Q2 2023 Chartwell Retirement Residences Earnings Call

This conference is being recorded. This conference is being recorded.

All participants, please stand by. Your conference is now ready to begin. Good morning, ladies and gentlemen, and welcome to the Chartwell Retirement Residences Q2 2023 Financial Results Conference Call. I would now like to turn the meeting over to the CEO , Vlad Velodarski. Please go ahead.

Thank you Paul, good morning and thank you for joining us today. There is a slide presentation to accompany the conference call available on our website at charwell.com under the Investor Relations tab.

Joining me are Karen Sullivan, President and Chief Operating Officer, and Jonathan Blachia, Chief Financial Officer, Chief Investment Officer, and Chief Legal Officer.

Before we begin, I direct you to the cautionary statements on slide 2, because during this call, we will make statements containing forward-looking information and non-GAAP and other financial measures. RMDNA and other securities filings contain information about the assumptions, risks,

and uncertainties inherent in such forward-looking statements and details of such non-GAAP and other financial measures.

More specifically, I direct you to the disclosures in our Q2 2023 MDNA under the headings of 2023 Outlook and risks and uncertainties and forward-looking information. For a discussion of risks and uncertainties, these documents can be found on our website or on the Cedar Plus website.

Turning to slide three are Q2 2023 results clearly show that our strategies focused on acceleration of occupancy and cash flow recovery are working.

We are at 80.4% occupancy in our same property portfolio in July , and expect to grow another 130 basis points by September . It combines 300 basis points increased from April of this year.

With continuing improvements in closing ratios and solid leasing activities in all our platforms, I believe this strong trend will continue in the remainder of this year and beyond.

Our recruitment and retention efforts have resulted in the continuous reduction of our reliance on agency staffing. With these agency staffing costs gradually decreasing throughout the year, our residents managers, vacancies are now at or below pre-pandemic levels. It is important because stable leadership is key to smooth operations and...

call center systems, implemented the recruitment module of our human capital management system, launched our new website and marketing automation system, and accelerated the rollout of our electronic health record system almost doubling the number of land rollouts to 60 properties in 2023.

This system improve our employee, residents and prospects experiences, and over time will create significant efficiencies in our operations.

We continue our important portfolio optimization activities by visiting non-core, less competitive properties, where we have to make the difficult decisions to seize operations, our operations teams with their people first approach, successfully transitioned most of the impacted residents to other chartered residences.

These residents obtained a superior accommodation in services, and we have increased occupancies and cash flows in our core properties and eliminated unsustainable losses in the underperforming known core properties.

Our 2023 employee engagement survey results are in.

I have a high degree of confidence and trust in our team's ability to deliver exceptional results in all aspects of our operations, and because of that I have high expectations.

I must admit that our 2023 employee engagement results are exceeded these high expectations.

54% of the survey participants in our retirement operations indicated their high engagement.

At 5% is points increased from our 2022 score, and only 1% is points short of our 2025 aspirational target of 55%.

The combined engaged and high-language score was 84% and participation rate increased 8% as points to 77%.

Thank you to all the Charwell employees. For your commitment to our residents, their families, and each other, and for your deep and personal connection to our shared values and goals.

On that note, I will turn the call to Karen to provide an operational update. Thanks, Vlad. Moving on to slide four, we're seeing significant signs of occupancy recovery. Our initial contacts are up 6% year over year. But as importantly, our marketing strategies are leading to higher quality prospects in our pipeline as evidenced by...

as well as a focus on priority properties with unique resident specific messages and calls to action using a range of mediums, including that print, radio, billboard signage, direct mail, and digital ads. In Q2, our brand campaign focused on affordability and was deployed through sponsored content, paid social media.

videos and television. June year to date, least volumes of the highest total on chart all record and on a comparative same property total portfolio basis 11% or better than any year going back as far as 2015. We had 25 consecutive positive net activity weeks fueled by closing

to make investments in our technology to assist with sales and marketing. This included implementing an updated call center phone system for our click to connect agents that include significant enhancements to monitoring and reporting. I also invite you to check out our fully updated website chartwell.com.

designed for an enhanced customer experience, along with a goal of better organic traffic and improved conversions.

The revisions include expanded property specific information and enhanced pricing transparency.

The site integrates with our new marketing automation tool, Ella Qua, and our sales system yardie, senior CRM. This integration reduces the administrative work of our salespeople and allows for automated prospectors from strategies.

Other sales strategies in Q2 included a successful open house which resulted in over 1100 new prospects, with traffic being highly qualified as evidenced by high conversion rates of new ICs to PMIs occurring in the following week. Weeks. Mm-hmm.

Turning to slide five, employee vacancies and turnover decreased in Q2 compared to Q1 and staffing agency spend continue to decline for the third straight quarter decreasing by 24% in Q2 compared to Q1.

We continued our focus on recruitment and retention efforts, including the first release of Oracle Recruiting Cloud, which was launched in May. This technology reduces manual administrative work, allows for more efficient tracking of candidates and improves speed to higher. We're focused on recruiting registered staff, including hiring a seasoned nurse recruiter.

staffing agencies we're using and to improve contract terms and conditions.

In addition, we recently developed an implemented enhanced accountability for our residences that are using staffing agencies through new workforce activity tracking, approval, and reporting.

We've also now completed staffing optimization in 100% of our retirement residences. This has allowed us to standardize our staffing levels and staffing schedules based on occupancy, occupancies and revenues across our residences.

Finally, the Karen Operations Team continues to roll out Yardee's electronic health record in our retirement homes, having already completed the implementation in 34 of our residents with an expectation that we will have 60 finished by the end of the year. This tool will automate our assessments and care plans and assist us to capture and build care services.

more effectively. I will now turn it over to Jonathan to take you through our financial results.

Thank you, Karen.

As shown on slide 6 in Q2 2023, that loss was $7.5 million compared to that income of $1.1 million in Q2 2022.

This net loss included $3.1 million of negative change in fair value of financial instruments, primarily from the increase in trading prices of our trust units, compared to a positive change in fair value of financial instruments of $7.2 million in Q2 2022.

Total FFO in Q2 2023 was 13 cents per unit, and FFO from continuing operations was 11 cents per unit. Both consistent with Q2 2022.

While FFO per unit was consistent with the prior year, operating results in our core property portfolio have shown a strong improvement.

Our same property occupancy increased 1.8 percentage points to 79.2 percent, and adjusted NOI increased by $4.5 million or 8.7 percent.

This growth was offset by $1.9 million higher GNA expenses, primarily due to severance costs and higher unit-based compensation expenses resulting from the increase in the trading price of our units.

Slide 7 summarizes our same property operating platforms results. All our platforms posted occupancy gains in Q2 2023 compared to Q2 2022, which positively impacted our results. Our Western Canada platform, same property adjusted NOI, increased $2.3 million or 16.4%. Q2 2023 included a one-time reversal of certain staffing cost of $1.7 million upon settlement of contracts for which there was not a comparable amount in Q2 2022.

Our Quebec platform, same property adjusted NOI, increased $1.2 million or 13%, primarily due to the 210 basis points occupancy growth. Turning to slide 8, our same property retirement portfolio occupancy was 80.4% in July . We forecast it to grow another 130 basis points to 81.7% in September . We continue to see positive trends in our personalized towards closing ratios and lease signings, which sets us up well for our usually strong fall leasing season.

We're also achieving our expected rate increases and expect to continue reducing our staffing agency spend throughout the remainder of the year.

Turning to slide 9, at August 10, 2023, liquidity amounts to approximately $194 million, which included $26 million of cash and cash equivalents, and $168 million of borrowing capacity on our credit facilities.

For the remainder of 2023, we have $121.5 million of debt maturing at a weighted average interest rate of 3.68% of which $39.6 million is CMHC insured.

refinancing of these mortgages is expected to proceed in the normal course.

At August 10, 2023, 10-year CMHC-insured mortgage rates are estimated at approximately 4.5%, and five-year conventional mortgage financing is available at 5.9%.

We receive regulatory approval for the sale of our Ontario long-term care platform.

This sale is scheduled to close in September and generate after-tax net proceeds of approximately $206.3 million, which we intend to use to pay down our credit facilities. The sale of valley cliff long-term care currently in redevelopment is expected to follow in Q1 2024 and generate after-tax net proceeds.

of $62.9 million. In December 2023, our senior unsecured debentures with a face value of $200 million will mature. We expect to refine these debentures with new senior unsecured debentures or other unsecured or secured debt subject to market conditions.

To de-risk this maturity, we arranged a $200 million delayed draw credit facility with a syndicate of Canadian financial institutions.

This credit facility is available anytime prior to December 11, 2023, and if drawn, we'll have May 29, 2025 maturity date, and we'll be subject to substantially the same covenants in pricing as our existing unsecured credit facility.

I'll now turn it back to glad to wrap up.

Thank you, Jonathan. Turning to slide 10, there is a significant and baddest potential value in our portfolio and we are committed to realizing it. Occupancy is key in this value creation and our teams are focused on the execution of our operating sales, marketing strategies to accelerate this growth.

We continue our work to optimize our portfolio, investing capital in our core assets to ensure their continued competitiveness, repositioning properties requiring more complex strategies, and divesting non-core assets. I'm confident that these initiatives supported by the strong demographic trends.

improving consumer sentiment towards retirement living, lower new construction starts, and continuing shortages of long-term care beds across the country will deliver sustained growth in 2023 and beyond.

and will help us to achieve our aspiration of 2025 targets in employing engagement and residence satisfaction and occupancy.

I'd like to finish by telling you a story of one of our new residents, pictures of Flight 11.

Not only do I find the stories of our residents and staff heartwarming, but they're also extremely important because they speak to the impact we have on our residents' lives. The lives of their families and the communities in which we operate. They speak to the kind of company Charville is and the kind of culture we have. They are deserving to be shared.

During a walk-in tour at Charwell Empress Kannada, an individual who does not speak English asked for a tour by using his phone to translate Mandarin to English.

Tina, the retirement living consultant, met with him at SHOW and SHOW him a studio suite. However, without Google Translation, it was challenging for them to communicate.

It was then that Tina realized the residents have two frontline employees on their team who speak Mandarin, Joanne, a housekeeper with over 15 years of experience, and Jenny a cook for over three years.

Both ladies were able to have a wonderful conversation with the individual about the food housekeeping, the sweets, and much more. The ended up coming back shortly after and signed a lease at Charlempeer, Canada.

To me, this is a great example of empowerment of our front-end employees, the team-op approach to sales, and importantly, diversity and inclusion that is being full-sterd in our communities.

We would now be pleased to answer your questions.

Thank you. We will now take questions from the telephone line. If you had a question and you are using a speaker phone, please lift your hands before making your selection.

If you have a question, please press star one on the devices keypad.

You can cancel at any time by pressing star two.

So please press star one at this time if you have a question. There will be a brief pause while the participants register.

We thank you for your patience.

The first question is from Jonathan Keltcher from TD Cobbon. Please go ahead. Your line is open.

Thanks, good morning.

First question, just on the agency cost, good to see them coming down quarter over quarter. How close to pre-pandemic levels are you on that?

One, do you think you can get there?

We're probably still 30-40% higher than what we were before the pandemic. And our goal is to give there and hopefully lower than that. Over time, you know, exact timing is hard to tell. It's care-and-pointed out. We're 24% quarter over quarter. If this base continues and we're doing everything we can.

your margins back to, well, at least close or very close to pre-pandemic levels in 2024. Are you still thinking you can do that?

Yes, that is still our expectations. Labor costs continue to grow higher. We are, as you know, put higher rent increases this year. Probably have to do something similar next year based on the market conditions and the cost inflation.

We think will be in the kind of mid-30 margins at the end of this year and on our way to pre-pandemic levels in 2024.

Okay, are you getting any pushback on rent increases?

No, I mean, I would say overall, it's typical of what it's always been a little bit more pushbacked in Quebec. But...

Nothing that I would suggest is abnormal. I think there is some...

you know, overall sense from our residents, they certainly pay attention to what's going on overall the conflation. So it's...

It's going.

Quite well.

Okay, and then last one for me just on the GNA was,

little bumpy in the quarter and I guess it'll continue to be so until the long term care.

deal closes. What would you say would be a normalized sort of G&A and that we could maybe sort of run for 2024 or run a little bit of inflation off for 2024?

Well, so you're right, it was bumpy in the first half of the year and we wouldn't expect the second half to necessarily be reflective of that. We wouldn't double the first half to come up with an annualized number. So we think...

This year we're probably going to be running at about $56 to $58 million by the end of the year.

And that's probably the right annualized number, but we continue to look at ways to reduce our DNA overall.

Okay, thanks, I'll turn it back.

Thank you.

The next question is from Palmy Burr from RBC Capital Markets. Please go ahead, your line is open.

Thanks. Just great to see me. The occupancy strides. But as you think about maybe the next 12 months or so, what are some of the things that might impede the moment that you've generated so far? You know, from a competitive standpoint, maybe more aggressive, or maybe just

tougher these up in some more challenged markets. Just curious as to you know how much further we can expect this momentum to continue. Thanks.

Well as I mentioned I do have high expectations. I expect this momentum to continue and maybe even accelerate. This question is hard to answer for me because I've been asked this question many times about the potential headwinds and it's really difficult to see in the current environment. The headwinds I guess another wave of pandemic or something that we don't know obviously can always be a factor but if you look at the

Demographic growth of the senior population of low construction starts of continuous lack of long-term care beds and improving consumer sentiment. I think this sector, not just Jarville but everybody, is really poised to this accelerated growth and that's why we continue to maintain our aspirational target of 95% occupancy budget.

than another pandemic type event that is hard to foresee right now. I can't really see any of that. It could be faster, it could be slower, but I think direction is pretty clear.

Got it. And I think, you know, in the past, you talked about that 89% pre-pendemic level. Is that, is that sort of talking, I guess, 95% by 2025 is 89%, you know, reasonable target for, for 2024, but the end of next year.

Yeah, I mean that's certainly what we'll be striving towards.

Okay. And then just coming back to the agency cost, I think pre-pandemic, they were 3% of revenues. Where are they now?

I mean, I think I answered that question in a different way, Pam, not as a percentage of overall costs. I think Jonathan asked about how far are we from the pre-pandemic levels, and we are about 30 to 40% higher right now. And with the pace of reduction that we saw quarter over quarter.

from Q1 to Q2, it was 24%. We'd probably be there within.

2-3, maybe 4-4 waters. So it should continue to come down and we have full intention to do everything we can to hire as many as possible of our own people so that we can deliver better and more consistent services to our residents and control cost matter.

Okay, and then just one last one for me, with respect to the projects with Baccimo, I think one more property is stabilized at this point, beyond the one that you announced this quarter that you expect to acquire. Just on that second property, are you participating in them to exercise their footprints there as well? And...

And it's so, what might that happen? Yeah, we have a continuous open dialogue with our partners at BADIMO. We're working through this process on click alley right now. We don't expect in the short term to be going through the same process with them on the second property.

Of course, as you mentioned, they have that right, but we're in constant dialogue with them and we expect that to be not happening in the near term.

Great, thanks very much. You'll turn it back.

Thank you once again. Please press star one on the devices keypad if you have a question.

The next question is from him and Chugupta from Scotia Bank. Please go ahead, your line is open.

So just on NOI margins, I think your target was mid 30% NOI margin in second half of the year. I mean, given that occupancy is tracking higher than your target so far, is there upside potential to this number? But actually, but at this time, we would maintain getting to mid 30s this year and close the pre-pandemic levels by the end of next year. Okay, fair enough. And then, will add on distribution, any updated views there, especially in the context of occupancy gains you're seeing there. And I mean, are you seeing any elevated maintenance graphics expenditures? And are you factoring that as well?

And by the back end of next year, we will be very close to covering our full capital with our operating income, operating cash flows. All right, thank you. And maybe just turning to balance sheet, $200 million of unsecured adventure, I mean, do you, I think that's the December . What are your rate expectations if you were to go to unsecured market today? Oh, the high success of the present time. Okay. And is there any room to do more CMS, see the financing, execute financing with CMS, which could have a better rate than the unsecured adventure market? Absolutely. That is another benefit of growing occupancies, you know, it's a lot easier.

and our teams are working really hard to monitor that and maximize CMHC insured borrowings so that we have that lower cost of debt in our structure and more of it.

Do you need to get to a certain occupancy level or certain NY margin before you can qualify for up-financing consumer see some of the properties?

Okay, and maybe just a $120 million mortgage is coming due for the, I think the second half of the year. Will everything be done with the CMSC or there's something which doesn't qualify for CMSC data management? Not everything will be CMAC, but also remember we will have proceeds from the sale of Ontario Long-Term Care portfolio coming into our structure and these proceeds are intended to be used to pay down that. So some of the mortgages that may not be qualified for CMSC will be paid down from those proceeds. Awesome. Okay, and maybe just last one then you know back to the occupancy side of things.

looks like Q-Back in particular, issuing some good occupancy improvement. Is there any specific markets which are doing better in M-K-Back?

Yeah, certainly it's been great to see Quebec City starting to come back. They're performing very well on signed leases in their futures look really good. The other markets that we talked to you about that have been challenging are also starting to improve so Durham and Ottawa. Calgary.

you know, the occupancy's come back more quickly in terms of needs-driven properties.

Okay. Thank you so much, you are very welcome and I'll turn it back.

Thank you. Darn over the questions registered at this time. I will turn the call back to Mr. Volodowski.