Ladies and gentlemen, welcome to the Sienna 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 Senior 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 and risk factors section in the company's public filings, including its most recent MD&A for more information. You will also find 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'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 third quarter, Sienna's diluted OFFO per share increased by 4.6% to CAD 0.36. We have continued to strengthen our balance sheet and ended the quarter with debt to gross book value 350 basis points below the third quarter of 2017 at 48.3%. Moving to slide eight, 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% year-to-date compared to 2017. Strong operating efficiencies compensated for the temporary decline in occupancy. Turning to slide nine, the long-term care portfolio achieved an average occupancy of 98.7%. 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 2018'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 healthcare 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 Sienna. Sienna'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 respects 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 Sienna 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 one 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%, or CAD 9.8 million compared to the same period last year, for a total NOI of CAD 40.5 million. The retirement division achieved a moderate organic growth, generating same-property NOI increase of 4.2% over prior year to CAD 8.9 million. 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 5.3%. Sienna same-property long-term care NOI for the third quarter increased by 3.5% to CAD 23 million due to timing of expenses. Year-to-date long-term care same-property NOI growth of 1.8% includes a one-time CAD 300,000 rate reduction in employer premiums due to medical services premiums in B.C. being phased out and replaced by a new employer health tax effective in 2019.
Excluding this year-to-date long-term care NOI growth would 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 one-time prior year HST refund of approximately CAD 1.3 million, which we received during the first quarter of this year. Diluted OFFO per share increased by 4.6% to CAD 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 CAD 1.04 is up 6.9% compared to the same period in 2017. Diluted AFFO per share decreased by CAD 0.01 from the prior period to CAD 0.37, driven by the timing of maintenance capital expenditure, and year-to-date diluted AFFO per share is CAD 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%-1.4%, 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 350 basis points below third quarter 2017 at 48.3%. Sienna's debt to EBITDA declined to 6.9 x in the quarter compared to 7x in the prior period. The company's interest coverage ratio has further strengthened to 4x versus 3.9 x in the prior year. Sienna ended the third quarter with approximately CAD 150 million in undrawn credit lines and cash.
During the first nine months of 2018, Sienna has refinanced CAD 182 million in debt at a weighted average interest rate of 3.4% and a weighted average term of maturity of nine years through a combination of CMHC and conventional financing. In 2019, we anticipate to refinance CAD 84 million 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 Sienna 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. 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 one-time benefits. 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-2019. Further to this, we are optimistic the new Ontario government's policies will be favorable to advancing our phase one development strategy, which will receive the renewing of over 1,000 older long-term care beds. Additionally, we will be adding over 500 new retirement suites to create seniors living campuses. Currently, we have two 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 one 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 your participation on the call this morning, we will be pleased to answer your questions
Thank you. Ladies and gentlemen, at this time, if you do have a question, please press the star and the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Chris Couprie of CIBC. Your line is open.
Good morning. Can you hear me?
Yeah. Hello, Chris.
Oh, hi. How you doing? I want 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? Maybe looking at the history of that portfolio, what's kind of been the peak for it? You mentioned the integration of the acquisition portfolio coming along. Just how far into that process are we? Yeah.
Yeah. 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 fronts of the house. As you know, it's an operating business, so it really is getting all of the team members onto the Sienna platform and program, and offering the residents everything that's in the Sienna platform. As we had indicated initially, that it would take a good year to integrate this platform. We're very much on track for that. In terms of occupancy, as you know, some of these properties were in lease-up because of recent expansion. We expect, again, around.
Close to 90% in occupancy for this portfolio. That's where it's been trending. I think our focus is, again, just making sure the margins are correct, the front office is integrated well, and then after that time, we'll start to see some uptick in occupancy. We are on track as we originally anticipated.
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. Our next question comes from the line of Jonathan Kelcher 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 are happy with the direction of the new government. Do you think that could help accelerate the phase one redevelopment?
Yeah, I think so. We've been very pleased that this government's moved swiftly, as you know, on rectifying the language in Bill 148, 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. We're really optimistic that this program's going to start to pick up speed in terms of approvals and feasibility.
Okay. That's good. Just on the operations side, the occupancy in the retirement portfolio did dip in Q3, but did recover by the end. Has that recovery carried on into Q4?
Our current occupancy is close to where we ended the quarter. Our average occupancy would be close to that, Jonathan. We do expect that, where we ended the quarter in Q3, is that what the average would be for Q4.
Okay. You normally get a little dip near the end of the year, right? With flu season and less move-ins.
Yeah. That's always the theme in Q1, typically. We're well prepared for that in terms of resident and employee immunization. We start that campaign aggressively, kind of late October, early November.
Okay. Thanks. I'll turn it back.
Thank you.
Thank you. As a reminder, if you have a question at this time, please press star and the number one. Our next question is from the line of Pammi Bir 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. 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 favorable commentary is more about, I guess, the timing of the ability to execute on these projects and the approval of the licenses, I guess.
That's part of it, Pammi. But part of the ask is to look at the funding as well, so it is both. But to Lois' point, I think as an industry, what we can do is provide input. We don't really have insight into policy at the moment.
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?
It's really too early. We haven't really seen anything at this point. Other than, 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 in specific markets, or is it still sort of holding in fairly well?
Yeah, I would say, it's always the same. Ottawa's always oversupplied and continues to be. I think there continues to be new supply going in there. That market's a challenge. There is some new supply in the Durham Region area as well. I'd say those two are probably the major ones at this point.
Okay. 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 perhaps pricing expectations too far apart?
I think there's always opportunity. For us, we're very strategic and disciplined in our approach. 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. Our next question is from the line of Brendon Abrams of Canaccord Genuity. Your line is open.
Hi, good morning, everyone.
Hey, good morning, Brendon.
Hi, just looking at the revenue, maybe I missed it in the opening remarks. It was up about CAD 3 million sequentially. Could you just remind us kind of the driver behind that? Was it all occupancy and rate driven, or were there some one-time items in there?
You're just talking from a Q2 to Q3 number?
Correct.
Is that for retirement or overall?
Just overall went from CAD 162 million-CAD 165 million revenue.
I think when you look at revenue, you really have to look it by segment, Brendon, because for long-term care, a lot of the revenue that you would see is a pass-through. It goes directly to expenses. 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 off all of those envelopes. Really, the revenue differential there wouldn't really make a difference. If you look at the retirement revenue, that's where I think you 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. Just taking a look at G&A, it seems to have ticked up a bit. Is that what you would expect to be a normalized run rate?
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.
Morning, Yash.
Just following up on Brendon's question. Would you be able to quantify the one-time revenue bump in the LTC segment this quarter?
No, what we meant by one time, 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 it to change in NOI for that. That was the comment there. There's really no one-time impact in revenues this quarter that we have in the results, other than just regular funding changes.
I mean, the 3.5% NOI growth does look like.
That's related to expenses, Yash.
Yes. That's the timing of expenses.
Right. 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 CAD 1.8 million, 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. I think if you look to the year-to-date, that would be more relevant.
Got it. 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. Ottawa is always oversupplied, and we have a couple of properties there, and that hasn't changed. 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 just moving out. 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. Good morning. I have two questions. First, just on the acquisition front, Lois, when do you think you'll be in a position, comfortable that you fully integrated the acquisitions you did earlier this year and sort of start looking new? What do you think you'd be targeting? 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 situation like that. Typically, long-term care. This happens where, if you have residents that have lived with you for five or six years, there can be some attrition, just natural attrition happen. It tends to go in spurts.
Okay.
On the other, I guess with the acquisitions, we don't have targets. We're always very selective. We are looking to grow across Canada. I'd say, our integration, we had said it would take a year, and it will. We're very committed to getting it right. We would say, Q2. Having said that, we're always looking at opportunities and developing relationships across the country. I can't really guide you in terms of a target.
Okay. Thank you.
Thank you.
Thank you. As a reminder, if you have a question, please press the star and the number one key on your touchtone telephone. Our next question is from the line of Troy MacLean of BMO Capital. Your line is open.
Good morning.
Hi, Troy.
It looks like you added two properties to your managed services business. I was just curious, how much EBITDA does a management contract generate?
In the past, Troy, we used to have a separate segment for management services, and as you might remember, it was always small. Each quarter we would be explaining why it changed by 10% because we had CAD 10,000 more in expenses. We stopped to do that. It is not a material part of our business today. The same team which supports our management services supports our overall operations as well. It's very hard to just look at margins for those. These contracts, we saw a few go up, and in a quarter or two you could see one or two going down because there is always, as contracts come due, we would lose some, and there's some new that we sign on. I would say at this point today, it's not a material part of our business.
When we originally had this, it was around 1%, 1.5% initially, when we used to report it separately, I don't think that has materially changed since then.
Thanks. Just on the 2019 refinancing, what length of term are you looking to replace the maturing mortgages?
It's really a mix of, if it's a retirement, or if it's a BC residential care, because there is a CMHC program for BC residential care. That is always the first option for us to look at because it's very favorable rates, and you can lock in for a much longer term, close to 10 years. We would look at that as well, and we would look at some mortgage financing for five and seven years. Overall, when we refinance in 2018, our average term was around nine, 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. 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. 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?
One of the things, Chris, as you already know, but just a reminder for everyone, our balance sheet is debt to gross book value, not fair market value. When we say we are at 48.3% 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. 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. With development, again, our goal is to go around CAD 100 million a year.
We don't see that as a big change in our balance sheet as we do that. That has been one of the reasons why we want to have a pretty strong balance sheet. When we get into development and we see a percent or two uptick in debt, it does not really tip us over the 50% range.
Thanks.
Thank you. At this time, there are no further questions. I'd like to turn the conference back over to Ms. Lois Cormack for the closing remarks.
Well, thank you everyone for joining our call this morning. We know it's been a busy quarter for you, have a good holiday season and a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.