CWSRF - Chartwell Retirement Residences (CWSRF) Q3 2023 Earnings Call Transcript
2023-11-10 13:27:06 ET
Chartwell Retirement Residences (CWSRF)
Q3 2023 Earnings Conference Call
November 10, 2023 10:00 AM ET
Company Participants
Vlad Volodarski - Chief Executive Officer
Karen Sullivan - President and Chief Operating Officer
Jonathan Boulakia - Chief Financial Officer, Chief Investment Officer and Chief Legal Officer
Conference Call Participants
Himanshu Gupta - Scotiabank
Jonathan Kelcher - TD Cowen
Pammi Bir - RBC Capital Markets
Presentation
Operator
Good morning, ladies and gentlemen and welcome to the Chartwell Retirement Residences Q3 2023 Financial Results Conference Call. I would like to turn the meeting over to the CEO, Vlad Volodarski. Please go ahead.
Vlad Volodarski
Thank you, Dona. Good morning and thank you for joining us today. There is a slide presentation to accompany this conference call available on our website at chartwell.com under the Investor Relations tab. Joining me are Karen Sullivan, President and Chief Operating Officer; and Jonathan Boulakia, Chief Financial Officer, Chief Investment Officer and Chief Legal Officer.
I would like to take this opportunity to thank Jonathan for taking on the CFO responsibility 5 months ago, for his excellence while fulfilling these duties and for never missing a beat driving forward our investment, development, asset management, portfolio optimization and legal initiatives. Thank you, Jonathan.
Jeffrey Brown, our incoming CFO is also in the room with us today, has been quite a busy first 2 weeks for him, getting to know our people diving into many strategic projects on their way and attending our Board meetings. I think so far I kept my promise that he will not be bored at Chartwell. I have no doubts he will be highly successful at his role, and will help us shape and execute strategies to deliver sustainable growth and value to all our stakeholders now and in the future. Welcome, Jeff.
Before we begin, I'd 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. Our MD&A 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 Q3 2023 MD&A under the headings 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 SEDAR+ website.
Turning to Slide 3, building on the strong results in the previous quarter, our Q3 2023 financial and operating performance reflected our team's excellent execution of our operating, sales and marketing strategies. Same property NOI grew 19.7%, occupancy increased 300 basis points and FFO from continuing operations increased 27.6% from Q3 2022.
Importantly, we see strong occupancy trends continue with the same property portfolio occupancy forecasted to reach 84.2% in December. Our sales leading indicators, initial contacts, personalized tours and lease signings remain strong, and with marketing activities driving more qualified prospects, our sales closing ratios continue to improve. This sets us up well to continue this occupancy momentum into 2024.
We believe that highly engaged employees deliver exceptional personalized experiences to our residents, which in turn drives higher resident satisfaction rates and through residents referrals result in high occupancy rates. In 2023, both employee engagement and resident satisfaction scores exceeded my expectations.
Employee engagement score increased 5 percentage points from last year to 54% highly engaged and resident satisfaction score increased 7 percentage points from last year to 61% very satisfied residents. Remember, our scores we only count top box strongly agree scores in our results. These are tremendous achievements by our teams. Thank you to all Chartwell employees for your commitment to our residents, their families and each other and for you to deep in personal connection to our shared values and goals.
On that note, I will turn the call over to Karen to provide an operational update.
Karen Sullivan
Thanks, Vlad. Moving on to Slide 4, we continue to see impressive signs of occupancy recovery in Q3 including 11 positive net activity weeks this quarter. In fact, we've gained occupancy every week except for one since February. Initial contracts were up 4% compared to Q3 2022. And most importantly, they are of a higher quality, as evidenced by increased personalized tours and permanent move-ins.
Beginning in early 2023, we shifted our paid Google strategy to drive higher qualified traffic through tighter keywords and geographic parameters and new advertising tactics. We have now added more investment to expand our audience and test new strategies including paid Facebook campaigns.
Our recently updated website, which is drawing more traffic includes suite plans for all our properties as well as pricing transparency, including current promotions and discounts where applicable. In Q3, we launched campaigns in 80 priority properties that include a personalized call to action and a range of advertising mediums including print, radio, billboard, signage, direct mail and social and digital media.
We also focused on Chartwell brand campaign after advertising in August and September on television, in sponsored content and across paid social media channels. In addition, residents Facebook pages are live for the first cohort of over 80 homes.
Chartwell's click-to-connect call center has always been a competitive advantage that ensures that we do not miss prospect calls and provides a positive and high-quality experience for potential residents and their adult children who are seeking timely and useful information. In Q3, we transitioned our call center to a more stable and modern system with improved reporting capabilities. The call center agents increased their personalized tour conversion rate by 12% compared to Q3 2022.
Finally, in mid-September, we hosted our most successful open house to date welcoming over 2,000 new prospects, representing an almost 40% increase compared to our April open house event. All of these collective sales and marketing efforts have resulted in an increase in lease volumes of 16% compared to Q3 2022.
Turning to Slide 5, employee turnover declined across all job categories and staffing agency spend was 31% lower in Q3 2023, compared to the same quarter in 2022. We expect this trend to continue in Q4 based on a number of efforts including retendering for preferred agency partners in light of increased competition among staffing agency providers.
We also remain focused on recruitment and retention efforts, including a targeted nursing strategy that incorporates a referral bonus program, agency staff conversions, reaching out to non-practicing nurses that have recently left the profession, exploring strategic partnerships with expert immigration organizations and campus outreach activities for recent grads.
We are also steadily increasing our employee review ratings on Glassdoor and Indeed, and gaining more five star reviews from current employees and positive testimonials about why they love their job and working at Chartwell. Finally, I am so proud of our team's continued focus on an exceptional resident experience, which is our stated unique value proposition.
Each year we measure our progress through our annual resident satisfaction survey, which is conducted by a U.S firm that specializes in the seniors housing sector. We focus and evaluate our success based on strongly agree responses. Because we know that very satisfied residents are 4x more likely to recommend their residents than merely satisfied residents.
Our 2023 very satisfied score is 61%, a 7 percentage point increase from our score of 54% in 2022. The combined strongly agree and agree scores were an impressive 86%, and our participation rate increased from 72% to 77%. With resident referrals having the highest closing ratios compared to all other types of initial contacts, this will only help -- continue to help us with the momentum of our occupancy recovery.
I will now turn it over to Jonathan to take you through our financial results.
Jonathan Boulakia
Thank you, Karen. As shown on Slide 6, in Q3 2023, net income was $158.2 million, compared to net income of $4.3 million in Q3 2022. This net income included gain on sale of our Ontario long-term care platform completed on September 6, 2023. FFO from continuing operations was up 27.6% and FFO from total operations increased 22.3% in Q3 2023 compared to Q3 2022, and operating results in our core profit portfolio have shown a strong improvement.
Our same property occupancy increased 300 basis points to 81.4% and our same property adjusted NOI increased by $10 million or 19.7%. This growth was offset by $3.2 million higher G&A expenses, primarily due to higher unit-based compensation expenses resulting from the increase in the trading price of our trust units, regular staff compensation increases and higher professional fees. Q3 2023 FFO was also impacted by higher finance costs from rising interest rates.
Slide 7 summarizes our same property operating platform's results. All our platforms posted occupancy gains in Q3 2023 compared to Q3 2022, which positively impacted our results. Our Western Canada platform same property adjusted NOI increased $1.7 million or 12%. Our Ontario platform same property adjusted NOI increased $5.3 million or 20%. Our Quebec platform same property adjusted NOI increased $3 million or 29.4% with the strong occupancy growth of 400 basis points.
Turning to Slide 8. Our same property retirement portfolio occupancy was 83.2% in October. We forecasted to grow another 100 basis points to 84.2% by December, a 480 basis points growth for the full year of 2023. We expect to see continued occupancy growth in 2023 and beyond, supported by accelerating demographic growth, shortages of long-term care beds and fewer seniors housing construction starts. We are also achieving our expected rate increases and expect to continue reducing our staffing agency spend through the remainder of the year.
Turning to Slide 9. At November 9, 2023, liquidity amounted to approximately $455.2 million, which included $43.3 million of cash and cash equivalents and $411.9 million of borrowing capacity on our credit facility of which $200 million is specifically for the repayment of our Series A debentures maturing on December 11, 2023. For the remainder of 2023, we have no mortgage debt maturing. At November 9, 2023, 10-year CMHC-insured mortgage rates are estimated at approximately 4.9% and 5-year conventional mortgage financing is available at approximately 5.9%.
On September 6, 2023, we completed the previously announced sale of our long-term care operations in Ontario. The gross sale price on September 6, 2023, excluding the forward sale of Ballycliffe LTC was $378.7 million. Net proceeds after property specific debt, working capital adjustments, transaction costs and taxes was $148.9 million which was used to pay down amounts outstanding on our secured credit facility.
I'll now turn it back to Vlad to wrap up.
Vlad Volodarski
Thank you, Jonathan. Our real estate group led by Jonathan in partnership with operations, finance and legal teams have been busy executing our portfolio optimization strategies as shown on Slide 10. To date, in 2023, we closed the sale of our Ontario long-term care business, we seized the operations of three noncore underperforming residences and sold two of these for alternative use. We sold another noncore operating property.
And yesterday, we announced an agreement with Welltower to wind up our joint venture. These transactions will help reposition our portfolio towards high-growth, high-quality assets and improve our financial and operational flexibility to invest in our strategic priorities, including future portfolio growth. Our teams are working on several other important investment and portfolio optimization opportunities.
Turning to Slide 11. We established our partnership with Welltower in 2012 with equal ownership of the properties, where the interests of both parties were strongly aligned. Over the years, we worked together to enhance the services delivered to our residents, improve our assets and drive results for our investors. As the party's strategic priorities evolved, we worked in the same spirit of collaboration to arrive at a mutually beneficial arrangement to divide the portfolio to allow each party to independently pursue strategic objectives.
Under the terms of the agreement, Chartwell will convey its ownership interest in '23 assets with 4,633 suites to Welltower in exchange for Welltower's ownership interest in 16 assets with 3,511 suites and $97.2 million in cash. We estimate net proceeds to Chartwell after taxes and closing costs to be approximately $71 million. Closing of the transaction subject to the required regulatory and lender approvals is expected in Q2 2024.
On closing, we will assume approximately $140.3 million in debt on the Chartwell assets, bearing interest -- weighted average interest rate of 2.8% and a weighted average term to maturity of 4.4 years. The net change to total debt on Chartwell's balance sheet will be a reduction of approximately $51 million before any impact of the cash consideration. The debt and cash consideration estimates above are based on an assumed closing as of April 1, 2024.
While we work to position our portfolio for long-term success, it is important to note that we operate in a sector with exceptional supply-demand characteristics, which are likely to continue for many years to come as illustrated on Slide 12.
Demographic growth of the seniors population combined with the existing post-pandemic pent-up demand and improving consumer sentiment towards retirement living meets all-time low construction starts and continuing shortage of long-term care beds across the country. These dynamics, combined with the obsolescence of some of the existing inventory over the next 10 years will support strong growth in occupancy and rent and services rates in our sector. Our teams remain highly committed to capitalize on these positive dynamics to deliver a sustainable long-term value to all our stakeholders.
As it is now becoming our tradition, I will close our prepared remarks with a story from one of our residences. Pictured on Slide 13, we have an unusual one to share with you this time. As you know, we still have a few suites available at some of our homes. I hope it doesn't last too long. For now, one of our residences teams at Chartwell Colonel Belcher in Calgary, Alberta, found a wonderful use for a few of their rooms that created an amazing experience for their residents and also helped some young athletes from overseas.
It all started with our retirement living consultants and former curler Cassandra Murray, responded to a Facebook post from the New Zealand Men's Curling team who are looking for accommodations, while they train in the curling Mecca that is Calgary. The team arrived at Colonel Belcher in September and quickly became the most popular attendees at Happy Hour. The bond between team food and our residents was almost immediate, sharing meals, advice and cheering squad are just a few of the ways our residents have adopted the young Kiwis. This story has been covered by major news broadcasters around the country, including CBC and CTV with TSN planning to cover the Olympic [indiscernible] during the World Men's Curling Championship in Switzerland next month.
Aside from all the national buzz, our residents recently hosted a reporter from the New York Times pictured on the slide, who flew in for 2 days to cover the story, shining a light on the virtues of intergenerational living. They've captured the hearts of millions around the world at a time when we can all use a heartwarming and uplifting story. I hope you agree that this is certainly a new twist on retirement living.
Thank you for your attention this morning. we would now be pleased to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question is from Himanshu Gupta from Scotiabank. Please go ahead.
Himanshu Gupta
Thank you and good morning.
Vlad Volodarski
Good morning.
Himanshu Gupta
So question is on the Welltower transaction. How much management fee income was associated with this JV? And how much reduction in associated G&A are you expecting?
Vlad Volodarski
Thanks for the question, Himanshu. There is approximately $7 million of management fees. Our expectation is that we will find efficiencies in our structure to compensate for loss of these management fees, and we expect this transaction to be earnings neutral or over time positive for Chartwell.
Himanshu Gupta
Okay. And like in terms of year one, so these efficiencies will be, I would say, realized over the next few years. So in the first year, are we expecting immediate reduction in G&A? Or is there something over time, you're expecting?
Vlad Volodarski
It will take some time for us to implement the efficiencies. I mean we've been, over the past few years investing in process improvements and technologies to enable us to become more agile organization that can more rapidly adjust to the changing world and scale up or down based on the volume of business we have. And we expect to further go down this path and simplify and scale our operations to reflect the new size or temporarily smaller size of our portfolio and including compensation for this loss management fee income.
Himanshu Gupta
Okay. All right. And then just on the asset split, how did you decide what assets you will keep and what will go away? Like was there some criteria, and how did you split?
Vlad Volodarski
That was in negotiations with both parties. As I said, we've been working collaboratively to arrive at an outcome that is favorable to both parties. I think we've achieved that outcome. From our perspective, we obviously looked at the geographic locations of the properties and our belief in their future potential.
Himanshu Gupta
Okay. And then maybe just to close the loop, how did you agree on the price? I mean, effectively, you're doing like a $150 million disposition and like how was the pricing side? I know there's a $7.7 million lower NOI from the assets which is getting disposed here. Just wondering any color on the pricing.
Vlad Volodarski
I mean, as you can see, this is basically trade properties for properties or interest in the properties for properties, and then we ended up with a smaller portfolio. So we were a net seller for that. So I cannot offer you much more than -- it was a negotiated settlement and both parties are satisfied with the outcome, and you could see in our disclosure the implications for Chartwell on the balance sheet and historical earnings.
Himanshu Gupta
Okay. Fair enough. I will jump in back. Thank you.
Vlad Volodarski
Thank you.
Operator
Thank you. And the next question is from Jonathan Kelcher from TD Cowen. Please go ahead.
Jonathan Kelcher
Thanks. Good morning.
Vlad Volodarski
Good morning, Jon.
Jonathan Kelcher
Just on the occupancy charge [ph] for Q4, I guess, you said in your [technical difficulty] December you should see some seasonal decline [technical difficulty] last year. [Technical difficulty] expect in this year based on what you're currently seeing with your leads?
Vlad Volodarski
Jonathan, you're breaking up a little bit. If I understood you correctly, you were asking our Q4 occupancy expectations and what they were based on. The expectations are based on non-leases and notices in hand plus our estimate for mid months move-ins. This is the methodology that we've consistently employed in developing our 2 months out -- 1 and 2 months out occupancy forecast. I hope it answered your question.
Jonathan Kelcher
Yes [indiscernible] next year. So I'll just ask one more and then turn it back. Do you think it would be fair to say that you still expect a little bit of a [technical difficulty] from January to March or April?
Vlad Volodarski
Yes. This is the unknown that we have in our business. It will depend on the severity of the flu season or lack thereof. You could see that our pre-pandemic average dips were a lot larger than what we experienced, both in 2022 and certainly this year when it was only 40 basis points. I think we have a number of things that is going on our way. This time, all the things that we put in place to drive occupancy even through the winter months, plus what I believe still exists in the system pent-up demand from the pre-pandemic period, the demographic growth of the population and lower levels of new supply. All of these should help to moderate that winter dip. But if you're asking how we budget, we do budget for some of that winter dip.
Jonathan Kelcher
Okay. Thanks. I will [indiscernible] back.
Operator
Thank you. [Operator Instructions] And the next question is from Pammi Bir from RBC Capital Markets. Please go ahead.
Pammi Bir
Thanks. Just coming back to the wind up of the JVs. On that 7.7, or roughly [indiscernible] of NOI that you disclosed at the last 12 months, what would that look like on a stabilized basis?
Vlad Volodarski
Yes. It's -- I'm not really prepared to talk about that. I can tell you that the occupancy was -- the difference here -- that different in the occupancy was -- this portfolio was at about low to mid 80% occupancy.
Pammi Bir
Okay. All right. So that was already on the portion that you retained or on the retained fees?
Vlad Volodarski
It's really both pieces.
Pammi Bir
Both, okay. Okay. And then just in terms of the -- maybe just thinking about -- you talked about reserving a couple of hundred million dollar from the credit facilities from the debenture maturity. Is the thinking then to -- I'm just curious are you thinking about ultimately that draw on the line or the intent that you use, I guess, proceeds from this net disposition to ultimately pay that down or maybe what's the undertaking there?
Vlad Volodarski
Yes. I think we are, as we said, before, trying to keep as many options as possible for as long as possible. So we do have this delayed draw credit facility available to take down debenture when it matures in December. We are also expecting DBRS to complete their review after we released these quarterly results. As you remember in their initial report from last year, they commented that they would like to continue to see occupancy recovery and the sale of long-term care portfolio closed. Both of these things, I think they've seen. And my hope would be that they would remove negative trend on our rating and then we'll assess whether -- when the most appropriate time for us to access unsecured debt or use some of the proceeds from the asset sales to take down the debentures or to use our credit facility that's available for us to do this. So all options are available for us at this time. It's a question of timing.
Pammi Bir
Okay. All right. And then just with respect to the agency costs, I think Karen mentioned that they’re down 30% year-over-year. At this point, are you on pace to maybe get back to 2019 levels? I think you're targeting spread at some point next year. Is that still sort of the objective?
Karen Sullivan
It is. I mean we've made significant progress, as you can see. We have some difficult markets, mostly in Quebec, particularly Quebec City and some of the kind of resort areas in Ontario, Collingwood, Vineland. But I would also say when I went through my remarks, we've a number of strategies in place, in particular, to focus on nurses because they're the ones that are still difficult to get. But yes, we are trending towards that for sure.
Pammi Bir
And then just lastly, thinking about margins, I think you hit your target in queue in this quarter or, I guess, your overall target for -- by year-end and sort of the mid 30% range. Again, just maybe thinking about the outlook and your targets, I think you cited 89% by the end of next year from an occupancy standpoint. Again, as all of this is still moving in the right direction and you're on pace to sort of hit those goals?
Vlad Volodarski
Yes. It's all about occupancy, Pammi, as we talked about before. Our rent increases, we put through what we said we were going to do 4% to 7% depending on where the properties are located, and we will probably do something similar next year, although we will give you more definitive guidance when we publish our year-end results. And so with those rent increases and the momentum that we have in occupancy recovery, the margins should be where we expect them to be, which is in kind of high 30s range next year.
Pammi Bir
Thanks very much. I will turn it back.
Vlad Volodarski
Thanks.
Operator
Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. Volodarski.
Vlad Volodarski
Thank you, everybody for joining us today. As always, if you have any other questions, please do not hesitate to give us a call. Goodbye.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
For further details see:
Chartwell Retirement Residences (CWSRF) Q3 2023 Earnings Call Transcript