waiting to see how quickly our redevelopment program moves forward, which will dictate the capital needs, you know, for that. I think we've got still some work to do before we make final decisions on how best to deploy the capital and when.
Okay. That's helpful. Just one more quick one. Just on the LTC, the way it works, you're 95%, give or take, for February and March. Is the 97% a full year average, or is it sort of done by month?
It's a full year. Yeah, it's a full year. Well, typically, it's an annual calendar measurement, and this year it's gonna be an 11-month year, just given they had that, the COVID-related occupancy protection in place for January. The test is 97% for the 11 months. It's something.
Okay.
You know, we measure as we go and, you know, have an outlook as well. Yeah, we are for the two-month period, we're 94.9% on the new basis of the calculation. So that's a number we'll be tracking and talking about as we move through the year. Obviously, the goal there is to get that number to 97% for the 11 months.
Okay. Thanks. I'll turn it back.
Thank you. Our next question is from Tal Woolley with National Bank Financial. Please proceed with your question.
Yeah. I just wanted to talk a little bit more about the labor situation. Most of your employees are unionized, correct? Like, in terms of, like, the rate you're paying, you have visibility on that, correct?
Well, yes. Yes. You mean visibility going forward as well? Is that what you're asking?
Well, yeah. I'm saying, like, you've got, like, you know, contracted wage rates for the next few years with your unions, right? The issue with respect to labor costs is really, it seems like it's an availability issue. It's not so much a wage rate issue. Is that?
Yeah. I think availability is the biggest factor right now. Yes. That's true. Just, you know, as we're talking about home care, just over half of our staff is unionized, so it's not 100% union.
If we say, you know, just going back to the question about, like, travel costs and obviously, like, you know, you've got fuel costs through the roof, so clearly that's gonna, you know, that's gonna have an impact. Just the way the contract works with the governments, is it basically gross revenue to you and the costs are on your own? Or is it more you're on your own for the costs? Or is it more like LTC, where it's a bit more prescribed, you know, in terms of how.
No. It's very much the former.
Okay.
You know, our revenue is paid as a single rate, and then we're responsible for the costs.
Got it. Okay. Makes sense. You know, you talked a little bit about turnover, you know, post-pandemic. Do you have a sense of where your staff is going? Is it a certain, you know, is it nurses? Is it PSWs? Is it care assistants? Like, or is it just kind of across the board?
Well, there are several dynamics here. First of all, we have, let's say, a competition within the healthcare sector itself, where we've got hospitals adding beds, long-term care adding staff, and then, of course, the expansion in home care. There is significant movement between those segments of the healthcare, you know, the healthcare sector. You know, we certainly see people, you know, moving to other opportunities as they get experience. We have staff that come into our organization, get training and experience, and then move on to other opportunities.
I think the other thing that's happened is, you know, for certain groups that we employ as part of our home care operations for general housekeeping and supporting people in their independent living, those people can also leverage that experience to move into the hospitality sector. Of course, we've seen in the last six months a big opening up of hospitality, which is increasing competition for labor as well. There's dynamics within healthcare, and there's dynamics across with other sectors. You know, that combined with the generally very high participation right now in the, you know, from an employment perspective means that labor competition is heightened at the moment.
Are you also seeing a dynamic where, you know, the industry, you know, is suffering from, you know, availability challenges, and so you're employing agencies? I mean, the agencies are getting contracted back to you at a higher typical rate than you would have for the staff. Are you seeing employees move from staff to deciding to go work for an agency instead?
That's a dynamic that is true in the long-term care side of the business, not in home care. We don't use agencies in home care for the most part. In long-term care, we do tend to see a surge in agency use during periods of heightened absenteeism. When we get a lot of outbreaks, agency use tends to go up. We manage it back down again when things go back to normal. That tends to be a transient kind of situation as opposed to something that is on a long-term trend.
Sorry, I guess just more specifically, if I'm a, you know, a care worker in an LTC facility on a union contract, is it possible for me to go work for an agency instead and make more money?
Well, theoretically, yes. You'd be moving to a situation of stable employment to unstable employment, right? 'Cause it's by its very nature, it's short term. There's no commitment. You know, while that might happen in a few, you know, in a few cases, generally, doing that is kind of putting your long-term employment at risk.
Got it. Okay. Just going back to the restructuring of the LTC operations. When you start the redevelopment of certain of your Class C facilities with Axium, can you talk a bit about how the pricing of the sale of those assets into the JV will work?
Sure. The structure of the deal is the joint venture we're going to establish will acquire an 85% interest in the home. We are gonna be the manager of the home within the JV on a sort of typical management agreement structure and earn management fees to continue to operate that home. The pricing, the details of the mechanics have a couple of different elements to it around you know how we arrive at the components. There's a development fee, a management fee, there's some other consideration. In the end, you know, we're looking at selling the homes into the JV in you know cap rates in the 6.5%-6.75% range.
There's a lot of ways we get there, but on an implied kinda cap, you're in that sorta six and a half to seven range.
You know, 'cause I thought one of the ways you could have structured it too is you would, you know, maybe take less for the homes and then participate less on the CapEx side, in the redevelopment. But it sounds like you're gonna do it sort of like try and do it as everything at market as best you can through the JV.
Yes.
Okay. How much NOI right now comes from the Class C beds?
We don't generally break that. I don't think we've broken that out before.
If I use the proxy, like, just of the bed count, am I in the ballpark?
Yes. I'd say if you took our NOI and extrapolated across the beds, I'd say the C beds run at, you know, they run lower NOI than an A bed home, just given the composition of the home and basic versus preferred split, and the funding. So if you looked at our long-term pre-COVID NOI margins in long-term care of sort of 11.5%-12%, you'd have the C beds slightly below that average and the A beds a bit above. But you could do a proration off the beds.
Okay. For the occupancy bonus for this year, if you hit 97%, everything's cool. If you come in, let's say, at, like, 95% for the year, what's sort of the amount of dollars we're talking about in terms of that you end up giving up as a result?
Yeah. It's there isn't a lot of homes, to be honest. We're tracking a handful of homes in Ontario now that you know need a recovery plan that the ops team is focused on. I think sitting here today at 94.9%, we're talking about CAD 1.2 million-CAD 1.3 million potential impact that we're gonna be working to mitigate. It isn't big, but I mean, it is straight to NOI, so it is, you know. But that's kind of the magnitude of how we're feeling today given where we're at. I mean, if we have some type of resurgence of a seventh wave or something different, but where we sit today, that's kind of the magnitude of the problem we're looking to solve.
Okay. Michael, just lastly, like I appreciate that all these changes, you know, you made are gonna take quite some time to actually play out. If you think about, you know, five, 10 years down the road, do you have an idea in your head of like how much NOI you expect to be generating from, you know, principal investment in real estate and operations of long-term care homes versus how much will come from service operations and management fees, that kind of stuff?
Yeah. Well, it's a good question. Our focus at this point has been to create a number of growth platforms for our organization so that we have opportunities for organic growth in terms of course, home care, in terms of long-term care management services, in terms of the services that we provide to other operators. These transactions are setting us up to be able to do that. To be able to predict what the mix might be five to seven years out really is difficult because you know, with our partnership with Axium, we see lots of opportunity for new greenfield builds in all the provinces that we operate.
We know that the demographic projections that actually just came out with the recent census release are predicting that by 2040, the number of people over age 85 will triple in that period of time. Of course, that's our prime market focus, and that's where our demand comes from. We could see quite a lot of expansion. What the government decides to do in terms of the mix of long-term care or home care in terms of servicing that aging demographic still remains to be seen. It's an issue of some debate. I think people will be feeling their way forward kind of year-over-year as we see what happens with the wait lists and what happens with demand, et cetera.
You know, I'm really not sure. You know, our agenda is to be able to capitalize on wherever the growth materializes, whether it be in people's own homes or in homes that we operate. Either way, we'll be able to capitalize on that demographic demand.
Got it. All right. Thanks very much, gentlemen. I appreciate it.
Thanks.
Thanks, Tom.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. There are no further questions at this time. I would like to turn the floor back over to Jillian Fountain for any closing remarks.
Thank you, operator. That concludes our call for today. This presentation is available on our website, as are the call-in numbers for an archive recording. Thank you everyone for joining us today, and have a good weekend. Please don't hesitate to give us a call if you have any questions.