Ladies and gentlemen, welcome to Ciena Senior Living, Inc. Q2 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 statements or information.
Please refer to the forward looking information and Risk Factors section of the company's public filings, including its most recent MD and A for more information. You will also find a more fulsome discussion of the company's results in 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 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 will now turn the call over to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Sherry. Good morning, everyone, and thank you for joining us this morning. I am pleased to share the highlights of another strong quarter for Sienna. Total net operating income grew by 33.9% from Q2 in 2017. Q2 solid results were driven by same property net operating income growth of 6.2% in retirement and 2.8% in long term care, for a total same property growth of 3.7%.
The remaining growth was from significant investments that we have made in retirement living. And AFFO increased 4.1% from the prior year period. We have continued to strengthen our balance sheet and ended the quarter with a debt to gross book value 210 basis points below the Q2 of 2017 at 49.4%. Building on the successful execution of our strategic priorities, I'm pleased to share that we have approved a 2% increase in Ciena's monthly dividend. Our operations team delivered same property strong occupancy results in our retirement residences, finishing the quarter with average occupancy of 93.2%.
The recently acquired property finished the quarter with average occupancy of 90.3%, including the properties in lease up. We expect that occupancy will increase over time in these residences as the lease up properties stabilize and we fully Slide 9. As a result of executing our growth strategy over the past year, we have expanded our retirement portfolio, increasing the NOI mix from 27% at the end of 2016 to now 44% of the overall business. This is outstanding progress on our goal of achieving a balanced portfolio with a 50% private pay NOI mix. The integration of the newly acquired Retirement Residences is proceeding well.
These 12 new residences are all high quality, are in key locations and have further strengthened our operating platform with the addition of over 1,000 experienced team members. Sienna's development projects are on track, and we are pleased to report that the retrofit of Bloomington Cove has been completed. The residents have now moved in, are enjoying their new accommodations. The 55 suite expansion at Island Park is on track for completion in early 2019. We are extremely pleased with our residential care communities in British Columbia, receiving a 4 year accreditation award with exemplary standing.
This is the highest distinction awarded by Accreditation Canada. Sienna has exceeded all of Accreditation Canada's requirements. This speaks to the dedication and expertise of our team members who achieve quality results and help residents to live fully every day. Quality and resident safety remain our top priority, and Ciena continues outperform provincial and national averages on publicly reported quality indicators. As part of Seniors Month in June, Sienna's Residences hosted a number of fundraising events in support of Sienna for Seniors, our charitable giving program, which supports marginalized seniors living in the community.
More than 100,000 has been raised so far this year. This money provides programs and services for seniors in need living in communities across Canada. At our recent leadership conference, we were honored to recognize a number of SCIM's top performing teams with awards for achieving excellence in the categories of resident experience, team member experience and financial performance. These are further examples of ways that we continue to strengthen our culture, which was named one of Canada's most admired corporate cultures by Waterstone Human Capital last year. We were pleased that the Ontario's new government has reaffirmed its campaign promise about 15,000 new long term care beds in 5 years, with a total of 30,000 over the next decade.
We are optimistic that this government's policies will be favorable for the seniors living sector. Our hope is that the government's commitment to reducing hallway medicine, for instance, will translate into greater investment in the seniors living sector, where a large number of hospitalized seniors' needs could be better met. 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 14. Net operating income for the Q2 of 2018 grew by 33.9 percent or $10,000,000 compared to the same period last year for a total NOI of 39,400,000 dollars The Retirement division achieved strong organic growth, generating same property NOI of 6.2%, which was driven by a combination of market rate adjustments, operational efficiencies and annual rate increases. Sienna's same property long term care residential care increased by 2.8% over the same period last year to $22,200,000 driven from the stable funding environment, lower utility expenses and timing impact of a stat holiday. We are pleased by the strong future results.
For the quarter, Ciena has achieved 47.6 percent same property NOI margin in our Retirement division, continuing the consistent trend of solid performance over the last 3 years. The company's total Q2 2018 is 24.3%. This is an increase of 2.90 basis points from Q2 2017. The margin expansion reflects Sienna's growth in achieving an expanded and balanced portfolio, where the retirement now represents 44% of the company's total NOI. Moving to Slide 16.
In the Q2 of 2018, diluted OFFO per share increased by 12.7 percent to $0.37 which was driven by strong operating results, lower G and A due to timing and favorable mark to market adjustments on DSUs. Q2222018 diluted AFFO per share increased by 4.1 percent to $0.38 driven by the OFFO variances offset by the DSU adjustment. To better streamline reporting starting in Q3 of 2018, we will not be adjusting deferred share compensation charges to AFFO. Now moving to a strong financial position. Executing on our debt strategy at the end of Q2 2018, Ciena's debt to gross book value finished 210 basis points below 2nd quarter 2017 metrics at 49.4%.
Ciena's interest coverage ratio further strengthened in the quarter to 4.1x versus 3.8x in the prior year, which is an increase of 0.3 turns. We ended second quarter with approximately $130,000,000 in undrawn credit lines and cash, which is an increase of approximately 20% over the prior year period. During the quarter, Ciena exercised its right to redeem all of its outstanding convertible debentures, which were due June 30, 2018. $33,000,000 or 72 percent of those debentures were converted into common shares at $16.75 per share, and the remaining debentures were redeemed for cash. In addition, Ciena paid down its $115,000,000 acquisition term loan facility ahead of schedule.
The facility was used to finance a recent retirement portfolio acquisition and was repaid with proceeds from new mortgages. Weighted average term to maturity of the new mortgages is 9.5 years, and the weighted average interest rate is 3.5%. As a strong Board of confidence on the execution of our company's strategy, the Board of Directors have approved an increase of 2% in Ciena's monthly dividend from $0.075 per share to $0.765 per share, which would be $0.918 per share annualized. The increase will commence on September 14, 2018, payable to shareholders of record on August 31, 2018. With that, I'll turn the call back to Lois.
Thank you, Nitin. In late May, we were honored to open the Toronto Stock Exchange celebrating Canada's addition to the S and PTSX Composite Index. This is a reflection of the team's success in executing the company's growth strategy, shareholder value creation, and it is a testament to the Ciena brand and its strong operating platform. Looking ahead, we believe the outlook for Ciena is very strong and we expect continue the progress that we have made on our strategic priorities, which are growing the company, enhancing the operating platform and maintaining a strong balance sheet. Our focus on these priorities should continue to translate into long term accretive growth for the company's shareholders.
44% of the portfolio is private pay retirement and we are committed to continued expansion of Ciena's retirement portfolio. In fiscal 2018, we anticipate mid single digit growth from the Retirement segment and consistent performance from the funded part of the business. We are pleased with the progress on the integration of our recent investments. Going forward, we will continue to remain strategic and disciplined in our approach to acquisition and believe the tremendous efforts to date have positioned us very well for future growth through our national platform. We continue to progress on Phase 1 development strategy, renewing over 1,000 older long term care beds.
Additionally, we will be adding over 500 new retirement suites to create seniors living campuses. Thank you for your participation on the call today. Nitin and I will be pleased to answer your questions.
Thank Our first question comes from Jonathan Kelcher with TD Securities.
Thanks. Good morning.
Good morning, Jonathan.
First question, just I know it's early days for the new government in Ontario, but do you expect to see any changes funding or development or anything along those lines?
Well, we're just kind of we're setting up some meetings. We have one actually next week. But we're very optimistic with this with the government. We think that they've got a very strong team in health, with the minister and deputy of the people in health. They have a senior secretariat as well.
So we believe it's a very strong team that will be very friendly to the seniors living sector because of the issues with respect to the hospital overcrowding and so on. So we do expect to get some traction and maybe quicker approval processes and some traction on the redevelopment project.
Okay. And then speaking of the redevelopment projects, I think the 1,000 Class B and C beds that you put in your slide deck this quarter is new. Is that new or did I miss something along the way?
No, there is a Phase 1 project we've announced previously. There's a couple that are moving ahead more quickly than the others, the 2 that had been previously approved. But we have a number of others in the hopper waiting approval as well.
Okay. And how many projects would that 1,000 be?
It will be closer to 5 to 6 projects, Jonathan, specific on-site. And again, as Lois mentioned, they are in the pool process, both from a regulatory perspective and also just ensuring that we have the right return for those as construction costs continue to rise. So it's on both our regulatory review and also internal financial review.
Okay. And then just lastly before I turn it back, the cash balance increased pretty good this quarter. Maybe give a little color on that and any plans with that?
Sure. We ended that quarter with around $56,000,000 in cash, which was more related to timing because we had a property which we got some proceeds for. And a couple of days later when we repaid our risk financing. So it was more related to timing. We ended our Q1 cash at around $19,000,000 and that's probably a good proxy going forward adjusted for company size.
Okay. Thanks. I'll turn it back.
Thank you, Jonathan.
Thank you. Our next question comes from Michael Smith with RBC Capital Markets.
Thank you and good morning. I'm wondering if you could just give us some color into your thinking on the dividend. I don't think you've increased it since 2,002 and I mean, it's good news for income oriented investors. But anyhow, I just wanted to get your what your thinking was?
Thank you, Michael, for the question and good morning. As we have talked previously, we review our dividend policy every quarter. Our objective is to pay a sustainable dividend to investors while using some of our retained cash to execute our company's strategy, which we have continued to do so and to further improve our platform. As we have transformed the company into retirement and continue to grow, which is reflected in our operational results, We feel confident about the increase at this time. And going forward, we'll do the same.
We'll continue to monitor our dividend policy and make adjustments as appropriate.
And Michael, just a clarification, the last dividend increase was 2012.
2012, yes. Okay.
And we've been as you know, we've been working on the balance sheet and our growth strategy.
And is it safe to say that you now you're now at a payout ratio that you're comfortable and you don't really have to lower it as much, although you may increase the dividend at a lower rate than your growth rate in AFFO? I
mean, our focus, Michael, has never been on payout ratio. Our focus is really we talked about reducing our leverage and increasing our platform, which we have done. So we feel we'll continue to see growth. We feel our leverage is at a good place. And looking at the best proceeds of cash, we'll continue to monitor on a quarterly basis, but not really not a specific payout ratio that we are targeting, more what's the best use of cash.
Okay. And just finally on the one more on the dividend. So some other REITs, what they've done is they went through a period of many years, 5, 6, 7 years, where they kept it flat. And then once they initiated a small dividend increase, the goal was subject to performance of the business was to increase it by a small amount every year. Is that factoring to your thinking as well?
Or you want to you're thinking about it differently?
I think that's a reasonable approach, Michael. We wouldn't want to make any commitments at this point, but I think that's a very reasonable approach.
Okay. Thank you. And just switching gears, so the 15,000 new LTC beds that was promised for Ontario, could you talk about how that might affect your business?
Well, I mean, there's significant demand for additional long term care bed stock as well as redeveloping the 30,000 older beds in the province. So there's just demand and particularly in the urban and GTA areas, there's huge demand with a significant wait list of 32,000. So I think it's just it would be great news for the province if we can get some of these beds built.
And would some of these beds be built by you or like into expansions or is it do you plan on participating? Or is it that would go against your long term goal of fifty-fifty mix, I guess, or your medium term goal?
Yes. The way Cianna views this is we would look at any additional bad debt impetus to assist our redevelopment strategy. So we have a number of projects. And if you recall, in the last call, I think we shared that we had received some additional licenses, which will enable some of those projects to work to get to the right size that we'd like to build. So that's how we would view it more as enabling our redevelopment to get those projects to work.
Great. Thank you. That's it for me.
Thank you.
Thank you. Our next question comes from Brendan Abrams with Canaccord Genuity.
Hi, good morning. Good morning, Brad.
Do you
mind getting your outlook on margins? Obviously, there is a nice bump in the quarter, I suspect due to the 10 property portfolio completed at the end of Q1. But if you could just provide kind of some color on your margin outlook and whether you're seeing any kind of cost inflation creeping in?
Sure, Brendan. So just I think if you look at our margin, you would look at long term care and residential care as consistent going forward. When you look at retirement, you really need to break down margin into 2. 1 is same property. So for our same property, our Q1 margin was around 46.5 percent and in Q2, that margin is around 47.6%.
So we have seen definitely see good consistent growth in retirement margin for same property. We wouldn't expect more. Like I don't think you should reflect a higher margin for same property because this is very good results. On our acquisition, in our Q1, our margin was around 42 percent roughly, and that is because of the acquisitions we've done last year. The big acquisition that we did, which closed in March 28, so it had very minimum impact on the Q1.
That portfolio margin is around 39%, and we disclosed it when we bought that portfolio. And it's due to the size of the properties and locations as well. So over time, as we put it in our platform, we expect those margin to expand, but we don't expect them to go to 47.6 percent just because they are different products in different markets. So I think what you see today from a same property, that 46.5%, 47% is probably a good way of thinking about them. And for acquisitions, what we did in Q2, which is on 42.5%, is probably a good mix because it includes some property with a higher margin, which were the 2 Waterford properties we bought last year and then the 10 property portfolio, which we bought in Q1, which is around a 39% margin.
Okay. And how would you just your outlook on the overall retirement market as a whole, how would you characterize that? Is there room for is there pricing power or is supply factor, increased supply factor? How would you characterize the market as a whole?
Well, there's always new supply coming on and supply is always very market specific. So overall, we don't see supply affecting the overall portfolio. It may from time to time as new residences open in certain communities, so it may impact one community in a certain area when new product comes online. So overall, we don't see a significant impact as it relates to supply in terms of the overall portfolio.
Okay. That's it for me. Thanks.
Thank you. Our next question comes from Troy MacLean with BMO Capital Markets.
Good morning. For the Class A LTC portfolio, I was wondering if you could provide what percentage of the private rooms are at the current private rate and what percentage are at grandfathered under the any prior lower rate? I know that may be a tough question to answer on the call, but just kind of curious if you had any color on that.
Sure, Matt. We'll try to answer if you have some numbers. So there's the Class C beds, which is around 16% of a private stock, that number would not change substantially. And then the balance, which is around 84% or so, there are different ranges of the private pay premium. The current one is nearly $25,000,000 $63,000,000 So around I would say around 60% of our beds are at the highest private pay rate.
And then the balance 24% would be in that range of when people move there, that rate is fixed to the time they are in the community. So there's another around 24%, which can eventually go up to the current rate over time.
And then just on the acquisition mark sorry, on the acquisition market, is it becoming more competitive? Or would you say the cap the acquisition cap rates that you're looking at in the market are relatively stable versus the last couple of quarters?
We think there's still very strong demand in this space. There's lots of interest in the space. There's lots of people looking for good assets. So we would say it's still pretty competitive and competitive cap rates, again, depending on the product type and location and age and a lot of different variables that would go into a cap rate.
Have you seen any new buyer groups bidding on assets? Or is it kind of the same players that it was last year?
I think overall, Troy, the players have been saying for retirement, long term care, there have been some new buyers as well. So there is a different market for that. And we have seen our cap rates compression on long term care. Some of the studies which CBRE and few others have done are now looking more close to a sub-seven cap rates for good markets long term care rates, which frankly is not really market specific because the funding is nearly the same. So that has been a change as well.
Thank you. That's it for me. I'll turn it back.
Thank you.
Thank you. Our next question comes from Fred Blondeau with Echelon.
Thanks and good morning. I had to reconnect, so sorry in advance if my questions were answered. I got 3 questions for you. First, it looks like your NOI margin continues to improve as you mentioned, Nitin, and year to date. And how do you feel for the rest of the year and next year and more specifically in terms of your current cost structure?
So thank you, Fred, and good morning. So again, I think we would read and kind of talk about what you have said in the script and the question which was previously asked. I think our margin for our long term care residential care have been consistent. We don't feel there's any cost pressure more than inflation and the funding goes with inflation as well. So it would be it has been enough in the past to cover it and we expect the same.
Retirement, again, I would break it down into 2 buckets, same property, which again we will have some of the higher margins, so we expect them to stay consistent. And for acquisitions, it's a combination of 2 bigger properties that we bought in end of December, the 2 Waterford's. Their margins would be similar to our portfolio. And then the Maple portfolio, the 10 property portfolio in Ontario, that was around a 39% margin. We do expect to increase it over time, but it will take some time to put it on our platform.
So but now I would assume similar margin at what we bought it for.
And quickly in terms of the lawsuits, I was wondering if you had any update at this point and if you are possibly in a better situation at this time to assess the credibility of it?
Yes. Well, we as you know, we were served this on May 2 and we certainly do not believe that the claim has merit. We are vigorously defending it. It will take time. It has to go through the court process.
We do have outstanding quality and safety results, and I'm proud of the team. We continue to outperform provincial and national averages on our indicators, all quality indicators. All of our residences are fully accredited by the 3rd parties, including Accreditation Canada, which we just received an exemplary award for. And Ontario properties are through another body called CARB, and they assess quality of care against best practices. All of our residences are highly regulated and inspected by health authorities.
All are in good standing. And we do have insurance coverage, and we believe that any it would not be any material adverse impact on the business operating results or financial condition of the company as a result of this.
Okay, that's fair. And lastly, you mentioned in MD and A that you have received preliminary approval on 2 additional development projects. I was wondering if you could either remind us or give us a bit more details on these projects?
Yes. So it was North Bay and, Keswick. And we're just really waiting now because there was kind of a hiatus with the election cycle. So there was a period before the election where nothing could happen and post election. And now with the new government, they're just getting every 13 teams place and some processes in place.
So it's been a bit of a hiatus, but we do expect that they'll get some traction moving quickly because we know that this whole area is a priority for this government.
Yes, perfect. Thank you. I'll leave it there.
Thank you. Our next question comes from Yash Sankpal with Laurentian Bank.
Good morning. So the first question is on your retirement home, same property occupancy. I see that your occupancy was down 100 beats year over year, but your margins were up 100 beats year over year. So maybe you could explain what caused that divergence, that would be great?
Yes, with the occupancy is down because as you know Q1 was a horrific flu season. So and this often happens in Q2 where you're actually leasing up all of the decline in occupancy from Q1. So that's often what happens in Q2. So that's the case. And we've continued to get good rent increases or rate increases on suite turnover.
So when we're turning over residents move out, we're able to get readjust the market rate in many cases. And that's helping to drive our our at least to maintain our margin.
Okay. And another question is on like in a typical retirement home, what percentage of the staff is personal support workers versus like say nursing staff?
Sorry, Ash, you missed that?
So in a typical retirement home, say 100 bed retirement home, what percentage of the staff is like our personal support workers?
It depends on the community and that like in sub communities we have designated assisted living areas and most we don't, we do it in suites. Of it, it might be 20%.
And what would that percentage be in a typical long term care facility?
Sorry?
What would be the percentage of personal support workers in a long term care facility?
On a long term care, it's about 75%.
So 75% of the staff is personal support workers?
Yes. In long term care, about 75% of the staff would be personal support workers.
That seems counterintuitive, right? Because in a long term care facility, you would need more nursing staff because of the amount of care that is provided.
No, the majority of the care is provided by personal support workers in long term care. And then we have the other highest group would be registered practical nurses in long term care.
All right. Okay. That's it for me. Thank you.
Thank you. And our final question comes from Chris Couprie with CIBC.
Good morning. Just a quick question on, so in Q1, we kind of called out the Easter shift and how it had a kind of negative impact on the results and you had a number ex Easter shift. I'm just wondering if 2Q had any benefit because of Easter going into Q1 this year?
Hi, good morning, Chris. So yes, so this quarter we saw long term care, residential care, same property growth of around 2.8%. And then the Q1, it was negative. But if you look at Q2 year to date, which is around 0.8%, and that's what we've always talked about this business as being 1% to 1.5% consistent performance year over year. So we did see some benefit in Q2.
And that's why if you look at this business, looking at the Q2 year to date would be a better way of looking at these numbers.
Okay. And sorry, in retirement homes, there was no impact?
That's correct. No material impact on that.
Okay, great. And then when we look at the development pipeline, in terms of the sites that you're going to be tacking on the retirement homes, how did you select the sites that you chose? And do you have the land available on the existing site? Or do you need to acquire new land in order to proceed with that expansion and adding retirement homes?
Yes. So in each case, each of our projects will be campuses, each will be greenfield, so new sites. And in most cases, we do have land or land an option on land for the Phase 1 project.
Okay. And then just one last question on acquisitions. So in Ontario and BC, would you consider other provinces?
Definitely. We're always looking across Canada.
Okay. Thanks, guys.
Thank you.
Thank you. Ladies and gentlemen, this concludes the question and answer portion of today's call. I would now like to turn the call back over to management for any closing remarks.
Well, thank you, everyone, for joining our call this morning for your support of Sienna. Have a great day, and enjoy the rest of your summer.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a wonderful day.