Ladies and gentlemen, welcome to Sienna Senior Living Inc.'s Q1 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 sections in the company's public filings, including its most recent MD&A, 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, the details are provided in the company's news release. The company has posted slides which accompany the host remarks on the company's website under Events and Presentations. With that, I will now turn the call to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Julie. Good morning, everyone, thank you for joining us on our Q1 call this morning. In the first quarter of 2019, our team continued to focus on operations on integration of the acquisitions from 2018. Our Q1 results highlight the benefits of running a more balanced, larger-scale platform. Q1 2019 net operating income grew by 20.1% year-over-year compared to Q1 2018, which was driven by growth from accretive acquisitions in addition to strong organic growth. Same-property net operating income increased by 7.3% in our retirement portfolio by 4.3% in long-term care. Diluted OFFO per share increased by 4.2% year-over-year to CAD 0.32 in Q1 2019. This includes a mark-to-market adjustment of share-based compensation reflecting Sienna's share price growth.
We have continued to strengthen our balance sheet ended the quarter with a debt to gross book value of 47.8%, a reduction of 250 basis points year-over-year. Retirement net operating income is now 46% of the overall business. We are well along the way to meet or exceed our strategic goal of a 50% private pay, 50% funded portfolio. Q1 2019 occupancy in the retirement same-property portfolio declined by 1% year-over-year to 91.6% as a result of higher resident attrition rates and softer occupancy in the acquisition portfolio. Now turning to Slide 8. At an average occupancy of 98.2%, the long-term care portfolio remains virtually at full occupancy with waiting lists for each of our long-term care homes. Same-property net operating income grew by 4.3% in the quarter. This was largely as a result of the timing of expenses.
Resident and family satisfaction continues to be a priority at Sienna, and we are very proud of the contributions of our 12,000 dedicated team members who create a great resident experience and who have enabled Sienna to outperform national and provincial averages on publicly reported quality indicators. We remain focused on Sienna's people strategy and are investing in new ways of attracting, recruiting, and retaining talent. We recently launched a new careers website to enhance the user experience and to support recruitment of key positions across the company. As part of our commitment to the team member experience and a great culture, we are launching a new team engagement survey and platform to monitor and measure engagement on an ongoing basis. We are also investing in point-of-care technology and in electronic record-keeping to improve the workflow for nurses and for personal support workers.
With the flu season largely behind us, we are ramping up our marketing campaigns to increase awareness and to invite prospective residents to experience a Sienna retirement residence in their local community. Turning to Slide 10. Fundamentals in the Canadian senior living sector remain strong. According to Statistics Canada, the average growth rate of the seniors population aged 75 plus will double in the next 20 years with a compound annual growth rate at approximately 3.9%. The sector's key challenge is to match the rapidly growing demand for seniors residences with supply. While we have seen some levels of temporary oversupply in certain markets such as Ottawa and the Durham region, we believe that our geographic diversity and industry-leading platform positions us well as the market adjusts to the growing supply and demand.
With the Ontario government overhauling the healthcare system aimed at providing better access and reducing hallway medicine, we have been engaging with hospitals in our communities on discussions about the Ontario Health Teams. These health teams should ultimately improve the experience for seniors and their families who are navigating the transition between hospital and other parts of the system, including retirement residences and long-term care homes. I will now turn the call over to Nitin to discuss our financial results.
Thank you, Lois, and good morning, everyone. I will start on slide 12. Net operating income for the quarter grew by 20.1%, or CAD 6.5 million compared to the same period last year for a total NOI of CAD 38.9 million. This increase was largely a result of organic growth, accretive acquisitions, and timing of Good Friday, which fell in Q1 last year and in Q2 this year. The retirement division generated same-property NOI of CAD 11.8 million, an increase of 7.3% over the prior year. This was driven by a combination of market rate adjustments, annual rate increases, and reduced variable expenses, partially offset by softer occupancy. Sienna same-property long-term care NOI for the quarter increased by 4.3% to CAD 21 million, largely because of a half a million-dollar timing impact on Good Friday. Excluding the Good Friday timing impact, same-property long-term care NOI delivered stable 1.9% growth over the prior year period.
Diluted OFFO per share increased by 4.2% to CAD 0.32. Excluding the impact of mark-to-market stock compensation, OFFO per share would be CAD 0.34 per share. This growth was driven by income from accretive acquisitions completed at the end of Q1 2018 and strong organic growth, partially offset by incremental interest expense for the acquired properties. Diluted AFFO per share was CAD 0.353, up 2.6% year-over-year. This increase was driven by higher OFFO. Excluding the impact of mark-to-market stock-based compensation, AFFO per share would be CAD 0.37. Now moving to our financial position on Slide 14. We continue to strengthen our balance sheet. At the end of Q1 2019, Sienna's debt to gross book value was 47.8%, a reduction of 250 basis points from Q1 2018. Sienna's debt to EBITDA declined to 7.1 times in the quarter, compared to 8.2 times in Q1 2018.
Our interest coverage ratio remained high at 3.8 times, unchanged from Q1 2018. The average debt term increased by four months year-over-year to 4.4 years in Q1 2019, highlighting our refinancing initiatives over the past four quarters. We intend to optimize our capital structure by effectively managing our upcoming debt maturities and by maintaining a healthy level of liquidity and a favorable credit rating. In March, DBRS confirmed our A low credit rating with stable outlook for the company's CAD 322 million Series B debenture. Sienna ended the first quarter with approximately CAD 137 million of undrawn credit lines in cash, which we can use to further drive the company's strategy. With that, I'll turn the call back to Lois.
Thank you, Nitin. We made significant strides in executing our growth strategy of building a balanced portfolio of high-quality retirement and stable long-term care residences. We are highly optimistic about our future growth prospects. Going forward, we will remain strategic and disciplined in our approach to growing the business. Our continued focus is on high quality and accretive acquisitions in key markets in Canada, as well as strategic developments that complement our existing platform. We remain optimistic about our future development opportunities and are on track to complete the expansion of Island Park by mid-2019. As part of our commitment to a strong operating platform, we are constantly working to improve the resident experience and are making further enhancements to services and care, responding to the changing needs and preferences of our residents. Looking ahead, we expect the long-term care portfolio to deliver strong growth consistent with 2018.
With respect to the retirement portfolio, we expect moderate single-digit growth going forward. We believe the outlook for Sienna is strong, and we expect to continue the progress that we have made on our strategic priorities. Thank you for your participation on the call today, and we will now be pleased to answer any questions.
Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line, Jonathan Kelcher with TD Securities.
Thanks. Good morning. First question, just on the acquisition occupancy was down a little bit in Q1. Have you started to see an improvement in that beginning in Q2?
Good morning, Jonathan. Thank you. To date, our occupancy is pretty much in line with what we reported at the end of Q1. We always expect this. As you know, in the winter months, there's the flu season, so we have a higher level of attrition. Our residents aren't out doing tours and moving in in the winter months, so we usually expect this. In addition, there was a softer occupancy in the acquisition portfolio.
It seems to me like the acquisition portfolio performed a little bit worse than the stabilized portfolio. Is that fair to say?
That's fair to say. That's a result of when we acquired this portfolio, we knew that it would take a full year to integrate, we're well on track with that. We expected that as well as some attrition as we stabilize onto our platform.
Okay. Just secondly on the, I guess, the MD&A, you talked a little bit about it in your remarks, you're enhancing your website. First of all, is it just internal or just for internal employees, or is it more broad-based than that?
Oh, it's both. To date, we've enhanced the career section of the website, which is primarily for external potential candidates. In Q2, shortly, we're launching a revised Sienna website for the public-facing website, which will be a significant enhancement from what we have today.
Okay. Are you going to promote the Sienna name more? Is there any sort of change in your strategy on that front?
No, I wouldn't say that. We believe that this is a local business, and we have always promoted the name of the community locally. Each of our residences have its own unique name, and that's how it's known in the community rather than by Sienna. We will continue to do that, to focus on the local communities with our marketing campaigns and so on. What the website does is it really drives potential prospects to the sites, to the property level.
Okay, thanks. I'll turn it back.
Thank you.
Your next question comes from the line, Chris Couprie with CIBC.
Good morning. A couple questions. Just in terms of your outlook, when you talk about moderate organic growth in the retirement home business, so 7% in this quarter, would you consider that more than moderate? In other words, how should we think about the business for the balance of the year?
Good morning, Chris. For us, in that 7.3%, there's around 0.9% or 1% impact because of Good Friday, you remove that. There might be partially other timing changes in it because our margin is a bit higher in Q1, and we don't believe that's a good run rate for that margin. I would say, when we say moderate single digits, we are more closer to five than we would be to seven.
Okay. That's great. In terms of developments, I think you had a few redevelopments that you were looking to, I think it was the Keswick in North Bay, potentially, that you were looking to, I think, kick off maybe this year. Any update there? In your most recent slide deck, you call out some excess land for future expansion. Just curious as to how many units you think you might be able to add there, and what will it take to kick off these expansions?
I guess on the redevelopment, we do have three projects which have received preliminary approval. Right now, we're just waiting for some changes to the program, and our association is working with government on any potential changes to the program as a result of the recent provincial budget announcement. Right now, we wouldn't see anything happening in 2019 with those projects in terms of getting started. It would be more like 2020 if things line up in terms of approvals and the program metrics. In terms of expansion of current sites, we do have opportunity there, and we're just exploring all of our opportunities. We have about three or four sites that have potential for intensification, and so we're looking at the markets in each and which ones make the most sense and the timing. Again, there, we would expect, if any, that would be in 2020.
Okay. I'll get back in line. Thanks.
Thank you, Chris.
Your next question comes from Matt Logan with RBC Capital Markets.
Thank you. Good morning.
Hello, Matt.
Just following up on the provincial budget. Can you talk about the impact to your business and any thoughts on the Ministry's efforts to increase long-term care beds?
In the provincial budget, there was a recommitment to redevelopment of the older C-class beds, as well as the addition of 15,000 new long-term care beds. That was all good news. We're just waiting, I think, for details, as I mentioned, through our associations working with the Ministry to determine what the details of those programs are going to be in terms of the metrics as well as the approval processes.
I guess suffice it to say, there's a little more commitment in terms of providing increased levels of construction funding, particularly given where construction costs have trended over the last few years?
Yeah. Again, that's the detail that our association is working through with the Ministry. We're optimistic that certainly government seems intent on increasing capacity to make more capacity for seniors, given the current wait list of about 30,000 seniors and the hallway medicine challenges in the Province.
With the government looking to increase supply, would you ever consider partnering with other REITs that might have excess density?
Sorry, what do you mean, Matt?
In terms of, we've got a number of retail REITs who have excess land and are looking to intensify their sites. Would you ever consider maybe building on some of that land or forming JVs with other businesses?
We would certainly do that to redevelop our current sites. I would say that our focus really is on redeveloping of the current beds that we have, the 2,200 C-class beds that we have to redevelop. That really is our focus, and we would just add additional beds to those projects to make them work. We would definitely be interested in JVs and opportunities, where there's excess land to do that.
Makes sense to me. In terms of staffing, I've got, I guess, two questions. One, is it too early to discuss the impact of any of your recruiting and IT changes? Two, how do you see the impact of demographics on Sienna's ability to retain talent over the next, call it five to 10 years?
Well, staffing is definitely a challenge sector-wide. We've been working hard at this for several years now on learning and development and a number of programs to recruit and retain staff. We're just constantly working and advancing what we do in this regard. A lot of what we do is focus on our culture and team member engagement. The information technology we're implementing in our sites is really to improve the workflow and quality of work-life for employees. That's an ongoing initiative that we've had in place and expect to be making further improvements in mobile technology by the end of this year.
That's great color. I appreciate it, guys. That's all for me. Thank you.
Thank you.
Your next question comes from Brendon Abrams with Canaccord Genuity.
Hi, good morning.
Hi.
Just with respect to the retirement operations, it seems like rate growth helped offset any occupancy losses during the quarter. I'm just wondering if you could provide any color in terms of what type of rate growth you're seeing on a percentage basis. I'm not sure if you would differentiate between existing and new tenants or residents.
Yeah, we do. Rate growth for existing tenants is usually around 3% on the annual increases. On turnover, it depends on the property, and where we have full occupancy, we would get higher than that on turnover. In communities like Ottawa that are undersupplied, we wouldn't be getting any significant uptake on turnover.
Okay. Would you say, on average, across your portfolio, new tenants would be above that 3% threshold in terms of-
On average, yes
rollover. Okay. I don't believe you segmented out in the MD&A, I could be wrong, but in terms of the retirement portfolios, are you seeing any material differences in fundamentals between your B.C. and your Ontario properties?
Hi, Brendon. Good morning. We do not segment B.C. and Ontario because I think by itself, the segments are smaller. One property could have a pretty material difference. Just overall market fundamentals in both B.C. and Ontario. The vacancy rate in B.C. is much lower. There was a CBRE report which talked about a vacancy rate of around 3%, roughly. Depending on where our properties are, if we have direct competition, then obviously our vacancy rate might be a little bit bigger than that. Otherwise, we see similar results. In Ontario, the vacancy rate is close to 10%. That, again, unless we have a couple of markets which are in a bit of an oversupply, which Lois has talked about before, for example, Ottawa. Again, our results would be similar to what we see as overall trend from CBRE.
Right. Okay. I think in that same CBRE report maybe you were referencing, it seems like transaction volumes across the sector are a lot lower than past years, perhaps just due to limited availability of product. Is that what you're seeing out there as well?
I think the pipeline continues to be strong. We don't have specific targets on an annual basis to grow. For example, between Q1 of 2018 and 12 months prior, we grew by close to CAD 500 million. For us, it's not that every year we have to do a certain amount. Our first focus is make sure that the Maple portfolio that we bought last year is well integrated, and that is on track. That is really our first focus, but we'll keep a continued look. I think opportunity is still out there. We don't see a huge change in the number of opportunities out there.
Okay. That's very helpful. Thank you.
Your next question comes from Troy MacLean of BMO Capital Markets.
Good morning. Just wondering if you're seeing any indication of a slowdown in building, in either Ottawa or Durham, like projects getting canceled or delayed, or is it still seems like the shovels that are down on the ground, the projects are going to finish?
We don't see any slowdown in those markets. In fact, there's still new products coming into Ottawa and the Kanata area all the time. There's a couple of new ones that are going to open within the next year or so.
Are any of these projects built by developers who you think would sell, and would you add in these markets, or are you happy with what you have?
I think we're pretty happy with what we have in the Ottawa market. We only have one in Durham region, we have no plans to add capacity there at the present time.
In your comments, you mentioned changing or adding to the service and care for the retirement homes. I was just wondering, would these be something that would you charge more for, or is it really just to more efficiently serve residents, and would there be any margin impact?
No, there wouldn't be any margin impact at all. I think it's really just constantly enhancing the services that we provide. The residents' preferences and needs change. As I mentioned earlier, it is a local business, so we find difference in preferences in BC than Ontario. We're constantly kind of revising menus and leisure activities and programs to meet residents' needs. We have a huge focus on that. As well as, in some communities that residents have a need for more care and where we have the ability to designate some care units, we will be doing that, just clustering care and that sort of thing. Just driving some internal efficiencies as well as improving the resident experience. That's kind of an ongoing focus.
Does your size give you an advantage versus maybe some of the homes that are getting built by maybe smaller operators? Does that give you an advantage you think that you'll be able to win over time, even in the crowded market?
I think so. Larger communities are more efficient to operate. There's no question about that. Having said that, we also have some smaller communities, and you can develop a very unique approach to a niche resident population in those communities as well.
Just on the 15,000 new LTC beds the Ontario government's talked about, do you think they'll give those out to kind of enhance returns on redevelopment projects and make all the projects as efficient as possible, get the right number? Like you said, I know some of the B homes are smaller, below the efficient size. I know there's probably not the details out there, do you expect that to happen?
We definitely do. In fact, that's what we've seen. In any beds that have been awarded to date, the priority seems to be going to projects, the C class projects, to make them work and to make the right economic size, because they tend to have to be in multiples of 32. That's definitely the direction we've seen to date and that we would expect to continue.
If that were to play out, do you think you could increase your B and C redevelopment program maybe a little quicker than what you have outlined previously?
Potentially. I think it really all depends sort of in what details we're able to ascertain post the provincial budget that are being worked through now.
Thank you. I appreciate the color. I'll turn it back.
Thank you, Troy.
Your next question comes from Tal Woolley of National Bank Financial.
Hi. Good morning.
Good morning.
Good morning, Tal.
The Ontario Long-Term Care Association put out their regular sort of annual update, and they did speak to, on the labor side, trying to utilize more RPNs in place of RNs and maybe coming up with a new class of employee that could substitute for the PSWs. Is that something you're supportive of? Do you think that that's a healthy solution that could work going forward?
Yeah, I guess, we are supportive of that. We would say that, in fact, we have, in some of our properties, we're already using care aides. We wouldn't say that's a substitute for PSWs. It's in addition to.
Yeah.
There's things that a care aide can do that would free up a personal support worker to provide the direct care, where the care aide can do things like quartering and bed making and that sort of thing. That's a great model. That certainly is something we're supportive of and advocating for. RPNs are just a tremendous addition to the team. Again, they wouldn't replace RNs because both have a very valuable role. We're just looking for, I think, I guess, less rigidity in terms of how the compliance regulations are interpreted and applied so that we can use RPNs more effectively. This is Nurses Week, I will say, and we're very pleased with all of the services and care that our nurses give every day, both RNs, RPNs, and personal support workers.
Got you. The one thing that also came out of the budget, it was sort of a glancing reference to transitional care and the government being supportive of looking more into that. Do you have any further details maybe on what sort of would come under that umbrella for any of that?
We don't have a lot, this is something we have done in the past, where we do transitional care in retirement homes, and this kind of frees up seniors who would otherwise be in a hospital that don't necessarily need to be there, but aren't able to go home. It's something that we're very interested in doing more of, we have been meeting with some of the hospitals where we have retirement homes close by, having those discussions to see whether we can get involved in those pilot projects.
Just lastly, on the same property NOI growth in the retirement business, you talked about on the rent side you're seeing sort of a 3% kind of growth. A lot of that extra incremental upside has been on cost containment. As you think about how that same property pool will evolve going forward, is there any sort of limit we should be concerned about? You can't cut cost to zero, is there sort of a threshold at which you think we shouldn't expect that same cost containment can come through?
Sorry, is that specific to retirement?
Yeah. I was just thinking on the retirement side. It would look to me, if you're talking about 7% this quarter and roughly 5% going forward, that you're getting about 3% on the rent side, the balance is coming from levering the operating costs. Sometimes there's only so much you can kind of do on the cost side. I'm just wondering-
Yeah, I think it's-
-how much more work you think you can do on the cost side.
Well, the way we do the cost side is there's the variable expenses. We're able to make some efficiencies when occupancy is lower. In the winter months for this quarter, with resident attrition and some softer occupancy, we're able to make some improvements in the variable expenses, which we do.
Okay.
On the other side, it's not just the in-place rent, but as I mentioned earlier, with turnover, there's greater than the 3% increase. It's a combination on the revenue side. On the expense side, it really is just being as efficient as we are, being cost-conscious and disciplined cost management, as well as managing the variable expenses when we have softer occupancy.
Got it. Okay. Thank you very much.
Thank you.
Your next question comes from the line of Pammi Bir with Scotia Capital.
Thanks. Good morning. Just coming back to the acquisition portfolio, and one of the questions earlier. In terms of the year-over-year occupancy drop, was most of that market related, perhaps from new supply, or really just a function of the integration process?
I would say in the Ottawa market, it's supply, because there's a few properties in that market, and as well as on the integration, just friction with integration in terms of getting everything onto our platform, some higher resident attrition rates with resident acuity.
Okay.
That's really it in a nutshell.
Just with the integration, getting closer to the final stages of that portfolio, can you comment on maybe what you're seeing in the acquisition market and perhaps areas where you'd like to actually raise your exposure?
Well, I think as Nitin said, there's always opportunities. We're very disciplined, and we look at every opportunity that comes out. We would like to grow across Canada, particularly further in the western provinces.
Anything in Quebec that's of interest at this stage, or?
Not at this stage. We haven't seen anything that would make sense for Sienna.
Great. Thanks so much. I'll turn it back.
Thank you.
Your next question comes from the line, Yash Sankpal with Laurentian Bank.
Good morning. Hello?
Hello, Yash.
Hi, Yash. Good morning.
Yeah. I just want to focus on the retirement home margins one more time. Looks like the margins were up in the quarter because you got rid of some variable costs.
It was also Good Friday, Yash.
Right. What I'm trying to understand is what would be a sustainable NOI margin for your retirement home portfolio after you have integrated the BayBridge portfolio?
Yash, I think every quarter to quarter our margin could change. Even if you look at a same store portfolio or same property portfolio.
I'm looking for an annual number, like roughly.
Yeah. The annual number, for example, for Q4 2018, which is published, is we finished the margin at around 44%.
In the high 44s. 44.9%, I think is the margin number compared to the 46 percentage points that we just In Q1. As Lois mentioned, part of it is because of timing of Good Friday. I would say that's probably is a good way of thinking of margin for us, is the annual number that we did last year.
All right. In terms of retirement home occupancy, given what you see right now in your portfolio, where do you expect your year-end occupancy to be?
I think year-end, we would end.
Do you think it'll be quite lower?
No, I think year-end, we would end where we did at the end of 2018.
Okay.
That was 91.6, where we ended 2018. Similar numbers. Today we are at 90.4 as an average occupancy. Again, we expect some uptick in occupancy between now and end of the year.
Got it. Okay. Just one more question on your debt refinancing. What is the average rate you're seeing for your maturity, like refinancing?
Right. We have around CAD 90 million of debt coming due this year at different times, the average rate for this CAD 90 million is close to 4.5%. We do expect us to be able to refinance, roll over, be a multiple scenario that we're looking at these rates or similar. Again, there's so many options available depending on what property type it is. For example, CMHC rates could be very favorable. There's obviously a challenge with loan to value there at times. There's an opportunity of doing something like a revolver, what we have already, which is floating rate, but also gives us a lot of flexibility. Again, high level, we would say that we expect to refinance them at similar rates or better.
All right. That's good. Thank you very much.
Thank you.
Again, ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchtone telephone. Your next question comes from Chris Couprie with CIBC.
Hi, guys. Just two quick ones. In terms of the Ottawa and Durham assets that you guys called out, how would you characterize occupancy in these assets in this quarter versus a year ago? How long do you think it might take for those properties to restabilize? My second question is just circling back on the Ontario budget. The ministry called out a commitment to upgrade 15,000 older long-term care beds. I believe the previous government had used a number of 30,000. I think that maybe was over two different time periods. I'm just wondering if you can comment on that difference.
Sorry, Chris. What was your reference to the 15? Were you talking about older long-term care beds or new ones?
Yeah, older.
Older. Well, there is 30,000 older BC class beds in the province today.
Yep.
That is the number of beds. I think the government referenced 15,000. That was probably in reference to a certain period of time.
Okay.
With respect to Ottawa, we would say it is softer there. Having said that, we have more properties now with the acquisition that we did. We would say that the occupancy in Ottawa is softer than it was a year ago, and we would expect stabilized occupancy in that market to be probably never more than 85%.
What about Durham?
Durham, again, we just have one property there, and we would see that sort of as a very temporary kind of adjustment. Expect that to stabilize within a year or so.
relative to stabilized levels in Ottawa, how are your assets performing?
Well, in the rest of Ontario, it would be more consistent with Well, you heard what I think CMHC and CBRE are guiding at 90%.
Okay. That's all right. I'll take that offline. Thanks.
Okay. Thank you, Chris.
I am showing no further questions at this time. I will now like to turn the conference back to Lois.
Well, thank you, everyone, for joining our call this morning, for your support of Sienna, and we look forward to seeing all of you at our AGM on May the 22nd. Thank you, and have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.