Ladies and gentlemen, welcome to the Ciena Senior Living Incorporated Third Quarter 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 Sienna Living Incorporated. 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 statements or information. Please refer to the forward looking information in Risk Factors section in the company's public filings, including its most recent MD and A for more information.
You will also find 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, cnnliving. 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's website under Events and Presentations.
With that, I would now like to turn the call over to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Amanda. Good morning, everyone. I'm pleased to share the highlights of another strong quarter for Sienna. Total net operating income grew by 31.7% from Q3 of 2017 with 3.7% coming from same property growth and 28% from accretive acquisitions. Q3 same property net operating income growth was 4.2% in retirement and 3.5% in long term care.
In the Q3, Sienna's diluted OFFO per share increased by 4.6% to 0 point 3 $6 We have continued to strengthen our balance sheet and ended the quarter with debt to gross book value 3.50 basis points below the Q3 of 2017 at 48.3%. And moving to Slide 8 in terms of Retirement operating performance. In our Retirement same property portfolio, average Q3 occupancy was 91.8%, down 220 basis points, largely due to increased resident turnover during the quarter. We are very pleased that same property occupancy has strengthened to end the quarter at 93%. Same property net operating income in our retirement portfolio grew by 4.2% in the quarter and 5.3 percent year to date compared to 2017.
Strong operating efficiencies compensated for the temporary decline in occupancy of 98.7 percent. Same property NOI grew by 3.5% in the quarter and 1.8% year to date. The above average increase this quarter is mainly due to the timing of expenses. Moving to Slide 10. We continue to have a high degree of resident satisfaction at 84% for 20 eighteen's results.
Quality and safety continue to be Sienna's top priority in long term care, and the latest results from the Canadian Institute For Health Information in October show that Sienna continues to outperform both provincial and national averages on the majority of publicly reported quality indicators. Most recently, Silverthorn Care Community in Mississauga was recognized for their work to reduce avoidable hospital transfers. This is a tremendous achievement and a prime example of Sienna providing a positive impact on residents and the health care system. Moving to Slide 11. We know that having a strong culture helps to recruit and retain the best talent in the sector, and we continue to invest in enhancing the team member experience.
We have had excellent feedback on our Take the Lead on demand learning platform, and we continue to see hundreds of our leaders join monthly education programs to build their leadership skills and grow their careers with Ciena. Ciena's strong operating platform has been invaluable as we integrate the 10 recently acquired retirement residences. We have taken a people focused approach to integration that the identity, culture and traditions that residents, families and team members value in each of the communities that we serve. In addition, we have completed the integration of all of the support services functions, including finance, information technology, payroll and procurement. We are now focused on enhancing the resident experience and integrating all aspects of the Ciena operating platform, including the culinary experience, branding, team education and resident programs.
Overall, the portfolio continues to perform as expected. Turning to Slide 12. Industry fundamentals in our key markets remain very strong. This is driven by an aging population and higher affluence among many seniors. With the growing demand for senior living, governments are increasingly looking to the private sector to meet the fast growing demand.
New development and redevelopment of seniors living communities are key components to meet this increased demand. We are really pleased with the direction of the new Ontario government as it relates to the long term care sector, and we are optimistic about the opportunities to advance our Phase I development plans. We are hopeful that the recently announced restructuring of the Ontario Ministry of Health will also streamline the development approval process and reduce administrative burden moving forward. 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 14. Net operating income for the quarter grew by 31.7 percent or 9,800,000 dollars compared to the same period last year with a total NOI of $40,500,000 The Retirement division achieved a moderate organic growth, generating same property NOI increase of 4.2 percent over prior year to $8,900,000 This was driven by a combination of market rate adjustments, annual rate increases and operational efficiencies, which helped to offset lower occupancy results. Year to date retirement NOI has grown by 5 point 3%. Sienna same property long term care NOI for the 3rd quarter increased by 3.5% to 23,000,000 dollars due to timing of expenses.
Year to date Long Term Care same property NOI growth of 1.8% includes a onetime $300,000 rate reduction in employer premiums due to medical services premiums in BC being phased out and replaced by a new employer health tax effective in 2019. Excluding this year to date long term care NOI growth will be 1.3%, which is more indicative of the performance of this business. Similarly, reflected in total year to date long term care NOI is a onetime prior year HST refund of approximately $1,300,000 which we received during the Q1 of this year. Diluted OFFO per share increased by 4.6 percent to $0.36 This was driven by income from accretive acquisitions completed since Q3 of 2017 and strong operating results, partially offset by higher interest expense on the acquired properties. Year to date diluted OFFO per share of $1.04 is up 6.9% compared to the same period in 2017.
Diluted AFFO per share decreased by $0.01 from the prior period to $0.37 driven by the timing of maintenance capital expenditure and year to date diluted AFFO per share is $1.11 which is approximately 3% higher than the same period last year. For the full year of 2018, we expect maintenance capital expenditure as a percentage of revenue to be in the range of 1.3 percent to 1.4 percent. And as we continue to invest in our property portfolio, we anticipate maintenance capital expenditure to stay in the similar range for 2019. Now moving to our financial position on Slide 16. We continue to strengthen our balance sheet at the end of Q3 2018.
Our debt to gross book value finished 3.50 basis points below Q3 2017 at 48.3%. Ciena's debt to EBITDA declined to 6.9x in the quarter compared to 7x in the prior period. And the company's interest coverage ratio has further strengthened to 4x versus 3.9x in the prior year. Sienna ended the 3rd quarter with approximately $150,000,000 in undrawn credit lines and cash. During the 1st 9 months of 2018, Ciena has refinanced $183,000,000 in debt at a weighted average interest rate of 3.4% and weighted average term of maturity of 9 years through a combination of CMHC and conventional financing.
In 2019, we anticipate to refinance $84,000,000 of scheduled maturing debt with an existing weighted average interest rate of 4.5%. We expect the company's overall cost of debt to remain unchanged by the end of 2019. With that, I'll turn the call back to Lois.
Thank you, Nitin. Looking ahead, we believe the outlook for Ciena 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 Ciena's shareholders. We expect moderate single digit growth from the Retirement segment in 2019 through maintaining occupancy and achieving rate increases in accordance with market conditions. In regards to the funded part of the business, we expect consistent performance in 2019 similar to the 2018 performance after excluding the We are pleased with the progress that we are making on the integration of our 10 recently acquired residences.
This is a great portfolio, and we continue to expect it to perform as anticipated. On the development front, the expansion of Island Park is expected to be completed mid-twenty 19. Further to this, we are optimistic that the new Ontario government's policies will be favorable to advancing our Phase I development strategy, which will receive the renewing of over 1,000 older long term care beds. Additionally, we'll be adding over 500 new retirement suites to create seniors living campuses. Currently, we have 2 projects that have reached preliminary approval by the Ministry of Health and have received 223 additional licenses, which will help support the feasibility of Phase 1 projects.
With another solid quarter of operating results, reflecting the contributions from our 12,000 dedicated team members and an exceptional operating platform, we are poised to end 2018 on a strong note. Thank you for
Our first question comes from the line of Chris Couprie of CIBC. Your line is open.
Good morning. Can you hear me?
Yes. Hello, Chris.
Hi. How are you doing? I wanted to just chat a little bit about the retirement assets, specifically the acquisition portfolio. Where do you guys think that you can ultimately take occupancy to for that portfolio? And maybe looking at the history of that portfolio, what's kind of been the peak for it?
And just you mentioned the integration of the acquisition portfolio coming along, just how far into that process are we?
Yes. So as I mentioned, the integration of all of the, I guess, we would call it the back office support functions have been fully completed. We're now focused really on all of the front of the house. As you know, it's an operating business, so it really is getting all of the team members onto the Ciena platform and program and offering the residents all of everything that's in the Ciena platform. As we had indicated initially, we that it would take a good year to integrate this platform.
We're very much on track for that. And in terms of occupancy, as you know, some of these properties were in lease up because of recent expansion. And so we expect, again, around
Close to 90% in occupancy for this portfolio. I mean, that's where it's been trending. So I think our focus is, again, just making sure the margins are correct, the front office is integrated well and that's and then after that time, you'll start to see some uptick in occupancy. But we are on track as we originally anticipated.
So when you think about the organic growth outlook in retirement, mid single digit growth, is that for both the same store and the acquisition portfolio?
Yes.
Okay. Thanks guys.
Thank you.
Thank you. Your next question comes from the line of Jonathan Kettler of TD Securities. Your line is open.
Thanks. Good morning.
Good morning, Jonathan.
First, Lois, maybe you can expand a little bit on your commentary. It sounds like you're happy within the direction of the new government. Do you think that could help accelerate the Phase 1 redevelopment?
Yes, I think so. I mean, we've been very pleased that this government's moved swiftly, as you know, on rectifying the language in Bill and 48, and they've realigned the ministry so that all of the approvals are now under one branch. It used to be under several branches. They're committed to reducing red tape. So we're really optimistic that this program is going to start to pick up speed in terms of approvals and feasibility.
Okay. That's good. And then just on the operation side, the occupancy in the retirement portfolio did dip in Q3, but did recover by the end. Is that recovery carried on into Q4?
That is I mean, our current occupancy is close to where we ended the quarter. Like our average occupancy would be close to that, Jonathan. So we do expect that where we ended the quarter in Q3, is that what the average would be for Q4.
Okay. And then you normally get a little dip near the end of the year, right, with flu season and less move ins?
Yes. I mean, that's always the theme in Q1 typically. We're well prepared for that with in terms of resident and employee immunization. We start that campaign aggressively kind of late October, early November.
November.
Our next question is from the line of Pammi Beard of Scotia Capital. Your line is open.
Thanks. Good morning. Just based on the, I guess, the discussions with the government, how are you feeling about any perhaps additional funding that could improve the overall economics of the long term care redevelopment program?
I can't really comment on that, Pammi, just because we don't know. I mean, we don't have visibility into actual policy. All we can comment in terms of the meetings that we've had are very positive, and there seems to be a good understanding of the issues and some real responsiveness.
I guess the like the favorable, I guess, commentary is more about, I guess, the timing of the ability to execute on these projects and the approval of the licenses, I guess?
I mean, that's part of it, Tammy, but part of the ask is to look at the funding as well. So it is both. But to Lois' point, I think what we can as an industry, what we can do is provide input. We don't really have insight into policy at the moment.
Okay. That's helpful. Just with respect to, I guess, the flu season and maybe it's a little too early, but how are you feeling about that? What sort of indications have you seen of how it could be shaping up?
Yes. It's really too early. We haven't really seen anything at this point. Other than what we're preparing, as always, we do extensive preparations in the fall.
Right. I guess, just in terms of new supply across some of your markets, any update there in terms of what you're seeing? Has there been any acceleration or in specific markets? Or is it still sort of holding in fairly well?
Yes, I would say, I mean, nothing it's always the same. Ottawa is always oversupplied and continues to be. So I think there continues to be new supply going in there. The Durham region area as well. So I'd say those 2 of the Durham region area as well.
So I'd say those 2 are probably the major ones at this point. Okay.
And then just lastly, how are you feeling about the acquisition environment at
this stage?
Is there a lot out there? Are you looking at a lot of opportunities? Or are there just or perhaps pricing expectations too far apart?
I think there's always opportunity for us. We're very strategic and disciplined in our approach. And as we had indicated, I think when we acquired these recent residences within the past year, we really are focused on integration of these properties and getting the most out of it, adding the value that we know we can.
Great. Thanks very much, Lois.
Thank you.
Thank you. Your next question is from the line of Brendan Abrams of Canaccord Genuity. Your line is open.
Hi, good morning everyone.
Hi, good morning Brendan.
Hi, just looking at the revenue, maybe I missed it in the opening remarks. It was up about $3,000,000 sequentially. Could you just remind us kind of the driver behind that? Like was it all occupancy and rate driven? Or were there some one time items in there?
So you're just talking about it from a Q2 to Q3 number?
Correct. Is that for retirement or overall?
Just overall went from 162 to 165 revenue.
Yes. I think when
you look at revenue, you really have to look at by segment, Brendan, because for long term care, a lot of the revenue that you would see is a pass through, so it goes directly to expenses. So if there is a change in funding, the revenue goes up and the expenses go up in the same way and we don't really make any money most of all of those envelopes. So really, the revenue differential there wouldn't really make a difference. If you look at the retirement revenue, that's where I think can make a difference in terms of how much the revenue went up and our expenses went up around half of that and that's where the growth in NOI came in Q3. Right.
Okay. And just taking a look at G and A, it seems to have ticked up a bit. Is that what you would expect to be a normalized run rate?
Yes, that's in accordance with our significant growth over the past year.
Right. Okay. That's it for me. Thanks. Thank you.
Thank you. Our next question is from the line of Yash Sankpal of Laurentian Bank. Your line is open.
Good morning.
Good morning, Yash.
Just following up on Brandon's question. Would you be able to quantify the one time revenue bump in the LTC segment this quarter?
No. What we meant by onetime, Yash, is I think when we just look at revenue and try to make sense of NOI, my point was more around you can't really look at revenue in long term care and quantify the change in NOI for that. So that was the comment there. There's really no one time impact in revenues this quarter that we have in the results other than these regular funding changes.
I mean the 3.5% NOI growth does look like
That's related to expenses, cash.
Yes. That's the timing of expenses.
Right. So if you were to adjust for that, whatever one time thing was there, what would it be?
If you look at the year to date, the $1,800,000 that's more kind of, I guess, a better context or better way to think about it because quarter to quarter in the funded part, it can always be just the timing of revenue and expenses. So I think if you look to the year to date, that would be more relevant.
Got it. And just one more on your retirement home occupancy. How much of the decline in Q3 was related to new supply versus other things?
It's really all related to not new supply in this case. I mean Ottawa is always oversupplied and we have couple of properties there, and that hasn't changed. It's really as we mentioned in the script, it's really resident turnover. We had a high degree of residents just moving out either to long term care or moving just moving out. So that was really the change in the same property.
Got it. Okay. That's it for me. Thank you.
Thank you.
Thank you. Our next question is from the line of Michael Smith of RBC Capital Markets. Your line is open.
Thank you and good morning. I have two questions. First, just on the acquisition front, Lois, when do you think you'll be in a position like comfortable that you fully integrated the acquisitions you did earlier this year and sort of start looking new? And then what do you think you'd be targeting? And then just secondly, when a resident moves out and they're not going to a nursing home, what's the typical
reason? They go to hospital. Like normally they would go to hospital like if there's an illness or a fall or some sort of some situation like that. Typically, long term care and this happens where you have if have residents that have lived with you for 5 or 6 years, there can be some attrition, just natural attrition happen and tends to go in spurts. On the other, I guess, with the acquisitions, we don't have targets.
We're always very selective, and we are looking to grow across Canada. I'd say, our integration, we had said it would take a year, and it will, and we're very committed to getting it right. And so we would say
Q2.
Having said that, we always we're always looking at opportunities and developing relationships across the country. So I can't really guide you in terms of a target.
Okay. Thank you.
Thank you. Thank you. Our next question is from the line of Troy MacLean of BMO Capital. Your line is open.
Good morning.
Hi, Troy. Greg. It looks like you added 2 properties to your managed services business. I was kind of curious, but how much EBITDA does a management contract generate?
So in the past, Troy, we used to have a separate segment for management services. And as you might remember, it was always small. And each quarter, we would be explaining why it changed by 10% because we had $10,000 more in expenses. So we stopped to do It is not a material part of our business today. And the same team which supports our management services supports our overall operations as well.
So it's very hard to just look at margins for those. And these contracts, we saw Q go up and in a quarter or 2, you could see 1 or 2 going down because that is always as contracts come due, we will lose some and there's some new that we sign on. So I would say at this point today, it's not a material part of our business. When we originally had this, it was on a percent, 1.5 percent initially when you reported separately, and I don't think that has materially changed since then.
Thanks. And then just on the 2019 refinancing, what length of term are you looking to replace the maturing mortgages?
So it's really a mix. So if it's a retirement or if there's a BC Residential Care because there is a CMHC program for BC Residential Care. That is always is the first option for us to look at because it's very favorable rates and you can lock in for much longer term, close to 10 years. So we would look at that as well. And we would look at some mortgage financing for 5 7 years.
But overall, when we refinanced in 2018, our average term was around 9, and we expect to do the same next year as well. Again, market dependent.
Thank you. That's it for me. I'll turn it back.
Thank you.
Thank you. And our next question is from the line of Chris Couprie of CIBC. Your line is open.
Hi, guys. Just a quick follow-up on kind of what Troy was talking about the balance sheet. What how are you thinking about the balance sheet in the context of the upcoming redevelopment program in terms of where you'd like the leverage to sit as you embark on that?
So one of the things, Chris, as you already know, but just for a reminder for everyone, like our balance sheet is debt to gross book value, not fair market value. So when we say we are at 48.3 percent on a fair market value basis, it would be much lower because a big part of our portfolio was fair valued in 2010 when we did our IPO. So we think on a fair market value basis, we would be in the low 40s roughly. I think for the business we have and the stability of long term care, I think where the margin is close to 50% sorry, the balance sheet is close to 50% debt to equity, I think we're comfortable in that range. So with development, again, our goal is to go around $100,000,000 a year.
So we don't see that as a big change in our balance sheet as we do that. And that has been one of the reasons why we want to have a pretty strong balance sheet. So when we get into development and we see a 1% or 2% uptick in debt, it does not really tip us over the 50% range.
Thanks.
Thank you. And at this time, there are no further questions.
For you. So have a good holiday season and a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This does