Good day, ladies and gentlemen, and welcome to the Ciena Senior Living First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I would now like to introduce your host for today's conference call, Lois Cormack and Nitin Jain. You may begin.
Thank you. Good morning, everyone, and thank you for joining Ciena's Q1 2018 conference call. 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 sections in the company's public filing, 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 our 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 remarks on the company's website under Events and Presentation.
With that, I'll turn the call to Lois.
Thank you, Nitin. Well, good morning, everyone, and thank you for joining our Q1 call this morning. Guided by our mission of helping residents to live fully every day, we have made significant progress on Sienna's strategic priorities: growing the company, enhancing the operating platform and maintaining a strong balance sheet. Moving on to the Q1 2018 highlights. The organization has continued to achieve strong operating results in Q1.
Total net operating income grew by 18% from the prior year, which was driven by 5.5% growth in same property retirement and a prior year tax recovery and 12.9% growth from acquisition. In the Q1, Sienna's diluted OFFO per share of $0.31 is up 2.7% from the prior year period. Sienna has continued to strengthen its balance sheet and ended the quarter with a debt to gross book value of 50.3%. This is 210 basis points below the Q1 of 2017. During the quarter, DBRS confirmed the rating of Ciena's Series B secured debentures at A low with a stable trend.
This is a very strong vote of confidence to the health and stability of the long term care portfolio. Sienna's operations team continued to achieve consistent occupancy and retirement residences, finishing the quarter with overall average and ASV occupancy at 92.6 percent despite the unusually aggressive flu season. As previously mentioned, the Baltic portfolio has been combined with Long Term Care to become Long Term Care Residential Care segment, and this segment continues to enjoy very high occupancy. Q1 2018 average occupancy of 97.9 percent and these levels are supported by significant demand and very long waiting lists. Quality and resident safety are our top priority and Ciena has continued to outperform both provincial and national averages on publicly reported quality indicators for the past 24 months.
We also outperformed the provincial average on government inspections and 88% of CMS care communities are in the lowest risk rating according to the Ontario Ministry of Health and Long Term Care. In addition, resident and family satisfaction has increased to 89%. Now moving on to Slide 9. We were thrilled to have completed the acquisition of 10 high quality residences throughout Ontario. We are delighted to have welcomed the team members who bring a depth of experience in retirement living.
This investment expands Sienna's retirement footprint and expertise into new and desirable communities. It further enhances the company's growth profile and drives long term value creation for shareholders. We are now focused on fully integrating these new residences into the Sienna operating platform. The previously announced campus projects in Keswick and North Bay are expected to begin construction in 2019. The Ministry of Health and Long Term Care has begun to grant additional VAD licenses.
And as part of this program, Sienna has received additional licenses, which will help to support the feasibility of redevelopment projects in Scarborough and in Brantford. And we look forward to sharing more details of these projects in the future. The retrofit of Bloomington The retrofit of Bloomington Cove Care Community, our signature dementia care home, is expected to be ready to welcome residents by the end of Q2 2018. And the expansion of Island Park Retirement Residence in Campbellford is progressing very well and it is on track to be completed by the end of Q1 'nineteen. I am very pleased to report that Ciena was added to the S and P TSX Composite Index effective March 2019.
This is a reflection of our team's success in executing the company's strategic growth strategy and shareholder value creation. It is a testament to the Ciena brand, our strong operating platform and our mission of helping residents to live fully every day. With that, I will turn it over to Nitin for further details on Centimeters's financial results.
Thank you, Lois, and good morning, everyone. I'll start on Slide 13. Net operating income for the Q1 of 2018 was $32,400,000 which represents an increase of 18% or $4,900,000 compared to the same period last year. The company's retirement division achieved strong organic growth, generating same property NOI of $7,800,000 growth of 5.5 percent or $400,000 over Q1 2017. This was driven by year over year rent increases.
Sienna same property long term care residential care NOI for Q1 2018, excluding prior year tax recovery adjustment, declined by 1.4% over the same period last year to $19,700,000 This was driven by the timing of expenses due to the Good Friday statutory holiday during the quarter, which last year fell in Q2 2017. On a full year basis, we expect long term care residential care NOI to be consistent to prior year. In the Q1 of 2018, diluted OFFO per share of $0.31 is up 2.7% since the same period in 2017, and diluted AFFO per share of $0.35 for the quarter is in line with prior year. Fee per share metrics reflect the dilution impact of the closing of the equity raise on February 9 and the order allotment option exercised on February 22, whereas the Ontario portfolio acquisition was completed on March 28. Now moving to our financial position on Slide 15.
Executing on Sienna's debt strategy at the end of Q1 2018, Sienna's debt to gross book value was 50.3%, which is 210 basis points below Q1 2017 metrics. Sienna's debt coverage ratio has increased to 2x from 1.6x in the prior period, and Ciena ended the Q1 with approximately $86,000,000 in undrawn credit lines and cash. During the quarter, Ciena announced that it has completed the portfolio acquisition of 10 high quality retirement residences in Ontario. The $382,000,000 acquisition and related transaction costs were financed through a combination of $88,200,000 in property level debt, $115,000,000 acquisition term loan facility, net proceeds from the company's recent $184,000,000 equity offering and draws on the company's existing credit facilities. Subsequent to the quarter, Ciena announced its intention to exercise its right to redeem all of its 4.65 convertible debentures due on June 30, 2018.
Currently, the outstanding amount of the debentures is approximately $44,000,000 Holders of the debentures have the right to convert into common shares at a conversion price of $16.75 per share prior to end of market close on May 22, 2018. On a fully diluted basis, company's debt to gross book value would represent 48.1%. Also subsequent to the quarter, Ciena acquired an additional 16% interest in Glenmore Lodge that brings Ciena's total interest in this property to 77%. We are happy to continue to expand our ownership in this best of class residential care community in British Columbia. Glenwood Lodge opened over a year ago in Kelowna, BC, housing 118 suites with approximately 15% of the suites being private pay.
Additional 16% interest was acquired for a purchase price of $6,300,000 using the company's available cash on hand and the assumption of the existing mortgage on the property. With that, I'll turn the call back to Lois.
Thank you, Nitin. Looking ahead, we believe that the outlook for Sienna is very strong, and we expect to continue the program that we have made on our strategic priorities. We were delighted recently to welcome more than 1100 residents and over 750 new team members at special events to celebrate our newest retirement acquisition. As with other recent acquisitions, Sienna will enjoy the benefits of its new team member's depth of experience, which will continue to strengthen the company's expertise in retirement living. We will further remain strategic and disciplined in our approach to acquisitions and believe that the tremendous efforts to date have positioned us very well for future growth in key markets in Canada.
We have increased private pay retirement to 44% of the business with the goal of achieving 50% in time. Sienna continues to progress on its development plan and expects to be in the ground with 2 of these projects within the next year. In addition, we are pursuing the development of freestanding retirement in key markets. With respect to our same property portfolio, we continue to anticipate consistent performance from the funded part of the business and moderate single digit growth from the Retirement business. Thank you for your participation on the call today, and we will be pleased to answer your questions.
Our first question comes from Jonathan Kelcher with TD Securities.
Thanks. Good morning. First, just on the retirement home occupancy decline. I know you noted it was flu related and lease up. Is that all it was?
Or is there any are you guys facing any new supply pressure in any markets?
Well, I guess there's the flu season, Jonathan, which was very aggressive. We had some residences that were in and out of outbreak, which means that you cannot admit residents or to a resident or potential prospects. So that's a challenge. But in addition to that, if you'll recall, we have 2 residences which we recently acquired, which are in lease up. So that contributes to some of it as well.
And right now, there's no significant new supply that we would identify in any of our markets. There will be once we only have a couple of days, as you know, of the Maple acquisition. But once that comes in, there are some in those communities of more well supplied markets as well as in the future over the markets in which we operate.
Okay. And your as at occupancy included the acquisition?
Yes, that asset occupancy includes 4 days of the Maple acquisition, Jonathan. So in the both numerator and the denominator.
Okay. And secondly, just on the bed licenses you were awarded in Brantford and Scarborough, how many licenses were you awarded? How many beds?
Well, this was both were intended for top ups for development projects, which we wanted to do to upgrade CHOMES or to rebuild CHOMES. So in Brantford, we received 70 and then Scarborough, we received 129. So right now, we're just going through all of the planning and modeling to look at how many we're going to build in total and the desired locations. And we'll look forward to sharing more information on that once we kind of confirm our plans and get some preliminary approvals.
Okay. But that would be more 2020 start or later than I would assume?
That's right. Yes.
Okay. And then just finally, there was a little bit of press a week or so ago about a class action lawsuit against you guys and I guess a couple other long term care providers. Can you maybe give us a little bit of color or thoughts on that?
Yes. So I think it's important to keep this in perspective. It's important to note that it is only a proposed class action. It has not been certified. We do not believe that it has merit, and we certainly intend to vigorously defend the claims through the appropriate court process.
And I think also it's important to note that Ciena is highly regulated, all long term care homes are highly regulated in the province, but we Sienna, in our case, outperforms both provincial and national averages on all of our quality indicators. And we do have a very complex population that we care for every day. We care for very marginalized, complex seniors who, in fact, our average length of stay is under a year because we do care for very frail seniors that have complex healthcare needs.
Okay. Thanks. I'll turn it back.
Our next question comes from Fred Blondeau with Echelon Wealth.
Thank you and good morning. Two quick questions for me. First, I was wondering if you could give us a bit more color on the trends you're seeing in the same property operational expenses for both LTC and Retirement segments. It seems like they are steadily increasing in this juncture. I was wondering what should we expect for the next 12 months, 24 months?
Brad, can you just expand on the question?
I was just wondering if you could give us a bit more color on the trends you're seeing in the same property operational expenses. It seems like they're on the
upward trajectory. Sure. Yes, I mean if you compare our margin, I think that's probably a good way of looking at it because revenue has been increasing as well. So we merged our long term care in the Baltic portfolios to call it long term care residential. So obviously, the margin is going to be a little bit higher there as a mix because the Baltic portfolio had a bit of a higher margin mix.
And if you look at Retirement, our margin has been in that for same property, in that 45%, 46% range, and that's where we expect it to stay. We don't anticipate much change in it. And the portfolio that we just acquired, that is at a lower margin. And as Lois discussed in the previous call, when we acquired a portfolio this size, the 1st year is really putting all the systems and processes together. And then over time, we will get to see some synergy.
So we expect from a transaction standpoint, the margins would be a bit lower than what we see from the same property.
Okay. And second, in terms of your projects like Kisliuk and North Bay and Coff, I guess Bloomington and Island Park. Could you remind us what kind of what would be your expected yields on these projects?
Sure. So for
Island Park, which is an expansion project, so there's a lot of common areas which have already been built and intensification opportunities usually have a bit better return, especially in our case. So we expect the cost of the project to be $10,000,000 to $11,000,000 range, and we expect the return close to around 9% on that. For other projects, which we have talked about both North Bay and Kesswick to be campus developments, which is a combination of long term care and retirement residents. We expect that to be around close to 100 basis points to 150 basis points over cost of capital just because there's lower return on long term care, but also lower risk. A return would have a high return, but obviously a bit higher risk because of the lease up challenge there usually in a new community.
Our next question comes from Pammi Bahr with Scotia Capital.
Thanks. Good morning. Just going back to the lawsuit for a minute, can you maybe just provide some high level color on the legal process and just how long this could play out?
Pammi, sure. So obviously, we won't comment on the process and the timing. I think we'll go back to what Lois mentioned that it is a proposed class action. It has not been certified. So obviously, there's a difference between those.
We do not believe it has merit. So again, the timing and all of those things would depend on a lot of different factors, including if it ever gets certified, which we again, we believe at this point, it lawsuit has no merit and it has not been certified. So we won't comment on that. I think what we will do is going forward, depending on where things are, we'll obviously provide updates on it on our quarterly information. And if something changes, we will do so sooner.
Got it. Okay. Maybe just switching gears, can you comment on how the integration is going on the Ontario acquisition? And you mentioned expectations for perhaps some synergies there. But what levers do you have that you can often, I guess, pull in terms of driving margins higher?
Yes. Well, I guess this is an operating business, as you know, Tammy. It's we have over 1100 residents and about almost 800 staff that we're orientating and onboarding. So this is we're working well and well on our way with all of the back office integrations, such as payroll and finance and so on, all of the back of the house. So this is going to take time.
I think we've indicated for an acquisition of this magnitude, it can really take up a year to get any sort of synergies and that's we don't really see any in the short term. But what I can say, we're very pleased with the team and the assets and the expertise that they have and certainly adding a lot of a new dimension to our retirement platform.
Great. That's helpful. Just maybe one last one. In terms of, I guess, the pipeline of acquisitions and sort of what you're seeing in the market, can you just comment on what's out there today? And is there anything sort of in any, I guess, advanced stages of discussions?
No, I would say that we're we'll continue to be very disciplined and strategic. Right now, we are very focused on integrating all of the acquisitions that we've done recently in the last 12 months or so.
Great. Thanks very much.
Our next question comes from Michael Smith with RBC Capital Markets.
Thank you and good morning. Just wondering if you have any comments on the Ontario election campaign. There's been a number of promises made with regards to senior care in Ontario.
Not really. I mean, I think regardless of the party, I think there's an acknowledgment that senior care is a significant priority really across the country with the aging demographic that there has to be solutions for all levels of seniors' care. I think that specific to Ontario, all parties have recognized the need for more investment in long term care in terms of staffing as well as additional beds and capacity. So I wouldn't see any significant change of direction in the immediate term. I think regardless of the party, we have pretty good we have excellent relationships with all regulatory authorities and good relationships with all FPPs.
So we wouldn't see any significant change other than over the near and long term, there's going to be continued emphasis on the needs for seniors care and solutions.
Okay. And just switching gears. So Nitin, when you said LTC, you expect same property NOI to be consistent with prior years. I just want to be perfectly clear. That's basically 1% to 2%.
Yes. That's right. I would say more 0 to 1%, Michael, because the rates usually go up with inflation and the cost usually rise a bit faster. So I would say, I think last year, our long same property long term care NOI was around 1.4%, and that's probably would be in the range that we would expect 0% to 1%, 1.5%.
So 0% to 1.5%, last year, you're 1.4%, but 0% to 1% to be conservative is kind of what you're saying.
Sure. Yes.
Yes. And in terms of debt, you've made some good progress getting your debt levels down to 50.3%. What is your goal?
I think we feel and again, as you know, our debt is to gross book value, not fair market value. And a big part of our portfolio was fair market value in 2010 when we did our IPO. So again, if we did it from a fair market value perspective, we easily would be in the 40s. We think around 50% 52% is not a bad place for us given the stability in our long term care structure. So with the converts, we are at 48.
With the Maple acquisition, we went up a little bit just because we thought it was strategic and over time will come down using our retained cash. So the range we are in today, 48 to 52, I think that's a pretty good range for us and we will go up and down depending on the use of cash.
Okay. Thank you. And lastly, I guess I'm a little puzzled. I mean, for the last 2 years, you've consistently outperformed both the provincial and national averages on quality indicators. You're highly regulated.
You've got an almost a 90% satisfaction rate. I just I was really surprised that there could be any with all given all of that, like this suit, I mean, it just seems like it's totally frivolous.
We can't I mean, from time to time, we do get suits and that's just sort of the nature of the business. Unfortunately, it's just unfortunate that it's got so much press around it.
Right, right. And the press doesn't seem to be picking up all the good things. Anyhow, I'll leave it there and turn it back. Thanks.
Thank you, Michael.
Our next question comes from Troy Mclin with BMO Capital Markets.
Good morning. You've added a lot of services in your retirement portfolio over the last number of years. I was wondering, is there any opportunity to add any additional services to the portfolio acquired at the end of March that they didn't currently have?
I would say that, I mean, yes, some of them were doing assisted living. I would say across the board, there's always opportunities to add additional services as residents age. What we typically find is that the longer the resident stays with us, the more services that they require. And that's the beauty of how we approach this. Our service deliveries, we can provide services as residents require them.
And when they come in and don't need them, they're more independent. So will, across the portfolio, continue to add services over time, Troy.
And then just on the Stouffville retrofit, I was wondering how actual cost came in versus budget now that the project is nearing completion?
So that was the first project and we anticipated our cost to be around $5,000,000 to $6,000,000 and we would be pretty we would be within that range. So we don't see much change in it. And it was a good way for our team to kind of get through the development process. It was a much smaller project, a small wing. So there was a lot of learning which came out of this, which obviously would apply in intensification opportunities and also the campus and the standalone retirement projects.
And then just on the Class C redevelopment, I understand most of that's going to be greenfield. Typically, over the last couple of years, what kind of inflation do you see in redevelopment costs for LTC properties in Ontario? Is it more in line with inflation or is it higher?
It is higher than inflation in what we have seen and it is trade specific because of there was obviously, there's been a huge change in the residential side. So a lot of the trades have been difficult to find, and they have become more expensive. And that again, as we got new beds, as Lois mentioned, we are still going to run through performance because the cost does change on a consistent basis. And when we do a pro form a depending on where the construction starts, we actually build in increases in it depending on what has happened in the past. So the cost has not kept up with inflation, it's been higher, and we would budget as such to ensure whether a project is feasible or not.
Our next question comes from Yash Sankpal with Laurentian Bank.
Good morning. I just want to talk or discuss the retirement home portfolio. I mean despite the bad flu season and the margin the occupancy decline, your margins held up quite well. So just want to get some more color around how you guys managed to keep your margins high in the 46% range? And also want to understand how the once the Bay Bridge acquisition is fully integrated, how your margins will trend as compared to where they are right now?
Well, I guess the only thing I can say on margin is that we do we manage the expense side as well, Yash. Like when occupancy is down in a residence, we make sure that our we're being efficient with our staffing and our operating expenses. And that summer, obviously, the majority are fixed, but wherever there's variable, we manage them. And with respect to Maple, our margin may come down a little just because there's some of them are smaller properties than what we have now. Our overall average, we've got some a number of larger communities.
And as you get around 100 and 20 suites, they're a little smaller. So the margin overall margin may come down as we grow.
And just what is the current margin of that portfolio, NOI margin?
So when we acquired it, I don't have the number top of my head. It was in the 30s, Yash. And again, I wouldn't think that it will go all the way to 46 where we are today because as Lois discussed, some of those properties are smaller. It is market specific. So even in our portfolio, which is same property, we have margin from 30s to higher because the average is 46.
So again, for time being, we expect the margin to be similar. And then a year later, as we put it on our platform, we expect there will be some synergies, which will help expand the margin for that portfolio.
Right. And do you have the weighted or the average monthly rate for that portfolio by any chance?
It's the numbers I guess we can back into it. I don't have again, we don't have the top of our head. And so
Is it comparable to your existing portfolio?
It would be a little bit less just because our existing portfolio has bigger sites versus a percentage of smaller ones. So it would be lower than our existing portfolio in terms of average rent per suite.
Speed. And I'm not showing any further questions at this time.
Well, thank you very much for joining our call this morning for your questions and your support. And we look forward to seeing all of you at our AGM, we hope.
Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.