Q3 2023 Extendicare Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to extent of caring Inc. Third quarter 2023 analysts conference call. As a reminder, all participants are in listen only mode. The conference is being recorded after the presentation. There will be an opportunity to ask questions to joined the question.
Q you May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero I would now like to turn the conference over to Jillian Fountain, Vice President Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone and welcome to extended care third quarter 2023 results conference call.
With me today are <unk>, President and CEO of my career, and our senior Vice President and CFO David Bacon.
Q3 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 accompanying slide presentation, which viewers made that's himself.
A replay of the call will be available later this afternoon until November 24.
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 Mike.
Thank you Jillian and good morning.
Our third quarter results.
<unk> substantial improvement in our financial performance across all our operating segments.
With improving operating margins and strong growth reflect the compelling market opportunity emanating from the growing demand for seniors care.
This quarter also marks a significant milestone in our strategic transformation with the close of the Riviera and axiom transactions.
Our Q3 results give us a first look at the impact of having the 56 Rivera and joint venture homes as part of our managed services portfolio.
Our long term care operations continued to recover from pandemic related impacts.
Occupancy improved 60 basis points from Q2 to 97, 8%.
430 basis points from the prior year.
Cost management initiatives and moderating inflation are driving better margins.
Notably our teams have made steady progress in lowering the use of high priced agency staff as we recruit full time care professionals to staff our homes.
While better alignment of costs and funding in the quarter improved long term care margins. We are still contending with funding increases that have fallen behind inflation in recent years.
We continue to work with the government and sector partners to address the ongoing funding gap in a joint effort to return to long term care sector to its historical financial stability.
Our home Health care segment continues to perform well.
Overcoming the seasonal softness usually experienced in the summer months to deliver its fourth quarter of consecutive volume growth.
Average home health care daily volumes increased 1% from the previous quarter and were up nine 3% from the prior year.
Our technology enabled back office proved highly scalable, allowing us to reduce costs, while expanding volumes.
Along with government rate increases that offset increased operating costs, we are making steady progress in restoring operating margins to historical norms.
We expect continued strong demand for our services supported by demographic trends, which will continue to drive growth in the coming years.
S. G P added significantly to its market share in the quarter, increasing its third party and joint venture bed served by 11, 6% from Q2.
25% from the private prior year.
On slide four we look at the impact of closing the Riviera and axiom transactions, which were key steps in our strategic transformation to focus on long term care and home health care using a less capital intensive higher margin business model.
These transactions set in place the foundation to support growth as demographics increased demand for the services that extended care provides.
We will focus on expanding long term care managed services.
Building, new homes utilizing the joint venture partnerships to support capital requirements.
And growing our home health care services.
Our managed service offerings include management contracts redevelopment services consulting services and the S. G P purchasing partnership.
The axiom transaction closed on September 13th at which time the limited partnership joint venture formed with Axiom acquired our four class C home redevelopment projects under construction.
The projects comprise an aggregate 960 funded long term care beds in Sudbury Kingston Statesville in Peterborough.
We realized a gain of $8.7 million with.
With net cash proceeds to extended care of $59 million.
The partnership with Axiom provides us with a more capital efficient business model for the redevelopment of our C class long term care homes with extended care retaining a 15% managed interest in each new home.
We will continue to undertake all development and construction management activities in respect of the homes sold into the joint venture, earning development fees in our managed services segment during construction.
On completion extended care will operate dorms, earning recurring management fees and S. G. P revenues over the life of the home.
No did extended care continues to own and operate the legacy C class long term care homes, which are to be replaced by the redevelopment projects sold into the joint venture.
The revenue and NOI from those legacy homes will continue to appear in our results until the developed home opens.
At that time, the sea bed at home will close and recurring management fees and S. G. P revenues earned from the joint venture will enhance our managed services segment revenue and NOI.
Our 15% share of the joint venture a F. F. O will also be included in our results.
We will then work to monetize the closed C class homes, selling or Repurposing. The property for alternative uses to generate additional proceeds or sources of revenue.
As previously reported the Rivera transactions closed on August 1st, adding 56 homes and approximately 7000 beds to our managed services segment.
We acquired a 15% managed interest in 25 of these homes through an existing limited partnership joint venture with axiom.
The recurring fees earned for managing these homes since the close on August 1st are reflected in our managed services segment in the quarter, adding approximately $4 million of revenue and $2 million and NOI.
We are working to complete full integration of the operations in it platforms supporting the 56 homes and approximately 9000 team members by the end of 'twenty 'twenty four.
Moving to slide five subsequent to the end of the third quarter, we broke ground on a new 256 bed home in Orleans, Ontario, which qualified for the capital funding subsidy program that ended in August.
This home is expected to open in Q2, 2026 and will replace the 240 bed class C home in the Ottawa area.
Bringing to five the number of extended care projects under construction.
We anticipate that the home will be sold into the axiom joint venture.
This new Ottawa project together with the four projects recently sold into the JV total 1260, new beds under construction, replacing 1074 class C long term care beds in Ontario.
The temporary enhancements to the Ontario governments capital funding program expired at the end of August well.
While no successor program has been announced as yet we continue to advance the remaining 15 homes in our redevelopment portfolio in anticipation of future funding availability.
Construction costs interest rates and applicable regulatory approvals will be pivotal in determining whether and when our other projects might be financially viable to proceed.
Additionally, as part of the Rivera transactions, we have the option to purchase alone or with axiom all future long term care redevelopment projects that proceed in connection with Revere is 30 class C long term care homes that we now manage.
With that I'll turn it over to our CFO, David Bacon to discuss our first quarter results in more detail.
Thanks, Michael I'll start by reviewing our consolidated results for the quarter as Michael mentioned, we closed the Rivera and axiom transactions in Q3, which contributed to improvements in our results this quarter and strengthen our financial position.
As a result of the sale of our four redevelopment projects under construction to the axiom joint venture included in our earnings from continuing operations. We recognized an after tax gain on sale of $8 $7 million that proceeds were $59 million in the joint venture assumed that the construction debt facilities, which had $72.
$3 million drawn at closing.
We retained a 15% managed interest in these projects through our joint venture ownership.
And our interim consolidated results.
Pre tax gain from the sale of $9 1 million is netted in the line item other income with their strategic transformation costs, which in Q3 were $4 1 million, bringing the total of such costs. This year to $9 1 million.
As a reminder, this line item is excluded from our adjusted EBITDA and a F F O N.
These costs include the transaction legal regulatory integration and management transition costs associated with the Rivera transactions.
We will continue to incur an aggregate of between 10 and $12 million and strategic transformation costs through to the end of 'twenty 'twenty four as we complete the full integration of <unk> operations and it platforms.
Turning to our consolidated results on a year over year basis, our Q3 consolidated revenue increased four 4% to $322 5 million.
This increase was driven primarily by long term care flow through funding enhancements fire L. D C occupancy home health care rate increases and a nine 3% increase in average daily volumes and growth in our managed service segment.
This was partially offset by Covid funding recognized in 2022 of $22 million.
Our Q3, NOI increased by $11 7 million to $35 2 million with an NOI margin of 10, 9% compared to seven 6% in the prior year.
This reflects our growth in home health care, Adv and rate increases and improved alignment of LTC costs with funding and growth in managed services, partially offset by higher operating costs.
Adjusted EBITDA reported in Q3 increased by $10 7 million to $20 8 million, reflecting the improvement in NOI offset by higher administration costs.
Our <unk> per basic share in Q3 was 14 up 12 from the prior year, reflecting the improvement in adjusted EBITDA, partially offset by higher taxes and maintenance Capex.
Our payout ratio for the third quarter improved to 82%, reflecting the improvements in the underlying operations and the impact of the closed Rivera transactions.
The contribution this quarter to our E F F O from the growth in managed services related to the Rivera homes, including the impact of our 15% share of the joint venture <unk> is approximately 2.3 sets.
Turning to our individual business segments, and beginning with long term care, excluding the impact of $18 7 million in Covid funding received in Q3 of 2022, our revenue increased by $18 1 million year over year, driven by funding increases timing of spend and improvements in occupancy.
NOI as reported improved by $2 7 million to $16 6 million with an NOI margin of eight 7% compared to seven 2% in the prior year.
The improvement reflects lower staffing agency use funding enhancements and increased occupancy partially offset by higher operating costs.
Well, we are seeing improvements in our NOI margins the elevated level of inflation that has impacted our operating costs in recent years remains an issue.
The 2% accommodation rate increase in Ontario effective April one of this year was below our expectations given the funding gap that has accumulated and continues to impact our NOI margins.
Turning now to our home health care segment revenue was up $10 4 million or nine 6% driven by growth in our volumes and rate increases partially offset by the impact of last year's Covid funding of $3 3 million.
NOI increased by $6 4 million to $11 6 million with an NOI margin of nine 8% compared to four 8% last year.
Adjusting for last year's Covid impacts NOI improved by $5 7 million and an NOI margin of 410 basis points.
The improvement in NOI was partially offset by higher wages and benefits are staffing capacity is stabilizing thanks to the ongoing efforts and our employee retention and work force expansion projects.
Turning to our managed services segment, we had strong growth this quarter due to the addition of the managed homes from the Ribera transactions and the addition of other new SGP clients, partially offset by extended care assist clients that reduced their scope of service or went to self management as we have disclosed in the second quarter.
Our Q3 revenue increased by $3 9 million or 44, 3% to $12 7 million contributing to growth in NOI of two 5 million to $7 million compared to last year.
The Rivera transactions contributed approximately $4 million in revenue and $2 million in NOI in Q2 for the two months following the August 1st closing.
At the end of Q3 extended care assist had management contracts supporting 9962 beds up 59, 1% from a year ago and S. G. P supported over 128903rd party beds up 25% from a year ago and up 11, 6%.
<unk>.
Turning finally to our financial position the proceeds from closing the axiom of transaction more than replenished our cash used in the Rivera transactions. In addition, under the axiom transaction the joint venture assumed the construction financing facilities in connection with our redevelopment projects that were acquired.
At the end of September our liquidity is healthy with cash and cash equivalents of $96 million and access to a further $76 million in undrawn credit facilities, and our maturity profile remains strong with only modest debt maturities coming due prior to 2025.
Lastly, we continue to be active under our normal course issuer bid and purchased approximately one 4 million shares for cancellation. This year at a cost of $8 8 million, representing a weighted average price of $6 29.
This includes 771000 common shares under our N CIB that we renewed in June.
With that I'll pass the call back to Michael for his closing remarks. Thanks.
Thanks, David.
The improved operating performance across all our segments highlight robust demand for our services and increasingly stable workforce and our team's ability to execute and manage costs.
Although cost pressures continue to present challenges, we are seeing a return to more normal operations. After three years challenged by the pandemic.
We have completed a significant chapter with the closing of our strategic transactions, marking progress in executing our long term strategy.
The revere at axiom transactions have enhanced our scale and expertise and increased our ability to advance the delivery of high quality care for Canadian seniors.
Our focused strategy will enable long term care long term growth and further improvements in our financial metrics.
I'll finish my remarks today by recognizing the outstanding efforts of our dedicated care professionals and team members, who work tirelessly in pursuit of our mission to help people live better.
With that we'd be happy to take any questions that you might have.
Operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.
Using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
The first question comes from Jonathan Culture, but T. D. Cohen. Please go ahead.
Thanks, Good morning.
My first question. The first question just on the managed services business I guess with the closing of two months of that your.
Your margins were 55%.
But it looks like the Rivera contribution was only really 50% I'm just trying to get a sense of how we should think about operating margins in that business going forward.
Yeah I think.
On that I think we have said in the past, where we're looking at within the 50% to 55% or 80 blended for the managed services. So there is some variability quarter to quarter based on consulting projects that can that can vary the margins there, but we're looking in that sort of.
In that range, probably between 50, and 55 would be probably a longer term view and we've said that I think that's consistent with what we've said in the past.
So you can see obviously I guess you had some consulting projects.
Q3 to sort of push that to the top end of that range.
Yeah.
Okay, and then I guess, just sticking with that with operating margins of our home health care business was a was very good in the quarter.
Is that a sustainable operating margins was there anything one time in there or do you expect it to sort of trend up as you as you keep adding.
Being able to add to the.
Average daily volume Sir.
Yeah, there, there's nothing unusual in the quarter.
There is some seasonal patterns that do happen in this business, although as we said we.
We did not experience the Q3 decline that we usually see.
But partially because of all the efforts we've had on on growing capacity and staffing and we're on a good trajectory.
You know it will be there will be some quarterly volatility Q4 with holidays and weather you get into Q1, and certain wages and benefits cost kick in when our workforce goes back to a full C. P. P M.
So they so there is some variability that youll see and that.
In terms of is it sustainable or is that a good number I mean, we're not.
Really giving guidance at this stage, but we have said in the past that we do think that it can be.
A low double digit margin business, when we hit that but yes.
We're not going to say, but I think that's where.
We're on a good trajectory.
Positive signs seeing there in the Q3 results.
Okay. That's helpful. And then last one for me on the on the JV with with axiom.
Is there is there like is that a limited life JV or is there a set amount of capital to be invested in the <unk>.
Reason I'm asking is like just looking at the slide deck and seeing.
Future Ribeira Redevelopments they go into a JV to.
Just curious why it.
It wasn't just stay in the first JV.
Yeah.
Three questions. There so it's not a limited life joint.
Joint venture partnership, it's it's a long term partnership.
Axiom is quite committed to the space and has a very long term focused investor, which was part of the attraction for us as a partner.
And in terms of capital.
Capital is never unlimited, but they are committed to this space and they are a sizable player.
In terms of the joint venture structure. We there are two separate jv's and that's just by the.
The necessity in the sense that we bought an existing our 15% interest in the legacy Ribeira joint venture was an existing joint venture.
So it made you know from a whole host of reasons, we stepped into Rivera shoes buying that interest and we created a new joint venture focused on our projects.
Over time, I mean, as we think about it it really the same partner same governance structure same ownership percentage same same asset class.
So it's more of a legal form issue that there happens to be too, but I think as we go forward it really isn't different.
Obviously down the road, we may look to do some things about restructuring.
So just thinking about that.
Already is there already are two of them.
Yeah, there is two and but the distinction is really more of a legal form distinction versus anything meaningful from an economics point of view.
Okay Fair enough I'll turn it back thanks.
Once again, if you have a question. Please press Star then one.
This concludes the question and answer session I would like to turn the conference back over to Jillian Fountain fountain for any closing remarks. Please go ahead.
Thank you operator that concludes our call for today.
Presentation is available on our website as are the call.
All in numbers for an archived recording.
Thank you again for joining US please don't hesitate to give us the coffee has any questions.
Goodbye.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yes.
Uh huh.
Yeah.
Okay.
Yeah.