Chartwell Retirement Residences (CWSRF) CEO Brent Binions on Q1 2019 Results - Earnings Call Transcript

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About: Chartwell Retirement Residences (CWSRF)
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Earning Call Audio

Chartwell Retirement Residences (OTC:CWSRF) Q1 2019 Earnings Conference Call May 10, 2019 10:00 AM ET

Company Participants

Brent Binions - President & Chief Executive Officer

Karen Sullivan - Chief Operating Officer

Vlad Volodarski - Chief Financial Officer and Chief Investment Officer

Conference Call Participants

Jonathan Kelcher - TD Securities

Brendon Abrams - Canaccord

Tal Woolley - National Bank

Pammi Bir - Scotiabank

Operator

Good morning ladies and gentlemen and welcome to today's Chartwell Retirement Residences Q1 2019 Financial Results Call. Following the formal comments, we will hold a question-and-answer session. Please be advised that this call is being recorded.

I'd now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residences. Please go ahead sir.

Brent Binions

Thank you. Good morning and thank you for joining us today. There's a slide presentation to accompany this conference 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 our MD&A and other security 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.

Our operating teams delivered strong financial results in the first quarter of 2019. Despite headwinds from the competitive pressures in some of our markets, our same-property portfolio adjusted NOI grew by 4.7% with FFO per unit growing by 10%.

To-date in 2019, we've opened three newly developed retirement residences in Burnaby, B.C., Edmonton, Alberta, and Toronto, Ontario adding 574 suites to our operating property portfolio as you can see on slide 3. There are four additional openings scheduled for 2019 including three projects with our partners Signature Living and Batimo.

Our financial position remains strong as you could see on Slide 4. At March 31, 2019, our liquidity which includes cash and available borrowing capacity under our credit facilities amounted to $369 million. We continue to build the value of our unencumbered asset pool which has grown to 38 properties valued at $785 million. Our debt leverage and coverage ratios also remain strong with interest coverage ratio at 3.3 and net debt-to-adjusted EBITDA ratio of 8.0.

Importantly, in May, we received approval from our syndicate lenders to extend maturities of our $400 million credit facilities to May 29, 2024 improving the stability of our financing structures and allowing for an even better staggered maturity profile of our debt portfolio. We continue to access low-cost CMHC financing on favorable terms and expect to complete a number of new and top-up mortgage financings this year.

We continue to build value in our real estate portfolio through portfolio and asset management programs development of new properties and opportunistic acquisitions as shown on slide 5. These value-add activities are supported by extensive industry and market research and by rigorous risk management practices.

Work continues on our development pipeline of 1,169 suites with four projects with 402 suites in construction and five projects with 767 suites in predevelopment. These projects are expected to generate meaningful development returns and allow us to grow our property portfolio with new efficient state-of-the-art residences. We continue to add future projects to our development pipeline.

In addition we have options to acquire close to 2,800 additional suites in Québec through our partnership with Batimo. And subject -- subsequent to the quarter end we entered into an agreement to sell one non-core property in Ontario.

I'd now like to turn it over to Karen Sullivan, our Chief Operating Officer to talk about some operational initiatives that she and her team are working on. Karen?

Karen Sullivan

Thanks Brent. Turning to slide 6, same-store permanent move-ins were up quarter-over-quarter by 8% in Q1 and move-outs were down by 9%. The move-out trend was in part due to a better outbreak season. We believe that providing enhanced education and awareness as well as the vaccine being a better match resulted in a significant reduction in outbreaks.

Not only were there less outbreaks, but more importantly, the duration of outbreaks was much shorter and there was also a decline in residents effected with symptoms as well as hospitalization. They also had a 9.2% increase in employee immunization rate.

Our Spring Open House was held on April 7th and was very successful with a 15% increase in visitors compared to the Open House held in the fall of 2018. We also saw a 10% increase in prospects attending. On the Monday following the Open House, our retirement living consultants followed up with these prospects during a national sales flex.

Turning to slide 7, as part of our sales strategy, we are also focused on having our retirement living consultants develop business-to-business relationships with community influencers such as realtors financial planners and other community influences who are -- who interact with local seniors.

Although, in some cases this is a longer-term strategy, we're confident that over time, it will lead to additional initial contacts and eventually permanent move-ins.

We're beginning to make strides with some of our recruitment strategies, including increasing awareness of job placement opportunities for candidates with a variety of profiles, including students, recent graduates and new Canadians.

Job fairs were held in various residences and communities across the country in Q1, resulting in candidate hires, an increased awareness of job opportunities in these markets. We are also piloting a hire for fit train for skill program, to educate PSWs, in select Québec city, homes where recruitment challenges are most difficult.

I will now turn it over to, Vlad to discuss our Q1 2019 financial performance.

Vlad Volodarski

Thanks Karen. As shown on slide 8 for Q1 2019, FFO was $41.7 million or $0.22 per unit, compared to $42.8 million or $0.20 per unit, in Q1 2018. The following items impacted the change in FFO.

Higher adjusted, NOI, of $8 million consisting of a $3.2 million increase in same-property adjusted, NOI, and a $4.8 million increase in contributions from acquisitions and development.

Higher interest income of $0.2 million and other items combined of $0.1 million, but partially offset by higher finance costs of $3 million, lower management fee revenue of $0.8 million and higher G&A expenses of $0.2 million.

For Q1 2019, FFO was reduced by $1.9 million of lease-up losses. And imputed cost of debt related to our development project. Comparable number for Q1 2018 was $0.8 million. Turning to our operating platform results as shown on slide 9.

Our Ontario Retirement platform same-property adjusted NOI increased $1.9 million or 5.4%, as rental rate increases in line with competitive market conditions, higher ancillary revenues.

And lower marketing expenses were partially offset by lower occupancies and higher communication and repairs and maintenance costs. In Q1 2019, combined same-property occupancy was 85.9% compared to 87.6% in Q1 2018.

In Q1 2019, our Western Canada same-property adjusted NOI, increased $0.1 million or 1%, primarily due to rental rate increases in line with competitive market conditions, partially offset by lower occupancies and higher staffing costs as shown on slide 12.

Q1 2019 occupancy was 95.3%, compared to 96.3% in the first quarter of 2018. On slide 11, you'll see our Quebec platform same-property adjusted NOI decreased marginally primarily due to a lower occupancies and higher staffing costs partially offset by rental rate increases in line with competitive market conditions.

Combined same-property occupancy was 91.5%, compared to Q1 2018 occupancy of 92.3%. On slide 12, you'll see our Canadian Long Term Care platform. Same-property adjusted NOI increased $1.2 million or 20.1% in Q1 2019, primarily due to higher preferred accommodation ancillary revenues and timing of certain expenses.

Weighted average occupancies in the same-property portfolio were 98.3% in Q1 2019 compared to 97.7% in Q1 2018.

I will now turn the call back to Brent, to wrap-up.

Brent Binions

Thanks, Vlad. I'm confident that Chartwell is on the right path. With our unique Chartwell culture, winning business strategy, and strong corporate governance we are poised to take advantage of the upcoming growth in demand for retirement living in Canada.

We have begun our journey towards our 2023 goals, with a number of specific initiatives in the areas of customer experience and employee engagement which undoubtedly will help us to continue to improve our scores in these two critical areas.

You may have also seen the announcement yesterday that, I will be retiring as President and CEO of Chartwell in March of 2020. Until then, I will remain in control. But my congratulations to Vlad, who will be the new CEO when I leave.

I'm confident that the Board has made the right choice. And I will be working closely with them to ensure a smooth transition.

Thank you for your time and attention this morning, we'll now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] We will now move to the first question.

Jonathan Kelcher

Thanks. Jonathan Kelcher with TD Securities. First, congrats Brent and Vlad on the retirement and promotion.

Brent Binions

Thank you.

Jonathan Kelcher

In terms of question, occupancy that's -- the data you give is weighted for the quarter, is that correct?

Vlad Volodarski

Yeah.

Jonathan Kelcher

Okay. How did that trend in -- during the quarter? And more importantly, how is it trending thus far in Q2?

Vlad Volodarski

So, in the quarter, it's trending down that's consistent with the trends that we're seeing every year where our sort of fastest lease of season is end of the year. And then in Q1 there is usually more attrition than move-ins. So, this year has not been different than other years other than it's been better in terms of volume. The decreases were lower this year than they were before.

And maybe I'll pass it over to Karen to talk about the trends now.

Karen Sullivan

Yeah. So, we're still seeing occupancy issues in some -- three areas that are tough across the country. Ottawa, Durham and Calgary are the -- certainly the tougher markets.

Jonathan Kelcher

Okay. So, it sounds like the decline in year-over-year occupancy is probably more due to supply than it is due to -- I guess a tougher outbreak of flu season?

Karen Sullivan

Yeah. Yeah. And we were really pleased though to see in Q1 the permanent move-ins were up as I said by 8% and then the permanent move-outs were down by 9%. And as I said much better outbreak season.

Jonathan Kelcher

Okay. Do you guys do a lot or much in a way of short-term stays?

Karen Sullivan

In Ontario we do. Not so much in Québec and Western Canada, but in Ontario, yeah.

Jonathan Kelcher

Is that something you can see increasing with any new programs that the Ontario government might bring out?

Karen Sullivan

We will participate in the consultations that they're starting to have to determine whether there's any value in that, but we certainly prefer the private pay. So it would depend on the markets and it would definitely depend on the details of those programs.

Jonathan Kelcher

Okay. Thanks. I will turn it back.

Operator

And we'll move to the next question.

Brendon Abrams

Hi. It’s Brendon Abrams here from Canaccord.

Brent Binions

Good morning.

Brendon Abrams

Good morning. First of all, congrats, both Brent on your retirement and Vlad on the appointment. I guess just on that topic, Vlad, obviously you've been at Chartwell for a long time and obviously have worked closely with Brent for many of those years. I guess a few questions. Do you expect any major philosophical differences, I suppose in terms of operations or capital allocations with the business? Or do you think pretty much going to be the status quo of what we've seen for the last few years?

Vlad Volodarski

As you mentioned I've been with the company now for over 15 years and working with Brent very closely on all of these points. And one thing that I can say definitively at this point is I'm 100% confident that the company is on the right path. And all the progress that was made under Brent's leadership is right and we're moving into the right direction. So, I do not expect that there'll be any significant changes in direction or capital allocation decisions or where we're focusing our efforts and our investments.

Brendon Abrams

Okay. Makes sense. And just turning over to the operations. Clearly, there's some competitive pressures in certain markets, but at the same time, you're able to grow rental rate across the portfolio. Can you just talk a little bit about kind of that dynamic where there is some pressure on occupancy, but at the same time you have been able to grow rent?

Vlad Volodarski

Yeah. Sure. The occupancy pressures Karen has described pretty clearly for you. In terms of the rental rates, we continue to add new services to our residents. We continue to get better on how we price units based on desirability of those units in the buildings, and that certainly helps to overcome some of the occupancy declines and continue to grow our revenue and deliver same-property NOI growth. And we're not done yet. We continue down this path and we will get better as the time goes on. And we are though optimistic that the occupancy will improve later this year and going forward.

Brendon Abrams

Great. And I guess that leads to my next question in terms of last quarter with the announcement of the 2023 objective to be a 95% stabilized occupancy. You're just under 91% today. What do you see really changing or triggering kind of that catalyst of that upward move over the next few years? Is it an acceleration in demand based on kind of population projections? Is it kind of a curtailment of future supply maybe due to construction costs? Some combination? Or what takes us from 91% to 95% over the next few years?

Brent Binions

Yes. It's Brent. Our strongly held view is that highly engaged employees will deliver a great customer experience and that if our customers are getting a great experience they will talk about that. 70% of everybody who moves in our home has a reference from somebody to move there. And if all the references in your community are saying this is the best place to be, people will come and you'll get a bigger share of the clientele that is looking for a place to go than your competitors.

And so our investments in this company are focused on what will drive employee engagement and what will drive customer satisfaction. We're only interested in very engaged employees and highly satisfied customers -- residents in our homes. So it's a focus on that, it's the investment in that that we believe will drive occupancy. Layer in the fact that demographics are getting stronger every single year over the next five years quite significantly, so we think that will give us a lift as well.

And on the issue of new supply it is running at a higher rate than perhaps any of us would like, but this -- right now. But the world is cyclical. I think you'll see that ease off a little bit. Construction costs have already started to slow it down. I think you'll see more slowing down. As people open up homes and don't lease them up very fast that's what will also put the brakes on new supply. If there's too much new supply they'll slow -- in certain cases, it'll slow pickup of occupancy in those homes, and so it will naturally slow down. We're pretty confident that that's the case. And between all three of those items I think we will hit our target.

Brendon Abrams

Great. And I guess just talking about lease-up with respect to the three you've completed year-to-date anywhere between 20% to 40% occupied currently. What are your expectations in terms of timing of those of -- to where you get stabilized occupancy?

Vlad Volodarski

Yeah. We've been consistently better in underwriting, more conservative lease-ups. So for these properties, it's between two and three years is what we have depending on which property it is. They're a little behind of where we expected them to be at the present time, but we see very strong traffic and trust in these properties. Certainly our sales and marketing efforts are paying off, and we expect that we'll catch up and will lease these properties as planned.

Brendon Abrams

Okay. And then just last question for me before I turn it over, just some qualification. On the preconstruction pipeline the five projects referenced there, are those projects that will go ahead? I mean in terms of they've gotten -- they have the green light? Or are they still subject to market conditions, construction costs, projections, et cetera?

Vlad Volodarski

They're still subject to construction costs projections, and they continue to be evaluated on that basis. I expect that some of them will proceed this year and some of them may be delayed. But at the present time, we're actively evaluating all of these projects and assessing their liability and risks associated with them.

Brendon Abrams

Okay. That’s helpful. Thank you.

Operator

And we'll take our next question. Please go ahead.

Tal Woolley

Hi. Good morning. It's Tal Woolley from National Bank. How are you?

Vlad Volodarski

Good.

Tal Woolley

Good. I just wanted to talk quickly about the occupancy versus same-property NOI that we saw this quarter. What are sort of the operational or cost levers that you can pull when you do to sort of protect your NOI when occupancy slides like it does -- like it did this quarter?

Vlad Volodarski

Well, we will not do anything that would impact services that we deliver to our residents or impact the long-term performance of the property. What we do from time to time is we adjust staffing levels depending on the volume of the residents that we're serving in the properties. But generally there's -- we will not be cutting on our resi maintenance expenses. We'll not be investing in our staff developments and things like that that we would stop doing because occupancy declines a little bit. So those levers we -- are available, but we're not really actively using them because we really think it impacts long-term prospects of the property.

Tal Woolley

Okay. And then at The Sumach, given that it's a new-to-market product, is there anything we should be thinking about just in terms of the variability or seasonality of this business versus a traditional retirement facility?

Vlad Volodarski

Yes. I mean there's less services that people are buying right upfront when they enter these properties. So there's less staff in the beginning because the services are not being required at the beginning. And then as people continue to buy services, there's going to be more staff and more investments in that area. Other than that I cannot think of anything that would be different in terms of the seasonality or performance of this property from the regular retirement home.

Tal Woolley

And do you have an estimate of what you think the stabilized cap rate for that building would look like going forward?

Vlad Volodarski

Well our expectation is that the cap rate on costs or construction costs is going to be 7.2% once the building stabilizes. The market cap rate for this building, it's really the question to the appraiser. My view is it's supposed to be a lot lower than it is on the regular retirement home because it's truly an apartment building with services being offered on à la carte basis. But because this model is relatively new in Ontario, it remains to be seen how the market will view those.

Tal Woolley

Okay. And then just lastly, you rolled out the internal FFO per unit metric I think in Q4 with the Q4 release, just sort of noting between Q4 and Q1 not much of a divergence in the sort of growth rate between the internal FFO and your regular FFO number. Can you just talk a bit about why you wanted to put this out and to have us start looking at this? And is there a stretch where you think that those growth rates actually might start to diverge more materially?

Vlad Volodarski

So FFO is impacted because of the active development pipeline that we have. FFO is impacted by lease-up losses and imputed costs of debt. Once the project opens and even sometimes before it opens, we incur marketing costs and other operating costs both in the building. Under the prior Canadian GAAP, those costs would've been capitalized as costs of development. Under IFRS, these costs are required to be expense as incurred. And so FFO has the impact of these costs that vary from time to time given the volume of the development activities and timing of when we open these sale centers.

And so because of that variability, we didn't want -- and IFFO is based for compensation -- as a compensation metric for our senior team and actually most people across the company. And so we did not want to create -- or the Board didn't want to create an incentive for us to purposely delay development projects, so we don't incur these lease-up losses and imputed cost of capital that impact our FFO for the wrong reasons.

And so the IFFO metric excludes -- this is probably the main difference between FFO and IFFO. It's the exclusion of the lease-up losses than vary from the volume of our development activities, so that we're on incentives to continue to develop and make long-term decisions for the company as opposed to being more driven to the short-term decisions.

Tal Woolley

Okay. That’s great. Thank you very much.

Operator

[Operator Instructions] We'll move to the next in the queue.

Pammi Bir

Hey, good morning. It's Pammi from Scotia.

Brent Binions

Good morning.

Pammi Bir

Vlad, just -- good morning. I’m just curious on The Sumach. Is that running ahead or behind in terms of your leasing expectations?

Vlad Volodarski

It is slightly behind, Pammi.

Pammi Bir

Okay. And then just can you comment on what range of rents you're achieving there say comparable to I guess the neighboring residential multifamily type product?

Vlad Volodarski

Our rates are approximately $600 to $800 a month more than the comparable apartment buildings rates in Toronto and that is because we have a lot more infrastructure for the residents to use common areas, they have security systems and we have more staff at our home to address their needs even before they start buying additional services from us. And so for that our rates are higher than regular apartment rates.

Pammi Bir

And so what is the range of the all-in rate?

Vlad Volodarski

I think right now one bedroom would be in about $2,800 area and two bedrooms will be in $3,400, $3,500 range.

Pammi Bir

Got it. Maybe just switching gears, looking at the long-term care segment. I realize, obviously, it's a smaller piece of the business. But can you maybe just expand on what drove that sizeable jump? Was that good fall you related? Or you do mention some ancillary revenues as well.

Vlad Volodarski

It's -- there's certainly an impact -- timing impact of the Easter and the rest of it is coming from higher ancillary revenues and some timing of other smaller expenses.

Brent Binions

There's a third piece on that, Pammi. This year, the government announcement is late; we actually don't have it yet. Usually we get it back in January on how funding works. And so in prior year, we knew exactly what we would get. We'd budget for it across 12 months. And we might overspend at the beginning of the year because we knew we were getting it back at the end of the year because we knew what our funding was. And so on prior years, we might have a little bit of overspending in Q1, which we don't have this year because we don't know what our funding is. So we have to be more cautious, so we don't have any overspending in Q1. So a small piece of it is that as well.

Pammi Bir

Got it. That's helpful. Maybe just on the ancillary revenues, what exactly do these relate to?

Vlad Volodarski

That’s additional services that are being provided by ourselves or our partners to the residents in the homes that are allowed under the legislation.

Pammi Bir

Okay. And so these are privately funded by residents?

Vlad Volodarski

Sorry, Pammi. I didn't get that.

Pammi Bir

Sorry. These are -- these would be paid directly by residents, the ancillary revenues?

Brent Binions

Not all of them, some of them.

Pammi Bir

Okay. Maybe just in Ontario, is it fair to think of the stabilized occupancy there? Is that going to be closer to maybe the mid to high 80% range rather than say low 90% or getting to low 90% over the next couple of years?

Vlad Volodarski

Sorry, we didn't get it again, Pammi. I think you're breaking up.

Brent Binions

You're a bit -- you broke up. You're a bit garbled. Can you just ask the question again Pammi?

Pammi Bir

Sure. Is that a little better?

Brent Binions

No. It's worse.

Karen Sullivan

No.

Pammi Bir

Okay. Let me try. Is that better.

Brent Binions

Slightly. Okay, let's try again then. What's your question?

Pammi Bir

Yeah. Just in Ontario, looking at some of the new supply pressures, is it fair to think of the stabilized occupancy? Is that maybe closer to the mid to high 80% range instead of maybe, we call it low 90% over the next couple of years?

Brent Binions

Yeah. Well, our expectation is certainly to continue to grow occupancy and we have overall target of 95% in five years. It's actually applicable across the country. We expect that this growth is going to be slower in the early year of this five-year cycle and faster at the back end of it. So going from 85% to 95% is a long way. And we're going to start making movement towards that the direction, but it is going to be slower in the first few year of our five-year strategy.

Pammi Bir

Great. I will turn it back. Thanks very much.

Brent Binions

Okay.

Operator

And actually at this time, it looks like we have no further questions from the audience. I'll turn the floor back to Mr. Binions for any additional remarks.

Brent Binions

Okay. That wraps up today's conference call. Thanks again to everybody for joining us. As always if you have any further questions please do not hesitate to give us a call. Thank you and goodbye.

Operator

Once again, ladies and gentlemen that concludes our call for today. Thanks for joining us. You may now disconnect.