Extendicare Q2 2024 Earnings Call Transcript

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August 13, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to Extendicare, Inc. 2nd Quarter 2024 Analyst Conference Call. As a reminder, all participants are in a listen only mode.

Operator

The conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Extendicare's 2024 Second Quarter Results Conference Call. With me today are Extendicare's President and CEO, Michael Greer and Senior Vice President and CFO, David Bacon. Our Q2 results were released yesterday and are available on our website as is a live audio webcast of today's call along with an accompanying slide presentation. An archived recording will also be available on our website following the call.

Speaker 1

As well, replay numbers and passcodes have been provided in our press release to access an archived recording of the call until August 30. Before we get started, please be reminded that today's call may include forward looking statements and non GAAP and other financial measures. Such forward looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors as well as details of non GAAP measures as well as details of non GAAP and other financial measures 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 Michael.

Speaker 2

Thank you, Jillian, and good morning. Yesterday, we reported very strong second quarter results, highlighting the growth and earnings potential of all three of our operating segments. Each one contributed to significant growth in net operating income and margins. Our financial performance this quarter benefited from the confluence of 4 factors that contribute to the potential of our operating 1st, our investments in technology to create a scalable back office to support volume growth and margin expansion 2nd, our transformative shift to a less capital intensive, higher margin business model focused on managed services through our JV with Acxiom. 3rd is a strong demand for our services as we emerge from the pandemic, reinforced by underlying demographic trends.

Speaker 2

And finally, government funding increases that address cumulative cost inflation to restore home care and long term care to their historical margin profiles. Consequently, revenue and operating margins were up substantially across the board. In long term care, Q2 occupancy levels increased 60 basis points to 97.8%, marking the return to the historical levels required for full funding and underscoring the characteristic stability of this business. You can also see the impact of the catch up long term care rate increases in Ontario coming through. In Home Healthcare, our strong volume growth contributed to outpace demographic trends, with average daily volumes increasing 10.8% from the prior year.

Speaker 2

Rate increases and a highly scalable back office supported a return to double digit margins. Additionally, Easter landed in the Q1 in 2024, which reduced the cost of 1 paid holiday this quarter compared to Q2 last year. As our operations normalize following the pandemic, we are seeing the return of seasonal patterns. Historically, Q2 volumes tend to be strong, followed by seasonal softness in the summer months from vacations and closure of school based home care programs. In our Managed Services segment, we also saw strong results supported by the Revera and Acxiom transactions which closed last year.

Speaker 2

Extendicare Assist beds increased by 64% from the prior year period and the number of third party and joint venture beds served by SGP increased by 22.1%, driven by both organic growth and the strategic transactions. As a result, both managed services revenue and NOI more than doubled in Q2 from the same period last year. NOI continues to be weighted toward our services segments, with managed services and home healthcare comprising 56% of consolidated NOI in the quarter. We expect the proportion of NOI coming from these segments to continue to increase as we execute on our strategy. Note also that 20 24 rate increases for long term care in the Western provinces and home health care in Ontario have yet to be announced.

Speaker 2

These would be effective retroactively to April 1, 2024, further offsetting cost inflation and enabling continued service expansion. Turning to Slide 4, each of our growth pillars contributes to improved results. Our services segments are growing organically, adding significant cash flow with minimal capital needs. On the redevelopment front, we have 5 homes under construction with 3 more being ready to start construction later this year. We also improved the balance sheet in Q2, adding $25,400,000 in liquidity from the sale of our 256 Bed Orleans project into the Acxiom JV as well as completing the sale of the legacy seabed home in Sudbury following the opening of the new 256 Bed Countryside home in the joint venture at the end of Q1.

Speaker 2

Although our payout ratio in the quarter was 43%, our trailing 12 month payout ratio was 63% after removing one time funding received over the past year. The adjusted trailing 12 month ratio is a better indication of the underlying cash generation potential of the business. Coupled with our strong liquidity and improved credit metrics, we are well positioned to execute on our growth agenda, including our redevelopment program in partnership with Acxiom. Slide 5 provides more detail on our redevelopment progress. We are focused on opening our 192 Bed Kingston Home and 256 Bed Stittsville Home, both held in the JV.

Speaker 2

Labor shortages experienced by the general contractors have delayed these openings into Q4. We anticipate the sale of the vacated Kingston seabed home will close shortly thereafter for estimated proceeds of $3,800,000 Our partnership with Acxiom allows us to recycle the capital generated from the sale of legacy C Class homes no longer in service to fund our 15% interest in new redevelopment projects that we pursue through the joint venture. During construction of the new homes in the JV, our Managed Services segment earns development fees, followed by management fees to operate the homes once they open. We currently have five homes under construction in Ontario in the joint ventures with Acxiom, totaling 12.80 new beds, which will replace 11.21 Class C beds that will be decommissioned. In 2024, we're targeting to begin construction on 3 new projects comprised of 576 beds, replacing 382 seabeds.

Speaker 2

These projects are in advanced planning stages and will proceed provided they meet the requisite financial conditions, including confirmation of final construction costs, interest rates and applicable regulatory approvals. Work also continues to advance an additional 12 redevelopment projects that are in our planning pipeline for future years. At this point, I will turn it over to David Bacon to discuss our results in more detail.

Speaker 3

Thanks, Michael. I'll start by reviewing our consolidated results for the quarter. Our Q2 results were impacted by favorable out of period items and we have summarized these in the appendix to the presentation. Given these impacts, when I speak to the year over year variances, I'll include reference in some metrics to our results excluding the impact of these out of period items. On a reported basis, our consolidated Q2 revenue increased by 13.3% to 348,500,000 dollars This was driven primarily by LTC funding increases and improved occupancy levels, growth in home health care average daily volumes and billing rates and growth in our managed services.

Speaker 3

Our Q2 NOI increased by $24,300,000 with a margin of 15.2% compared to a margin of 9.3% in the prior year. Excluding out of period LTC funding of $4,100,000 recognized in the quarter, NOI improved by $20,200,000 reflecting growth across all our segments, offset partially by higher operating costs. Our reported adjusted EBITDA for Q2 increased by $23,800,000 Excluding the impact of out of period LTC funding, adjusted EBITDA increased by $19,700,000 reflecting the improvement in adjusted NOI, partially offset by modestly higher administrative costs. Our AFFO per basic share in Q2 was $0.27 compared with $0.11 in the same period last year. And on an adjusted basis, AFFO increased year over year by $0.13 to $0.24 per share in Q2.

Speaker 3

Turning to our individual segments, starting the long term care. Excluding the impact of out of period funding of $4,100,000 recognized in the quarter and COVID funding received in Q2 of 2023, our revenue increased by $11,300,000 driven by funding increases and improved occupancy. NOI excluding the out of period funding recognized in the quarter increased by $7,600,000 driven by increases in revenue as noted, partially offset by higher operating costs. The corresponding NOI margins increased to 11.3% in the quarter from 7.8% last year. Our long term care results were strong this quarter even without the benefit of the one time funding.

Speaker 3

The 11.5% increase in Ontario other accommodation funding has largely restart our NOI and together with the additional Ontario flow through funding has helped alleviate the cumulative impact of higher operating costs. We've also made considerable progress realigning our post pandemic cost structure by reducing our dependency on agency staff. Our long term care operations saw lower year over year utility and maintenance costs this quarter and benefited from the timing of the Easter holiday. As a result, our year to date results provide a more indicative view of our NOI margins coming out of Q2. In addition, LTC funding increases for both Alberta and Manitoba for April 1 have yet to be announced.

Speaker 3

These pending funding increases and continued focus on operating cost efficiencies, primarily in our Western Canadian LTC operations, will provide further opportunities to improve our LTC segment NOI. Turning now to our Home Health Care segment. Revenue in the Q2 increased by $20,000,000 or 17.2 percent, driven by the 10.8% year over year growth in our volumes, supported by billing rate increases. NOI increased by $7,100,000 to $17,100,000 with an NOI margin of 12.6%, an increase of 400 basis points over the same quarter last year. The strong growth in NOI was driven by higher volumes and rate increases.

Speaker 3

And as Michael mentioned, that benefited from the impact of 1 less statutory holiday due to the timing of Easter in 2024, which reduced holiday pay this quarter by approximately $1,400,000 ParaMed's volume growth continues to outpace demographic trends. In recent years, the pent up demand for services and improvements in our recruiting and retention programs have driven our volume recovery and lessened the seasonality that has historically characterized our Home Care segment, including effectively muting the seasonal softness typically experienced in the summer months. But as our capacity comes in line with demand, we do expect the historical season patterns to return. Turning finally to our Managed Services segment, revenue and NOI more than doubled this quarter as the business continues to reflect the addition of managed homes and new SGP clients from last year's Rivera and Acxiom transactions alongside organic growth in SGP. Our revenue increased to $18,000,000 and our NOI to $10,100,000 This quarter's NOI margin was 56.1%, an increase of 4 60 basis points over the same period last year.

Speaker 3

Our year to date NOI margin is 53.5%, which is in line with the expectations for this segment of between 50% and 55%. Finally, turning to our financial position. We ended the quarter with a strong liquidity position with cash of $136,400,000 and access to a further $72,000,000 in our credit facilities. Our liquidity position was bolstered during the quarter with the cash proceeds of approximately $25,400,000 from our redevelopment related transactions. We are well positioned, thanks in part to our strong operating results in the quarter and our solid debt metrics and liquidity.

Speaker 3

The added flexibility from our strategic transactions have us well positioned as we continue to assess our options related to the convertible debenture that matures in April of 2025, and we expect to be able to provide an update on this before the end of the year. In June of this year, the company renewed its normal course issuer bid to purchase up to 7,100,000 shares for cancellation beginning July 2, 2024 and will be in place until July 1, 2025. Decisions regarding the quantity and timing of purchases continue to be based on market conditions and our outlook for capital. With that, I'll pass the call back to Michael for his closing remarks.

Speaker 2

Thanks, David. Our second quarter results demonstrate the growth We can deliver this given our strategic focus, strong financial foundation and commitment to operational excellence. Our strong operating results show we can grow to meet the needs of seniors while driving shareholder value. Over the past several years, we have invested in our technology platform, formed a joint venture with an infrastructure partner to drive long term care redevelopment, invested in a formidable recruiting and retraining operation and built a sales team to sell our managed services across the country. These strategic pillars position us well in a growing fragmented market underpinned by strong demographic trends.

Speaker 2

Our results are a testament to the continued efforts of the leadership team and the dedication of our valued team members. As always, I am deeply grateful for their ongoing commitment to our values and for the compassionate care they deliver each and every day. With that, we're very happy to take any questions that you might have.

Operator

Thank The first question comes from Jonathan Kelcher with TD Cowen. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 4

First question, just I see you applied for some extensions for the Class C, some of the Class C properties. Do you anticipate any issues in getting those? Is that fairly normal

Speaker 2

for us? Yes. We don't anticipate any issues there, Jonathan. We haven't received those license extensions yet. To our knowledge, nobody has in the sector, but we don't anticipate any issues there.

Speaker 4

Okay. And then on the Sudbury asset sale, who bought that or what was the buyer profile for that property?

Speaker 3

Yes. Jonathan, that was bought by a local investor sort of philanthropist in the area. Our understanding is that they intend to repurpose the building for student housing in the Sudbury market. So the building will the old building will stay and be refurbished and repurposed as student housing is what we understand the intent

Speaker 4

is. Okay. And then just switching to operations on the long term care side, it looks like you're back to free COVID and all that stuff. What sort of margins do you think that business can run on a stabilized basis?

Speaker 3

Yes. I think, Jonathan, on that, a couple of thoughts. And you heard in our comments, and I think a couple of things. The year to date results, I think, in that segment are the starting point to answer that question. So our margins are running at 9.7% sorry, 9.6% when you normalize year to date.

Speaker 3

I want to remind everybody that the effect that's built up over the last few years and now fully in effect with now having moved to 4 hours of care. That additional incremental flow through revenue probably equates to between 130 basis points, 140 basis points impact to our margins from a percentage point of view. So I think just keep that in mind. Our pre COVID levels, we would run 11.5% to 12%, but I think you have to think of those now more like in the 10.5% to 11% range with the effect of that flow through. So I think we're at 9.6% to date.

Speaker 3

Our absolute NOI year to date is about $37,000,000 So if you annualize that, we're sort of $74,000,000 $5,000,000 which is very close to where we were in 2019 on an absolute dollar basis. So we still think we have room to improve in terms of there's still some work we're doing in Western Canada and LTC. We made some great strides in the last couple of quarters on that. We don't have our rate increases yet in the West for April 1. Those hopefully come shortly.

Speaker 3

And so those will help as well. So I think you put all that into the blender and you're looking at our margin should be returning back, I'd say, to the 10.5% to 11% range, which would just would be take us back to historical norms. And then hopefully, we fall back into a pattern where rate increases are keeping better pace with inflation as we go ahead. So we can get back to that steady reliability that we were used to before where 2%, 2.5% a year growth in NOI keeping pace with inflation.

Speaker 4

Okay. That's very helpful. And then on the Home Health Care side, I think, Michael, you talked a little bit about seasonality returning to that. And you guys have done, I guess, year to date just over 3% growth in each of Q1 and Q2. What how should we think about that for the back half of the year?

Speaker 4

And secondly, do you think margins in that business segment continue to jump back to maybe not historical levels, but close to it?

Speaker 2

Yes. I think on the volume front, we've been seeing for the last couple of years now the 10% year over year, 11% year over year growth. That's definitely higher than demographic trends and that's because we're catching up to the care gap that opened up during the pandemic. So there's still a bit of a gap there and we're still working to close that. So I think we've still got a couple of quarters where our year over year growth is going to be in that same zone.

Speaker 2

But then we expect that that growth rate will ease off, approaching more of the just underlying demographic. So call it 5%, 4%, 5%, something in that neighborhood. So we're not we don't have absolute clarity as to when that will happen, as to when our growth pace will ease off. So, we'll be watching for that. And at that point, we expect it to settle back.

Speaker 2

As far as margins are concerned, I think Q2 traditionally is our best quarter from a margin perspective just because of volumes and costs and when rate increases kick in and that sort of thing. So, that said, I think that we're now squarely into double digit margins in Home Care and we'll stay there. I think David's comment about the year to date numbers being a better indication of our kind of underlying run rate in the sector is probably where I would suggest you look. And I do think that we still have room for gradual margin improvement going into future years. And of course, we don't have the rate increase for the province of Ontario yet for 2024.

Speaker 2

So, we're expecting that anytime. So that isn't factored into the results yet either.

Speaker 4

Okay. Do you think that rate increase will be a huge catch up like LTC or will it be more are you expecting more inflation type?

Speaker 2

No, I think it will be more in line with our labor costs. It will be more in line with there will be more than CPI, but it will be in line with our labor costs, I think. So, I think that this quarter is reflecting the catch up that really came in late in Q4 and we reported in Q1. So, I think the catch up is there now.

Speaker 4

Okay. That's helpful.

Operator

The next question comes from Pammi Bir with RBC Capital Markets. Please go ahead.

Speaker 5

Thanks. Hi, everyone. Just wanted to clarify some of the commentary in Long Term Care. There was some one time income in there, I guess, from Alberta and Manitoba. But was there any sort of timing difference in terms of the spending there in the Q2 figure?

Speaker 3

Yes. I think, Bobby, in Q2, a couple of things. I mean, we called out the stat holiday, which does have a bit of an impact between Q1 and Q2, looking sequentially as well as year over year. We did make some good improvements on costs, reducing agency costs quite significantly in the quarter year over year and sequentially. There is a bit of movement between Q1 and Q2 around the funding envelopes mostly to do with the statutory holiday.

Speaker 3

So the $900 impact that we call out is more the think of that as the OA type impact is largely historically the timing of stat days as it relates to the flow through envelopes is generally not seen. This is the first time since 2019 where Easter changed. So there is a little bit of movement just a bit over $1,000,000 between Q1 and Q2 between the envelopes just because the timing of Easter hitting in Q1 would have pushed a handful of homes potentially into an overspend position. When you get into Q2 and the rate increases kick in for April, there's an ability to absorb some of that. So there is a little bit of movement between Q1, Q2 that hasn't happened for 5 years since Easter was last flipped between Q1 and Q2.

Speaker 3

But a lot of our improvement is agency reduction and just general ops improvement in terms of other focused on non wage costs as well around supplies and R and M and utilities. Some of that is timing and some of that is just seasonality and utilities.

Speaker 5

That's helpful. I guess just maybe coming back to the agency commentary, how much were you able to reduce the agency costs? Like was there much change between the quarters? Or is it just more on a year over year basis that's where the biggest impact was noticed?

Speaker 3

Yes. It's both actually. I think we reduced our agency spend just about $1,500,000 between Q1 and Q2 and closer to 3,000,000 dollars on a year over year basis. So it's been a very it's been a big focus in the West, mostly in the West. I think in Ontario, we're in good shape on that.

Speaker 3

The West where has been had some holdouts in certain regions in the West where it's been tougher to displace the agency, but we've been putting a lot of recruiting programs in place to target those homes in those areas that where the agencies have taken a bit of a stronghold during COVID.

Speaker 5

Okay, got it. And then just coming back to David your comments on, I think you said, did you say 74,000,000 to $75,000,000 sort of the annualized long term care NOI is, sort of the reason a reasonable starting point? And then, maybe just coming back to some growth that you anticipate in the Western Canadian provinces as well?

Speaker 3

Yes. I mean that number is if you take our first half of the year, Tommy normalized for the sort of out of periods, we're running at about $37,000,000 of absolute NOI. So if you use that as a starting point for and that's where we're still waiting for our rate increases in Alberta and Manitoba that should help contribute to growth from there as well as there still is some focus. We still have some work that we're doing in the West on some of the cost side of things. So there's still some progress we think we can make still in the next couple of quarters in the West on spending mostly around the agency and some of the key markets.

Speaker 3

So still some room to go there that would help add to the performance.

Speaker 5

Thanks very much. I will turn it back.

Operator

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

Speaker 1

ahead. Thank you, operator. That concludes our call for today. This presentation is available on our website as are the call in numbers for an archived recording. Thank you everyone for joining us and please don't hesitate to contact Investor Relations if you have any questions.

Operator

This brings to close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Key Takeaways

  • Extendicare delivered robust Q2 2024 results with net operating income and margins up across all three segments, fueled by technology investments, a transformative JV with Acxiom, strong post-pandemic demand and government funding increases addressing cost inflation.
  • In long-term care, occupancy climbed to 97.8%, driven by catch-up rate increases in Ontario and reduced agency staffing costs, returning margins to historical levels as funding aligns with inflationary pressures.
  • Home healthcare average daily volumes surged 10.8% year-over-year, supporting a return to double-digit margins via rate increases and operating leverage, with a gradual normalization toward seasonal patterns expected.
  • The managed services segment saw revenue and NOI more than double year-over-year, as Extendicare Assist beds rose 64% and third-party JV beds grew 22.1%, with services now representing 56% of consolidated NOI.
  • Partnerships and redevelopments are on track with five homes under construction and three more slated to start this year, while strategic asset sales have bolstered liquidity to $136 million cash and enhanced balance sheet flexibility for funding future growth.
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Earnings Conference Call
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