Good day, ladies and gentlemen, and welcome to the Sienna 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. If you require operator assistance during the program, please press star then zero on your touch-tone telephone. I would now like to introduce you all to this conference call. Lois Cormack and Nitin Jain, you may begin.
Thank you. Good morning, everyone, and thank you for joining Sienna'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&A for more information. You will also find a 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 our 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, 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 first quarter, Sienna's diluted OFFO per share of CAD 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 first quarter of 2017. During the quarter, DBRS confirmed the rating of Sienna's Series B secured debentures at A/low with a stable trend. This is a very strong vote of confidence for the health and stability of the long-term care portfolio. Sienna's operations team continued to achieve consistent occupancy in retirement residences, finishing the quarter with overall average and as-at occupancy at 92.6%, 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. This segment continues to enjoy very high occupancy, Q1 2018 average occupancy at 97.9%. These levels are supported by significant demand and very long waiting lists.
Quality and resident safety are our top priorities. Sienna 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. 88% of Sienna's 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 nine. 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 bed licenses. 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. We look forward to sharing more details of these projects in the future. 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. The expansion of Island Park Retirement Residence in Campbellford is progressing very well. It is on track to be completed by the end of Q1 2019. I am very pleased to report that Sienna was added to the S&P/TSX Composite Index effective March 19th.
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 Sienna 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 Sienna's financial results.
Thank you, Lois, and good morning, everyone. I'll start on slide 13. Net operating income for the first quarter of 2018 was CAD 32.4 million, which represents an increase of 18%, or CAD 4.9 million, compared to the same period last year. The company's retirement division achieved strong organic growth, generating same property NOI of CAD 7.8 million, a growth of 5.5%, or CAD 0.4 million 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 CAD 19.7 million. 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 first quarter of 2018, diluted OFFO per share of CAD 0.31 is up 2.7% since the same period in 2017, and diluted AFFO per share of CAD 0.35 for the quarter is in line with prior year. These per share metrics reflect the dilution impact of the closing of the equity raise on February 9th and the over-allotment option exercise on February 22nd, whereas the Ontario portfolio acquisition was completed on March 28th. 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 first quarter 2017 metrics. Sienna's debt coverage ratio has increased to two times from 1.6 times in the prior period, and Sienna ended the first quarter with approximately CAD 86 million in undrawn credit lines and cash.
During the quarter, Sienna announced that it has completed the portfolio acquisition of 10 high-quality retirement residences in Ontario. The CAD 382 million acquisition and related transaction cost were financed through a combination of CAD 88.2 million in property-level debt, CAD 150 million acquisition term loan facility, net proceeds from the company's recent CAD 184 million equity offering, and draws on the company's existing credit facilities. Subsequent to the quarter, Sienna announced its intention to exercise its right to redeem all of its 4.65% convertible debentures, due on June 30th, 2018. Currently, the outstanding amount of the debentures is approximately CAD 44 million. Holders of the debentures have the right to convert into common shares at a conversion price of CAD 16.75 per share, prior to end of market close on May 22nd, 2018. On a fully diluted basis, the company's debt to gross book value would represent 48.1%.
Subsequent to the quarter, Sienna acquired an additional 16% interest in Glenmore Lodge. That brings Sienna'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. Glenmore 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 CAD 6.3 million, 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 progress that we have made on our strategic priorities. We were delighted recently to welcome more than 1,100 residents and over 750 new team members, a special event to celebrate our newest retirement acquisition. As with other recent acquisitions, Sienna will enjoy the benefits of its new team members' depths 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 plans and expects to be in the ground with two 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.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone 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 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 are you guys facing any new supply pressure in any markets?
Well, I guess there is 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 tour residents or potential prospects, so that was a challenge. In addition to that, if you will recall, we have two residences which we recently acquired, which are in lease up. That contributes to some of it as well. Right now, there is 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. Once that comes in, there are some in those communities of more well-supplied markets, as well as in the future, over the coming year, there will be some new supply in some of the markets in which we operate.
Okay, your as-at occupancy included the acquisition?
Yeah. That as-at occupancy includes four days of the Maple acquisition, Jonathan. In both numerator and the denominator.
Okay. Secondly, just on the bed licenses you were awarded in Brantford and Scarborough, how many licenses were you awarded, or how many beds?
Both were intended for top up for development projects, which we wanted to do to upgrade C homes or to rebuild C homes. In Brantford, we received 70, and then Scarborough received 129. 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. We'll look forward to sharing more information on that once we kind of confirm our plans and get some preliminary approvals.
That would be more a 2020 start or later then, I would assume.
That's right. Yeah.
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?
Yeah. 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 claim through the appropriate court process. I think also it's important to note that Sienna is highly regulated. All long-term care homes are highly regulated in the province. Sienna, in our case, outperforms both provincial and national averages on all of our quality indicators. 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 Desjardins .
Thank you. Good morning. Just two quick questions from 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, 24 months?
Sorry, Fred, can you just expand on the question?
I was just wondering if you'd give us a bit more color on the trends you're seeing in the same property operational expenses. It seems like they're on an-
Sure, Fred.
Upward trajectory.
If you compare our margin, I think that's probably a good way of looking at it, because revenue has been increasing as well. We merged our long-term care and the Baltic portfolios. We call it long-term care residentials. 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. 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. The portfolio that we just acquired, that is at a lower margin, as Lois discussed on the previous call.
When we acquire a portfolio this size, the first year is really putting all the systems and processes together, and then over time, we will get to see some synergy. We expect from a transaction standpoint, the margins would be a bit lower than what we see from the same property.
Okay. Second, in terms of your projects like Keswick and North Bay and I guess Bloomington and Island Park, could you remind us, what would be your expected yields on these projects?
Sure. 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. We expect the cost of the project to be CAD 10 million-CAD 11 million range, and we expect the return close to around 9% on that. For other projects, which we have talked about both North Bay and Keswick to be campus developments, which is a combination of long-term care and retirement residences. We expect that to be around close to 100 to 150 basis points over cost of capital just because there's lower return on long-term care, but also lower risk. A retirement would have a higher return, but obviously a bit higher risk because of the lease-up challenge there usually in a new community.
Okay. Perfect. Thank you. I'll leave it there.
Thank you.
Our next question comes from Pammi Bir with Scotiabank .
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. 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. Obviously, there's a difference between those. We do not believe it has merit. Again, the timing and all of those things would depend on a lot of different factors, including, if it ever gets certified, which again, we believe at this point, the lawsuit has no merit, and it has not been certified. I 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? 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?
Yeah. Well, I guess this is an operating business, as you know, Pammi. We have over 1,100 residents and about almost 800 staff that we're orientating and onboarding. We're working well and well on our way with all of the back-office integration, such as payroll and finance and so on, all of the back of the house. This is going to take time. I think we've indicated for an acquisition of this magnitude, it can really take up to a year to get any sort of synergies. We don't really see any in the short term, but what I can say is 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 anything sort of in any, I guess, advanced stages of discussions?
No, I would say that 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, 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 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. I wouldn't see any significant change of direction in the immediate term. I think, regardless of the party, we have excellent relationships with all regulatory authorities and good relationships with all MPPs. We wouldn't see any significant change other than, over the near and long term, there's going to be continued emphasis on the need for seniors care and solutions.
Okay. Just switching gears. 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%-2%.
That's correct. I would say more 0%-1%, Michael, because the rates usually go up with inflation, and the cost usually rise a bit faster. I would say, I think last year, our same property long-term care NOI was around 1.4%, and that probably would be in the range that we would expect, 0%-1%, 1.5%.
0%-1.5%. Last year, you were 1.4%, 0%-1% to be conservative, is kind of what you're saying.
Sure. Yep.
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, again, as you know, our debt to gross book value, not fair market value. A big part of our portfolio was valued fair market value in 2010 when we did our IPO. Again, if you 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. 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, we'll come down using our retained cash. The range we are in today, 48%-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. Lastly, I guess, I mean, for the last two years, you've consistently outperformed both the provincial and national averages on quality indicators. You're highly regulated. You've got almost a 90% satisfaction rate. I was really surprised that given all of that, this suit, it just seems like it's totally frivolous.
From time to time, we do get suits, and that's just the nature of the business, unfortunately. It's just unfortunate that it's got so much press around it.
Right. 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 MacLean 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 just 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, yes, some of them were doing assisted living. I would say across the board, there's always opportunity 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. That's the beauty of how we approach our service delivery, is we can provide services as residents require them, and when they come in and don't need them, they're more independent. We will, across the portfolio, continue to add services over time, Troy.
Then just on the Stouffville retrofit, I was wondering how actual costs came in versus budget now that the project's nearing completion.
That was our first project, and we anticipated our cost to be around CAD 5 million-CAD 6 million, and we would be within that range. We don't see much change in it. It was a good way for our team to get through the development process. It was a much smaller project, a small wing. There was a lot of learning which came out of this, which obviously we would apply in intensification opportunities and also, the campus and the standalone retirement projects.
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 obviously there's been a huge change in the residential side. A lot of the trades have been difficult to find, and they have become more expensive. Again, as we got new beds, as Lois mentioned, we are still going to run through pro formas because the cost does change on a consistent basis. When we do a pro forma, depending on when the construction starts, we actually build in increases in it, depending on what has happened in the past. The cost has not kept up with inflation, it has been higher. We would budget as such to ensure whether a project is feasible or not.
Thank you. That's great color. I'll turn it back.
Our next question comes from Yashwant Sankapal with Laurentian Bank.
Good morning. I just want to talk or discuss the retirement home portfolio. Despite the bad flu season and the occupancy decline, your margins held up quite well. 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, once the BayBridge 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 manage the expense side as well, Yash. Like when occupancy is down in a residence, we make sure that we're being efficient with our staffing and our operating expenses. Some are, obviously, the majority are fixed, but whatever there's variable, we manage that. With respect to the Maple, our margin may come down a little just because some of them are smaller properties than what we have now. Our overall average, we've got a number of larger communities, and as you get around 100 or 120 suites, they're a little smaller. The overall margin may come down as we grow.
Just, what is the current margin of that portfolio, NOI margin?
When we acquired it, I don't have the number off the top of my head. It was in the 30s, Yash. Again, I wouldn't think that it'll go all the way to 46, where we are today, because as Lois discussed, some of those properties are smaller. It is market specific. Even in our portfolio, which is the same property, we have margin from 30s to higher, because the average is 46. Again, for the time being, we expect the margin to be similar. Then a year later, as we put it on our platform, we expect there'll be some synergies, which will help expand the margin for that portfolio.
Right. Do you have the weighted or the average monthly rate for that portfolio, by any chance?
I guess we can back into it. Again, we don't have it off the top of our head.
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. It would be lower than our existing portfolio in terms of average rent per suite.
Okay. That's great. Thank you.
I'm not showing any further questions at this time.
Thank you. Thank you very much for joining our call this morning, for your questions and your support. We'll look forward to seeing all of you at our AGM, we hope.
Ladies and gentlemen.
Have a great day. Good weekend.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a wonderful day.