Chartwell Retirement Residences (OTC:CWSRF) Q2 2016 Results Earnings Conference Call August 5, 2016 10:00 AM ET
Brent Binions - President and CEO
Karen Sullivan - COO
Vlad Volodarski - CFO and CIO
Jonathan Kelcher - TD Securities
Jimmy Shan - GMP Securities
Yash Sankpal - CIBC
Jenny Miller - Canaccord Genuity
Heather Kirk - BMO Capital Markets
Good morning ladies and gentlemen, and welcome to the Chartwell Retirement Residence Second Quarter 2016 Results Call. Following the formal comments, we will hold a question-and-answer session. Please be advised that this call is being recorded.
I would now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residences. Please go ahead, sir.
Thank you. Good morning and thank you for joining us today. There's a slide presentation to accompany this call available on our website at chartwell.com under the Investor Relations' tab. Joining me are Vlad Volodarski, Chief Financial Officer and Chief Investment Officer; and Karen Sullivan, Chief Operating Officer.
Let me remind everyone that during this call, we may make statements containing forward-looking information and non-GAAP measures. I direct you to your MD&A and other securities filings for information about the assumptions, risks, and uncertainties inherent in such forward-looking information and details of such non-GAAP measures. These documents can be found on our website or at sedar.com.
With our focus on delivering exceptional services and quality care to our residents, we believe we will be able to continue to build sustainable value for our investors based on our four key priorities as shown on slide three.
Building on strong performance in the first quarter of this year, our operating teams with the support of our corporate office departments delivered excellent second quarter results. Same property NOI increased $4.2 million or 8.4% in Q2 2016, driving year-to-date growth to $8.3 million or 8.6%.
Same property occupancy improved to 93.4% in Q2 2016 compared to Q2 -- compared to 91.8% Q2 2015 with all operating platforms posting strong occupancy gains.
Of the many corporate initiatives in progress, three are especially of note. Improved brand awareness and online social media strategies continue to drive initial contacts and personal visits which contributed to occupancy growth. Our newly established internal business support services center At Your Service delivers improving business process support to our operating teams and our homes and the implementation of our core human capital management system is on track with the established timelines and budget.
Our financial position and liquidity remain strong. Earnings growth, debt refinancings, and non-core asset sales all contributed to much improved debt leverage and coverage metrics as shown on slide four.
At June 30, 2016, we had cash on hand of $8 million and $73.9 million available borrowing capacity under our credit facilities. Our interest coverage ratio increased to 3.4 times in 2016 year-to-date compared to 2.5 in 2015.
Net debt to adjusted EBITDA ratio was 7.2 at June 30, 2016 compared to 7.6 at December 31 2015. And our indebted ratio was 48.7% in June 30, 2016 compared to 49.7 at December 31 2015.
And in Q2 2016, we redeemed our 5.7% convertible debentures to the issuance of trust units, creating room to finance that current development and acquisition activities to lower our cost debt.
We've also established a newly added $50 million credit facility with a Canadian Chartered Bank. We continue to build value in our real estate portfolio through portfolio and asset management program, development of new properties, and opportunistic acquisitions as shown on slide five. These value-add activities are supported by extensive industry and market research and by rigorous risk management practices.
Year-to-date 2016, we have completed and announced five acquisitions for a total $211.7 million. Work continues on our development pipeline of 2,129 suites with two projects now complete, six projects in construction, and four projects in preconstruction.
I'd like now to turn it over to Karen Sullivan, our Chief Operating Officer to talk about some operational initiatives that she and her team are working. Karen?
Thanks Brent. Turning to slide six, the operations, sales, and marketing team continue to integrate our recently acquired properties including planning for the integration of Tiffin House in Midland which is expected to close around September 1st.
There has also been significant focus on our development projects that are underway in BC, Alberta, and Ontario, and with our partners Batimo in Quebec. We recently opened three sales centers, one in Vaudreuil, Quebec for the 290 Suite Chartwell Le Prescott, one in Candiac, Quebec for the 284 Suite Chartwell Le Montcalm, and one in Oakville, Ontario for the 128 Suite Chartwell Waterford Retirement Residence.
The first two homes will have all independent supportive living suites, while the Oakville property will have 98 ISL suites and 30 Memory Living suites. All three homes are expected to welcome their first residence later in 2017.
Turning to slide seven. In Q2, we held a very successful Open House event, which drew [ph] over 5,000 people including approximately 2,300 prospects. This event was followed by an intensive sales the following week.
Based on our success, we will be hosting another Open House on Sunday, September 18th. Also in Q2, we worked with a third-party provider undertake 40 mystery shops of our homes across the country and an additional 60 in our competitor's homes.
Based on objective measures developed by the mystery shop company, Chartwell scores were higher than our competitors in most markets. In all cases, the results helped individual homes to make improvements to their sales process and also allow allowed us to assess trends for improvements across the company.
The marketing team recently launched two initiatives. The first Moments that Matter is a collection of real pictures videos and stories about the daily life of our residents. These stories will be shared through our various social media channels including our new Instagram page.
The second Asked Edna is a series of six video montages that tackle a variety of retirement living topic, from how to raise the topic with a parent, to budgeting for retirement living, to what to expect when living in a retirement home.
The series can be viewed on Chartwell's YouTube page and on our Facebook and Instagram accounts.
I will now turn it over to Vlad to discuss our Q2 2016 financial performance.
Thanks Karen. As shown on slide nine, Q2 2016 AFFO from continuing operations was $39.8 million or $0.21 per unit diluted compared to AFFO of $25.9 million or $0.15 per unit diluted in Q2 2015. This increase is primarily attributed to higher NOI of $14.6 million consisting of a $4.2 million increase in the same property NOI, primarily as a result of occupancy growth and a $10.4 million higher contribution from acquisitions and developments.
Higher NOI guarantees of $0.7 million and lower interest costs of $0.3 million due to lower interest cost in our same property portfolio and as a result of redemption of our convertible debentures, partially offset by interest costs incurred to fund acquisitions.
These increases were partially offset by higher G&A expenses of $1.6 million, which primarily due to higher staffing costs incurred to support newly acquired properties and higher cost of unit-based compensation resulting from the appreciation in value of our trust units.
For 2016 year-to-date AFFO from continuing operations was $78.3 million or $0.42 per unit diluted compared to $49.2 million or $0.28 per unit diluted in 2015 year-to-date. Total AFFO increased $5.7 million or 16.6% in Q2 2016 and increased $12.8 million or 19.5% in 2016 year-to-date.
Turning to our operating platform results. As shown on slide 10, our Ontario Retirement Platform same property NOI increased $2 million or 11.3%, primarily due to higher occupancies, regular annual rental rate increases in line with competitive market conditions and lower marketing costs which are partially offset by higher staffing and food expenses.
In Q2 2016 occupancy increased to 88.5% compared to 86.6% in Q2 2015, an increase of 1.9 percentage points. While we experience our normal seasonal occupancy deep in 2016 -- in Q2 2016 with occupancies decreasing by 80 basis points from Q1 2016, occupancy of 89.3%, our leasing activities are strong. And looking forward we expect to continue occupancy growth in Ontario with an approximate 2.5% increase in rental rates in 2016.
In Q2 2016 our Western Canada same property portfolio delivered NOI growth of $0.8 million or 7.7%, primarily due to higher occupancies, regular annual rental increases in line with competitive market conditions, partially offset by higher staffing expenses as shown on slide 11.
Occupancy reached 95% in Q2 2016, a 2.6 percentage point increase from Q2 2015 occupancy of 92.4%. We expect rental rate growth 3% in our Western Canada platform in 2016.
On slide 12, you will see our Quebec platform same property NOI increasing $1.1 million or 7.9%, primarily due to higher occupancies, regular annual rental rate increases in line with competitive market conditions and lower utilities, marketing, and insurance expenses, partially offset by higher staffing and food expenses.
Occupancy improved to 94.4%, 1.8 percentage points increase from Q2 2015 occupancy of 92.6%. We expect to maintain high occupancies in this platform with approximately 2.5% rental rate growth in 2016.
As shown on slide 13, our Canadian LTC platform same property NOI increased 3.3% in Q2 2016, primarily due to higher preferred accommodation revenues, partially offset by timing of other expenses. Weighted average occupancies in the same property portfolio remained high at 98.8% compared to 98.9% in Q2 of last year.
In Q1 2016, we removed 45 long-term care beds at one of our retirement communities from our available Suite count. These beds were operated on an interim basis under a short-term government contract that is now expired. We intend to redevelop this section of our property to offer ISL accommodation.
I will now turn the call back to Brent to wrap-up.
Thanks, Vlad. As shown on slide 15, we continue with our focus on enhancing customer's experience in our homes. We believe that this focus complemented by our ongoing investments in branding, marketing, and sales will enable us to continue to grow our occupancy and rental rate and by extension AFFO.
We continue to invest in recruitment, training and development of people. It is only to having the right people with the right skills and sense of purpose that we can deliver an excellent customer experience to our residents and their families in each of our communities.
We continue to improve our existing service levels and to implement new information technology systems to better understand our customers, communicate with our employees and reduce administrative time commitment in the deal.
We have put the infrastructure in place to successfully execute on the significant development program we set for ourselves in 2016-2017, and we're confident that these new state-of-the-art properties will generate growing value for unit holders. We also remained open to and proactively seek additional acquisition and development opportunities in our core markets.
Thank you for your time and attention, this morning. We would now be pleased to answer any questions you may have.
Thank you. [Operator Instructions]
Thank you for your patience. The first question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Just first on the small bit of land you bought in Gatineau, is that, I guess -- I'm guessing as for future development is that something you would -- you're looking to do with Baltimore or on your own balance sheet?
It's like they will be on our own balance sheet.
Okay. And just looking -- sticking with developments, if you look Western Canada, are there any developers out there similar to Baltimore that you would look at doing similar type transactions with?
We would be open to similar arrangements with different reputable developers, not just in Western Canada, but in the other parts of the country where we're currently present. And we continue to discuss this opportunity with various people, but at this point in time, it's very early to comment on any specifics.
Okay. So, Ontario's well then.
Okay. And in Western Canada with you guys at 95%, I'm assuming that's a function of very tight market, are you starting to see an increase in development in Western Canada yet?
There is definitely an increase in development in Calgary, in particular, and to a lesser degree in other parts of Alberta and BC, but Calgary is now seeing a bit more development than historically seen.
Okay. Thanks. I'll turn it back.
Thank you. [Operator Instructions]
The next question is from Jimmy Shan from GMP Securities. Please go ahead.
Thanks. So with the BC and the Western Canada and Quebec platform now pretty well at 95% occupancy, should we not expect rate growth to be a little bit more, to be higher than what has historically?
Maybe I'll have Karen answer that.
Yes, we're already actually starting to see that in those different markets that you mentioned. So, we are continuing to have that expectation from those platforms that they'll be able to drive rate.
And would you think sort of with the range that would be reasonable to expect?
At this stage the game we've given you a little bit of guidance on our 2016 numbers as they said we are not at this stage of the game providing anything beyond as we look out and begin the process of setting our budgets for 2017, that's not we do not provide -- not prepared to provide any future guidance on that as of yet.
Okay. Well, if you were to look at the affordability ratio I mean whether its rent, income or however you define it. Do you think there is a lot of room in terms of the tenant base being able to…?
We believe that in most of our markets the room exists as occupancy has risen to the higher levels that there is a potential upside in the vast majority of our markets.
Okay. And then just on the seasonality comment in Ontario, the sequential debt, I was curious as to why we don't see the same thing in Western Canada and Quebec?
It's really just a historical issue. Usually it is more pronounced in Ontario, Some years we do see it in Quebec as well, not so much in Western Canada, Western Canada usually tracks pretty steadily. So, what are the reasons for that I can speculate it's weather and…
Certainly Western Canada, weather is a big impact. Another one of the biggest issues for us in Ontario is that when we -- when we get turnover in the early part of the year January, February people give us notice, not as many people coming out to visit because it's the dead of winter in this part of the country.
And our costs customers are little bit older in Ontario and so we just don't get the traffic to fill, so that second quarter, it's about a 90 to 120 day fill window after they first come. So, without that traffic, Q2 is always a bit soft. West, certainly you don't get that kind of real harsh cold in Vancouver or in the Okanogan Valley, the two areas where our properties are and we still get the traffic during that period of time.
Quebec, the only thing I would say in Quebec is our customers a little bit younger in the Quebec marketplace and they are prepared to venture out a little bit more. We don't lose that much traffic we tend to get more of a drop in Quebec than we did this year, but never as big as it is in Ontario. Our turnover in Quebec was much lower this year for sure.
Right. Okay. Well, that makes sense. And then just lastly, just -- I don’t know if you look at the portfolio that way, but if I would look at the Ontario portfolio in retirement side, are there any discernable trend or difference between the GTA assets and the non-GTA asset or the secondary market assets in terms of just a rental fundamental?
You're talking about?
Yes, both occupancy and rent.
Yes, it's market-by-market. It's not outside Toronto and inside Toronto. We'll have markets in Toronto doing extremely well. Some of them are a bit softer and they are softer because a bunch new competition is coming and so it's a bit softer.
Rural market, there's no new competition. They will be doing well if new competitions come in, it will be a little softer during that period of time. It's very much market-by-market, you could not make a generalization on that.
Okay. Okay, that’s it for me. Thanks.
Thank you. They are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Brent.
Actually, I do apologize, we have a question from a participant, please state your name and company, your line is now open.
Hi, this is Yash Sankpal, CIBC.
Just your development CapEx going forward, how should we model that number, roughly $230 million?
Yash, all we can say at the present time, we showed you the projects that approved and we expect to go in the ground and later this year, maybe early next year. The pipeline remains to be full.
As I keep saying the timing of when these projects actually will be ready for shovel is harder to predict. I can also say that from kind of operating standpoint, the volume of the project that you're seeing on the list today is probably as high as we are prepared to handle at any single period of time.
So, I would suspect if you're looking for a number to model, you should model bit lower number than what's on the page today, but again it all depending on the timing of when these projects are going to come and be ready for development.
No, no, I was talking about the existing projects like how should -- like should we model an even number of every quarter or?
Well, we’re showing you when we expect to complete these projects and so the once that are in construction you can now model evenly. The ones that have not yet started development, you can model them to start at the end of this year, maybe early next year and then evenly until the opening date that we provided in our MD&A.
Okay. And just on this Tiffin House acquisition. I'm just trying to understand your rationale in that acquisition, like you’re going into a kind of secondary market and property, that is still in lease-up, so just how you thought about it?
This is in fact a type of the acquisition that we love doing. This is the property that is not yet stabilized; we feel that we can create value by acquiring the property that has significant growth potential.
And it is certainly not the primary market, but we feel very good about the Midland market and the location of this property and that we believe that there is sufficient demand certainly to feel this property overtime. It certainly take a little bit of time to fill it up, but we feel very comfortable that we will be able to do that and create some value for our shareholders by doing that.
By doing that.
Okay. That's it from me. Thanks.
Thank you. The next question is from Jenny Miller from Canaccord Genuity. Please go ahead.
Thanks. Good morning everyone.
On the Tiffin House, what's the occupancy at now and are you expecting a typical sort of 12 to 24 month lease up to get to stabilization?
It's about 55% now and yes, we underwrote with a 24 month stabilization, we hope to do it faster.
Okay. And as -- in same vein as Jimmy's question, I'm looking at the occupancy rate of the Ontario portfolio versus Western Canada and Quebec. Can you give some color on where you expect the stabilized number to be and if it's materially different than where Western Canada and Quebec are at, maybe what are the factors behind that?
It’s a function Jenny of the development. There has been a lot more development in this marketplace over the last five or six years than in the other one as it gates the growth in demand. So, it means occupancy is a little bit softer in tariff. But everybody sees the demand coming and so they get in a little bit early and so the occupancy wee bit softer.
The future growth in occupancy, there's no reason why it wouldn’t reach the same level as other parts of the country. If new supply stays under or in line with growth -- demand in growth. If there are developments which it is at the moment and it's why occupancies are going up quite nicely, but it's more -- that's a more current issue here than it has been say west, where supply has been restricted much more for some time.
It really is a question of how much new development is going to come on stream over the next couple of years. If it stays at the current rate, you will see occupancies grow just like in Ontario, just like they have everywhere else supply accelerate then they will be a little softer than other parts of the country.
Okay. That makes sense. Now, is this typically focused in that GTA or is this a province-wide phenomenon?
It's market-by-market. There are people who have built in small markets; there are people who build in the large urban markets. So, it's really -- a new development occurs all over the province and it tends to be more concentrated. The GTA is getting certainly a lot, has had quite a bit, Ottawa is a major area for development. It seems to have slowed down a little bit more outside those areas at present time, that doesn't mean it will pick up again because it certainly has been in the past. There are guarantees on that.
Okay, that's great color. Thanks a lot.
Thank you. The next question is from Heather Kirk from BMO. Please go ahead.
Just a follow-up on Tiffin House. It looks like higher end property. Just trying to understand it was running like BayBridge. What is that you see in that market that maybe they weren’t seeing? And can you just talk about why you have I guess more confidence than they would with respect to the lease-up?
Well, I can't comment on what BayBridge sees or doesn't see in this property. From our perspective, we feel that this market is strong. We feel that by employing our sales and marketing platforms. We should be able to lease the property up. As you pointed out, the property is very well built. It's in a good location. It is appropriate for the market and we feel very comfortable we'll be able to lease it up within the period that we underwrote and hopefully even faster.
And when was property completed?
It's about two years old.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Brent Binions.
Thank you. That wraps up today's conference call. Thanks again to everybody for joining us. As always if you have further questions, please do not hesitate to give us a call. Thanks and goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation. Once again thank you for your participation, the conference has now ended. Please disconnect your lines at this time.
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