Q2 2023 Extendicare Inc Earnings Call
Speaker 1: Thank you for standing by. This is the conference operator. Welcome to Extendicare Inc. 2nd Quarter, 2023 Analysts Conference Call.
As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.
To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then 0. I would now like to turn the conference over to Jillian Fonten, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Extendicare's second quarter of the 2023 results conference call. With me today are Extendicare's President and CEO , Michael Greer, and our Senior Vice President and CFO , David Bacon.
Our Q2 results were disseminated yesterday and are available on our website. The audio webcast of today's call is also available on our website, along with an accompanied slide presentation, which viewers may advance themselves.
A replay of the call will be available later this afternoon until August 25th.
The replay numbers and passcodes have been provided in our press release, and an archived recording of 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. Such 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 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.
Thank you, Jillian, and good morning.
Q2 put more distance between us and the pandemic.
There was steady improvement in our operating metrics as we gradually returned to more normal operations.
Revenue increased in each of our business segments, driven by funding enhancements and increased volumes in pyramid.
As COVID outbreaks declined throughout the quarter, average occupancy in our long-term care homes improved 60 basis points from Q1 to 97.2%.
470 basis points from the same quarter last year.
This is approaching pre-pandemic levels.
We continue to wind down the elevated staffing levels that were needed during the pandemic in our long-term care operations, as COVID-19 funding supports have been withdrawn and related operational requirements have been relaxed.
Our cost structure remains elevated as we work to reduce the use of higher cost agency staff and adjust staffing levels to align with the new direct care models introduced by the provinces.
We are also experiencing inflationary pressures only partially offset by rain increases.
We continue to work with the government and sector partners to address the gap in funding in an effort to return long-term care margins to historical bubbles.
Our home health care segment continues to gain traction with its third consecutive quarter of volume growth.
demonstrating strong demand for services and increased success in attracting and retaining care staff.
Average daily volumes increased 4.1% from the previous quarter, up 7.7% from the same period last year.
We expect strong demand for services to continue, supported by the underlying demographic trends.
Concurrently, home care operating margins are recovering thanks to our scalable, technology-enabled back office and rate increases from the government.
Note that we expect pre-pandemic seasonality in our service volumes to return.
This typically includes a small drop in volumes in the third quarter, as summer vacations temporarily reduce delivery capacity and certain client programs are suspended.
Finally, in our managed services segment, we continue to experience strong growth in our SGP customer base this quarter, which increased 3.3% from Q1, up 12.9% from the prior year period.
David will comment in a few minutes on how we have redefined the key performance indicators for our managed services segment and updated them to reflect significant changes in our customer base that occurred subsequent to quarter end.
adding 56 long-term care homes and approximately 7,000 beds to our Higher Margin Managed Services portfolio. As well, we acquired Revere's 15% interest in a joint venture partnership with Axiom that holds 25 of those homes. The aggregate consideration net of holdbacks totaled $69.7 million in line with our prior announcements. The transaction brings together two of the most experienced Seniors Care teams in Canada and leverages our combined scale and expertise to drive improved performance,
and advance the delivery of high-quality care for Canadian seniors. As we move forward, these transactions position us to be a driving force in building more and better homes and care for the needs of those seniors who can no longer live independently.
Included in the Revera transaction is the right to acquire, either alone or with Axiom, any seabed homes that are redeveloped by Revera, giving us the ability to further scale the joint venture.
An integration program to bring the two businesses together is now underway.
It involves bringing the operation to the 56 homes and over 9,000 staff into alignment with the extended care network.
We expect the full integration of the Revere homes will be complete by the end of 2024, with estimated strategic transformation costs of $14 to $16 million to be incurred over the next six quarters.
Subsequent to quarter end, we also receive government approvals to form a new joint venture with Axiom in respect of our own redevelopment projects, in which Axiom will own an 85% interest with extended care, retaining a 15% managed interest. We have amended the purchase and sale agreement with Axiom to include our 256 bed Peterborough long-term care home that commenced construction in May.
We anticipate closing the axiom transaction in the third quarter, subject to customary closing conditions, transferring the four redevelopment projects we currently have under construction into
This partnership with Axiom provides us with the foundation for a more capital efficient business model for the redevelopment of our own C-Class homes.
We will continue to undertake all development activities in respect of these homes.
and earn development fees from the Joint Venture for Managing Construction.
While legacy seabed home revenue and NOI will be eliminated from our long-term care segment as the old seabed
We will provide managed services to the JV to operate the homes upon completion of construction, resulting in recurring management fees.
We will also retain a 15% interest in the earnings of the homes within the JV and have options to monetize the decommissioned buildings after the C homes close.
Moving to slide five, during the second quarter, we broke ground on our new 256 bed home in Peterborough. This home will replace our existing 172 bed Class C home in that community and marks the fourth project currently under construction. Together with our projects in Sudbury, Kingston and Stittsville, these four homes comprise 960 new long term care beds, replacing 834 Class C beds. These four projects will be acquired, as I just mentioned, by the joint venture with Axiom.
bending into the Axiom joint venture later this year.
The current funding program
set by the Ontario government, will expire at the end of August . And while no extension has been announced, we continue to advance the balance of our redevelopment portfolio in anticipation of future funding programs.
Standard construction costs and applicable regulatory approvals will be pivotal in determining whether and when our other projects might proceed.
The need for more long-term care capacity in Ontario and across Canada is driven by demographic trends.
We will continue to advance redevelopment of our remaining 16 projects in anticipation of capital funding that may be made available in the future.
With that, I'll turn it over to our CFO , David Bacon, to discuss our first quarter results in more detail.
David.
Thanks Michael. I'll start by reviewing our consolidated results for the quarter, followed by some financial highlights of our business segments and our liquidity
On a year-over-year basis, Q2 consolidated revenue increased 3.7% to $307.5 million.
This increase was driven primarily by LTC flow-through funding enhancements, improvements in LTC occupancy, home healthcare rate increases, and a 7.7% increase in average daily volumes.
managed services growth. This was partially offset by lower COVID funding of $17.69.
Our Q2 NOI decreased by 1.9 million to 28.5 million with an NOI margin of 9.3% compared to 10.2% in the prior year.
If we exclude the impact of Q2 2022 workers compensation rebates of 3.9 million and a recovery of estimated COVID-19 costs of 0.5 million, NOI increased by 1.6 million, reflecting home healthcare ADB growth and bill rate increases.
partially offset by cost increases in our LTC operations.
If we exclude the one-time items impacting the 2022 results, our adjusted EBITDA year-over-year is unchanged at $14.8 million, reflecting the improvement in NOI offset by higher administrative costs.
As a reminder, we report one-time costs relating to the strategic transformation of the company in connection with the Rivera and Axiom transactions as a separate line item in other expense, which is excluded from our adjusted EBITDA and AFFO.
These costs include transaction, legal, regulatory, IT integration, and management transition costs.
In Q2, we reported $1.4 million in strategic transformation costs, bringing the total for the first six months of the year to $5 million.
As Michael mentioned, we will continue to incur these costs through to the end of 2024 as we complete the full integration of Rivera's operations and IT
Our AFFO per basic share was unchanged at 11 cents in Q2. Excluding the one-time items impacting the 2022 results, our AFFO per basic share is up 3 cents from 8 cents in the prior year.
Our payout ratio for the second quarter was elevated at 112%. We expect the ratio will fall as LTC costs normalized and the benefits of the Rivera transactions closed subsequent
Turning to our individual business segments, beginning with long-term care.
Revenue increased by 0.4% in Q2, driven by funding enhancements, timing of flow through spending, and improvements
NOI declined by 3.8 million to 13.9 million with an NOI margin of 7.6%.
Excluding the impact of 2022 COVID recoveries and workers compensation rebates in the prior year, the year-over-year decrease in NOI is 1.1 million, reflecting higher operating costs partially offset by the funding enhancements.
As Michael mentioned, our long-term care NOI margins are lagging, mainly due to elevated levels of higher cost agency labor that we are focused on reducing as we realign our homes in line with the new Direct Care Hour programs introduced by the provincial governments.
High levels of inflation impacting our operating costs remain an issue.
The 2% rate increase in our accommodation funding in Ontario, effective April 1, 2023, was below our expectations given the inflationary impacts we have been experiencing in recent years, which have contributed to our N.Y. margin performance.
Turning now to our home health care segment, revenue was up 9.6 million or 8.9 percent, driven by growth in average daily volumes, rate increases, and additional funding to support the permanent PSW wage enhancements implemented last year.
This was partially offset by reduced COVID-19 funding of four point two million.
NOI increased by 1.8 million to 10.1 million with an NOI margin of 8.6% compared to 7.7% last year.
Once adjusted for COVID impacts and worker compensation rebates in the prior year quarter, the NOI improvement over the prior year is 2.5 million or an increase of 130 basis points.
The improvement in NOI was driven by higher volumes and rate increases partially offset by higher operating costs.
wages and benefits associated with our recruitment, retention, and training programs to address sector-wide labor
Our Q2 results reflect a rate increase of 3% as part of the $300 million the Ontario government announced to support contract rate increases for the home health care workforce.
and an 8% increase in Alberta.
These increases help to offset our increased operating costs and higher wages and benefits rates that we have
Turning now to slide 11, we continue to continue to see strong growth in our managed service segment comprised of our Extendicare, ASSIST and SGP group purchasing divisions.
Q2 revenue increased by 8.1% to 8.8 million, largely due to growth in SGP clients and the mix of consulting services in the corridor, which led to a $100,000 increase in NOI compared to last year.
Higher costs related to the mix of our assist consulting services and our business development costs contributed
At the end of Q2, SGP supported over 115,000 third-party beds, up 12.9% from a year ago and up 3.3% sequentially.
In connection with the closing of the Rerar transactions, which marks a key milestone in our strategic strategic transformation, we are redefining our key performance indicator for the managed service segment to better reflect the range of services
We will classify our services into two categories. Management Contracts We will classify our services into two categories.
consulting and other services, which include policy subscriptions.
Two versions of a management contract are offered to our assist clients. The first is a fully managed service which provides management oversight over the day-to-day operations of the homes supported by our full back-office
The second offering is limited to providing just back office services.
We will report the homes and beds under our management contracts as our key performance indicator, and we will also provide insight into the number of homes for which we provide consulting and other services.
During second quarter and subsequent to quarter end, certain of extended care assist clients moved or notified the company of their intent to move to self-management or close their homes.
We also entered into full service management contracts with two additional homes, representing 340 new beds.
With the impact of these changes and the closing of the Rivera transactions, Extended Care Assist has management contracts with 73 homes comprising 9,962 beds and provides a further 53 homes with consulting and
We will also see an increase in third-party bedserv by SGP to 122,785.