Ladies and gentlemen, welcome to Sienna Senior Living Inc's Q4 2023 conference call. Today's call is hosted by Nitin Jain, President and Chief Executive Officer, and David Hung, Chief Financial Officer of Sienna Senior Living Inc. Please be aware that certain statements or information discussed today are forward-looking and actual results could differ materially. The company does not undertake to update any forward-looking statement or information. Please refer to the forward-looking information and risk factors sections in the company's public filings, including its most recent MD&A and AIF, for more information. You will also find a more fulsome discussion of the company's results in its MD&A and financial statements for the period, which are posted on SEDAR+ and can be found on the company's website, siennaliving.ca. Today's call is being recorded, and a replay will be available.
Instructions for accessing the call are posted on the company's website, and the details are provided in the company's news release. The company has posted slides which accompany the host's remarks on the company website under Events and Presentations. With that, I will now turn the call over to Mr. Jain. Please go ahead, Mr. Jain.
Thank you. Good morning, everyone, and thank you for joining us on our call this morning. Last year, we outlined where we see significant growth potential in our business over the next few years and how it will contribute to the expansion of Sienna's net operating income. Our consistently strong financial performance in 2023, which was driven by our focus on optimizing revenue and costs, indicated that we are on the right track. Each quarter throughout the year, we were able to achieve notable improvements in our same property net operating income in both lines of our businesses, resulting in a 16.5% increase year-over-year. Moving to slide five, our primary focus last year was to grow our business. Nowhere was this more evident than in our Long-Term Care operations. Average occupancy was 97.6% in the fourth quarter, with occupancy exceeding the 97% required for full government funding.
Further supporting our results were higher preferred accommodation revenues and significantly reduced agency staffing costs as a result of our ability to fill vacant positions with our own team members and minimize agency usage whenever possible. We ended the year with a 21.1% increase in our Same Property NOI in Q4 compared to last year. Our results show the significant progress we have made in closing the gap left behind by the pandemic. However, there's still work to be done to get back to the NOI levels we used to generate prior to 2020, and we are committed to fully closing that gap. With respect to retirement operations, same property occupancy grew to 88.2% in Q4 of 2023. This was an improvement of 20 basis points year-over-year and 130 basis points since the third quarter.
We continue to make steady progress towards our goal of stabilized occupancy of 95%. Supporting this goal is our intensified focus on high-opportunity homes with low occupancy levels, combined with our continued strong performance across the balance of our portfolio. Addressing the high-opportunity properties will remain a key focus for us in 2024. Our results were further supported by average rate increases approximately of 5%. We ended the year with Same Property NOI growth of 11.8% year-over-year in Q4 2023. Based on our occupancy forecast, we expect same property occupancy to improve by approximately 150 basis points to 89% for the full year of 2024. With the return of seasonal occupancy patterns, we expect some softness over the winter months before the resumption of occupancy growth. Moving to slide seven, throughout 2023, we continued to take advantage of select opportunities to expand our business.
We started and ended the year by acquiring properties that we had already been managing for some time, including our Woods Park Campus of Care in Barrie, Ontario, and an additional 30% interest in Nicola Lodge in BC, where we now own 70% of the 256-bed Long-Term Care community. In the fourth quarter, we made an inaugural entry into the Alberta market. We entered into a management contract for a retirement residence in a prime location in Calgary, which is owned by Sabra Health Care REIT. Sabra is one of our largest joint venture partners, and this transaction underscores our strong relationship. We now manage 21 properties on behalf of Sabra or a joint venture with them, including the 12 properties we acquired together in 2022. In December, we completed construction of a retirement residence in Niagara Falls.
The first residence started to move in at the end of January, and leasing is progressing well. We own 70% of Elgin Falls in partnership with the Riedman Group, and once this home is stabilized, we will have the option to acquire the remaining 30% interest. Together with our Long-Term Care development in North Bay and our campus of care project in Brantford, these three projects are expected to improve our AFFO payout ratio in the mid- to high single-digit % ranges once they are stabilized. With respect to future expansion plans, our strong balance sheet and active asset management initiatives will allow us to pursue opportunities to further grow and improve our company through acquisitions and strategic partnerships. Moving to our focus on our team members.
Throughout last year, we continued to make team member engagement and retention a core focus of our initiatives, as staffing remains undoubtedly one of the biggest challenges in our sector. We invested in training and development, made significant improvements to the onboarding process, and enhanced the shift scheduling system. We also awarded shares to an additional 800 team members as part of Sienna's share ownership program. Today, approximately three-quarters of all eligible team members are now shareholders. In SPARK, the platform where team members can share their ideas, is a great success and continues to generate hundreds of new ideas. The Grand Prize of 2023 was awarded to a team member for an idea on donating excess food to Canadians living with food insecurity. To date, we have donated thousands of meals through a partnership with Second Harvest. Combined, these initiatives are having a significant impact.
We were able to increase team member engagement for the third consecutive year, and retention was up nearly 11% compared to last year. We believe that these improvements directly impact our ability to serve our residents. With that, I'll turn it over to David for an update on our results.
Thank you, Nitin, and good morning, everyone. I will start on slide 10 for financial results. In Q4 2023, total adjusted revenues increased by 13.3% year-over-year to CAD 218.9 million. This increase was largely due to rental rate growth and increased care revenue in our retirement segment, as well as flow-through funding for direct care, annual inflationary funding increases, and higher occupancy in our Long-Term Care segment. Total net operating income increased by 17.5% to CAD 38.2 million this quarter compared to Q4 2022, mainly due to Same Property NOI growth in both lines of business and the acquisition of a campus of care in Q1 2023. Same Property NOI in our Long-Term Care segment increased by 21.1% to CAD 19.7 million in Q4 2023 due to funding increases, high occupancy levels in our Long-Term Care Homes, which enable us to receive full funding, and higher preferred accommodation revenues.
Our retirement Same Property NOI increased by 11.8% to CAD 18 million in Q4 2023 compared to last year, primarily as a result of rate growth as well as improved occupancy, and was further supported by lower net pandemic and incremental agency expenses. Year-over-year, we reduced agency staffing costs by approximately CAD 8.9 million to CAD 5.8 million in Q4 2023. Agency costs, which are predominantly covered by flow-through government funding, have now returned to pre-pandemic levels. Moving to slide 11. During the fourth quarter of 2023, operating funds from operations increased by 24.9% to CAD 22.1 million compared to last year, primarily due to higher NOI. OFFO per share increased by 24.7% to CAD 0.303 in Q4 2023. Adjusted funds from operations increased by 2.6% to CAD 17.8 million compared to the last year.
The increase was largely due to higher OFFO offset by higher spending on maintenance CapEx as a result of timing of repairs and investments in our building systems ahead of the winter months, as well as a decrease in construction funding income. AFFO per share increased by 2.5% to CAD 0.243 in Q4 2023. In line with our results, we made notable improvements to our AFFO payout ratio in 2023, lowering it by 240 basis points year-over-year to 96.3% in Q4 2023. For the full year, we lowered the payout ratio to 90.9% in 2023, and this is an 840 basis improvement compared to 99.3% in 2022. Looking ahead, we expect continue improvements to our payout ratio. With respect to our debt metrics, we have seen notable improvements and further strengthened our balance sheet. We maintained ample liquidity of CAD 307 million at the end of 2023.
We increased our debt service coverage ratio to 1.9x year-over-year from 1.8x in 2022, and extended the weighted average term to maturity of our debt to 5.9 years from 4.5 years at the end of 2022. We ended 2023 with a debt to gross book value of 44.6% and CAD 1 billion of unencumbered assets. This provides financial flexibility and supports our refinancing initiatives at attractive rates. In particular, we were actively exploring opportunities to refinance our debt expiry in the fourth quarter of 2024. We have the option to refinance a portion of our expiring debt with proceeds from the financing or upfinancing of assets with CMHC insured mortgages at interest rates that are below those of other financing options. With that, I will turn the call back to Nitin for his closing remarks.
Thank you, David. 2023 was a year we returned to a stable operating environment and were able to achieve significant and consistent net operating income growth in both lines of our business. Throughout the year, our key performance indicators were moving in the right direction, which has put us in a strong position to take further advantage of the tremendous growth potential in Canadian senior living sector. As we look ahead, we are actively working on a number of initiatives to further optimize revenue, reduce costs, and add value to our asset base. We expect NOI in our retirement segment to benefit from an approximate 150 basis point increase in average same property occupancy in 2024. Combined with the continued rental growth in line with market rates as well as other initiatives to optimize revenue, we forecast NOI growth in the high single-digit percentage ranges for our retirement segment.
With respect to our Long-Term Care segment, we anticipate that current occupancy and cost management trends will continue in 2024, and we expect our 2024 NOI for the full year to grow in the low- to mid-single-digit percentage ranges. There's tremendous growth potential in Canadian senior living, with the oldest baby boomers now turning 80 in two years, and life expectancy continued to increase. Canadian seniors in the 85+ age group are expected to reach 1 million by 2026 and further grow by 25% from 2026 to 2031 and another 33% between 2031 and 2036. At the same time, wait lists for Long-Term Care are getting longer, and new supply of senior living accommodations has declined significantly in recent years. The favorable demographic trends continue, combined with the stability that has returned to our business, gives us an optimistic outlook for 2024 and beyond.
On behalf of our board of directors and our management team, I want to thank all of you for your continued support and commitment. We are now pleased to answer any questions you may have.
Thank you. We are now opening the floor for questions, and if you would like to ask a question, please press star, followed by the number one on your telephone keypad to raise your hand and enter the queue. When selected, if you are using a loudspeaker, kindly switch to your handset to ensure your question is heard clearly. Again, that is star one to join the queue, and your first question comes from the line of Jonathan Kelcher from TD Cowen. Your line is open.
Thanks. Good morning.
Good morning.
First question, just on Long-Term Care. What are the current industry expectations for rate increases for 2024, specifically for Ontario?
So we expect something to come out in the March budget. It is hard to really comment because there's only one party which decides that, which is the government. The conversation with government has been. There has been a lot of investments in Ontario and other areas, but other accommodation, which is how we keep the homes open, has frankly not been invested in. So the expectation would be a bigger increase than just cover inflation. But again, yet to be seen what comes out.
Okay. And I guess that's sort of the gap between whether you hit low single-digit Same Property NOI or closer to mid. Be very concerned.
That would be correct. That would be correct, Jonathan.
Okay. And then on development funding for Long-Term Care, do you also expect an announcement on that with the budget?
We are really focused on operational funding. Our conversation has been very clear that there is not an ability to construct homes unless we get the operating funding fixed. So we are very committed to getting alignment on that with government before we start talking about adding new beds to construction.
Okay. Fair enough. And then just on your current the Elgin Falls, what's the expected timing on the lease-up of that property?
It's a bit early to comment on it. I mean, usually, it takes anywhere from 24-36 months, closer to 36 months than 24. But again, so far, the results have been very strong. We have had good movement so far. I think we'll be able to give a bit better answer as we progress further.
Okay. Fair enough. And then just last two quick modeling questions, just on the expectations for current taxes for 2024 and G&A.
Yeah. So on current taxes, I would expect that it would be higher than in 2023. We did have some one-time recoveries in 2023, including a book-to-tax adjustment in the second quarter. So we would have to add that back on and then model on top of that. And then G&A, the results are a little bit lumpy from quarter to quarter, but we would anticipate that 2024 G&A would be relatively flat to 2023.
Okay. That's it for me. I'll turn it back. Thanks.
Thank you.
Your next question comes from the line of Himanshu Gupta from Scotiabank. Your line is open.
Thank you and good morning.
Good morning.
Just on the retirement home business here, I think, Nitin, you mentioned rental rate increases of 5%. Is that what you achieved in Q4, or was it for most of 2023?
Yeah. It really is on an annual basis because it's not depending on when the residents move in. So on an average, we achieved around 5% rental growth in all of 2023, and we would expect similar going forward.
Okay. That was my next question. So you're expecting something like 5% for 2024 as well?
In that range. Correct.
In that range. Okay. Okay. Thank you. And then on the retirement home occupancy side, I mean, obviously, you're expecting some increase this year as well. So just wondering, are there homes which are still in low 80% level or even below 80% occupancy which you expect to increase? I mean, what will be the breakdown of occupancy growth going forward?
As we shared, there's a big chunk of our portfolio which is performing extremely well, and there are many homes which are in the 95%+ range. That tells us that we have, and so that obviously gets to the data that we have few homes which are not performing well, and some would be below that 80% occupancy range. These are the homes which we have identified as high occupancy opportunities. Some of them need to be redesigned for something different. In other cases, it's different sales and marketing programs, different outreach, some combination of renovation to really ensure that they are aligned with what the market is expecting. That's our focus in 2024.
Okay. Have you identified how many homes are below 80% level?
Obviously, we know internally, but we have not identified it publicly.
Got it. Okay. Okay. Fair enough. And then maybe just lastly, on the NOI margin and again, on the retirement home side, it was around 36%, I mean, give or take, last year, but very similar to last two years as well. So we're getting this occupancy growth, which obviously, you're doing a great job there. Why margin is not moving much, or what will take NOI margin to move higher from here?
Yeah. No, thanks for that question, Himanshu. I mean, our expectation is that margin growth would increase between 50-100 basis points. In our view, it is meaningful growth back towards pre-pandemic levels. We're going to achieve that through a combination of occupancy growth as well as rental rate increases.
Okay. Fair enough. And maybe, I mean, you mentioned stabilized retirement home occupancy of 95%. What do you think is a stabilized retirement home NOI margin if you achieve that 95% stabilized occupancy?
We haven't really given that guidance out, Himanshu. I mean, the idea would be that going forward, there's a bigger chunk of revenue which goes into NOI, so we do expect margin to increase. And I think as you give further timing out in 2025 and beyond, we might be comfortable sharing those numbers at that stage, but not yet.
Okay. I mean, so my question was, you're expecting 50-100 basis points in 2024, but that's not stabilized. You still have more funding.
That's correct. That's correct.
Okay. Okay. Fantastic. Okay. So I think that's it. Or maybe one last follow-up on LTC. And I know you mentioned about the March budget. You will get more visibility around funding. But are you assuming any further cost savings, or most of them has been realized with respect to agency staffing or anything else?
Yeah. The biggest cost saving for us is really agency staffing. The rest of them are very fixed. It would be I mean, we continue to look for opportunities for cost saving, but nothing like the ones we saw in 2023 because the biggest impact has been staffing agencies, which we, in fact, have now down to 2019 levels.
Got it. Okay. Thank you. Thank you guys. Very helpful. I'll turn it back.
Thank you.
Your next question comes from the line of Dean Wilkinson from CIBC. Your line is open.
Thanks. Morning, guys. Nitin, I'm not trying to aid you, but you've been around for a cycle or two. You look at construction starts as a percentage of the seniors' inventory. It looks to me to be maybe a dangerously low level. Have you ever seen it this low, and how does it resolve itself?
You're not aging me because I'm a newbie to this sector. I've only been here for 10 because people have been doing it for much longer than me. I would say these numbers are quite low. There are two things, maybe multiple things, at play. I think the first one is, for a long period of time, at least close to 20 years, we have not seen this level of interest rates, which has had a significant impact. Combined with it, we have also not seen the difference between rental rate increases and construction costs. So construction costs are 40%, and obviously, rental rates have not gone up by 40% in the last three or four years. The last thing I would say, there is an understanding that this business has a big component of your platform.
And so the ability for a new developer to just come in and open a retirement home is getting less and less. I would say in 2019 and 2020, there would not be a week where we would not get a phone call from someone who has land and wants to build a retirement home. You don't get those phone calls anymore. It will be sophisticated retirement operators, owners who are building new retirement homes, not people outside the sector. So I would say a combination of all those three has had a significant impact on supply. And I think it will take a bit of time for it to get better. I mean, these asset classes take three to four years from the beginning to end of construction, and that's aggressive. Frankly, in GTA, it'll be much longer.
A short supply is here to stay for a period of time.
Right. So is really the limiting factor then just the construction costs and the imputed carry on interest rates, or is there a regulatory burden as well that sort of creates a log jam?
Yeah. There's no regulatory burden more than it was in the past. So it's really been interest rates, construction costs, but also understanding that you need the right platform for this business. I would say that third one, I cannot overstate enough because there were a lot of new entrants to the market who built one retirement home and looking to sell it very quickly. We are seeing less of that going forward.
Do you think that there is an opportunity to go out and acquire some of those one-offs now, or is that more of a one-off distress situation kind of scenario?
Yeah. I mean, there are opportunities here and there. In 2023, we did some acquisition. We are very focused on our organic growth. We continue to have very strong liquidity. We don't want to put it to work unless there's a compelling reason to do that. I think there would be opportunities as we move forward, but there are not many. There are not a lot of assets in distress. I think there were a lot of sales. The market was extremely busy in 2021, 2022, 2023. We, in fact, did a big acquisition during that time. So a lot of that clearing, for lack of a better word, has already happened.
Perfect. That's it. Thanks, guys.
Thank you.
Before we continue on to the next question, a reminder, if you would like to join the queue, please press star one on your telephone keypad. Your next question comes from the line of Pammi Bir from RBC Capital Markets. Your line is open.
Thanks. Good morning. I just wanted to come back to you mentioned some of the properties where you've had success in driving the occupancy because they were below average. Can you maybe just talk about which markets those are in and what strategies have worked in those markets or at those assets?
Yeah. It actually is when we look at even the assets which are currently under consideration for driving occupancy, they are, frankly, scattered all over. Some of them are market-driven. Ottawa, for example, continues to be a challenging market. Luckily, we don't have a lot of assets in that market. But in many cases, it's more the new entrants to the market in the last three or four years. So we have to do a bit of service offering difference. There is a move towards more care needs. Residents, in fact, don't want to move out from retirement living that easily. So the ability to provide more services to those residents, I think that is but that takes some reconfiguration of the home and also, more importantly, reconfiguration of services that you provide. So those would be some of the examples that we're doing in specific homes.
But the biggest, I would say, is really the community outreach. No one makes a decision at a provincial level that they're going to live in this home moving from somewhere else. These are very local decisions. People are making a choice close to where their family is, what their reputation is at that home, what their family doctor says which homes to go and where if they're in the hospital, what the discharge agents say which home has a good reputation. And that's really where the big focus would be.
Okay. That's helpful. I guess maybe just maybe as an extension to that, have incentives really played much of a role to help push that occupancy, or is it really about finding the right service for the right resident?
Yeah. I mean, the incentives are pretty consistent across the sector. Usually, it's around 1-month or moving expenses. So those have not really changed a lot. I think the idea would be going forward is to continue with some incentives which are pretty common time to time, but it really is providing the right care and service. That becomes a key. I think the incentive is really more, "Do you want people to move in faster than maybe 3 months later?" That really is the difference between that.
Okay. And then just last one for me, coming back to Long-Term Care. In BC, I think there was a small recovery for prior year pandemic or sorry, earlier in the year, some expenses that were incurred. Are there additional recoveries you're anticipating for 2024, or is that pretty much done?
Yeah. I can answer that. In the province of Ontario, we've been reimbursed virtually for all of the pandemic expenses that we've incurred in the past. In BC, they are about a year behind. So we're actively working with the government there for some reimbursements. So we may get some retroactive funding in 2024, but the quantum is hard to define at this point.
Okay. The guidance that you provided on the same-property NOI growth for the retirement portfolio, I think it's clear that that includes the retroactive funding.
That's correct on the Long-Term Care side. Yeah.
Got it. Thanks very much.
Thank you.
As there are no further questions, this draws close our Q&A session. I would like to thank Nitin and David for today's presentation, and thank you all for joining us. This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.