Sienna Senior Living's (LWSCF) CEO Lois Cormack on Q4 2016 Results - Earnings Call Transcript

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Sienna Senior Living, Inc. (OTCPK:LWSCF) Q4 2016 Earnings Call February 17, 2017 11:00 AM ET

Executives

Lois Cormack - President & CEO

Nitin Jain - EVP & CFO

Analysts

Jonathan Kelcher - TD Securities

Troy McLean - BMO Capital Markets

Pammi Bir - Scotia Capital

Michael Smith - RBC Capital Markets

Yash Sankpal - CIBC

Operator

Ladies and gentlemen, welcome to Sienna Senior Living Inc's Q4 2016 Conference Call. Today's call is hosted by Lois Cormack, President and CEO; and Nitin Jain, Executive Vice President and CFO.

Please be aware that certain information discussed today is forward-looking. Actual results could differ materially. The Company does not undertake any duty to update any forward-looking statements. Please refer to the forward-looking information and risk factor section in the Company's public filing 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.

Today's call is being recorded and a replay will be available. Instructions for accessing the call are posted on the Company's website, siennaliving.ca and details are provided in the Company's news release. The Company has posted slides which accompanies the host's remarks on the Company's website under Events and Presentations.

With that, I will now turn the call over to Ms. Cormack, please go ahead Ms. Cormack.

Lois Cormack

Thank you, Elena. Good morning, everyone and thank you for joining us on our call this morning. With me is Nitin Jain, our Chief Financial Officer. I am going to begin by reviewing some of the key highlights and Nitin will then discuss our financial results in more detail.

So starting on Slide 4, we are very pleased to report yet another strong quarter of financial and operating results for Sienna. During the quarter, we continue to execute on our key priorities, strengthening our operating platform, building our brand recognition, maintaining a strong balance sheet and growing the Company.

For Q4 '16 same-property NOI for Sienna's retirement residences was up 7.1% over the same period of last year and same property long-term care NOI remains stable, contributing to an overall same property NOI growth of 1.8% interest the quarter and 3.8% increase year-to-date. As seen on Slide 5 total NOI was up 24.5% for the fourth quarter of 2016 compared to the same period last year as we continue to execute on our growth strategy. Sienna's diluted OFFO per share also grew by 4.6% for the quarter and was up 9.7% year-to-date.

Now moving to Slide 7, we continue to experience strong occupancy at Sienna's retirement residences, finishing the quarter with overall occupancy of 94.5%. This is up 90 basis points over the fourth quarter of last year.

Additionally, total NOI for the retirement residences was up 34% over the same period last year related to the continued growth and expansion of the retirement portfolio. Sienna's strong same property and total performance are a result of the strong operating platform and the brands that we have built in every community that we serve. This focus has also resulted in some key accomplishments in 2016 that I'm pleased to share with you today.

Moving to Slide 8, Sienna was awarded a three-year accreditation award for our care community achieving an outstanding 99% of the rigorous quality standards. This award reflects our commitment to improving the residents' experience, the strength of our operations and the expertise of Sienna's team. Some of our care communities and team members were also the recipient of provincial honors recently, including Bloomington Cove Care Community which was named the Resident-Centered Home of the Year.

We also continued to deliver on our commitment to maintaining a strong balance sheet and increasing liquidity. Subsequent to the quarter, we merged two credit lines and increased the size of the combined lines while reducing the interest rate, providing additional liquidity to execute on our growth strategy. In addition to this, we executed on our strategic priority of growing the Company by completing the acquisition of eight high quality residences in British Columbia as noted on Slide 10.

The new residences have now been fully integrated into Sienna's portfolio and are posting strong operating results including occupancy of 95% at the required retirement residences. We continue our focus on strengthening our local brand and operation throughout British Columbia. I will now turn the call over to Nitin for further details on our financial results.

Nitin Jain

Thank you, Lois, and good morning everyone. I will start on Slide 12. Net operating income for the fourth quarter of 2016 was 27.4 million representing an increase of 24.5% or 5.4 million compared to same period last year. Same property NOI from continuing operations increased by 1.8% or 0.4 million over the same period last year.

Sienna's same property long-term care NOI for Q4 2016 was in line with the same period last year at 16.2 million. Our retirement division achieved strong organic growth generating same property NOI of 5.7 million a growth of 7.1% or 0.4 million over Q4 2015, driven by rate increases and occupancy gains.

In the fourth quarter of 2016, diluted operating funds from operations per share was up 4.6% or CAD0.01 and for the full year 2016 diluted operating funds from operations per share was up CAD0.11 or 9.4%, and diluted adjusted funds from operations per share for the full year was up CAD0.9 or 7.1%. These increases are attributable to the strong year-over-year operating results and the acquisitions completed in 2016.

Sienna's 2016 maintenance capital expenditure was 4.8 million, which is approximately 1 percentage of our revenue. As previously advised for 2017 year, we expect to have a similar spend on a percentage of revenue basis. For the full year 2016, Sienna's administrative expenses were 18 million or 3.6% of revenue from continuing operations. But the continued investment in Sienna's operating platform, we expect a similar expenditure in 2017 based on the percentage of revenue basis.

Now, moving to a strong financial position on Slide 14, at the end of Q4 2016, Sienna's debt-to-gross book value was 51.5% which is 410 basis points below fourth quarter 2015 metrics. The decline is a result of the execution of Sienna's debt strategy. Included in Sienna debt is approximately $45 million of convertible debentures, which on a fully diluted basis the Company debt to gross book value would be 48.4%. We continue to expect execute on Sienna's debt strategy of refinancing properties with the goal of increase in liquidity, creating a tenure debt ladder and creating unencumbered assets for future flexibility and growth; our interest coverage ratio for 2016 increased by 0.2 turns from 3.3 in 2015 to 3.5 for 2016.

Moving to Slide 15, in the fourth quarter, Sienna created unencumbered asset for future growth opportunities by up financing one property and reducing the interest rate from 5.18% to 3.64%. Subsequent to the year end, the Company also consolidated twofold in credit lines back by three retirement communities to increase the combined lines from 80 million to 105 million and further reduced Sienna's interest expense from approximately BA plus 187 basis points to BA plus 175 basis points, a reduction of approximately 12 basis points. These changes are in line with our debt strategy to maintain a blend of fixed and variable debt, so we can take advantage of the current interest rate environment allowing us liquidity and flexibility.

With these refinancing, Sienna's total liquidity is approximately 118 million, an increase of 58 million or 100% over Q4 2015. Sienna continues to win a healthy financial position, and we remain committed to maintaining a strong balance sheet and liquidity.

With that, I would like to turn the call back to Lois.

Lois Cormack

Thank you, Nitin. I am pleased to share that Sienna was named one of Canada's fastest growing company by Canadian business and profit magazine with five-year revenue growth of the 102%. Since our IPO in 2010, Sienna has experienced strong growth, growing our assets by 102%, our market cap by 314% and our total return was 184%. Looking ahead the 2017 year, we expect to continue to progress that we have made on the growth's strategy. With respect towards great organic growth or expecting moderate growth in the retirement portfolio to our focus on growing revenue with enhanced care services and rate increases.

We also expect consistent performance from our long-term care in Baltic division, with the Baltic division being annualized for the full-year of ownership. In terms of development, Sienna is now exploring opportunities for expansion at certain retirement resident locations where we have excess lands. We anticipate finalizing some of these plans later this year. Sienna is also seeking approval from provincial and regional health authority for some our initial redevelopment projects in Keswick and the North Bay, and we will provide more details on these projects once they are approved.

The future projects for redevelopments, we intend to develop seniors living campuses, providing a range of independent assistance and long-term care services; and we anticipate that these projects will be primarily greenfield. In terms of acquisition, we expect to continue to be strategic and disciplined in our approach to growing Sienna's portfolio in Canada. We are also looking forward to completing our previously announced acquisition of our interest in Glenmore Lodge in BC when it opens later this month. We are confident that with these strategies, we will continue to deliver long-term shareholder value.

With that, I want to thank you for your participation on the call today and Nitin and I will be pleased to answer your questions.

Question-and-Answer Session

Operator

Thank you. We will now take question from the telephone line. [Operator Instructions] The first question is from Jonathan Kelcher with TD Securities. Please go ahead.

Jonathan Kelcher

First on the Glenmore Lodge, I think Lois you just said that it's scheduled to open later this month? Is that correct?

Lois Cormack

Yes.

Jonathan Kelcher

And then you guys can buy it within 90 days. Do you have a day just for modeling purpose when you think that would come in?

Nitin Jain

I would model, Jonathan, somewhere in the first quarter. So, our view is we'll close within 90 days when it opens, and it's very shortly it will be opening. So, I would model it by the end of Q1, we would very sure on Glenmore Lodge, but more to be announced and we actually make that final decision.

Jonathan Kelcher

Okay, so around the end of March.

Nitin Jain

That's correct. I would just call it Q1 for now.

Jonathan Kelcher

Okay. And then just on the Baltic portfolio. If I look at the NOI that came in Q4, is that -- would that be sort of a good -- and Lois, I think you said you expect it to be steady. Would that be a good quarter to sort of look at? Or is there some seasonality?

Nitin Jain

Yes, Q4 is a good quarter to look at because it would have Nicola Lodge for the full quarter as well. So, if you take that and analyze for the full year that will be good way of looking at it; and as Lois commented in her comments, we expect stable consistent performance from Ontario Long Term Care and from the Baltic portfolio.

Jonathan Kelcher

Right. Now, is there much seasonality in the Baltic portfolio?

Lois Cormack

There is, Jonathan. I mean similar to others in the winters, there is higher utility expenses and so on. Occupancy is pretty stable, not a lot of variability either in Ontario Long Term Care or Baltic with respect to occupancy, but there is some variation and expenses in terms of timing.

Operator

Thank you. The next question is from Troy McLean with BMO Capital Markets. Please go ahead.

Troy McLean

Just curious on the, with the retirement home portfolio largely full, would you -- would be a look for rate growth in 2017?

Lois Cormack

Good morning, Troy. Yes, so we would expect to have average occupancy around where we've ended the year, so call it average occupancy around 94%. So from that, we would expect to kind of let's call it low-single digits mid-single digits growth for retirement.

Troy McLean

And then, given the strong fundamentals in the space, you've seen a lot of new supply come online in the -- get underway in the retirement home sector in either your major markets in Ontario or BC?

Lois Cormack

There's some, it's very local. It's kind of -- it’s very market specific. There are a few projects in BC. There's actually one besides one of our community Pacifica. We don't -- aren't sure at this point when it is opening, we expect it probably sometime or could be late this year. So, it’s really sort of market specific Troy that's probably the only one that we see that would be kind of local to where we are.

Troy McLean

And the one year, Pacifica, is that, the market, does it need the extra supply or do you think that the new addition would put any pressure on either occupancy or rates?

Lois Cormack

It could, I mean usually what we see when new products comes into any market is that there're usually some movements of current residents and so until usually what happens in the market is that until that the new product becomes somewhat stabilized and the market is absorbed, there is some impact on occupancy typically, that wouldn't be unusual.

Operator

Thank you. The next question is from Pammi Bir with Scotia Capital. Please go ahead.

Pammi Bir

Can you maybe provide some color around your comments for the retirement home intensification plan in any sense of cost and perhaps how many suites or which sites you're looking at?

Lois Cormack

Yes, thank you Pammi. Yes, so we do -- I think we've indicated before that we do have excess land in a number of locations. So, we're just really in the process of identifying which projects and we would be looking to finalize some of those plans, later this year and would be sharing those details as we confirm what makes sense. Pammi.

Pammi Bir

And most that's the -- in that sort of geared toward Ontario or some of the DC assets?

Lois Cormack

We have opportunity in both locations.

Pammi Bir

Any early sense of the potential spending on that and the costs?

Nitin Jain

Pammi, most of them would be additions to existing building; and as Lois pointed out, we're in the process of doing it. Let's say, it’s 40 to 50 suites at any given location, just using round numbers, let's say it's a CAD10 million development between construction financing and available cash, we have. In 2016, we generated on 17 million of free cash flow. So, we can easily add to that from a funding perspective.

Pammi Bir

And Lois, just given presumably these some of your higher occupied assets the recent on these ones they are complete. You're looking at basically less than a year or?

Lois Cormack

Again, it depends on the market and that’s some of the analysis that we are doing, Pammi.

Pammi Bir

And maybe just going back to the long-term care redevelopment plans. Can you just maybe provide or extend some other color for the one cost that is underway or to retrofit? And then in terms of total spending, you expect to incur for this year. On that project another as well, if you do getting approved?

Lois Cormack

Yes, this year given where we are at now sort of the cost isn’t.

Nitin Jain

Yes, for this year the cost is not material. There is a long process between acquiring the land and getting the right approvals. So, as Lois talked about between both the provincial and the local health authorities, so we will do that. But the one retrofit that we talked about, the cost would be in the range of $5 million and eventually would be added to the property level financing there. So, we will fund that in the short-term, and when it's fully constructed, we will just add it to the property level mortgage. So, it's not material for this year and then there could be some additional cost, if you buy some land. But again, we are looking for lands in secondary, tertiary markets where we are. So, we don’t expect any major expenditure on land either.

Pammi Bir

And maybe just turning to the acquisition market. What can you provide in terms of color there? Are there any similar opportunities similar to what you saw in the Baltic type transactions, some of the bigger deals? Or are you seeing more one-offs opportunities at this stage, and if you can comment on cap rates as well?

Lois Cormack

So, Pammi, just to your question was around acquisition?

Pammi Bir

Yes.

Lois Cormack

Yes, I think there is always opportunity for consolidation. We don’t see anything huge looming, but I think there is always opportunity for consolidation. In terms of cap rate, we think of our own retirement and cap rate is depending on the area sub-seven, and we believe that our long-term care, A, on Ontario was around cap rate seven.

Pammi Bir

So, your class A, good class A long-term care assets certainly that’s sub-seven or seven?

Lois Cormack

Seven, depending on the market.

Pammi Bir

And then just one last one, Nitin, just looking at the taxes, they did pick up this quarter I guess even after the tax loss carry forward adjustment. Do you have a sense of what sort of run rate to work with their like realized it obviously depends on, on the growth of the business, but if can you provide some color that would help?

Nitin Jain

Sure. You know, our cash taxes for this year would be roughly in the CAD6 to CAD6.3 million range, and from next year depending on the growth in NOI for each one of the individual models, I think you should just model whatever falls to the bottom line at that on 26.5%. So, we don’t expect a tax rate to change. So, depending on that different growth that you could be modeling, I would just add that to the current tax portion. And again on the growth perspective, as Lois mentioned in her comments, we are expecting low-single digits in retirement, stable growth in both Baltic and long-term care divisions. And we gave you guidance on both G&A and maintenance capital expenditure.

Operator

Thank you. [Operator Instructions] The next question is from Michael Smith with RBC Capital Markets. Please go ahead.

Michael Smith

Just wondering about the award that The Aspire to Excellent Award, three-year accreditation from CARF [ph]. Quite frankly, I'm not that familiar with that kind of the award. Is it unique or is it difficult to get like how unique is it for you to get that kind of award?

Lois Cormack

Yes, so CARF is an independent third-party accreditation body. There are the couple of these bodies. Many long-term care homes go through the process. It is a significant award to achieve 99% of the standards and have a three-year award is significant. Can't really comment on others what kind of awards they get, but for the most part many operators do seek this sort of the go through an accreditation process through one of the bodies.

But for us, it is a significant accomplishment given the size of our portfolio and the ability across all of these communities to reach that's what is a significant accomplishment. We believe really speaking not only but the quality, but also the resident satisfaction, the expertise of our team and the operating platform. These are all the things that they look at it. It's a very extensive review that has external surveyor onsite for about three weeks.

Michael Smith

And just on LTC in Ontario. I guess there is an election that's required to come in before June 2018, and it seems like provincial government has been a little bit more selective -- but have you noticed any change in tone in terms of LTC regulations, the rebuilding of the class Cs, anything like that?

Lois Cormack

We think our experience with Ministry is that they are anxious to get some projects approach. It's a bit of -- it's just a challenging process because residents are currently living in the home, so is it's much more complicated than as I'd say were just new beds or additional beds to RFPs being issued. So, it is the complicated process. There is now regional authorities as well as provincial authorities, so I would say that there is very much an interest in getting projects approved, it really is just the very complicated program.

Michael Smith

And is that different than it was six months ago?

Lois Cormack

I wouldn't say that. I think the Ministry has probably got their team in place now and is anxious to get approvals going. We found them extremely engaged and helpful.

Michael Smith

Okay. And finally, on retirement, I mean when you're at the Board level and you're sort of looking ahead three to five years. What is your -- do you have a goal of what you would like to have in terms of the split between LTC and credit pay retirement?

Nitin Jain

Our mandate, Michael, is to continue grow private pay and with the Baltic acquisition or the BC acquisition, we did that. So, we'll continue to grow that at currently 25 to 75, so our goal will be to continue to grow that 25 wherever it makes sense, it has to be strategic.

Michael Smith

So just as opportunities arise, basically?

Nitin Jain

That's correct.

Operator

Thank you. The next question is from Yash Sankpal with CIBC. Please go ahead.

Yash Sankpal

Just one question on this commentary you have in the MD&A about the redevelopment projects and looks like you guys are going to focus mainly on greenfield projects and not on retrofits. Just wondering why you guys have decided to go that way?

Lois Cormack

That's just, yes, that's just the virtue of the properties that we have because the residents are currently living in the home and where the home is located on the site at each case, it either requires a decamping of the residents in order to build on that site or a new site. So, in most cases, we would need to find a new site, which as Nitin said we're looking at now and build a new home and then move the residents in and then come back and we have the ability to repurpose the existing site.

Yash Sankpal

Wouldn't that need more capital than retrofitting the properties, just from a cost perspective?

Lois Cormack

No, it's pretty much the same, Yash. I mean in each case, if there are -- if we did have properties that we could actually do a retrofit, it would be involving significant displacement to the residents. So, we've looked at that and in most cases it's really not feasible and the cost is comparable to greenfield and more efficient to do a greenfield.

Operator

Thank you. This concludes the question-and-answer session. I would now like to turn the meeting back over to Ms. Cormack.

Lois Cormack

Thank you, Elena. Thank you very much everyone for joining our call today and have a great long weekend.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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