Sienna Senior Living Inc. (OTCPK:LWSCF) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
Nitin Jain – President and Chief Executive Officer
David Hung – Chief Financial Officer
Conference Call Participants
Tal Woolley – National Bank Financial
Himanshu Gupta – Scotiabank
Operator
Ladies and gentlemen, welcome to Sienna Senior Living Inc.’s Q3 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 statement or information. Please refer to the forward-looking information and Risk Factors section in the company’s public filings, including its most recent MD&A 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 in the SEDAR and can be found on the company’s website, siennaliving.ca.
Today’s call is being recorded, and a replay will be available. Instructions for accessing the call are posted on the company’s website, 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 website under Events & Presentations.
With that, I’ll now turn the call to Mr. Jain. Please go ahead, Mr. Jain.
Nitin Jain
Thank you, Josh, and good afternoon, everyone, and thank you for joining us on our call today. As we are heading into the final months of 2022, we are adjusting our business to a more challenging economic climate. While labor shortages and inflation are putting pressure on our operating margins, we continue to generate strong occupancy results, maintain a solid balance sheet, and increased our liquidity by $100 million. We also rolled out a number of initiatives that will help us stand apart as an operator and an employer of choice in Canadian senior living.
Average same-property occupancy in a retirement portfolio grew for the fifth consecutive quarter to a level we have not seen in over three years, and a further increase to 88.6% in October. We expect to end a year at a similar occupancy level in a same property portfolio. With respect to our 2022 acquisitions, we achieved a 490 basis point occupancy increased during third quarter, excluding one property in lease-up.
This was the first full quarter of owning the 12 retirement residences we acquired in Ontario and Saskatchewan. And after experiencing some initial softness, the strong occupancy gains in Q3 is a clear indication of the successful integration of these residences into our platform.
Going forward, we expect the occupancy trends for acquisition to be in line with the overall retirement portfolio. Our sales and marketing team continued to generate strong interest in our residences as we are heading into the late fall and winter months. Excellent relationships in the local communities and our Aspira brand and signature programs help support our sales initiatives and qualified leads have increased by approximately 26% year-over-year.
Moving to long-term care. In a long-term care communities, resident admissions progress steadily throughout the third quarter. Average occupancy reached 96.7% in the third quarter, and in February of 2022, the government of Ontario reinstated occupancy targets for 97% required for full funding and we anticipate to meet the required targets at the vast majority of our care communities.
We currently closely monitoring a number of government funding changes and their potential impact on operating results. Sienna and other participants in our sector have been working with Ontario government to have funding increased to accommodate inflationary pressures, both for operating costs and construction costs of our redevelopment projects.
While rising development costs have impacted the timing of our construction starts, we remain optimistic about our ability to redevelop Class C homes in Ontario. The implementation of a new long-term care platform is well underway. The platform changes are focused in four areas, the move-in experience, food and dining, wellbeing in visits and connections.
Our initial efforts are focused on how we help residents settle in. We have a new platform wide standard aimed at decreasing anxiety of residents and families and making them feel welcome and at home. Early feedback to date has been positive. Our transformation of dining, what we call Savour It is also an immediate area of focus. We have hired an executive chef to lead this work and we also aim to bring more of a hospitality like fields to a dining rooms.
Staffing will likely remain one of our biggest challenges for some time, and we have been active on many fronts to bridge the existing labor gap. We are making significant investments in attracting and retaining employees who are passionate about working with seniors. We are currently implementing a new scheduling and call out technology, which will help us fill staffing gaps more seamlessly and faster. It’ll also help us to better monitor agency staffing and improve scheduling of our team members. The implementation is nearly complete across our long-term care communities with the rollout at our retirement residences to follow in 2023.
We expect competition for talent to further intensify in the months and years ahead, and we’ve been working on a number of other initiatives. This include offering additional shifts to part-time team members and a pilot program that supports the placement of Ukrainian refugees at our communities.
Moving to SPARK, our team members have told us that they want to share their ideas on how to grow and improve Sienna. And as a result, we created our own version of Dragon’s Den named SPARK. During the first round of submissions last month, we received a total of 170 ideas. Not only did we get some outstanding submissions, it showed us a clear trend of what’s top of mind for our team members.
Over the coming weeks, we’ll select a number of ideas to be piloted with the goal to implement the best at our company.
With that, I’ll turn it over to David for an update on our operating and financial results.
David Hung
Thank you, Nitin, and good afternoon everyone. I will start on Slide 11 for financial results. Long-term care – long-term fundamentals in Canadian senior living and at Sienna remain strong as was reflected in the growth of our retirement occupancy and long waitlist supporting steady resident admissions in our Long-Term Care segment.
However, intense competition for talent, cost pressures and decades high inflation continue to affect our operations. In Q3 2022, total adjusted revenue increased by 11% year-over-year to $189.2 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, as well as flow through funding for increased direct care provided to residents and higher preferred accommodation revenues from increased occupancy in our Long-Term Care segment, partly offset by lower revenues as a result of a property that we sold earlier in 2022.
Total net operating income increased by 4.8% to $35 million this quarter compared to last year. Our Retirement segment contributed $3.7 million of this increase, mainly through same-property NOI growth and additional NOI from our 12 new retirement properties.
Our Long-Term Care segment decreased by $2 million year-over-year, mainly due to higher operating costs and the sale of the long-term care community earlier in 2022. Retirement same-property NOI increased by 14% to $15 million compared to last year, primarily due occupancy improvements and annual rental rate increases. This was partly offset by higher cost for agency, staffing, food, utilities, insurance and marketing.
Rent collection levels remain high at approximately 99%. We expect continued cost pressures to remain for some time due to labor shortages, increased insurance premiums, higher utility rates, and high overall inflation. We also expect continued unfunded pandemic expenses in Q4 in our retirement portfolio of less than $1 million.
At the same time, we anticipate that occupancy gains and rental rate increases will help mitigate some of these pressures in our Retirement segment. Considering all factors, we expect Q4 operating margins in our Retirement segment to be similar to Q3. Sienna’s long term care, same-property NOI decreased by 9% to $17.8 million in Q3 2022 compared to last year, primarily due to higher operating costs in particular with respect to labor, utilities and insurance, as well as higher unfunded pandemic costs because of lower government funding.
This was partly offset by an increase in preferred combination of revenues as a result of higher occupancy. We expect cost pressures to remain for some time in our long-term care operations and have been actively working with other sector participants and the Ontario government for funding to reflect the current inflationary conditions and offset significant cost increases.
We are also working with the Ontario Ministry of long-term care to better understand the full details of a recent announcement to not reopen the third and fourth beds in the Class C homes and its financial implications. We currently have approximately 350 third and fourth beds in Ontario, which could be impacted by this announcement. The extent of the impact will depend on how the government will implements the funding reductions.
In addition, we expect continued unfunded pandemic expenses between $3 million to $4 million in Q4 2022 in our Long-Term Care segment.
Moving to Slide 12. During Q3 2022, operating funds from operations decreased by 1.8% to $17.9 million compared to last year, primarily due to higher administrative expenses, higher interest expenses, as well as higher income taxes. This was partly offset by increase in NOI this year, mainly as a result of our acquisitions.
Q3 OFFO per share decreased by 9.6% to $0.246. Adjusted funds from operations increased by 5.7% to $16.6 million compared to last year. The increase was due to the timing of maintenance costs partly offset by lower of OFFO. AFFO per share decreased by 3% to $0.227 in Q3 2022, largely as a result of our 2022 equity offering.
Looking at our debt metrics on Slide 13, our debt to gross book value decreased by 230 basis points to 43.3% at the end of Q3 2022, compared to 45.6% at the end of Q3 2021, mainly as a result of our 2022 equity offering to finance our acquisitions and mortgage repayments with proceeds from property dispositions earlier in the year.
Debt to adjusted EBITDA increased to 9x in Q3 2022 compared to 7.8x in Q3 2021, and the interest coverage ratio decreased marginally to 3.3x in Q3 2022 compared to 3.4x in Q3 2021. Our debt is well distributed between unsecured ventures, credit facilities, unsecured term loans, conventional mortgages and mortgages insured by the Canada Mortgage and Housing Corporation, and our debt maturities are staggered within the next significant expiry being our $90 million unsecured term loan due in May 2023, which was used to support the acquisition of our 12 retirement residences.
On October 26, 2022, we upsized our unsecured revolver – revolving credit facility by $100 million to $300 million and extended it maturity by two years to March 2027. This will provide additional financial flexibility as we refinancing, refinance upcoming debt and support our strategic objectives in a more challenging operating environment. This has increased our current liquidity to approximately $350 million.
I will now turn the call back to Nitin for his closing remarks.
Nitin Jain
Thank you, David. Throughout the pandemic in a rapidly rising interest rate environment, we have maintained a strong balance sheet and ample liquidity. The recent upsizing and extension of our credit facility is a word of confidence in the future of a company and our sector and underscores the resiliency of our business.
As we finalize our business plan for 2023, we prepare for potential headwinds in a long-term care portfolio related to staffing and government funding, and expect continued pressure on our operating margins in our Retirement segment. Despite the short-term challenges, we remain focused on executing a long-term strategy to maintain and grow a balanced portfolio in which our retirement and long-term care operations each make a significant contribution to the company’s overall net operating income. With deep experience and scale in each segment, we’ll put initiators into motion to stand apart and pursue our vision to become Canada’s most trusted and most loved senior living provider.
On behalf of our management team and our Board of Directors, I would thank all of you on this call for your continued support. And with now, we’ll be pleased to answer any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Tal Woolley with National Bank Financial. Your line is open.
Tal Woolley
Hi, good afternoon, everyone.
Nitin Jain
Hi, Tal. Good afternoon.
David Hung
Good afternoon.
Tal Woolley
I guess, like my first question would be this is, in your – talking about cost pressures for that could persist for your words were some time. I guess, what is your working definition of some time? And then because I noticed like at the end and I’m not trying to play got you here, but you just sort of at the end you sort of called it a short-term challenge to you. So I’m just trying to get a sense of what you think the time frame here is we’re looking at?
Nitin Jain
Thank you for that question Tal and I think it’s the right question to ask. And I would maybe break it into two. So one, there’s pandemic cost pressures and you feel that you’re nearly out of it and then suddenly in Canada you’re talking about putting back, masking on and you saw some news coming out of there. So those things are obviously out of control and our goal is to react to them, keeping the health and wellbeing of both residents and team members in mind. So there’s a pandemic aspect of it which we are – we continue to work with government to resolve it and our view is that government funds us for pandemic funding and we need to find a backup way because David shared that we have $3 million or $4 million of unfunded pandemic cost.
So we have to find a way to stop that because really in long-term care the government assumes what the amount of money that you need for to manage pandemic and they have decided what that money is and we have to figure out a way to spend that. It is easy to say that, but obviously hard to do. So our goal is to figure out a way to do that over the next couple of quarters.
On inflationary pressures, that one, that is again, it’s hard to predict what might happen with interest rates, what might happen with utility costs. So we do expect, we do keep saying short term because there’s some consensus around softening of the economy. Then there’s some, early indicators of that. So that happens. The idea is, okay, well that is going to decrease the expenses. So that’s why we say short term. I think at this stage it is very hard to say on both of those things because both the pandemic and the economic uncertainty is obviously out of our control.
Tal Woolley
Okay. And I guess my question is that like because a lot of this, whether it’s general cost pressures versus pandemic, where does like net pandemic expenses and generalized labor kind of conditions begin because they’re kind of intertwined as far as I can tell.
Nitin Jain
Yes, thanks for that question Tal, you’re right. Expenses as we kind of move through the pandemic are getting a little bit blurred. Generally speaking, pandemic expenses would be related to agency costs. When we have staffing shortages or homes that are an outbreak pandemic expenses would include PP&E. So, the pandemic expenses themselves would generally relate to homes that are either an outbreak or where we have significant staffing shortages.
Tal Woolley
Okay. And I guess, the other thing, too, is like it was a question that sort of came up to me today was like, how useful is it now for us to sort of sitting there and be looking at like margins x net pandemic expenses? It’s like – after three years, like I think maybe it’s sort of like this is kind of where we are, like, I don’t know, sort of how like, or if there’s like a real legal definition there that you guys are working with because you think it is something that’s recoverable from the government.
Nitin Jain
So maybe just break it into two, both retirement and long-term care. So we do see a clear path of what is considered pandemic expenses. And even though it might be related to the staffing, it is, we are saying there’s a shortage of staff because you have nurses who are working at vaccine clinics or hospital systems which are overwhelmed. So, we do – what we think is pandemic expense in our mind it truly is pandemic expense and each public health union might have a different sense of outbreak, but at company level we are quite clear what goes into that bucket. So, you’re right, at some stage they’ve become stabilized. Our view is, we do have homes which have figured out a way to go back to normal or pre pandemic levels, whether it’s occupancy. So we have multiple homes, for example, a retirement home which are at 100% occupancy. We have long-term care homes which are not – which do not have significant pandemic expenses and their margins are back to the pre pandemic levels are pretty close to it.
So we see a clear difference. However, again, it’s hard to predict when everything will get back to that normalized level, but we continue to believe that there is a normalized level in homes which do not see those outbreaks. We do continue – our finding margins back to pre-COVID levels.
Tal Woolley
Got it. Okay. David, could you just repeat the number of third and fourth beds you thought might be exposed by this change?
David Hung
Yes, we have approximately 350 third and fourth beds.
Tal Woolley
Okay. And sorry, I was looking on the Ministry of LTC website, was this like a public announcement or is it an internal bulletin that we wouldn’t have seen from the outside?
Nitin Jain
It was an internal bulletin that would’ve been sent to all long-term care operators. So it wouldn’t have been in the public domain.
Tal Woolley
Okay. And when would this theoretically take place? Like when would this new decision not to fund those beds take place?
Nitin Jain
So I think that’s the – your last part of the question is key, that is why we do not have more information. And so it is not a policy at the moment. What we are working with government is to get clear indication what does that mean? Because obviously there are areas which you would have less expenses. So if they’re of 100 people in a home, if you have 70, you obviously would use less nursing hours. But if you have 70 people in a 100 and if you change the roof, you still have to change the whole roof. You cannot change 70% of it, or same could apply for housekeeping. You cannot mop half the floor. You have to mob the full home. So from based on our discussions with the government, people understand the issues with removing three and four funding and we continue to remain optimistic, that will find a way where costs that should be saved, and costs that should be reimbursed.
Tal Woolley
Okay. I guess like this combined with the fact that there was no, sort of occupancy premium increase this year like, is there sort of like a shift in like the government’s perspective on the sector? Like or is this sort of just part of the cycle of this business in terms of sometimes the funding is there and sometimes it’s not?
Nitin Jain
Sure. I would say this is an inflection point for long-term care and governments have been very supportive of long-term care, whether it’s Ontario and BC, the two provinces we are in long-term care and there has been significant, significant amount of money allocated to long-term care, whether it’s prevention containment funding, pandemic funding, all sorts of different things. And – but we also got into high inflationary environment at the same time. So the government has done a good job of managing the first part, but we – I don’t think we have had a good understanding of the inflationary pressures at all levels. So that’s the piece that we have been working on because we see that pressure, we see the decline in margin in 2021. We see that in 2022. And if you don’t see a good funding increase, it’s obviously going to persist in 2023. And then it’s going to start impacting really redevelopment, which is a big mandate for the government where we have to build new long-term care beds.
So regardless of capital funding, if you don’t have the right operating funding, the projects don’t really work. So again, we found, government to be understanding of the challenges obviously, but these things will take some time to work through. It remains to be seen whether we are blindly optimistic or we are optimistic, so we will find that out in due course. But at this stage we continue to be optimistic that there is going to be a viable solution because when we look back at the history of long-term care funding there has been lags with inflation, but eventually it has always made up. So and we, and our hope is that that will be the case this time around as well.
Tal Woolley
Okay. And then just lastly, can you just talk a bit about then, if you’re thinking about pulling back on some of the redevelopment stuff. What would you guess your sort of working capital budget would be for 2023, 2024 kind of time horizon? And is there any appetite on M&A right now?
Nitin Jain
So we did a big M&A deal the beginning of this year. We don’t have specific M&A targets in any of our criteria, which is very helpful because it stops us from doing stupid deals. So we don’t really are gunning for a certain amount and we’ll only do deals when they make sense. I would say on redevelopment, we continue to be optimistic that there is going to be a viable construction program. And when they – when we do get that program, we’ll start construction work at three of our sites in North Bay, Keswick and, and Brantford.
Tal Woolley
Okay, perfect. Thanks very much, Jain.
Nitin Jain
Thank you.
David Hung
Thank you.
Operator
[Operator Instructions] Your next question comes from Himanshu Gupta with Scotiabank. Your line is open.
Himanshu Gupta
Thank you and good afternoon. So in terms of the retirement home occupancy are you already there? I mean like 88%, 90% kind of levels. So has the corporate focus shifted to margins or are you still pushing sales to get to like 90% and above levels?
Nitin Jain
Hi, Himanshu. Good afternoon. So our target has not changed. We think stabilizes low 90s, call it 90% to 94%. And we are very optimistic with our team’s ability to get there. But our focus has changed to margin, I would say two quarters back. So once you are in the 85%, 86% range, and we have multiple homes, which at 100% occupancy, we have multiple homes, which at 95% plus. And at that time you can start to now look at pricing.
And from our experience, because when we went through rental rate increases across our portfolio with an explanation of why they’re increasing, food cost has gone up 20%, utilities have gone up, we found our residents, given the choice between reducing services at increasing rates. They gave us a very fair indication they would rather see rate increase. And that’s what we have been doing and we have not seen any significant pressure on it – that the goal is not to overdo it because we can potentially try to get too much out of that and then that might have some positive margin pressure, but would result in some negative issues with resident relationships, our ability to market more. So that’s what we are watching at the moment. But as our occupancy get more stabilized because we are not there yet, we should see our margin increase.
Himanshu Gupta
Got it. Okay. That’s helpful. And then, again like at 88%, 90% kind of levels what is a market they can see in some of your Ontario markets? I mean, do you see the whole market moving above 90% there or any color in terms of the market dynamics there?
Nitin Jain
Yes, I would – it’s hard to, there’s been work that CBRE does Cushman & Wakefield [ph] have done some market vacancy. There has not been a big update on it for a period of time because of COVID. So I don’t think views have changed. I mean, previously when we saw it, Ontario was called it 5% to 8% of vacancy rates, and we don’t think that has changed because not a lot of new supply has come in. So we expect those rates to be similar and that’s why we think the stabilizes in the low 90s call it 92% to 94%.
Himanshu Gupta
Got it. Thank you. And then, shifting to margins, and I know Tal has already covered a lot of expense questions, so simply on the retirement home NOI margin, I think in the MD&A you mentioned Q4 margin to be similar to Q3 margin. And if I recall, previously you have mentioned like 50 basis point to 100 basis point improvement in the second half of the year from Q2. Is that a change? Is that a reflection of all the discussion around the higher cost? What do you see?
Nitin Jain
Yes, no, thanks for that question, Himanshu. So yes, that’s right. In the MD&A, we did indicate that our Q4 margins would be similar to Q3. As you know, our Q3 margins are at 36.6%. So we expect something similar in Q4. And with respect to a change in sort of the narrative, it is a little bit of a change because we continue to see cost pressures around agency utilities and insurance.
Himanshu Gupta
Got it. Okay. That’s fair enough. And then one more thing again, in your MD&A, I see you mentioned about the funding of around $18 million government funding, had that already been received and reflected in the financials or this is over and above what you’re seeing here?
Nitin Jain
Sorry, can you repeat the number again, Himanshu?
Himanshu Gupta
Yes, so I’m looking at the financial, and I think you mentioned that in September, the Ministry of Long-Term Care, they announced some funding and Sienna share is $18 million, which could be used towards eligible expenses. So is that over and above, just trying to understand, is that like reflected or not reflected on the books?
Nitin Jain
That would I believe relate to the pandemic funding that that the government has allocated to Sienna. And that would relate to the period of April, 2022 to March 2023. And we would use those funds as we’re incurring pandemic expenses. So the answer is yes, we have been reflecting that within our financial statements.
Himanshu Gupta
Okay. So when you say that LTC will have $3 million to $4 million of unfunded pandemic expenses, this is over and above whatever funding, like $80 million or other funding you’ll be receiving. So that is a very [indiscernible].
Nitin Jain
That’s correct. The $3 million to $4 million would be in excess of the pandemic funding that we would receive.
Himanshu Gupta
Got it. Okay. Thank you. And final question on balance sheet, I think you mentioned debt to adjusted EBITDA for around nine times and just wondering what is your view on leverage in the next year or two and are you looking for any disposition program or any non-core assets, which could be a mean disposed at year or two?
Nitin Jain
Sure. So our view on leverage hasn’t changed. We have a very conservative balance sheet and a lot of liquidity. Our debt to book value is in the low 40s, and we will take our leverage up if need for redevelopment. That that would probably be one of the only few reasons to take our leverage up. And we don’t really have many assets which are not part of a core strategy. You might have one or two from time to time because of change in market, but nothing material.
Himanshu Gupta
Got it. Thank you very much.
Nitin Jain
Thank you.
Operator
There are no further questions at this time. This does conclude today’s conference call. Thank you for joining. You may now disconnect.
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