Ladies and gentlemen, welcome to the Sienna Senior Living Inc.'s Q4 2022 conference call. Today's call is hosted by Nitin Jain, President and Chief Executive Officer, and David Hung, Chief Financial Officer of Sienna 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 risk factor section in the Company's public filings, including its most recent MD&A and AIF 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 the company's website, siennaliving.ca. Today's call is being recorded, and a replay will be available.
Instructions for accessing the call are hosted 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 remark on the company's website under Events and Presentations. With that, I will now turn the call over to Mr. Jain. Please go ahead, Mr. Jain.
Good afternoon, everyone, and thank you for joining us on our call today. Long-term fundamentals in Canadian senior living remain strong despite an uncertain economic environment in a challenging labor market. Our Q4 financial results are a reflection of the growth potential embedded in our business as well as the current economic challenges. Continued occupancy and rate increases in the retirement segment offset some of the significant cost increases across both our business lines and funding shortfalls in the long-term care segment. Despite these challenges, we believe that having a balanced portfolio in which our retirement and long-term care operations each make a significant contribution to the overall net operating income adds to the financial strength of a business and helps us achieve sustainable long-term growth.
With respect to our operating results, average same-property occupancy in a retirement portfolio grew for the sixth consecutive quarter to 88.6% in Q4, which is up 440 basis points year-over-year and 20 basis points compared to the third quarter in 2022. Average occupancy in our acquisition portfolio was approximately 85.3%, which is an improvement of 310 basis points since we acquired the 12 assets in May of 2022. Going forward, we'll continue to capitalize on the growing demand for seniors living and expect further occupancy improvements. In 2023, we forecast average occupancy for the full year to achieve 90% in our same property portfolio and to exceed 87% in our acquisition portfolio.
We continue to leverage our Aspira brand and signage program to generate strong interest in our residences. Qualified leads have increased by approximately 29% year-over-year in the fourth quarter. Moving to slide 6. In the long-term care communities, resident admissions progressed steadily throughout 2022, with average occupancy reaching 96.3% in the fourth quarter. Demand for long-term care beds is higher than ever. With the rapid increase of Canadian seniors, the 85+ cohort is expected to triple over the next 25 years. This will put further pressure on the already long waiting list for long-term care beds and on Canada's hospital systems. At the same time, labor shortages, high inflation, and funding gaps are impacting our operations.
Together with other sector participants and associations, we have been working with the government to address the situation and feel confident that we'll find a solution to ensure the long-term viability of this sector. Elevating the quality of life and well-being of our residents is at the center of what we do. We are very pleased that Sienna maintained the highest achievement status of ASPIRE to Excellence in Ontario, which is awarded by CARF and also received an award of Exemplary Standing from Accreditation Canada for our communities in British Columbia. These are strong indicators that our team has demonstrated excellence in the quality of care they provide. A national shortage of healthcare workers continue to put immense pressure on our sector. Although a number of important government initiatives are underway, we expect staffing shortages to remain for some time.
In 2023, we'll continue to strengthen team engagement and retention by offering a compelling team member experience and by creating a purpose-driven culture. We'll also continue to improve our onboarding process, invest in team member training and development, and intensify recruitment campaigns. Our initiatives to improve team member satisfaction and engagement have been reflected in a recent engagement survey. Approximately 85% of our team members feel that they are able to do meaningful work every day. This is the second consecutive quarter year of improvement in our employee engagement score. Recently, we have implemented a centralized call-out and shift scheduling system to meet our staffing needs on a real-time basis. The system provides greater flexibility and a more seamless process to fill staffing gaps.
It also helps with tighter controls on overtime, allow team members to optimize their schedules, and ultimately reduces our reliance on external agency staffing. To further reduce the impact of agency and agency-related costs, we are finalizing an RFP process to reduce the number of agencies we use from nearly 100 to less than 20. At the same time, we are strengthening our contract terms, such as enforcing a minimum fill rate threshold and surcharges, while reducing agency rates by an average of 10%. Moving to our focus on development. Last year, the feasibility of a long-term care redevelopment plans was challenged as a result of rising construction costs and rapidly increasing interest rates. Together with other participants in the seniors living sector, we have been working with Ontario government to address this situation.
We're very pleased that in late 2022, the government announced a significant time increase to its long-term care construction funding. We expect to have a total of 480 beds under construction by mid 2023, including projects in North Bay, Keswick, and Brantford. The project in Brantford consists of 160 long-term care beds and 147 retirement suites as part of Campus of Care. The campus will have an estimated total development cost of approximately CAD 140 million and a projected development yield of approximately 7.5%. Sienna has over 1,000 beds in the planning stages in the Greater Toronto Area. We'll continue to advocate for funding that is aligned with inflation so that we can move forward with our redevelopment plans and improve long-term care in Ontario.
We are also approaching the finish line for our joint venture development with Reichmann Seniors Housing of a 150 suite retirement residence in Niagara Falls, which we expect to complete by the end of this year. The estimated total capital investments for this project is approximately CAD 55 million. With that, I'll turn it over to David for an update on our operating and financial results.
Thank you, Nitin, good afternoon, everyone. I will start on slide 11 for financial results. In Q4 2022, total adjusted revenues increased by 10.9% year-over-year to CAD 193.2 million. This increase was largely due to occupancy and rental rate growth and additional revenue from the 12 properties we acquired in Q2 in our retirement segment. Flow-through funding for increased direct resident care and higher preferred accommodation revenues from increased occupancy in our long-term care segment, partly offset by occupancy clawbacks in homes where we did not reach the required 97% occupancy target. Total Net Operating Income decreased by 2.8% to CAD 32.5 million this quarter compared to Q4 2021.
Our LTC segment decreased by CAD 2.9 million year-over-year, mainly due to higher operating costs and the impact of the sale of a long-term care community in Q1, 2022. NOI in our retirement segment increased by CAD 1.9 million, mainly as a result of same property NOI growth and additional NOI from our 12 new retirement properties, offset by higher operating costs. Sienna's LTC same property NOI decreased by 11.3% to CAD 16.4 million in Q4, 2022 compared to last year, primarily due to higher operating costs, in particular with respect to labor as well as occupancy clawbacks. This was partly offset by an increase in preferred accommodation revenues as a result of higher occupancy compared to Q4, 2021.
We expect cost pressures to remain for some time at our long-term care operations and forecast that our 2023 NOI for the full year in the LTC segment will remain at a similar level compared to 2022. Last year, the Ministry of Long-Term Care advised that it will not reopen the third and fourth beds in wardrooms and has signaled that it intends to introduce phased-in revisions to the funding for these beds. Changes which could impact 350 of the 3 and 4 beds at Sienna were expected to begin in January 2023, but have been delayed until at least the end of March. In addition, we expect continued unfunded pandemic expenses of between CAD 2 million-CAD 3 million in Q1 2023 for our long-term care segment, largely as a result of incremental labor costs.
Retirement same property NOI increased by 5% in Q4 2022 to $14.7 million compared to last year, primarily due to occupancy improvements and annual rate increases. This was partly offset by higher costs for labor and food, as well as increased maintenance and property taxes. In 2023, we expect NOI growth in our retirement portfolio to be supported by occupancy improvements and rate increases of approximately 5%. These factors will contribute to revenue growth while cost pressures will remain for some time, in particular with respect to staffing shortages as well as high overall inflation.
Considering all factors, we expect the operating margin in our retirement segment in Q1 2023 to be similar to the full year margin of 35.7% in 2022. We further expect the 2023 operating margin to improve by approximately 150 to 200 basis points for the full year. Moving to slide 12. During Q4 2022, operating funds from operations decreased by 3.1% to CAD 17.7 million compared to last year, primarily due to lower NOI and higher interest expenses. Q4 OFFO per share decreased by 10.7% to CAD 0.243, primarily due to additional shares issued in March 2022 to finance the company's growth initiatives.
Adjusted funds from operations increased by 4.5% to CAD 17.3 million compared to last year. The increase was due to the timing of maintenance costs, partly offset by lower OFFO. AFFO per share decreased by 4.4% to CAD 0.237 in Q4 2022. The AFFO payout ratio was 98.7% for the quarter and 99.3% for the full year. In addition, we recorded restructuring costs of CAD 6.6 million in connection with the permanent closure of a long-term care community in 2023.
Looking at our debt metrics on slide 13, our debt to gross book value decreased by 80 basis points to 43.9% at the end of 2022, compared to 44.7% at the end of 2021, mainly due to mortgage repayments with proceeds from property dispositions earlier in the year. Debt to adjusted EBITDA increased to 8.9 times in 2022 compared to 7.9 times in 2021, and interest coverage ratio decreased to 3.3 times in 2022 compared to 3.7 times in 2021. On December 9, 2022, DBRS confirmed Sienna's issuer rating and senior unsecured debenture rating of BBB with stable trends. These ratings underscore the resiliency and strength of our business and are a reflection of our strong balance sheet.
We ended 2022 with approximately CAD 287 million of liquidity, an increase of CAD 61 million compared to 2021. We also had nearly CAD 1.2 billion of unencumbered assets, which represents a year-over-year increase of approximately CAD 80 million. I will now turn the call back to Nitin for his closing remarks.
Thank you, David. 2022 has been a significant year for our company. We expanded our footprint in Ontario and entered Saskatchewan and have successfully integrated 12 retirement residences into our operating platform. At the same time, we put many initiatives into motion to strengthen team member engagement and continued with enhancements to our operating platforms to elevate the quality of life of our residents. These initiatives will support us at a time our sector remains under immense pressure amid a national shortage of healthcare workers and economic uncertainty. In 2023, we'll focus on operational excellence. We will continue with a disciplined approach of growing our revenue streams in both long-term care and retirement while reducing costs, in particular with respect to temporary agency staff.
We'll also advance the redevelopment of our long-term care portfolio and continue with enhancements at existing residences, all while maintaining a diversified portfolio and a strong balance sheet. We are confident that the significant changes in 2022 position us well to execute on our strategic objectives in 2023 and help us achieve sustainable long-term success. On behalf of our management team and our board of directors, I want to thank all of you on this call for your continued support. We are now pleased to answer any questions you may have.
The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad. At any point you would like to withdraw from the queue, please press star 1 again. You will be provided the opportunity to ask 1 question and 1 further follow-up question. We will take a moment to render our roster. Our first question comes from the line of Jonathan Kelcher from TD Securities. Please proceed.
Thanks. Good afternoon. First question just on, just on the LTC outlook with the NOI being expected to be flat versus 2022. What sort of assumptions are in there on pandemic expenses and reimbursements? As well as what do you guys think the outcome will be on the 3 and 4 bed, ward rooms?
Sure, Jonathan. Good afternoon. I can start by answering some of the questions, and David can specifically address pandemic expenses. I would say starting on the third and fourth bedrooms, you know, there was a, you know, I think the idea of closing the third and fourth bedroom for quality of life, we are completely aligned with and supportive of. I think the work with the government is that there are things that would not reduce, you know, expenses don't get reduced. You know, if you have a building of 100 people and only 80 are in it, you still have to, you know, clean the entire building. You have utilities in the entire building. You have the same administration and all so forth. Government overall has been receptive of understanding the issues at hand.
At this stage, we continue to feel confident that, you know, we will have a funding mechanism which obviously reflects the reduced number of residents in those homes, but also reflects that the cost has not changed and also reflects nearly a 9% funding gap between what inflation has been and what the long-term care funding has been. We continue to believe and expect that we'll have a viable program to continue to fund these homes which have three or four bedrooms. On assumptions on funding increases over a year, our going in assumption is similar to what we have had in the past.
Having said so, really the ask is, a clear ask is a 9% funding increase because that is the gap between inflation and what the funding has been. We have data going all the way since 2000, and this is the first time in the period of last 25 years where the long-term care funding has fallen before inflation and the gap is around 9%, and that's what's needed to close that gap. David, do you want to address the pandemic expenses?
Sure. With respect to pandemic expenses, our pandemic expenses do continue to contain, to include costs that prevent and contain outbreaks. Increasingly, they are also include costs for incremental staffing and agency costs, particularly in our rural communities where we, you know, experience staffing shortages. With respect to our assumption, our underlying assumption is really that net pandemic expenses will stay flat relative to 2022. In 2022, our net pandemic expenses were CAD 8 million, but that also included about CAD 5 million of retroactive funding relating to 2021. In 2023, we would expect that our net pandemic expenses will be similar to 2022, around CAD 8 million.
Okay. Just sorry, to go back to the ask on the funding increase. You said you're expecting what you've historically gotten but asking for 9%. That also that kicks in April first, if I recall, correct?
That's correct. I would say, I think to answer the question more directly, our outlook at this stage just only includes what has been in the past, which is, you know, around 2% or so. What we are expecting though, or what we are advocating for is the 9%, because that has been the gap in funding over the last four years. Obviously, when that comes through, that outlook would change.
Hopefully do the better. Okay, thanks. I'll turn it back.
Thank you.
Our next question comes from the line of Himanshu Gupta from Scotiabank. Please proceed.
Thank you and good afternoon. Just to follow up on long-term care question by Jonathan there. On long-term care, how many homes would you say did not achieve 97% occupancy protection last year? What was the impact in lost NOI because of that?
thanks for that question, Himanshu. There were about ten homes that did not achieve the 97%. Most were actually very close to 97%. Overall, the impact in Q4 was about CAD 800,000 in terms of occupancy clawback and CAD 1.3 million for the year.
Awesome. for your guidance in 2023, do you assume a similar run rate, or do you think recouping this CAD 1 million back in your guidance?
In our guidance, we assume that most of it would be recouped back because, you know, 2022 had, still had significant outbreaks. You know, we were working public health when you can admit people, when you cannot. I think that has been a bit all over the place from a policy perspective and process perspective. What we're really looking for is that it really should be in extreme cases where, you know, either there's no demand, which is gonna be very surprising considering the 40,000 people on a waitlist or some circumstances which are outside of everyone's control. We expect for majority of our homes to reach to get to 97%.
Awesome. Okay, that's helpful. My next question would be: how much of your 2023 NOI guidance is impacted because of phase out of third and fourth beds? I mean, basically, are you assuming any negative impact at all in this guidance?
We are not assuming any impact, from the phase out of the third and fourth beds.
If I were to say that, is there more upside or downside to your flat LTC NOI guidance, looking at both these items? You know, if the occupancy that's only 97% is downside, if the impact is there because of third and fourth beds, again, there's more downside to do. How would you frame that question?
Sure. That's, you know, that's a great question. I would maybe answer it in a few different... The first is third and fourth bedrooms, we have not built in any impact, and we continue to feel that the funding is obviously one thing and the impact in NOI, but I think it'll frankly destabilize the whole C portfolio. This is Ontario-wide problems because there's still 30,000 beds, which are C homes, and that'll put them significantly under duress. The second part on, you know, 97%. Obviously, we are assuming that we'll get to majority of our homes being 97%.
The CAD 1.3 million that David spoke about is frankly being eaten up because you have costs which are running much higher to the 1% or 2% funding increase that we are assuming at the moment. The upside is not really the right word, frankly. The right size is what we're after. What we want to do is ensure that the long-term care funding is right-sized because it's gonna put the sector at significant challenge when the whole sector is trying to build thousands of beds to meet these growing demands of long-term care needs. I would say, you know, whether it's upside or downside, I think remains to be seen.
As we talked about previously, you know, we find government in Ontario, BC, and Saskatchewan, quite understanding of the challenges, you know, and willing to hear. I think we continue to have very good access in terms of explaining what the challenges are. Obviously, what remains when the budget comes out, that's when we'll truly find out what the outcome is.
Awesome. Okay. Thank you. Thank you, Nitin. My next question is on the Niagara Falls development. Looks like the projected cost of construction has gone up from CAD 50 million-CAD 55 million, and yet the development yield is unchanged at 7.5%. Are you underwriting better rates now? What led to that increase and yet no change in development yield?
Sure. The cost, you know, frankly, you're right, the cost has gone up from nearly CAD 50 million to CAD 51 million to CAD 55 million. Given that those costs were from 2019, we frankly think it's a near borderline miracle that cost only went up 10%, and a big chunk of it is obviously, construction, financing, that impact on interest rates. We are very, happy with the outcome of it, considering cost has gone up nearly 30%-40% on other projects. We are seeing better rates. I mean, we're seeing better rates across our portfolio, so that's why the yield is not changing.
Okay. Thank you. Maybe my last question is on retirement home NOI margins. I think you provided guidance of 150-200 basis point expansion in this year. How do you get that visibility, and what is causing these margins to go up?
Sure. I mean, really, I mean, the, we are all expecting a change in occupancy. We ended the year at an average of around 88.6%, and we are calling an average occupancy in the same property portfolio of nearly 90%. That's the average. You start at 88.5, your average is 90. That mathematically will put us close to, you know, 92% in asset occupancy at the end of next year. Just from a math perspective. We are, you know, factoring in a significant change in occupancy, you know, going from 88.6 to the low 90s. With that, obviously, you know, at these occupancy levels, a bigger chunk of your revenue is going into the NOI. That gives us the first comfort.
Just in margin in general, you know, for example, the margin are running lower than what we have in the past. However, when you look at our full year NOI for retirement, you know, we're up nearly 10%. We ended the year 2021 at around CAD 52 and a half million, same property. We're ending this year at around CAD 58 and a half million. It's up significantly. That's the challenge in a rising in or is in an inflationary environment. For example, if you had a home which had a revenue of CAD 100 and your NOI is CAD 50, you know, and your cost is going up by, you know, 6%, so it's going up CAD 3, so you're increasing your revenue by nearly similar amount, because at some stage there's a cap to what you can increase.
Your NOI continues to increase, but your margin is gonna reduce a little bit. That's what we're dealing with at the moment. If we were not in an inflationary environment, we would have expected our margin, in fact, to be higher as we are progressing toward these higher occupancy and nearly stabilized levels.
Thank you. That's very helpful. Looks like NOI margin is down, from pre-pandemic levels, but maybe NOI per door or per suite could still be up. That's very helpful. Thanks. I'll jump it back.
Thank you.
Our next question comes from the line of Tal Woolley from National Bank. Please proceed.
Hi, good afternoon.
Good afternoon.
On the long-term care business, I just maybe if we could step back a little bit further. If we go back pre-pandemic, this is sort of like a CAD 85 million NOI business. I'm wondering as we look out going forward, you know, you've obviously provided some specific guidance for the near term, and that's helpful. Can this business get back to that level of profitability, do you think? Should we be thinking, you know, something a little, a lower rebound or a much slower rebound than maybe, what was initially hoped coming out of the pandemic a couple of years ago?
I would say so. You know, you're right, it's around 85. I would adjust for we did sell 1 long-term care home in Q1 of 2020 to a Class C home, to a significant gain. You know, I would remove that. That was around a couple of million CAD of NOI. We are unfortunately closing a long-term care home because of some building deficiency. Even though it had really no NOI impact in 2022, that's why we don't see any negative impact in 2023, you know, that was another CAD million and a half nearly of NOI. You know, I would say the starting point, it might not be 85, it might be 81.5, but the question remains the same.
We continue to believe that a big chunk of that is driven by the funding shortfall, which is around 9%. That would account for nearly two-third of the difference between, you know, what we are forecasting and, you know, that $82 million. The other part of it is pandemic expenses. You know, even though the world around us has changed, and for many people, COVID is in one way over. As I visit our communities, you know, we still have screening, we still have people masking, we still have outbreaks, which puts significant pressure on staffing and agencies. There is an aspect of that.
you know, we continue to believe that because the impact of COVID today has been very different than it was three,four years ago, and as time passes, it's gonna become more and more less. That's why we continue to feel confident that we can get to that number, which was pre-pandemic.
I know there have been some discussion too, like in addition to funding increases, maybe some work with the government around regulating agency, you know, how agencies practice in the province. Has there been any headway made on that particular file?
I would say there's been a lot of discussion because the issue is twofold. One is obviously there's a impact on funding, but the second is really, and equally important, is the impact it has had on the stability of team members because, you know, when you have agents in your team, and you're, you know, they're new, they don't understand what's happening at home at times, you know, that obviously creates more work for current team members, so gets into, you know, higher turnover eventually. The second is the impact on resident experience because you know, especially in long-term care, when you have complex healthcare needs of residents and you're getting new staff member on a daily basis, it's really not that helpful. Frankly, it's a combination of all of those things.
We don't know what the end would be, you know, in terms of resolving it, but we find there's more and more discussion about finding a viable process. You know, we're not trying to limit competition or people's businesses, but, you know, we are now looking at a scarce resource with, especially nursing staff, and in a place where you need to have nurses and you're at times paying in multiples of what your union wages are. That has to get resolved, and we feel that there's traction on getting something done on it.
Okay. This is something also that in fact, like, it affects the hospitals that like the other parts.
That's correct.
Of the healthcare system.
Yes.
That are owned by the government. Yeah. Okay. I'm just wondering if we could walk through, given that you've greenlit a couple new development projects here, can we just walk through, like, what you expect total capital spending to be this year?
We're gonna be very cautious on how we do that, you know, given what is happening to the share price, obviously the capital markets in general. Even though we continue to have very good access to capital, and David and his team recently went through some refinancing work, and CMHC financing is very attractive, even though it doesn't apply to long-term care, but because we have a number of unencumbered projects, we can obviously move financing around or fund it through different ways. This is something which is, you know, top of our mind, making sure that we are fully committed to doing three developments, especially the three projects we announced. We have to do it in a responsible way that it does not put undue pressure on our balance sheet.
So far, we feel comfortable with what we've announced, which is the Brantford project. As we decide the next two, you know, those are the different things we are contemplating on how best to finance them. We are set up for the long term without putting too much pressure in the short term.
Can we put some numbers around that?
I think it's-
In terms of what we're planning to spend this year.
Maybe it's a month and a half too early, so we are in the tender process for two projects. We have given out construction costs in the past, and we have been widely wrong, so we don't want to repeat the same mistake again. For Brantford, for example, the CAD 140 million, that what we are placing here, that's tended cost projects awarded, you know, construction to start in short order. We feel a lot more comfortable sharing those. The other two, high level, you know, could be in the same quantum combined total, but I think again, we'll have to wait for a bit of time to get those costs finalized.
In your normal course maintenance CapEx, where would you peg that right now?
We always disclose our maintenance CapEx as actual. David, you can speak to our spend in 2022.
Yeah. In 2022, we spent approximately CAD 11 million in maintenance capital. We would see that in 2023, our maintenance capital will increase, partly because of the acquisitions that we made earlier in the year, but also because of inflation, general inflationary increases.
Okay. I guess, just lastly, can you just talk a little bit about where you're seeing financing and, you know, where you're seeing financing costs right now? You talked earlier about, you know, make sure that you're not stretching too far with the balance sheet. Can you give us an idea of what that envelope may look like? What would you consider to be kinda like too much leverage at this point in time?
Yeah. I mean, I can start and Nitin can jump in after. With respect to financing, we're seeing, you know, we're seeing a very attractive market right now with CMHC debt. Just as an example, we refinanced one of our retirement buildings in Q4 for about CAD 45 million, and that helped us repay CAD 40 million of our acquisition term loan. Currently, CMHC debt is, you know, where we're looking right now. You know, we do have a number of unencumbered assets that we could use to basically refinance with CMHC debt. The rate itself, what we got in for this particular retirement home, it was under 4%.
Okay. How much more CMHC up financing theoretically could you be able to do?
Probably, I mean, we certainly don't wanna stretch our balance sheet. We are very mindful of, you know, our debt to gross book value. Probably in the range of CAD 100 million is what we would be looking at.
Okay. Then, you know, again, like as you start to take on more development, like what's sort of the envelope you'd like to keep the balance sheet in terms of ratios?
From a debt to book value, we, you know, I mean, there are two ratios we're managing closely. One is the debt to book value, where we have a lot of room. We are around 43%-44% and, you know, we said with development, we're comfortable getting it closer to 50. It'll take its time because even when we start these three projects, the impact in 2023 is smaller. Obviously, 2024 would be a bigger spend year. The second one is the debt to EBITDA. Again, our goal is to be between, you know, around 8. I think with development, it's gonna go a little bit higher, and that's what we are trying to match, that we don't really exceed it by too much.
The credit rating agencies are cool with you know, pushing north of nine. You think that that's gonna they'll allow for that?
We have had very good discussion with DBRS. You know, the current DBRS rating does not include a lot of development, but they know that there is a lot of development on the horizon. I think it really would depend on the pace. You know, as we said, the three projects by itself, and there are some interesting things we are looking at how best to finance those. You know, we obviously continue to work very closely with them. They expect this development to happen. With that in mind, obviously, our rating was reconfirmed, but that is something will be a continuous ongoing discussion, and a very important metric for us to ensure that we preserve that credit rating.
Okay. Thanks very much, gentlemen.
Thank you.
Our next question comes from the line of Pammi Bir from RBC Capital Markets. Please proceed.
Thanks. Good afternoon. Just, you know, with respect to these persistent pressures on labor costs and shortages, you know, whether it's in retirement homes or in long-term care, you know, in your mind, is this really now a perhaps permanent, structural issue that, you know, could last sort of well beyond the next year or 2?
Absolutely, Pammi. I think there are two things we said we believe that will be true. First, is there's not gonna be enough places for seniors to live because we have a long waiting list in long-term care already, and retirement construction has slowed down significantly. The second is the human resource crisis is here to stay. You're absolutely right. you know, we have a big push in immigration as a country and all sorts of different things, but I would say many other countries are doing the same. That is why I think we recruit a lot of people a year. I mean, last year, we recruited north of 5,000 people, so we have a very good talent acquisition team.
The focus really for us is how do we hold on to those people for a longer period of time because there's a higher churn of people, you know, in this sector, whether it's driven by wages, whether it's driven by, you know, more flexibility, you know, or other factors. That's what we're after, and that's why the work around scheduling systems, the focus on culture, focus on making sure our team is paid competitively, that's gonna be a key factor.
Got it. Nitin, maybe just coming back to you. I want to just clarify your comment earlier. You mentioned the 9% funding gap in the last 4... I think you said four years. Is that the average annual funding gap or the total funding gap in terms of, I guess, the, you know, the recoveries versus the actual funding that was received?
Yeah. Thankfully, it's combined 9%, Tammy. Otherwise, we frankly would have a very different call today. No, it's a combined 9% funding gap during this time. That, in our mind, will put us on the right course and obviously then funding changes on an annual basis which stay up with inflation.
Right. Okay. Just to clarify, was there, through Q1 to date, have there been any recoveries of pandemic costs related to 2022 so far?
No, there have not been any.
Okay. Just maybe closing the loop on the questions around capital and leverage and development spending. You know, I'm just curious. Look, you know, the payout ratio has now hit, you know, it's elevated and almost 100% now. You know, I guess you are assuming some growth in the retirement portfolio next year and maybe flat in long-term care. You know, under what circumstances would you consider or reconsider the current payout?
Sure. You know, we have always talked about, I mean, the questions we used to get four years back were the exact opposite because our payout ratio was in 60% ratio. You know, two things have happened which to take it from 60% to 98% or 99% now. One is obviously the impact of pandemic reduction of occupancy and retirement and increased expenses in both lines of businesses. The second, which is peculiar to us in senior living is the construction funding, which used to, we have it for our A homes, which were built previously, which has come down by nearly CAD 6 million-CAD 7 million over the last four years. Those are the two drivers which are factoring that.
You know, we continue to feel confident on a recovery path, both from a construction funding, that's why the importance of these three projects to start construction, and being able to get, make the funding gap between what the government is funding, what we expect the government to fund going forward, and our retirement occupancy. If we, if we don't get to those, you know, the gap of that, you know, the long-term funding, and we don't get occupancy, obviously, and we don't get start construction, that would be the time that we would have to rethink this. At, at this stage, we continue to feel confident on a recovery, you know, on all those three fronts.
Thanks for the color, Nitin. I'll turn it back.
Thank you.
There are no more questions. Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now-