Ladies and gentlemen, welcome to Sienna Senior Living Inc.'s Q4 2019 conference call. Today's call is hosted by Lois Cormack, President and Chief Executive Officer, and Nitin Jain, Chief Financial Officer and Chief Investment 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 for more information. You will also find a more fulsome discussion in 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 remarks on the company website under Events and Presentations. With that, I will now turn the call over to Ms. Cormack. Please go ahead.
Thank you, Tawanda. Good morning, everyone, and thank you for joining us on our Q4 call this morning. In 2019, we continued to invest in our people, platform, and properties. We further strengthened Sienna's position as a high-quality provider in a dynamic sector. We have focused on operating and financing initiatives and made great progress in fully integrating our retirement portfolio, operating platform, and team. Our strategic initiatives were aimed at providing a great resident experience and building and retaining a high-performing team. We have achieved a high level of resident satisfaction of 81% based on the results of our annual survey in 2019. Our national quality indicators continued to exceed industry benchmarks. To support occupancy in the retirement segment, we have continued to enhance sales, operations, and marketing programs and to invest in our properties.
We have made great strides in optimizing our capital structure. In early November, we finalized our CAD 150 million inaugural unsecured debt financing and subsequently repaid some long-term debt, creating a pool of unencumbered assets. Our financing initiatives further decreased the company's cost of debt and continued to strengthen Sienna's balance sheet, ending 2019 with a debt-to-enterprise value of 43.7%. Moving to slide five. Sienna benefits from owning a high-quality and balanced portfolio of long-term care and retirement residences. The long-term care portfolio has remained virtually at full occupancy at 98.2%, with waiting lists for each of our residences. The quality indicators in the portfolio consistently exceed industry benchmarks. We anticipate positive results with respect to the third-party accreditation of the Ontario Long-Term Care portfolio, which is currently underway and will be completed by Q2 2020.
Average same-property occupancy in retirement was 86.1% in Q4 2019. There are a number of factors that are contributing to the softness in occupancy, which I addressed on our Q3 call as well, including the temporary disruption associated with property upgrades and renovations at a number of the properties, oversupply in the Ottawa market, and there is new supply in both Kingston and the South Surrey markets, which are impacting our properties in these markets. We have been focused on several initiatives in retirement with the goal to enhance the resident experience and to support occupancy. These initiatives include enhancing our assisted living services, marketing campaigns and winter promotions, and investing capital to make further suite and amenity upgrades at a number of the residences, which we expect to be complete by Q2 of 2020.
With respect to our people strategy, a more centralized approach to recruitment, learning, and leadership development has improved the quality and the delivery of our programs and supports our goal to build and maintain a high-quality, engaged team, and great culture. The seniors' living sector continues to evolve, driven by an aging demographic, new technology, and changing consumer needs and preferences. Sienna is embracing these opportunities and will ensure that continued investment in our people, platform, and properties will further strengthen our position as a high-quality provider. With respect to supply and demand, we believe that the majority of Sienna's retirement residences are located in markets where future demand is expected to exceed supply. I will now turn the call over to Nitin for further details on Sienna's financial results.
Thank you, Lois. Good morning, everyone. I will start on slide nine. Same-property net operating income for the quarter was CAD 38 million, compared to CAD 38.9 million in Q4 2019. Largely as a result of softer occupancy in our retirement segment. The long-term care division generated same-property NOI of CAD 21.5 million compared to CAD 21.8 million in the prior year due to timing of expenses. The retirement division generated same-property NOI of CAD 16.5 million, impacted by softer occupancy, partially offset by rental rate increases in line with market conditions. For the year, same-property NOI increased by 0.7%, driven by stable growth in our long-term care portfolio and a stable operating margin in retirement business of 45%.
Moving to slide 10, OFFO in Q4 2019 was CAD 22.8 million, compared to CAD 23.6 million in 2018, largely resulting from lower same-property NOI in the retirement portfolio and non-recurring G&A expenses, which was partially offset by lower interest expense and lower current income taxes. Q4 2019 diluted OFFO per share was CAD 0.34, compared to CAD 0.3570 in the prior year's fourth quarter. Q4 2019 AFFO was CAD 20.9 million compared to CAD 21.7 million in 2018. Diluted AFFO per share was CAD 0.3130 in Q4 2019 compared to CAD 0.3290 in the prior year's fourth quarter. During the fourth quarter, Sienna received a BBB investment-grade rating with a stable trend from DBRS.
This provided the company with additional financial flexibility and supported Sienna's first unsecured debt financing of CAD 150 million for a five-year term at 3.109%, which was used to pay down part of our higher interest rate debt, including a CAD 35 million buyback of our Series B debenture, and to create a pool of unencumbered assets. At December 31st, 2019, Sienna had over CAD 300 million of unencumbered assets. Moving to slide 12. Continuing with the trend we set over the past quarters, we further improved our balance sheet and capital structure. Ending 2019 with a debt-to-enterprise value of 43.7% and a debt-to-gross book value of 46%, a reduction of 480 and 170 basis points respectively year-over-year. Sienna's debt to EBITDA improved to 6.7x in the quarter compared to 6.9x in Q4 2018.
Our interest coverage ratio remained high at 3.7 times, and we improved our weighted average cost of debt by 20 basis points year-over-year to 3.6%. With that, I'll turn the call back to Lois.
Thank you, Nitin. With more seniors than ever needing support, we are optimistic about our company and feel confident about Sienna's long-term growth potential with a balanced portfolio and future development opportunities. With respect to our operating results, we expect the long-term care portfolio to generate 2020 net operating income in line with 2019. In retirement, we expect a mid-single-digit decline in same-property NOI for the first half of 2020. We are working towards occupancy improvements in the second half of the year with the view of generating low single-digit NOI growth in the second half of 2020 and potential growth in 2021. We are committed to constantly upgrading the quality of our portfolio and will continue to focus on maintaining a balanced portfolio mix through strategic acquisition, potential disposition of non-core assets, in addition to development opportunities.
Our development plans include freestanding retirement residences with joint venture partners and intensification opportunities at existing sites. The developments of senior living campuses are subject to regulatory approvals and financial feasibility, and we continue to collaborate with industry associations and government authorities in seeking solutions for the development of new long-term care beds. With respect to intensification, we expect our recently completed expansion at Island Park in Campbellford to achieve stabilized occupancy by mid-2021. We also plan to start an expansion at Kingsmere in Alliston, comprising approximately 60 suites by mid-2020. This expansion has an estimated rate of return of 8%-10% and an expected completion date in 2021. Looking ahead, we remain committed to initiatives aimed at creating positive experiences for all of our stakeholders.
I am confident in the ability of our team to achieve continued success by remaining nimble and adapting to change, and by keeping focused on providing best-in-class services to our residents. With a sophisticated operating platform, extensive management expertise in senior living, and a strong balance sheet, Sienna is very well positioned to achieve sustainable long-term growth. Thank you for your participation on the call today, and Nitin and I will be pleased to answer your questions.
Ladies and gentlemen, to ask a question, you will need to press star then one on your telephone. That's star one to ask your question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Himanshu Gupta with Scotiabank. Your line is open.
Thank you and good morning. On the retirement home segment, do you think your expectation for recovery in 2020 has changed since we last spoke at quarter three results?
Has things panned out as expected in the last three months?
Our Q4 results are materially in line, Himanshu, with what we expected in Q4. As Lois mentioned during the Q3 call and on our comments now as well, we continue to see pressure in the three specific markets that we have called out, Kingston, Ottawa, and South Surrey. We are seeing more pressure from the new entrants to the market in terms of reducing rates versus what we originally thought. Our original guidance was that we expected same-property NOI to be slightly positive in next year. What we're coming back with is that we expect mid-single digits in the first half and lower single-digit recovery in the second half.
Okay. Specifically on your same-property NOI guidance for the first half, you expect a mid-single-digit decline. Are you expecting flat occupancy or do you see decline in occupancy as well?
Really what we are focused on is improving our occupancy for the long-term. What we don't want to be doing is buying occupancy by reducing rates. That has not been our focus, and which is evident in our margin for the full-year. It's stayed pretty stable to last year at 45%. We are focused on increasing margin over the long-term. Again, as Lois mentioned, our focus would be, we're not sitting idle on it, but we expect our occupancy to start improving really in the second half of 2020.
Okay. The expectation is the same as the recovery in the second half of 2020.
Yeah, that's right. We had said, we know that the winter is always seasonal. That's as we had forecasted, that we did not expect any substantive improvement in occupancy until the latter half of the year.
Okay. The recovery, is that a function of the renovations getting completed, or is that a recovery in the fundamentals itself?
Yeah. Well, we will be completed our renovations. That will definitely assist with the properties that are undergoing the renovations. As well, there's just the usual increase. Seniors don't tend to move in the winter months. The later months or over the summer and fall are usually the months where we have better uptake in terms of tours and leads and visits to our properties and move-ins.
Sure. Can you remind how many properties are going renovation right now, and what are the timelines in terms of them getting completed? When do you start to see occupancy pick up on those properties?
It's really the 10 Mayerthorpe properties. When we bought them in early 2018, we set aside CAD 5 million to work on those, and we are continuing on that. We expect most of them, or sorry, all of them would be completed by Q2 of 2020. Again, the change in occupancy would really be a blend of changing in occupancy in those residences and in addition to the market in Kingston and South Surrey, as some of the new supply gets absorbed.
Got it. Maybe just a last question on South Surrey market. What are you seeing in terms of new supply, and how is that impacting your properties? I think you have two properties there.
We have two properties, and there are two new properties that came into the market that are very close.
Okay. Thank you. I'll turn it back.
Thank you.
Thank you. Our next question comes from the line of Troy MacLean with BMO Capital Markets. Your line is open.
Good morning.
Hello, Troy.
For the development program, I'm just kind of curious, is that targeted at existing markets or as a way to enter new markets?
I think our development program, the two properties, the one that we completed and the one we are doing now, obviously, those are intensification, those are in existing markets. The standalone retirement homes we talked about would be in new markets, with joint venture partners.
Would that be like an existing territory, like Ontario and B.C.? Or would you look to enter like Alberta doing development?
Not at this time, Troy. Our development would be in existing markets with partners. We would not do development in new markets where we don't exist. Right now, that's not in the plans.
I believe you mentioned non-core asset sales. What's your determination of what would be non-core? Are you looking at the Class B or C LTC properties, or something on retirement homes where maybe you think you have too much exposure already? What's kind of the thought process there?
Well, we evaluate the alignment of our older and smaller properties all the time and want to make sure that we're allocating capital in the right place and getting the best value for shareholders. We're always kind of looking at what's the best opportunity for each of the assets.
Could you provide any color on the average length of stay in the retirement portfolio? Has that been consistent over the last year, or is that starting to trend down?
It's still about three years, by and large.
Perfect. Thank you. That's it for me. I'll turn it back.
Thank you. Our next question comes from the line of Brendon Abrams with Canaccord. Your line is open.
Hi, good morning. I'm just wondering if you could comment on any changes or trends you're seeing in traffic from potential residents throughout.
Throughout your retirement homes and I guess the lead conversions on that traffic, I guess my question really is, are you seeing a good flow of potential residents coming through the buildings, and just not converting, or are they choosing maybe new supply in the area? Just wondering if you could comment on that.
Well, that's exactly the issue. When there's new supply that comes into a market, seniors have more options, so they're touring more properties. They're taking longer to make their decision. When a new supply comes on stream, they can be very aggressive in their marketing tactics and strategies and rates. The strategy typically is to lease up the building as quickly as possible. That often happens in any market where there's new supply. In addition, usually, typically late fall, Christmas time, from after Christmas and into the winter months, seniors don't usually look for retirement living unless they really have to. Traffic is definitely always down in the winter months.
Right. From your perspective, it's not necessarily a demand issue, it's more driven by supply in terms of the occupancy.
Yeah. I would say demand is there, and particularly, given the challenge with the hospitals and the hallway medicine, there's just a lot of seniors that need other options and solutions outside of hospitals. Demand is there. There's increased supply, and in the winter months, we tend to have more people moving out with illness and so on, and just not as much moving in. Less traffic.
It might be a difficult question to answer, but, if you had to ballpark where your rents are compared to, let's say, new supply going up in your market, would they be significantly lower, in line? Where would rents be compared to new supply?
It depends. We're always in market. We do a competitive analysis and make sure that we're in line with market. When new supply comes on, they can be very aggressive with rates. I think as Nitin said, we would never try to match that or react to that, because our approach rather is to maintain our service level and consistency and focus really on the resident experience over time.
Right. Okay. Maybe just two other questions. Can you remind us again the total cost of the Kingsmere expansion?[Audio distortion]
It's in the range of around CAD 20 million.
CAD 20 million. Okay. I know in your release you mentioned, under G&A non-recurring expenses, just wondering if that's a significant number or not, and if so, what it would relate to.
It's close to CAD 1 million, and it's one-time expenses in our G&A.
Okay. I'll turn it over. Thank you.
Thank you.
Thank you. Our next question comes from the line of Frederic Blondeau with Echelon Wealth Partners. Your line is open.
Thank you, and good morning.
Good morning, Fred.
Just on the Kingsmere program, the 8%-10% expected yield, would that be levered yields? Sorry, I might have missed that.
Yeah, it's unlevered. It's cash on cash. Really would be.
Okay
entire development cost including capitalized interest, upfront losses that we will incur, and dividing that by stabilized NOI, or the other way, dividing the stabilized NOI by the total development cost. Unlevered.
Okay. Maybe lastly from me, a more general question. How is your focus on improving occupancy within the retirement segment takes away your attention from the development program? I guess what I'm trying to understand is whether or not you are at your target commitment in terms of development at this stage.
Yeah. The only development we have done last year was an expansion, and we know the market very well, so the risk of getting into new market is low with that. Same thing with the current one that we're doing, it's an expansion. We understand the market quite well. From an execution standpoint, we don't see a lot of risk. The new markets, we have talked about entering new developments. We're not looking at doing six or seven at a time. We might do one or two. There are obviously different people who do this kind of work. In our case, we have a big enough platform that doing one doesn't really hinder us from doing another one, or vice versa.
Mm-hmm. That's great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jonathan Kelcher with TD Securities. Your line is open.
Thanks. Good morning. Just to follow up on Fred's one question there on the Kingsmere, the CAD 20 million development cost, does that include the lease-up losses and capitalized interest?
That's correct, Jonathan. It would.
Okay. Just switching gears, how has flu season been so far this year versus last year?
I don't think it's really anything different. We do have some outbreaks in some of our communities, but it hasn't been dramatically different other than kind of the usual winter stuff where again, we have more residents moving out with illness or leaving, and fewer moving in.
Okay. Would it be fair to say that you'd expect occupancy to be pretty similar to Q4, or would you expect a little dip in Q1?
Probably a dip. Yeah.
Okay. Just on your guidance, I guess the mid-single digit down is really a function of tough comps on the occupancy front from Q1 and Q2 last year.
That's correct, Jonathan. It's really driven by occupancy.
Okay. If you end up being more successful in Q3, Q4, that would obviously be helpful to the back end in making the low single digit come to fruition because you'll also have easier comps in Q3, Q4 next year, right?
Yeah. That currently is included in our thought process. Again, as we get through the quarter, our goal would be to keep everyone informed to our outlook.
Okay. On the supply front, have you noticed a slowdown at all owing to any cost pressure on any new supply coming, or do you expect that pressure to sort of maintain?
It's hard to say. I know that there is new supply coming on over the next two years in some of our markets, like Barrie and some of the other smaller markets that we're in. There is other supply coming on.
Okay. Then just lastly, do you have any update on redevelopment on your Class C assets?
Well, I guess what we would say there is we're very pleased with the ministry's approach, that there's a new ministry now for long-term care, and they've been extremely collaborative, consulting with the sector, understanding that they need to make some changes. We just don't really have any line of sight to what or when there would be some changes to the program.
Okay. Thanks. I'll turn it back.
Thank you.
Thank you. Our next question comes from the line of Chris Couprie with CIBC. Your line is open.
Yeah, good morning. I think on the last call, you thought that potentially retirement home occupancy by the end of this year could be up 300 basis points, versus, I guess, where we were in Q3. Is that still a reasonable expectation?
Yeah, we ended Q3 of 2019 around 85% as our occupancy, which includes the development one as well. Our guidance was around getting close to 89% towards the end of the year. We are still on that number.
Okay. What gives you that confidence in terms of the, you alluded to that there's new supply that's going to still be coming on in a couple of your markets over the coming two years. I get that you'll eventually get absorption in Kingston and some of the other markets that are currently oversupplied. What gives you the confidence that this new supply is not going to then pressure occupancy in those markets?
Yeah. It's all in the timing of when the new supply comes on. A lot of that, like the new projects in Barrie, for example, are planned for later into 2020, 2021.
Okay. If we just think about the longer term, is the kind of stabilized level of occupancy maybe lower than we would've thought overall?
Yeah. I think in the past, we had like 92, 93%. Now we have a bit more exposure in the Ottawa market. The two properties in South Surrey, they're going to have a bit of pressure for some time. Again, I think it's very hard for us to predict what may happen in the next two years. I think for now, probably the outlook we can provide you for is for 2020.
I think the CMHC data for 2019, the average occupancy was 90% front to now.
Right. Understood.
Another thing to think about, though, to remember with Sienna, the real opportunity we have, because we've got a balanced portfolio with long-term care and retirement, it kind of helps to offset any short-term occupancy pressures that we have because the supply will be absorbed over time with the demand in all of these markets. Even by 2023, all of the markets that we're in, the supply should be absorbed. Because we've got a balanced portfolio and the stability of long-term care, that really is very beneficial for Sienna.
Yeah. Got it. Understood. In terms of your long-term care guidance, I think there was some chatter that the structural compliance premium might be removed. I think that's been delayed, or if you can give us an update on the status of that and how that could affect your outlook at all in that segment.
Yeah. Our understanding, and we know that our industry association is still in discussions with the ministry on this, but the last we heard, that it may end in March of 2020.
Right. The original guidance, Chris, is that it could potentially end in March 2020 or end of March 31, 2020. Since then, there's been some revised conversation that they might re-look at it. Again, we don't really know what re-looking might mean at this point.
Okay. In your guidance, though, you assume that it ends in March 2020?
Correct.
Okay. All righty. Maybe just on cash taxes, any thoughts for what that might look like this year?
Yeah. For this year, we had around CAD 6.1 million of cash taxes. I think for 2020, we should expect around CAD seven million-CAD seven and a half million.
Okay. Thanks. I'll turn it back.
Okay. Thank you.
Thank you. As a reminder, ladies and gentlemen, hit star one to ask the question. Our next question comes from the line of Yash Sankpal with Laurentian Bank. Your line is open.
Good morning.
Hi, Yash.
What is your retirement home occupancy at this point?
Our asset occupancy for the same property is around 86%.
Okay.
Pretty similar to where we ended the Q3, which was around 86.3. We are a little bit below the 86.3, so around 86%.
Just going back to this long-term occupancy expectation for the retirement home portfolio, do you think 90% is a good range in the long run for your portfolio? Or do you think you can go above, like, 92, 93?
Yeah. Right now, I don't know. We'd love to be at 92, 93. I think just given the supply over the next year or couple of years, I would look more towards where CMHC is today at 90. I think that's probably the best guidance.
All right.
Overall. Again, it's all kind of market specific, depending on which markets you're exposed to. Unfortunately, we have a number of properties in Ottawa and Kingston, which right now are oversupplied.
Fair enough. Lois, would you consider to increase your retirement home percentage at this point, or do you think where you are is good proportion?
Well, we're always looking. We do like a balanced portfolio. You can see the benefit that we have of running a balanced portfolio. We like that approach, and we'll continue to look at strategic opportunities that get us there to get a balanced portfolio.
You still want to reach that 50/50 proportion?
Yeah. We'd be happy with that.
Okay. Are you looking to sell any retirement home properties under the non-core disposition program?
I think as Lois just answered the same question previously as well, Yash, I think the idea would be to look at all assets and figure out, especially the small and older assets, where it would make sense. I think that's across our portfolio.
No. The reason I ask is your retirement home portfolio is relatively new.
Yeah, it's new in the sense when we bought it, but again, I don't think it's just new and old. It might be just the size of the property, where it's located. I don't think it's anything specific more that we can provide at this point.
Okay. On this impact of new supply, are you seeing any of your existing retirement home tenants leaving to go into a new building? Are you seeing that phenomena at all?
That occurs from time to time. It goes two ways. Often, when new supply opens, they can be very aggressive in marketing, not only within the community but to our current residents, doing mail drops and so on with current residents. Occasionally, we do have some residents that move out for the shiny new penny, and then more often than not, we'll also see them move back.
Okay. That's it for me. Thank you.
Thank you, Yash.
Thank you. I'm not showing any further questions. I would now like to turn the call back over to Lois for closing remarks.
Well, thank you everyone for joining our call this morning, and for your support, and we'll look forward to seeing you at our AGM in April.
Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone have a wonderful day.