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Leisureworld Senior Care Corporation (OTC:LWSCF)

Q2 2014 Earnings Conference Call

August 14, 2014 09:00 AM ET

Executives

Lois Cormack - CEO

Nitin Jain - CFO

Stephen Piunno - VP, Corporate Finance

Tim McSorley - Interim CFO

Analysts

Troy Maclean - BMO Capital Markets

Pammi Bir - Scotia Capital

Jonathan Kelcher - TD Securities

Michael Smith - RBC Capital Markets

Yash Sankpal - Dundee

Brad Sturges - CIBC

Nelson Mah - Laurentian Bank

Operator

Good morning, ladies and gentlemen. Welcome to the Liesureworld Senior Care Corporation Second Quarter 2014 Financial Results Conference Call. I would now like to turn the meeting over to Ms. Lois Cormack, CEO. Please go ahead, Ms. Cormack.

Lois Cormack

Thank you, Melanie. Good morning, everyone. Thank you for joining our call this morning. With me on the call is Nitin Jain, our new CFO; Stephen Piunno, our Vice President Corporate Finance and Tim McSorley. I would like to thank Tim for serving as our Interim CFO and assistance that he has provided during this transition.

Nitin is a very quick study and he is an outstanding addition to our team. Today’s call is being recorded and a replay will be available shortly. Instructions for accessing the replay are posted on our website and details are provided in the news release. We have also posted slides accompanying the remarks on our website at Liesureworld.ca under the Investors section Events and Presentations.

Please be aware that certain information discussed today is forward looking, actual results could differ materially and we do not undertake any duty to update any forward-looking statements. Please refer to the risk factors section in our public for further information.

Now I am going to start on slide four. We are very pleased with our second quarter results which continue to show good improvement over the same period last year. I will provide summary comments on the quarter and Nitin is going to go in more detail on our financial results.

Our retirement home same property net operating income was up 16.2% over the same period last year. We also had an overall improvement of 3.6% in our same property net operating income. A positive development is a subsequent to second quarter, the ministry announced that preferred accommodation rate for semi-private room will increase from $10 per day to $11 per day and the private premium accommodation will increase from $21.50 per day to $23.25 per day in Class A long-term care home. These rates come into effect for resident admitted after September 1 of 2014 and we’re very pleased with this direction.

On slide six, we’re making excellent progress on transforming the company and building a solid foundation and a culture for future growth. Our experienced and caring team have all contributed to our performance by focusing on helping our residents and our clients to live fully every day and improving our care and service delivery model.

To summarize Leisureworld today, we have ten retirement homes, 35 long-term care homes, our home care division serving seniors in their homes and management business serving not for profit and small owners of both long-term care and retirement homes and we have 7,500 dedicated employees. Today, long-term care provides us with stability to our income and we see excellent growth opportunity in earnings from retirement homecare and from management services.

Now slide seven, I will review our business lines starting with retirement. Our same property net operating income growth improved by 16.2% for the second quarter 2014 over the second quarter 2013, this as a result of disciplined expense management and increased occupancy. Overall, we had an average 83% occupancy in the quarter and we continued to lease up our Royale homes Astoria, Peninsula, Kingston and Kanata. These homes are all high quality, are all located in well supplied market and they will take us time to reach stabilized occupancy.

While we have historically been known as a long-term care provider, we are now focused on building our unique brand in retirement living. And our team is working hard at implementing our unique platform focusing on assisted living services, which enable our residents to stay with us longer, sales and marketing initiatives, improvements in food and beverage choices and expanding our lifestyle and leisure choices. We continue to experience a higher degree of residence attrition than in previous years with residents moving to long-term care when their health declines and we’ve been very successful in keeping up with this attrition and maintaining occupancy levels during 2014.

Now moving on to long-term care on slide eight. In the second quarter, our NOI remains strong and stable with same property NOI of 1.5%. We continued to experience good conversion to the new private accommodation rate paid for by the residents and today, 48% of our private A-class beds are now are the increased rate of either 19.75 per resident day or 21.50 per resident day and for residents after September 1, the new private rate will go up to $23.25 per day. We continue to have strong demand for private occupancy at 99.1%. And we’re excited about the future prospect for redevelopment of the seabed and we are pleased with the government’s announcement confirming their commitment to a redevelopment program.

The details of this program are yet to be released. There is currently no mandate or timeframe in which this will occur and there is very strong demand with a wait list of over 21,000 seniors waiting for long term care. Redevelopment of our C homes provide excellent longer growth strategy for the longer term care division. Now it is my pleasure to turn the call over Nitin, to take you through our financial performance.

Nitin Jain

Thank you, Lois and good morning everyone. I’m delighted to be here and it has been a very exciting and a busy time since I arrive. Before I begin I would like to note that you’ll find pools of discussion of our results in our MD&A and financial statements which are posted on both SEDAR and on our website.

We put some strong results in the second quarter of 2014 which I’ll discuss momentarily. As a reminder, in first quarter of 2014 we introduced operating funds from operations are OFFO which is our measure on normalized earnings.

Please turn to slide 9 and let’s talk about our results. In second quarter 2014, we generated net operating income or NOI of $20.2 million up $4.6 million or 29.7% from the same period last year. On a same property basis, NOI was $16 million an increase of $0.6 million or 3.6% over the second quarter of 2013.

Moving to slide 10, for the first six months of the year, we generated NOI of $39.7 million which is up $10.2 million or 34.5% over the first half of 2013. On a same property basis, NOI was $30.6 million an increase of $1.2 million or 4.3% compared to the same period last year. Our improved NOI performance is largely due to the acquisition, which close in December of 2013 and same property improvements in retirement and long term care. On a same property basis, NOI increased 3.6% and 4.2% for the three and six months period respectively.

In second quarter 2014 versus second quarter of 2013, retirement same property NOI was up 16.2% and long term care improved 1.5%. Pleased note that during the quarter, the recorded ministry of health and long term care reconciliation adjustment related to prior year’s which decreased both our revenue and NOI by almost $1 million. These adjustments relate to the difference between our annual reconciliation filings with the ministry and their assessment of those filings for year 2007 through 2011. These adjustments were excluded from the same property and transaction presentations to isolated from our current performance. As they relate to prior years.

Further the reconciliation adjustments have no impact to OFFO or AFFO. In second quarter general and administrative expenses for $4.5 million higher than Q1, $150,000 of the variance relates to differentiate units mainly due to non-cash mark-to-market adjustments as a result of our increased share price. As always an additional $150,000 for back office improvements as part of our 2014 objectives and strategy.

Moving to slide 11, in second quarter 2014 OFFO per share diluted was up $0.06 or 27% over the second quarter of 2013. For the six month period, OFFO per share diluted was up $0.10 or 22% from the same period last year. This is due to a transactional activity and positive same asset performance. Please note, prior year diluted OFFO per share excludes this impact of subscription receipts which were issued in April of 2013.

Moving to slide 12, similarly AFFO per share increased $0.06 or 22% for the second quarter of 2014 or the second quarter of 2013. For the first half of the year, AFFO per diluted was up $0.10 up 17% from the same period last year. On slide 13, during second quarter 2014, $106 million of our debt was transferred from long-term to current as is to over the next 12-month period. During the process of refinancing the current debt in accordance with that debt strategy and the second quarter retain $4.9 million of cash.

Moving to slide 14, we’re pleased that to announce that our Board of Directors has approved a dividend reinvestment plan, where our shareholders can automatically reinvestment their monthly dividends. This is subject to regulatory approval including TSX.

This plan would be implemented at a 2% discount, full details of the plan will be provided at the time of implementation. Before I turn it back to Lois, I’d like to take a moment to personally say thank you to Tim McSorley for his guidance and mentorship over the past few months and now back to Lois.

Lois Cormack

Thank you, Nitin. Looking ahead, Leisureworld is well positioned for strong organic and external growth. We’re currently the largest owner of long term care home in Ontario and have three growth businesses in retirement, home care and management services.

There is strong demand for our services with the growing seniors population and high barriers to entry in all of our business lines. We have a long-term vision for our business and while we manage our operating performance quarter-to-quarter, our strategy will be executed over the long-term.

Now on slide 15, our immediate priorities are to continue to transform the organization and launch our new brand strategy; lease up our retirement homes and establish a strong presence in every community that we operate, continue to strengthen our infrastructure to support all lines of business, prepare for the future redevelopments of C beds and continue to look at strategic acquisition opportunities.

I’d like to thank you for attending our call today. We know it’s the end of the quarter and you must be very tired and thank you for your continued support of our progress. Now Nitin and I will be pleased to answer any questions that you have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions). The first question is from Troy Maclean of BMO Capital Markets. Please go ahead.

Troy Maclean - BMO Capital Markets

Now that the ministry has increased private accommodation rates for September 1, what’s your outlook for 2015 same property growth in LPC? Is it in line with the 2013?

Nitin Jain

Are you talking about the private place accommodation increase or just the rate increase in general Troy?

Troy Maclean - BMO Capital Markets

What’s your growth outlook for LTC for 2015 the same property. Is it -- do you think you will be at 2015’s level or a little higher or?

Lois Cormack

Yes. It will continue to be as it is year-to-date the summer experience.

Troy Maclean - BMO Capital Markets

And then now that we’ve had three consecutive years of an increase in private accommodation and we’re through provincial election, do you think this is going to be an annual increase or is this still one year at a time?

Lois Cormack

Well, Troy as you know, there was a lot of catch up to do, because the rate hadn’t changed for about 20 years, so this is really catch up for all of the years where there hadn’t FDs and then a CPI adjustment. So it is likely to stable, to level off. We’re probably in or around that now and then that in the future would probably be an annual adjustment in accordance with CPI or something like that would be prudent.

Troy Maclean - BMO Capital Markets

And then just on the retirement homes, has there been any change in the competitive environment like have competitors got more aggressive with their offerings since last quarter?

Lois Cormack

I don’t know about that so much as it is as I’ve indicated what we are seeing is a high level of attrition and we believe that this is -- residents really staying in their homes as long as they possibly can. Accessing home care and when then decide to move into retirement, they are frail. And so there is a higher level of attrition and we’re very pleased that we’ve been able to keep up with this. And in addition, you know there are many markets that are very, very well supplied and we happen to be in some of them.

Troy Maclean - BMO Capital Markets

And then just any guidance for G&A for the rest of year. Just curious what’s the impact of the brand spending?

Nitin Jain

So I think Troy as Lois talked about 2014 is really a back office improvements and focus on our brand. So we don’t want to really give guidance. We will have one-time lumpiness as we execute on those strategies. But Q1 and Q2 are as good an indication as any and there would be one-time things as we execute on some items.

Operator

Following question is from Pammi Bir of Scotia Capital. Please go ahead.

Pammi Bir - Scotia Capital

Just with respect to the retirement home business, can you maybe just give a little bit more color on the specific markets between Ontario and BC and the trend that you are seeing there other than of course the high attrition? And then also with respect to occupancy do you sort of see that moving higher to the back half of this year or is it more of the same going back to the attrition comments that you made?

Lois Cormack

Well markets, I think with retirement it is local, it all depends sort of where you are. And so I wouldn’t say that whether it’s Ontario or BC, it really depends on the community that you are in and where there is additional or oversupply. And so for us it’s Kingston, Kanata, the Lower Mainland, BC are all very well supply. Other than that, we have homes in Ontario that are doing very well, our home in Keswick that is leasing up beautifully. So, it really is I would say local and with respect to your question about lease up in the latter half, there is always some seasonality to the business and the winter months are really flowing this year which I think some hangover from the long cold winter and then often reduce the little pickup in the fall as seniors decide to make a move before winter.

So, that’s normally and I guess I would just preface it by saying normal seasonality.

Pammi Bir - Scotia Capital

Okay, that’s helpful. Just going back to the B&C redevelopment it sounds like we still need some more time there for the government to come up with some details but given up it is all in terms of any color on sort of potential funding changes that might be under consideration other than of course the accommodation increase that was announced?

Lois Cormack

We don’t at this time, we’re very pleased that our association has been really good dialogue and providing a lot of great input and there is a good understanding and it needs to upgrade the 35,000 B&C beds. So, no further that will detail at this point.

Pammi Bir - Scotia Capital

Okay, and then just I guess with the accommodation increase, given estimate of how much benefit that provide for the expected returns from the redevelopment of B&C beds and it certainly helps but does it materially change the economics before that program?

Lois Cormack

Not at this time, I mean that’s all part of the program is increasing the preferred accommodation right for a better class of accommodation that resident pay. So that is part of the program but really no color on the detail at this point.

Pammi Bir - Scotia Capital

Okay, and then maybe just lastly with the acquisition environment, can you comment on what you are seeing, are there any deals in any sort of advanced stages of discussion at all and given where we are at this point of year any likelihood of any transactions closing before year end?

Lois Cormack

Well, we’re always looking at strategic opportunities always looking, we indicated, we are very focused on a lot of the activities outlined this year the integration work focusing on a retirement on lease up, but having said that we’re always looking and we’ll be well prepared to something that’s opportunistic for us just to take advantage of in term of talking (Ph).

Pammi Bir - Scotia Capital

And sorry, when you say talking I think in the past we’ve talked for maybe 20 million range, is that sort of the still the same number?

Lois Cormack

I think that’s reasonable for a talk in (Ph).

Operator

Following question is from Jonathan Kelcher of TD Securities, please go ahead.

Jonathan Kelcher - TD Securities

First, just on the retirement communities specifically the Royale portfolio, do you still expecting it how that stabilized, near the end of this year, beginning of next year?

Lois Cormack

It will be well into 2015, Jonathan with the attrition. We’re very pleased with the progress we’re making in terms of the programs that we’re implementing at the Royale homes and our ability to stay out of the attrition but they are well supplied markets and that will we do expect the product that will be well into 2015.

Jonathan Kelcher - TD Securities

Okay, and can you remind us what you define us stabilized, I guess in terms of occupancy?

Lois Cormack

Kanata is lower but in these markets it’s around 90.

Jonathan Kelcher - TD Securities

Okay, and then just secondly on the home health business, negative same property NOI due to I guess some investments that you’re making to grow the business, can you maybe give us a little bit more color on and our plans there?

Lois Cormack

Yes, that was really of the home care demand increases and so over the summer months then moving into the summer, there is a demand for services is there and the way we get volume in when other providers aren’t able to deliver. So we actually have used staff, we did not have enough staff to actually some overtime hours which increase the expense to deliver that product which is important to us because since last winter in terms of being able to respond to the demand when it’s there as well as doing some ramping up staff with orientation and education. So really an investment to make the demand.

Operator

Thank you. The following question is from Michael Smith of RBC Capital Markets, please go ahead.

Michael Smith - RBC Capital Markets

Thank you, I think you ended the quarter with 83% occupancy in the retirement to that portfolio, has that changed?

Lois Cormack

What do you mean?

Michael Smith - RBC Capital Markets

Basically, is it gone up or down since June 30th? In other words what is it today?

Nitin Jain

I think providing it at any one point Michael is tough because there is usually move-ins within the quarter. So that’s not really a comfortable with this closing.

Lois Cormack

But it’s good I mean we’re seeing good progress in the quarter although we do still have this attrition that we’re keeping at ahead of and certainly traffic has improved definitely over the previous quarter.

Michael Smith - RBC Capital Markets

Okay. And so some of those markets that have, that are well supplied or have excess supply, when do you anticipate the supply will be absorbed?

Lois Cormack

Again it’s sort of market specific. Kanata is a long time because it is so well supplied. The others where we’re looking at for ourselves it is for stabilized for occupancy, stabilized occupancy, they are well into 2015 and Kanata is likely to be longer.

Michael Smith - RBC Capital Markets

And for the NOI adjustments from the Ministry of Health and Long-Term Care that were done in the quarter for the prior year, so I guess ’07 to ’11, is that common in the industry. I am wondering if you could just give us some color on that.

Nitin Jain

Yes at any given time Michael we would always have reconciliations. So but for us they have been immaterial in the past usually in the $50,000 to $100,000 range. So this is the first time when it was a $1 million because it’s really related to four different years. And a part of that, a majority of that was due to a specific program which came out in 2010, which was quite complex and we have been in discussions with ministry during all this time and we reached a conclusion that it’s not going to be collectable. So we have decided to write it off.

Michael Smith - RBC Capital Markets

And then last question just back to the redevelopment of the Class B and C beds in Ontario, I know it’s uncertain but what’s your sense of when the new program would be announced. Obviously, this is just an estimate because it’s out of your control but what’s your sense?

Lois Cormack

It’s a good question. I mean if you look at just the cycle we are now sort of into the falls. So it’s likely to be next year at this point.

Michael Smith - RBC Capital Markets

Next year…

Lois Cormack

Into ’15.

Michael Smith - RBC Capital Markets

I mean like is there like a period in the year like spring, fall that they are more typical to make these kind of announcements or…

Lois Cormack

I don’t think so. It’s just there is -- we know there is a lot of work going on in the program and there has been just that there is with the new post-election and there is new players and so on throughout government that it would take some time for the new team to get in place and so on. So it’s likely not to be this fall, that’s really the best I could say just given the time that it takes for a new team to get things together and get briefed on the issues on so on.

Michael Smith - RBC Capital Markets

But do you think it’s reasonable to assume it’s not two years from now?

Lois Cormack

I think so. I mean we’re hopeful that it will be -- very hopeful that it will be something in 2015.

And for us, it will be number of years over which we implement the program when there is one that’s feasible to do so.

Michael Smith - RBC Capital Markets

Yes, of course. But I guess once you get, once the program is announced, then at least there is some certainty and then you could start your planning phase.

Lois Cormack

Yes, that’s right.

Operator

Thank you. The following question is from Yash Sankpal of Dundee. Please go ahead.

Yash Sankpal - Dundee

Just on your long-term care NOI margins, the NOI margin this quarter was a bit lower than the historical average. Even after adjusting for the MOHLTC reconciliation. So I am wondering if there was anything peculiar in the quarter or is it related to the LTC homes acquired from HCI.

Nitin Jain

Stephen, do you want to just answer to that?

Stephen Piunno

Margins in the Quarter on the same store were about 16% year-to-date about 15%, which is probably in line with expectations there is some seasonality to the business just due to the timing of expenditures. So there is nothing really unusual. But once you get hit harder with the utilities and with the [indiscernible] that we saw in Q1, but other than that there is really nothing exceptional within the numbers.

Yash Sankpal - Dundee

And is there NOI margin of the specialty care portfolio about like similar to what you had before?

Stephen Piunno

Yes.

Yash Sankpal - Dundee

And then the NOI from the third party management business also was lower than what it was in Q1. So I am wondering if this is a good run rate.

Lois Cormack

Yes. Rest of the management division because it’s new to Leisureworld it’s going to take us some time to allocate the right amount of the expense against the each contract or each project. And so this quarter as you saw some lumpiness as we are trying to get that right. And so you shouldn’t really read anything into that margin for now until we have some more experience with it and have some time to allocate the right expenses with the right projects.

Yash Sankpal - Dundee

Okay, and just on the MOHLTC capital renewal program, based on what development is often right now, I just want to know, what percentage of a redevelopment project that will be funded by the longer term, I’m just trying to get a high level number.

Lois Cormack

Well, right now there is no program. So that’s what we’re excited about the announcement for, the commitment for a redevelopment program, there are no details at this point and there is not a program available to participate in, but it’s all 35,000 over half of this documents in the province just as to will be upgraded at some point and we’re all looking forward to the details of the program.

Yash Sankpal - Dundee

Okay, based on let’s say the previously announced $10.80 I think, $10.80 or something like that? So based on that rate, what percentage of our redevelopment project would be funded by the government? Just a rough estimate 50%, 40%, 30%?

Lois Cormack

It all depends every project is very different whether it’s our retrofit or a green field and the previous program that was very very little uptick.

Operator

Thank you, the following question is from Brad Sturges of CIBC, please go ahead.

Brad Sturges - CIBC

On your return on portfolio, obviously highlighted the strong occupancy growth, just want to get sense of there have been change in strategy in terms of incentives or initial rental rates to help drive occupancy in light of some of your comments on the well supplied markets?

Lois Cormack

We’ve got a great team now really focused on sales and marketing that we changed our whole approach, much more focused on sort of client centered incentives, any incentives based on what is unique to each client and what’s important to them. So we do don’t broad sort of like scale initiatives across the platform it is very local depending on the community and what the client needs. So, wouldn’t say we have anything here and anything that we do is really one-time.

Brad Sturges - CIBC

And in the specific markets where you are seeing a lot of supply, are your competitors becoming more aggressive on those type of incentives or reducing rental rates out for their occupancy or how do you see the competition to?

Lois Cormack

Yes, I can’t really comment on the competition.

Brad Sturges - CIBC

Okay, and just lastly on the B&C redevelopment, just more looking at the market in terms of transactions, have you seen any activity in the market today that would give you a sense on pricing of those type of opportunities as there are more activity because of the potential for redevelopment?

Lois Cormack

We haven’t seen anything really lately in terms of B&C. I think there is always some run-offs happening but nothing major that we’re aware of.

Operator

Thank you. (Operator Instructions) The following question is from Nelson Mah of Laurentian Bank, please go ahead.

Nelson Mah - Laurentian Bank

I thought I clarify that reconciliation, I think when you guys do it at year end, you get it audited before you send to the government?

Nitin Jain

Sure, the way the reconciliation works Nelson, good morning, is really we for the year if you get nine months to file the reconciliation and then take two or three years to actually go through the process and then depending on the outcome, sometimes the money is [indiscernible] right away and at sometimes there are questions. So that really is the normal process of reconciliation so, you always will have reconciliations of the government but as I commented before the numbers usually are very small.

Nelson Mah - Laurentian Bank

Okay, so there is nothing specially unique from the government saying -- looking at anything in particular is that right?

Nitin Jain

Correct.

Operator

Thank you. There are no further questions registered at this time, I’d like to turn the meeting back over to Ms. Cormack.

Lois Cormack

Thank you, Melanie. Thank you all for joining us on the call today and for your questions. We hope that you do enjoy the rest of your summer and we look forward to speaking with you again on our quarterly call in November. Have a great day.

Operator

Thank you. The conference has now ended. Pleased disconnect your lines at this time. We thank you for your participation.

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