Extendicare Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 5, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Standard Care, Inc. First Quarter 2020 3 Analyst Conference Call. As a reminder, all participants are in a listen only mode and the conference is being recorded.

Operator

2. After the presentation, there will be an opportunity to ask questions. 2. 2. I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations.

Operator

Please go ahead. 2.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Extendicare's Q1 2023 results conference call. 2. With me today are Extendicare's President and CEO, Michael Greer and our Senior Vice President and CFO, David Bacon. 2.

Speaker 1

Q1 results were disseminated yesterday and are available on our website. The audio webcast of today's call 2nd quarter. The call is also available on our website along with an accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available later 2. This afternoon until May 19.

Speaker 1

The replay numbers and passcodes have been provided in our press release and an archived recording of 2. This call will also be made available on our website. Before we get started, please be reminded that today's call may include forward looking statements. 2. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.

Speaker 1

We have identified 2 factors in our public filings with the securities regulators and suggest that you refer to those filings. With that, I'll turn the call over to 2.

Speaker 2

Thank you, Jillian, and good morning. I'm pleased to report that in the Q1 we 2. We saw improvement in our financial results and growth in our key operating metrics across all our business segments. 2. This was supported by continued easing of pandemic impacts and a significant recovery of 2022 Unfunded COVID Costs.

Speaker 2

I'll begin our presentation today with an update on COVID-nineteen funding 2 and its impact on our operations. While outbreaks were prevalent throughout the winter, they dropped 2nd quarter. Accordingly, the Ontario government updated COVID-nineteen guidance 2 for long term care homes to phase out many prevention and containment measures at the end of the quarter, including the elimination 2 of biweekly testing of asymptomatic staff and relaxing of certain screening and physical distancing requirements. 2. With clear signs that the pandemic is transitioning to endemic status, we've been able to resume the more vibrant 2 social interaction in our homes that our residents and their families have missed for so long.

Speaker 2

These changes mean pandemic related costs 2. Although some infection control protocols adopted during the pandemic have become permanent, 2. The April 1 step up in direct care funding in Ontario will address any related costs. 2. With fewer outbreaks, occupancy has continued to recover, including improvement in our preferred accommodation occupancy.

Speaker 2

2. Accordingly, both the Ontario and Manitoba governments announced the end of pandemic funding effective April 1st. 2. Funding related to prior period COVID-nineteen costs once again drove volatility in our financial results this quarter. 2.

Speaker 2

We recognized $13,100,000 in prevention and containment funding related to costs incurred last year, 2, resulting in a net recovery of COVID costs of $12,100,000 in the quarter. We are grateful for the funding we have received from 2. We do not anticipate any further material 2nd recovery of COVID-nineteen costs. Turning to our strategic transactions on Slide 4, 2. We continue to advance through the regulatory approval process in Ontario and Manitoba in connection with our previously announced 2 strategic partnerships with Acxiom and Revera.

Speaker 2

We anticipate being able to close both transactions in Q3 2. This will mark a key milestone for Extendicare as we transition to a less capital intensive growth model 2. In anticipation of regulatory approval, 2. We have advanced a comprehensive integration plan, so we are ready to effect a smooth transition soon after approval is received. 2.

Speaker 2

These transactions are consistent with our strategy to leverage our deep expertise and scale 2 to drive higher margin growth in our Managed Services segment. This capital efficient business model will provide Extendicare 2 with greater flexibility to allocate capital to growth initiatives, including acquisitions. 2. The aggregate consideration to be paid on closing of these transactions remains an estimated $70,000,000 2. Though we were not active under our NCIB in Q1, we purchased an additional 520,800 2 common shares for cancellation subsequent to the quarter end.

Speaker 2

Since the bid launched in June 2022, 2. We've returned $38,400,000 to shareholders. Moving to Slide 5, 2. We continue to pursue our redevelopment agenda with the launch of our 4th redevelopment project in Peterborough. 2.

Speaker 2

The new 256 Bed Long Term Care Home will replace the existing 172 Class C Home 2 that we currently operate in that community. Total investment in the project is estimated to be 96 $600,000 and construction is scheduled to commence in the Q2 with projected completion in Q4 2025. 2. Together with our Sudbury, Kingston and Stittsville projects, the 4 homes will comprise 960 new beds, 2, replacing 834 Class C beds. We continue to work to break ground on up to 3 further projects this year to take advantage of the time limited capital funding supplement $35 per diem available in Ontario.

Speaker 2

Tendered construction costs and receipt of applicable regulatory approvals 2 will largely determine whether and when they might proceed. We are also working to advance the balance of our 20 project portfolio 2. To ensure they are construction ready in anticipation of capital funding that may be made available 2 in the future. Turning to operational highlights on Slide 6. 2.

Speaker 2

Performance improved in each of our business segments in the Q1. Outbreaks in our homes eased throughout the quarter, 2, enabling us to improve long term care occupancy by 60 basis points over Q4 2022. 2. Underlying the significant recovery of unfunded COVID costs in the Q1, we continue to experience staffing challenges 2 and inflationary pressures that impact our operating costs. The Ontario government increased 2.

Speaker 2

Long term care funding by 2% effective April 1, lagging the inflationary cost increases of the past few years that are weighing on long term care margins. We continue to work with other sector participants 2 and the government to identify solutions and align funding to better address continued cost pressures. 2. In our Home Health Care segment, we experienced a 2% sequential quarterly increase in our average daily volumes, 2, representing growth of 6.1% from the prior year period. While labor market shortages remain our most 2.

Speaker 2

Our retention and recruiting programs have enabled our return to growth. 2. We are experiencing strong demand for our services, driven by demographic trends 2 and Health Services backlog which developed over the course of the pandemic. Accordingly, in its March budget, 2. The Ontario government announced that it's accelerating a $569,000,000 investment in home health care funding, including 300,000,000 2.

Speaker 2

Allocated for contract rate increases to help stabilize staffing in the sector. Although we are not yet 2. Clear on the exact details and timing of this rate increase, the funding will help us to meet the growing needs for home health services across the province. 2. Finally, in our Managed Services segment, we continue to experience strong growth in our SGP customer base, which 2.

Speaker 2

With that, I'll turn it over to our CFO, David Bacon to discuss our Q1 results in more detail. 2. Thanks, Michael.

Speaker 3

I'll start by reviewing our consolidated results for the quarter followed by some financial highlights of our business segments to $324,700,000 This increase was driven primarily by long term care flow through funding enhancements and prior period funding, Home healthcare rate increases and a 6.1% increase in average daily volumes and managed services growth. 2. This was partially offset by lower COVID funding of $25,900,000 Our Q1 NOI improved by $11,600,000 $44,600,000 with an NOI margin of 13.7% compared to 10.8% in the prior year. 2. This was driven primarily by $13,100,000 in COVID funding related to 2022 that was recognized in Q1, $3,700,000 in long term care funding enhancements and occupancy improvements.

Speaker 3

Home healthcare volume growth and billing rate increases and growth in our managed 2. This was partially offset by higher operating costs across our segments. 2. Q1 adjusted EBITDA improved by $10,800,000 to $31,000,000 reflecting the improvement in NOI, partially offset by higher Administrative costs of $800,000 As a reminder, we report one time costs related to the strategic transformation of the company 2. In connection with the Rivera and Acxiom transactions as a separate line item and other expense, which is excluded from AFFO and EBITDA.

Speaker 3

2. This quarter we reported $3,600,000 in strategic transformation costs. AFFO per basic share $0.24 in Q1, up from $0.14 in the prior year, driven by the improvement in earnings and the impact of our share buyback activity in 2022. 2. Excluding the year over year impact of the net COVID cost recoveries and prior period LTC funding, our AFFO per basic share increased by $3 from Q1 of 2022.

Speaker 3

We expect the volatility in our quarterly results will stabilize going forward, 2, given the end of pandemic funding, easing of COVID protocols and the next step up in direct care hours in Ontario as of April 1. 2. Our payout ratio for the quarter was 49%. Excluding the COVID recovery and out of period LTC funding, 2. Our payout ratio remains elevated.

Speaker 3

However, the estimated annualized AFFO per share contribution from the pending Rivera and Acxiom transactions 2 and our NCIB activity will improve our payout ratio going forward. Turning to our individual business segments 2, beginning with long term care. We saw revenue increase by 3.9% in Q1, driven by funding enhancements and timing of flow through spending, 2 improvements in occupancy and prior period funding adjustments. NOI increased by $7,200,000 in Q1 to 33,800,000 2, representing NOI margins of 16.3%. Excluding an increase in COVID recoveries of 1,300,000 2.

Speaker 3

NOI increased by $5,900,000 which included the benefit of $3,700,000 in prior period adjustments, funding enhancements and improvements in occupancy, partially offset by higher operating costs. 2. Occupancy in our long term care homes continues to recover as the number of COVID-nineteen outbreaks declined throughout the quarter. 2. In addition, flow through care envelope funding for ward style beds no longer in service is being phased out over the next 2 years starting April 1.

Speaker 3

However, 100 percent of the accommodation envelope funding will be preserved through this phase out period, which will provide support to our NOI for those homes impacted. 2. As a reminder, we closed 185 ward style beds in our Ontario homes, 2. Of which 84 will be reopened as private and semi private rooms in the redevelopment projects currently under construction 2 and scheduled to open between Q3 of 2023 and the Q1 of 2024. The net impact of the 2 2.

Speaker 3

On April 1, funding increase Michael mentioned earlier and the phase out of the flow through funding for the closed ward beds represents 2. Incremental annual revenue of approximately $4,000,000 of which $2,200,000 is accommodation envelope funding. 2. Turning now to our Home Health Care segment. Revenue was up $8,800,000 or 8.9 percent in Q1, 2, driven by growth in average daily volumes, billing rate increases and additional funding to support the permanent $3 per hour PSW wage enhancement increased by $3,700,000 to $6,400,000 with an NOI margin of 6%, up 50 basis points from the prior year 2, when adjusted for COVID impacts.

Speaker 3

The improvement in NOI reflects these higher volumes and rate increases, 2, partially offset by higher wages and benefits, travel and technology costs, including the costs associated with our recruitment and retention and training programs 2 to address our staffing capacity challenges. On a sequential basis, our average daily volumes increased 2% due to the continued strong demand 2 and modest easing of our staffing capacity challenges. Excluding the impact of our net COVID costs, 2. Our NOI margin declined 60 basis points from Q4 2022 due to seasonal impacts. Turning now to Slide 11, 2.

Speaker 3

And we continue to see strong growth in our managed services segment comprised of our Extendicare Assist and SGP Group Purchasing divisions. 2. SGP now supports over 111,000 third party beds as of the end of Q1, 2, up 13.1 percent from a year ago and up 1.9% sequentially. Q1 revenue increased by 33 22.4 percent to $9,700,000 largely due to timing and mix of assist consulting services in the quarter and growth in our SGP clients served, 2, which resulted in a $700,000 increase in NOI compared to the prior year. Higher costs related to the mix of assist consulting services 2nd quarter contributed to the lower NOI margins.

Speaker 3

Finally, turning to our financial position. Extendicare Care remains well positioned with strong liquidity, including cash and cash equivalents of $105,000,000 and access to a further $77,000,000 in undrawn credit facilities at the end of the quarter. In addition, we have $107,000,000 in undrawn construction financing available 2 to fund the balance of the costs associated with our ongoing redevelopment projects. Our maturity profile remains strong with only modest

Operator

2. Debt maturities coming due prior

Speaker 3

to 2025. Our liquidity position continues to bide us with the flexibility to allocate capital strategically, 2, whether in respect of our long term care redevelopment program, the pending Rivera transaction or other potential acquisitions and capital structure initiatives. 2. As Michael mentioned, with the common shares we acquired subsequent to the Q1 under our NCIB, we have now acquired a total of approximately 5 point 5,000,000 shares at an average cost of $6.94 Our current issuer bid provides us with the ability 2 to purchase up to 7,800,000 common shares through to the end of Q2 of 2023 and any decisions regarding purchases continue to be based on market conditions, share price and the outlook of our capital needs. With that, I'll pass the 2.

Speaker 3

I'll now

Operator

turn the call back to Michael for his closing remarks.

Speaker 2

Thanks, David. With growth returning across all business segments 2 and clear signs that the pandemic is transitioning to endemic status, we have a renewed sense of optimism. 2. We emerge from the pandemic with a clear strategy that leverages our scale and expertise 2 to deliver high quality long term care and home healthcare services using a less capital intensive and higher margin business model. 2.

Speaker 2

The Acxiom and Rivera transactions, breaking ground on our Peterborough redevelopment project and ongoing investments to 2. Expand home healthcare staffing capacity are all important steps in growing our ability to meet the needs 2. I'd be remiss if I did not take this opportunity to extend my deep gratitude 2. To all of the caregivers and team members across our organization whose steadfast efforts over the last 3 years 2 have helped keep our residents and clients safe during this trying time. I thank them for their continued commitment to 2.

Speaker 2

And lastly, a reminder that our first in person annual shareholders meeting since 2019 2 will be held on May 29 in Toronto. Further details are available on our website and we hope to see you there. 2. With that, we'd be happy to take any questions that you may have. Operator?

Operator

We will now begin the question and answer session. 2. Question. 2nd question comes from Jonathan Kelcher from TD Please go ahead.

Speaker 4

Thanks. Good morning. Just starting with the Your development program, I guess the project submission period to get the extra $35 a day in Ontario is done and it sounds You guys got 3 more projects in on time for that. Are there talks of Similar programs going forward for the Ontario government.

Speaker 2

So 2. Jonathan, the government has announced their intent to 2 Fund 30,000 new beds and 28,000 replacement beds over the next 5 to 7 years. 2. So they've announced this 1st year and we're working to get 2. Further projects through that program.

Speaker 2

As far as what happens after this year's program, we're There's been no announcement about that. So we're waiting to hear what that might be. But just looking at what's happened in the past, the government seems to be assessing 2. The market and inflation and construction costs and setting It's a funding program on that basis. So while we expect that there will be Further programs coming after this one, we really don't have any information, any Detailed information as to what that might look like.

Speaker 4

Okay. And do you think 2. Like the 2% increase on other accommodation, I guess, is lower than everybody in the industry was hoping for. And 2. Do you think that has any relation to the amount of commitment the government's making For the 30,000 new beds and 28,000 replacement beds?

Speaker 2

2. I'm not sure how they would be related. 2. So I'm not sure Jonathan what your question is that because they're putting a lot into capital, 2. They haven't put as much into operating.

Speaker 2

I'm not sure exactly what you mean by that.

Speaker 4

Like the 2% seems 2. Kind of low to me. And I'm just curious as to some of the reasons why. And is that something that the ministry understands? And well, do you think they'll make it up over time or how are those discussions going?

Speaker 4

2.

Speaker 2

Well, we're continuing to share with the government what our inflationary pressures 2. Taken with the capital investments and the flow through funding that they're providing, 2. They've invested a lot in long term care over the last few years. It's really 2. An historic level of investment compared to what we've seen the last few decades.

Speaker 2

2. I think there's some fine tuning about how they're allocating funding that still needs to be done. And that's the nature of the conversations that we're having as to 2. As to what costs might be funded in the occupancy envelope versus Some of the other care envelopes. So I'm not sure how those talks will play out, but 2.

Speaker 2

Certainly, we're having conversations with government to make them aware. I mean, again, looking at history over the long term, 2. The government has a very good track record of funding long term care appropriately to cover costs. 2. So we do expect that in the long term that this will sort itself.

Speaker 2

2.

Speaker 4

Okay. And then just lastly on your development projects, 2. I guess there's if my math's right, you've got about $163,000,000 to spend and maybe $107,000,000 left under I'm drawing construction financing, sort of think of the balance there is the sort of equity that you need to contribute to the projects. Is that a fair way to look at it? 2.

Speaker 3

Yes, I'd say on the 3 that are already in flight, Jonathan, those are all of our equity is in those projects. So the cost For the balance to complete those through the opening is through the credit facilities that are undrawn. On the Peterborough project that's starting, 2. Yes, we will have an equity commitment to fund initially before we get into financing on that project. 2.

Speaker 3

So as we've disclosed that adjusted sort of cost outlook on that project is around 96,000,000 2. So if you think of our equity needs on that for construction in the 15% range, that would be the equity commitment over, I'd say the next couple of quarters until we get into financing.

Speaker 4

Okay. So you don't have a construction Financing in place on that yet?

Speaker 3

No, not yet. Okay. Yes, correct.

Speaker 4

Okay. That's it for me. I'll turn it back. Thanks.

Operator

Concludes the question and answer session. 2. The next question comes from Paul Woolley from National Bank Financial. I'm sorry for the confusion. Please go ahead.

Speaker 5

2. Hey, good morning.

Speaker 4

Good morning, Tal. Just to 2.

Speaker 5

Go back to the funding question on LTC. I think one of the other publicly traded peers that sort of said 10% was kind of the number that they thought needed to be achieved in the fullness of time To sort of balance out the inflationary impacts borne on the accommodation side, 2. Does that sort of scan with your perspective?

Speaker 3

Yes, I think you're Just to confirm, you're talking there about what type of increase they were thinking we would need to recover from the inflation of recent years? I think that's the 10% you're referring to?

Speaker 5

Yes.

Speaker 3

Yes. I think that there's as Mike mentioned, a lot of Going on with the ministry and the other operators around this that if you did go back over the last 3 years, We had a 9% to 10% gap between the rate increases we did experience and 2. And what we've been receiving. So there is a gap there that is about the size of the gap of the last 3 years. And as Mike said, over the fullness of time and long term historically, the government has gotten Those costs, the funding in line with the costs, but there is a gap given the high inflation we've experienced in the last 2, 3 years.

Speaker 3

So We continue to talk to the government with our partners about other ways to address that shortfall. But there is going to be some short term pressure here on margins as we work through that. Okay.

Speaker 5

And then my understanding is Coming out of, I believe it was the budgetary process that the government assembled, I think it's something called like a technical table or something like that to sort of study this issue Further, can you just talk a little bit more about that and what that might mean going forward?

Speaker 2

2. Well, I think one of the things that's been a strength of the sector for many years is the open dialogue With the government and sharing what our cost pressures are so that the government understands them and Chen set funding policy appropriately. And when you look at 2. What's been happening the last few years, although the inflationary increases have been below inflation, 2. The funding in our flow through envelopes to move us to the 4 hours of care, which was announced a few years ago, It's actually quite large.

Speaker 2

It's close to 30% over a 3 to 4 year period. So 2. There is a balance problem in terms of the way the various envelopes are funded. 2. And so the technical table is being assembled to look at that and look at whether there's some rebalancing in the various funding elements that has 2.

Speaker 2

To happen to make sure that the homes can operate appropriately into the future. 3. So my view is that the government has the funding 2. At the macro level, largely right. There's some technical details that are important in terms of which envelopes it's flowing through And the technical table will set its mind to looking at that and working to sort it out.

Speaker 5

2. And do you have an idea of the timeframe for that?

Speaker 2

I think the intent is to get this Done in the next few months so that in the fall timeframe some adjustments could be made. But 2. That's a guess on my part. It's not anything that I've seen published anywhere.

Speaker 5

Okay. And then just on the

Speaker 3

long term

Speaker 5

care NOI this quarter, so you report close to 30 $4,000,000 If I'm sitting on the outside trying to work that down to kind of a normalized number, I would deduct the $12,000,000 in, that are in prior pandemic net of the pandemic costs. And then I think there was a $6,000,000 wage settlement and then I think another prior period reduction or prior period expense reimbursement Tobey, when I take all that out, I get to a number sort of in the low $15,000,000 range. Is that kind of like what we should be thinking about as sort of the working number On a go forward basis once all these programs start to fall off?

Speaker 3

Yes, I think that's the right sort of 2. View of Q1 and the adjustments in terms of launching off point for the year, are 2. The rate increases that we did get kick in April, the 2%. We're still waiting for Manitoba and Alberta's decisions on rate increases and they generally kick in, in April as well. And there is always some seasonal Pressure on margins in Q1 just with timing of non rate increases and some Employee benefits type costs that kind of restart in the Q1.

Speaker 3

So 8.5 is the right number. You've got your Adjustments right there for Q1 and that's the starting point, but we are going to have some we're still waiting for the rest of the rate increases From the west to come in on top of the 2% we got in Ontario.

Speaker 5

Okay. And then as we To get closer to the closing of these Rivera and Acxiom transactions, like are we expecting all of these It's a bunch of different transactions. Will all of these close? Are they submitted for review like kind of like together and you expect them to all kind of close at the 2nd time or do they potentially happen in stages?

Speaker 2

Well, we've submitted them all Together, to be considered together. At this point, 2. We're hopeful that we're going to see approval in Q3, But we can't be sure until the government finishes its process. So we know that there's Activity going on in evaluating our applications. We know that all of them are proceeding through in both provinces.

Speaker 2

2. So but until the government renders its decision, we can't be sure Of all of them coming through together, but we are hopeful that they will.

Speaker 5

2. Okay. And the look, 2. You're obviously scaling up like your management platform for this and you highlighted in the initial announcement, I think it's about $17,000,000 in annualized revenue We're picking up Rivera's Class C beds. You'll learn some more management fees on the Class A joint venture with Rivera.

Speaker 5

Should we anticipate all of that falling to the bottom line? Like can you do that in the context of your Current staff level or is there do you need to like add some bodies to take on these management

Speaker 3

Yes. No, there will be costs with that and infrastructure related. If you think about it taking on the management 2. The 56 Homes. There is going to be some investment in the support services for that.

Speaker 3

So I think when we talked 2. When we first announced around the $17,000,000 in sort of revenue and management fees, we did talk also that 2. Sort of NOI contribution from that would be in the 40%, 45% range, which Which is what we spoke about at the time of the announcement. So there is a cost to support an incremental 56 homes for sure.

Speaker 5

Okay. And 2. The Acxiom development JV, is the plan then to shift 2. The stuff you already have sort of in process into those JVs? Or is it going to be on future

Speaker 3

Projects only. No, we have already committed to selling into the joint venture the 3 projects 2. That are under construction and we'd be working towards moving Peterborough in as well. The desired 2. Outcome and the way we operate going forward on redevelopment would be to as projects get to Construction ready tendered stage full approval, we'd be looking to move those into the JV and have them actually being constructed Within the joint venture as opposed to having those on our own balance sheet through construction.

Speaker 3

The goal is to have them Constructed within the JV going forward.

Speaker 5

2. And so like we would expect like will those types of transactions happen fairly quickly at Q3 or is that something that comes in the time thereafter? 2. I was trying to understand like how the overall change we should be expecting by the end of Q3 once all this stuff closes. 2.

Speaker 3

Yes, I think as Mike mentioned, I mean, we've submitted approving these all as a package and we're working toward 2. Our ideal would be that everything comes together within Q3. So 2. The view would be that the JV is the first four development projects would go into the 2. JV in Q3 and we'd also close on the management contract and the existing 15% interest in the Acxiom The existing Acxiom JV as well.

Speaker 3

All of that ideally would come together within the same quarter.

Speaker 5

Okay, got it. All right. Thanks very much, gentlemen. I appreciate

Operator

2. This concludes the question and answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks.

Speaker 1

2. Thank you, operator. That concludes our call for today. This presentation is available on our website as are the call in numbers for an 2 type recording. Thank you again for joining us and please don't hesitate to give us a call if you have any questions.

Speaker 1

Thank

Operator

2. This concludes the conference call. 2. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Extendicare Q1 2023
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