Ladies and gentlemen, welcome to Ciena Senior Living, Inc. Q4 2018 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 Ciena 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 section in the company's public filings, including its recent MD and A for more information. You will also find a more fulsome discussion of the company's results and its MD and A and financial statements for the period, which are posted on SEDAR and can be found on the company's website, cienaliving. Ca. Today's call is being recorded and 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 Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Kyle. Well, good morning, everyone, and thank you for joining us on our Q4 call this morning. In 2018, we made significant strides in executing our growth strategy and transforming the business. We acquired nearly $400,000,000 in high quality retirement residences. Our company was added to the S and PTSX Composite Index, and we increased income grew by 27.5 percent from Q4 in 2017.
Q4 same property NOI growth was 5.6% in retirement and 1.3% in long term care. In the 4th quarter, Sienna's diluted OFFO per share increased by 3.5% from the prior period to $0.36 due to same property growth and accretive acquisitions. We have continued to strengthen our balance sheet and ended the quarter with a debt to gross book value of 47.7%, which is 190 basis points below the Q4 of 2017. Now moving to Slide 8. In our retirement same property portfolio, average Q4 occupancy was 93.2%.
This was in line with prior year results. Same property net operating income in retirement grew by 5.6% in the quarter and 5.4% year to date compared to 2017. Over the past year, we have strategically grown our retirement net operating income mix up to 44% of the overall business. This was an increase of 15 percentage points from the prior year. With this, we are optimistic about our ability to meet or exceed our strategic goal of retirement representing 50 percent of the overall NOI mix.
Because of our strategic portfolio acquisition in 2018, we have spent a considerable amount of occupancy in the long term care portfolio remained high at 98.5 percent for the quarter. Same property net operating income grew by 1 point 3% in the quarter and 1.6% year to date, which is in line with expectations. Resident family satisfaction continues to be a priority at Sienna, and we were delighted to have received scores over 80%. We remain focused on Sienna's people strategy and team culture, and we are investing in new ways of attracting, recruiting and retaining talent. We are proud that Sienna team members were once again recognized for leadership excellence with a total of 22 nominees at provincial award ceremonies in British Columbia and in Ontario.
We are investing in our marketing campaigns to drive prospects to Sienna residences in their local community. And we have had an active influenza vaccination and prevention campaign in Q4 in an effort to minimize the severity and duration of the flu season. Now turning to Slide 11. We expect demand for seniors living to remain strong as the number of Canadians aged 80 and over is projected to increase on average by about 3% annually over the next 5 years and growing to 4% annually thereafter. Development of seniors living communities are key components to meet this increasing demand.
Although we expect the demand for senior living to remain strong, we have seen some levels of temporary oversupply in certain areas such as the Ottawa and Durham regions. We believe that our geographical diversity and industry leading platform positions us well as the market is adjusting to the growing supply and demand, and we remain highly optimistic about our future growth prospects. I will now turn the call over to Nitin for further details on Sienna's financial results.
Thank you, Lois, and good morning, everyone. I will start on Slide 13. Net operating income for the quarter grew by 27.5 percent or $8,400,000 compared to the same period last year for a total NOI of $38,900,000 The Retirement division generated same property NOI of 9,500,000 dollars an increase of 5.6% over the prior year. This was driven by a combination of market rate adjustments, annual rate increases and operational efficiencies. For the full year, retirement NOI has grown by 5.4%.
Sienna's same property long term care NOI for the quarter increased by 1.3% to 21 $800,000 Full year long term care same property NOI growth of 1.6% includes a one time $400,000 rate reduction in employer's premium due to medical services premiums in BC being phased out and replaced by a new employer health tax effective in 2019. Moving to Slide 14, diluted OFFO per share increased by 3.5 percent to $0.36 and for the full year, it increased 6% to $1.40 over 2017. This was driven by income from accretive acquisitions completed since Q4 2017 and current strong operating results. Diluted AFFO per share was $0.33 which is up nearly 1% over the prior year, and for the full year, it was $1.44 an increase of approximately 2.5% over 2017. The Fundament benefited favorably from lower cash taxes in the year due to the increase in interest expenses, transaction costs and tax depreciation associated with the portfolio acquisition during 2018.
In the wake of considerable amount of volatility that the security markets experienced in 2018, in 2018, we provided investors with a stable and growing dividend, while maintaining a low payout ratio of 63%, as our business fundamentals continue to stay strong. Now moving to a strong financial position. We continue to strengthen our balance sheet at the end of the 4th quarter. Sienna's debt to gross book value of 47.7 percent finished 190 basis points below prior year period. Sienna's debt to EBITDA declined to 6.9x in the quarter compared to 7.4x in the prior year period.
The company's 4th quarter interest coverage ratio continued to strengthen to 3.8x compared to 3.7x in the prior year period. Sienna's strong balance sheet enabled the company to refinance maturing debt with favorable rates and longer term maturities in 2018. In 2019, we anticipate to refinance over $90,000,000 of property level debt on favorable terms as the company continues to focus on optimizing leverage and managing refinancing risk by creating a balanced 10 year debt maturity ladder. We ended the 4th quarter with approximately $125,000,000 in undrawn credit lines and 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. In 2018, we made significant strides in executing our growth strategy of building a balanced portfolio of high quality retirement and stable long term care residences. Looking ahead, we believe the outlook for CF is strong, and we expect to continue the progress that we have made on our strategic priorities: growing the company, enhancing our operating platform and maintaining a strong balance sheet. Our focus on these priorities should continue to translate into long term accretive growth for Sienna's shareholders. Organically, we are expecting moderate single digit NOI growth from the Retirement segment in 2019 through rate increases and operational efficiencies.
With respect to long term care, we are expecting consistent performance in 2019, similar to 2018, after excluding the onetime benefit. On development, the expansion of Island Park is on track, expected to be completed mid-twenty 19. We continue to be optimistic about the opportunities to advance our Phase I development strategy of renewing over 1,000 older long term care beds and adding 500 additional retirement suites. We will further 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 that complement our existing platform as we continue to expand our retirement platform.
Thank you for your participation on the call today. Nitin and I will be pleased to answer any questions that you have.
Your first question comes from the line of Chris Couprie from CIBC. Your line is now open. Good morning.
Just wanted to touch on your mid single digit organic growth outlook for the retirement home portfolio. Just wondering if you could maybe give some details as to the breakdown of that between the same property portfolio as well as the acquisition portfolio? You kind of commented that occupancy was way down a little bit
in the quarter question. So I think maybe a few ways to answer that question. The first one is everything is going to become same property after the end of this quarter. So everything would really would be same property going forward. The same property, as you know, because of the size of that portfolio, the margins would be a bit lower.
So just from a margin perspective, for example, in our same property this year, our margin expanded from close to 46% to 46.5% in same property. So we had some margin uplift this year. So same progress on that for a same property portfolio. On the transaction, the things that Lois and I talked about previously was that it will take us a year to bring it on our platform. So we have seen a bit of our occupancy decline in our portfolio because when we first acquired the portfolio, the severity or the acuity level was a little bit higher than what we would normally have, as we expected during our due diligence.
So as we are as those people are turning over and we're bringing the right level of residents in it, they will obviously stay longer and we expect that occupancy in that portfolio to also pick up. So maybe to answer your question in 2 parts. For same property, it will be annual rent increases, rate increases on turnover and continued operational efficiencies. And for the portfolio, it would be focused on occupancy.
Okay. So the on the acquisition portfolio, is it fair to say that over time you could see it achieve occupancy levels consistent with the same property portfolio, the old same property portfolio?
I think that's market specific, Chris. Generally, I think, yes, in some markets like Ottawa, there's going to be continued headwinds in that market given that it's already over supplied and there continues to be new supply coming on.
Okay. Thanks guys. I'll turn it back.
Thank you.
Your next question comes from the line of Brendon Abrams from Canaccord Genuity. Your line is now open.
Hi, good morning everyone. Just in terms of the retirement has the impact specifically in Greater Vancouver area had any pronounced impacts on your portfolio there?
Of the first so I didn't don't know if I understood the second part of your question in Vancouver.
Sorry, the housing slowdown in Greater Vancouver.
Vancouver. No, I guess the first question about the difference between BC and Ontario, I think occupancy is a little stronger in BC, again, market specific or community specific. And I would say, no, we've not seen any impact from the housing slowdown in BC. There's been no direct impact on our residences.
Okay. And just in terms of SP NOI is pretty healthy throughout the year. What type of increases are you able to achieve on rent on both, I guess, specifically on turnover?
Well, I guess, again, that's market specific depending on occupancy and supply in the market and so on. Typically, it's around 3%. We may be able to get higher than that in some markets, certain suites and so on. We look at it on a market by market and suite by suite basis.
Okay. Yes, that makes sense. And here in Ontario, it's been several months now that we've had a new provincial government. I guess just from your conversations and any public announcements from government officials, do you anticipate any material changes to the regulatory or operating environment for LTC here in the province? And if so, with any positive or negative implications?
Or do you think it will be very much the status quo?
I think any conversations we've had, certainly the direction with respect to reducing red tape and the need for long term care services as a solution to the hallway medicine problem. We think that any policy direction is very favorable. In fact, there's already been a number of very favorable changes just in terms of with respect to clarifying the Bill 148 language, and there's been a number of efforts to reduce red tape. So we think that any policy direction is going to be
favorable.
Your next question comes from the line of Jonathan Kelcher from TD Securities. Your line is now open.
Thanks. Good morning. First off, just we're hopefully most of the way through flu season. And I think Lois, you talked a little bit about your programs with regard to that in your commentary. Could you maybe compare this year's flu season and the number of outbreaks versus the last couple of years?
We would say this year, it seems to be well, certainly, I would say milder than last year. I don't know that we're through it. I mean, usually, it starts at the end of Q4, and we did have a number of residences that did have an outbreak in Q4. I think what we found is that they're not as prolonged as in the previous year. And we're not sure whether that's just strain or also in addition to all the preventative work that our team does to reduce the duration of the flu.
So it usually goes well into right to the end of Q1. So I don't think that we're out of it yet, that we may still see some impact.
Okay. But so far so good relative to last year, it would be fair to say?
Yes, so far from what we've experienced. It's not as the duration isn't as long when there is a flu in one of the residences.
Okay. And just for Nitin, the cash taxes were a little bit lower in Q4 and I guess the G and A lower relative to me anyways. But can you maybe give us a little bit of guidance for 2019?
Sure. Thank you, Jonathan. So for cash taxes, you remember when you started the year before we did the acquisition, our guidance was cash taxes would be the range close to around $8,500,000 We ended the year with around $7,600,000 for the whole year. So we were around 1,000,000 lower, mostly driven because of the transaction cost. For next year, we expect the range to be around $8,500,000 to $9,500,000 So that's the range for cash taxes.
For G and A, I think the right way of looking at it is probably a bit of combination of 2017 2018. So 2017, our G and A as a percentage of revenue was around 3.7%. In 2018, it's around 3.2%. When we closed the acquisition, it took us a bit of time to ramp up and fill those roles. So 2019, we expect to be a bit of a midpoint between 2017 2018.
So some synergies with our size from the 2017 numbers. Obviously, since we have done the ramp up for the 2018, those roles now would be a lot of the people costs would be ongoing on an annualized basis. And the last one, just I know the question wasn't about maintenance capital, but just since we're providing a bit of color. For 2018, our maintenance capital expenditure as a percentage of revenue was around 1.4%, and we expect 2019 to be similar as
well. Okay. So G and A around 3.5% then?
That's correct.
Okay. Thanks. I'll turn it back.
Your next question comes from the line of Pammi Bir from Scotia Capital. Your line is now open.
Thanks. Good morning. Just can you maybe comment on what you're seeing in the acquisition market in terms of the volume of assets out there? And any change in the composition of buyers in terms of who you're seeing at the table?
Well, I don't there's not we haven't seen a lot of activity in terms of potential transactions. In terms of the universe of buyers, I think there's always we're seeing new sources of capital and interest in the sector all the as well as growth of smaller regional as well as growth of smaller regional providers. So there's definitely more interest in long term care, I think, both in Cs and in A Class properties across the country. And in retirement, there's again, there's lots of interest in different sources of capital. And in terms of opportunities, I think there's always opportunities.
It's just what's from our point of view, it's definitely opportunities out there.
Right. And it sounds like with the integration of Bay Bridge of that portfolio going pretty well, and I guess you're getting towards it sounds like maybe towards the tail end of that process, I suppose, by the end of, say, the first half of this year. So are you feeling a little more confident
that if the right opportunity
surfaced in the next, call it, quarter or so or a couple of quarters, would you be prepared to put some capital to work for an acquisition of size?
Yes. I think we're always I think what's most important to us is that it's strategic, that it's accretive. Even if it's not an immediate term, but it's accretive, well, we can add value to it. And it's in the geographical areas that we're interested in. So we look at every opportunity that kind of meets our ticks those boxes.
Right. Just one last one. Any update with respect to development spending in 2019 and any particular new projects that are set to advance this year?
The only development spending we have is for the expansion of 1 of our retirement homes, so which the spend there is not significant. It's close to $12,000,000 or so, and that will finish that project would complete in the first half of this year, operational in the second half. So that's really it. Over 2018, we have bought some land. So we might have some little bit of cost here and there.
I'd just be going through different phases of that zoning process or planning process for those sites, but nothing imminent for our redevelopment project as of yet that we can share.
Okay. So, yes, that was really where I was going. I guess nothing material on the long term care redevelopment program at this point, but is that more, I guess, of a potential 2020 ramp up?
Yes. Like we're continuing to work with the municipalities, as said, on approved planning approvals, simultaneous to working with the government on the Ministry of Health approvals to move those projects along. So we're still working on them. We just don't expect really to be although we would hope to be in the ground in 'nineteen, we're realistically probably not.
Your next question comes from the line of Troy MacRaean from BMO Capital Markets. Your line is now open.
Thank you. Good morning. Nitin, I think you just said that the Island Park expansion is going to cost about $12,000,000 That's a little higher than what I remember that project cost was going to be. Can you describe kind of what drove the higher cost?
Yes. So I think when we first started,
Troy, we always talked about our cost being around $10,000,000 to $12,000,000 We also talked about the development yield being north of 10%. So we are still in that range towards the higher end of the range. Construction costs continue to rise up across, but our yield has stayed unchanged. We still are confident that the yield that we get on that development would be north of 10%.
Are there any other projects like that you think you'd start? I mean, this one's nearing completion and it's a pretty high yield. Is there anything else in the portfolio that would be near term?
There are a few other sites that we are looking at which could be similar to this, but I think it's too early for us to comment on it.
And then I know you mentioned that Durham and Ottawa are over
There
There are a couple. 1 is White Rock, which may impact our South Surrey residences. There's new supply coming on, we anticipate this summer in that market as well as new supply in Berry. And that again is kind of late summer fall. So we'll just keep our eye on that.
And are these new builders to the industry that you think would be vendors? Are they kind of experienced operators?
They're experienced. The well known experienced operators.
And then just finally for me is just on debt refi for 2019. It's about $90,000,000 Given what you want to do with your maturity schedule, what kind of rate do you think you can refinance that debt at? I know interest rates are moving around, but just kind of curious about how you felt.
I think it's the portfolio is a mix of some Ontario long term care, some BC residential care and some retirement homes. And the reason why the importance to break it down like that is that there is no CMHC program for Ontario long term care, but there is a program for retirement homes and for BC Residential Care. So our recent refi for CMHC has been all in rate for around 10 years, less than 3%. So the debt which would qualify for CMHC, we would look at that. And for Ontario Long Term Care, we will do the refinancing, keeping in mind that we have a debenture coming due in a couple of years as well.
So we'll start a bit of planning for that as well. So I think the rates for CMHCs are going to be quite favorable. And then for long term care, it's going to be a bit of work starting on our bond refinancing.
Your next question comes from the line of Tal Woolley from National Bank. Your line is now open.
Hi, good morning. I just wanted to start by asking a little bit about your conversations with the government today here in Ontario. Is it in your sense from them, is the commitment to still increasing the overall number of beds, providing the top up beds, all of those commitments that were sort of made during the election campaign, they're still those are still seem firm to you?
Yes. I think that's definitely the message. And I think they're actively seeking out input from stakeholders, operators specifically for ways to get some traction.
Okay. And the other thing too is just like in the early sort of press reports we've seen on some of the overhauls they're proposing, the focus does, at least to my eyes, seem to be on like sort of the administrative spend that's within healthcare and not necessarily looking at service cuts per se like in terms of the on the ground support. Like what's your sense having had some conversations with them?
Yes, I would say that that seems to be consistent with what we've seen. We haven't seen or heard of cut to service delivery per se, but a lot of focus on reducing red tape and administrative efficiencies, which is probably a good thing.
Okay. And then just on that whole overhaul of like the LINZ and all that stuff that's being proposed, do you have a sense of the timing of when we might understand fully or when the government might sort of reveal its plans?
We don't. We really don't.
And then I guess my last question would just be, you sort of talked about on the long term care redevelopment that it's maybe the timelines are bleeding back a little bit. Can you talk to sort of the tempo of that process having gone through this change in government right now and how you sort of see that playing out? Or do you expect to see it maybe the speed sort of the decision making improve over time or?
I think so. I think so. I think it's just going to take time. They've already done some significant reorganization of the ministry so that to streamline the decision making process. So we do expect that it will be much more efficient once it gets going.
Okay. And then just lastly, when you're looking at when you sort of have this long term care redevelopment process to work through and you're trying to build the retirement business at the same time, how are you sort of deciding I guess I just think about that long term care redevelopment, something you have to work through. How do you sort of decide to take on new retirement projects or other projects within the company when you're sort of facing that? Like do you have the capacity to be able to handle all of this once it really starts to come through? Or will you need to scale up more?
Yes. I mean, we're constantly scaling up. I mean, we added to our team certainly with the acquisition, and we continue to do that as we as there's opportunities, we scale up accordingly.
Your next question comes from the line of Michael Smith from RBC Capital Markets. Your line is now open.
Thank you and good morning. Lois, I know there's a lot of moving parts, but I'm just wondering, are you is the integration more or less done
at this point? It's on track. We have said that this was a big portfolio. If you recall, we acquired the 2 Waterfords late in 'seventeen and then right on the heels of that closed on the 10 acquisition properties. So it's been a lot of work, and we said that it would take a good year to integrate just because we welcomed over 1200 employees and thousands of residents.
So it is a lot of work and the operate it is an operating business, as you know. And so it will take a good year and that will take us well into April of this year to get everyone on the platform. And even beyond, there's still a lot of work that we would want to do to harmonize everything.
But so far, you're happy?
Yes, we're happy. It's a great acquisition. They're great properties. And we are very pleased with the progress. It's on target.
And wondering if you could just comment on the labor conditions in both BC and Ontario?
Well, it's tough. There is a lot of demand for good employees, and there's a lot of options now in a tight labor market for people to work anywhere. So it is very competitive, both in BC and Ontario, particularly competitive in part time. That's where we see most of the turnover in part time workers, personal support workers and so on where they might have a better opportunity or they want to keep part time jobs so that they can work at multiple places with shifts that suit them. So that's where we see probably the most turnover.
And then as well just recruiting good leaders is always challenging and competitive.
Okay. And just you've already comment on some regulatory issues or changes positive, I guess, in Ontario. Any comments on BC?
Well, BC, the impact is, it's more regional because in BC, the regional health authorities really have the majority of kind of authority over both retirement living and long term care. That's who we interface the most with. So that's probably each region is a bit different. So I wouldn't say that there's been a major change other than there's the unions are pretty active in BC.
Okay. And finally, just for clarification, when you say in terms of your outlook for same property NOI growth for LTC, I think you said steady, is what you're looking at. So does that mean like between 1% 2% or does it mean 0?
So Michael, good morning. So for this year, we had around 1.6% growth for the year, but that included a one time medical services premium. So I think if you remove that, you're closer to 1%, and I think that would be our outlook going forward for 2019.
Great. Thank you.
Thank you.
Thank you.
Your next question comes from the line of Chris Couprie from CIBC. Your line is now open.
Sorry, my questions have been answered. Thanks.
I am showing no further questions at this time. Please continue.
Okay. Well, thank you, Kyle, and thank you, everyone, for joining our call this morning for your ongoing support, and have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.