EXETF - Extendicare Inc. (EXETF) Q1 2023 Earnings Call Transcript
2023-05-05 15:58:06 ET
Extendicare Inc. (EXETF)
Q1 2023 Earnings Conference Call
May 05, 2023, 11:30 AM ET
Company Participants
Jillian Fountain - Vice President, Investor Relations
Michael Guerriere - President and Chief Executive Officer
David Bacon - Senior Vice President and Chief Financial Officer
Conference Call Participants
Jonathan Kelcher - TD Cowen
Tal Woolley - National Bank Financial
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the Extendicare Inc. First Quarter 2023 Analyst Conference Call. As a reminder all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.
Jillian Fountain
Thank you, operator, and good morning, everyone. Welcome to Extendicare's first quarter 2023 results conference call.
With me today are Extendicare's President and CEO, Michael Guerriere; and our Senior Vice President and CFO, David Bacon.
Our Q1 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 may advance themselves. A replay of the call will be available later this afternoon until May 19. 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.
Michael Guerriere
Thank you, Jillian, and good morning.
I'm pleased to report that in the first quarter, we saw improvement in our financial results and growth in our key operating metrics across all our business segments. This was supported by continued easing of pandemic impacts and a significant recovery of our 2022 unfunded COVID costs. I'll begin our presentation today with an update on COVID-19 funding and its impact on our operations.
While outbreaks were prevalent throughout the winter, they dropped off significantly as we entered the second quarter. Accordingly, the Ontario government updated COVID-19 guidance for long-term care homes to phase out many prevention and containment measures at the end of the quarter, including the elimination of bi-weekly testing of asymptomatic staff and relaxing of certain screening and physical distancing requirements.
With clear signs that the pandemic is transitioning to endemic status, we've been able to resume the more vibrant social interaction in our homes that our residents and their families have missed for so long. These changes mean pandemic-related costs across the business are winding down. Although some infection control protocols adopted during the pandemic have become permanent, the April 1 step-up in direct care funding in Ontario will address any related costs. With fewer outbreaks, occupancy has continued to recover including improvement in our preferred accommodation occupancy.
Accordingly, both the Ontario and Manitoba governments announced the end of pandemic funding effective April 1. Funding related to prior period COVID-19 costs once again drove volatility in our financial results this quarter. We recognized $13.1 million in prevention and containment funding related to costs incurred last year, resulting in a net recovery of COVID costs of $12.1 million in the quarter. We are grateful for the funding we have received from provincial governments to support long-term care throughout the pandemic. We do not anticipate any further material recovery of COVID-19 costs.
Turning to our strategic transactions on Slide 4. We continue to advance through the regulatory approval process in Ontario and Manitoba in connection with our previously announced strategic partnerships with Axium and Revera. We anticipate being able to close both transactions in Q3 this year. This will mark a key milestone for Extendicare as we transition to a less capital-intensive growth model to meet the increasing care needs of an aging population.
In anticipation of regulatory approval, we have advanced a comprehensive integration plan, so we are ready to effect a smooth transition soon after approval is received. These transactions are consistent with our strategy to leverage our deep expertise and scale to drive higher margin growth in our managed services segment.
This capital-efficient business model will provide Extendicare with greater flexibility to allocate capital to growth initiatives, including acquisitions. The aggregate consideration to be paid on closing of these transactions remains an estimated $70 million.
Though we were not active under our NCIB in Q1, we purchased an additional 520,800 common shares for cancellation subsequent to the quarter-end. Since the bid launched in June 2022, we've returned $38.4 million to shareholders.
Moving to Slide 5. We continue to pursue our redevelopment agenda with the launch of our fourth redevelopment project in Peterborough. The new 256-bed long-term care home will replace the existing 172 Class C home that we currently operate in that community. Total investment in the project is estimated to be $96.6 million and construction is scheduled to commence in the second quarter with projected completion in Q4 2025. Together with our Sudbury, Kingston and Stittsville projects, the four homes will comprise 960 new beds, replacing 834 Class C beds.
We continue to work to break ground on up to three further projects this year to take advantage of the time-limited capital funding supplement of $35 per diem available in Ontario. Tendered construction costs and receipt of applicable regulatory approvals will largely determine whether and when they might proceed. We are also working to advance the balance of our 20-project portfolio to ensure they are construction-ready in anticipation of capital funding that may be made available in the future.
Turning to operational highlights on Slide 6. Performance improved in each of our business segments in the first quarter. Outbreaks in our homes eased throughout the quarter, enabling us to improve long-term care occupancy by 60 basis points over Q4 2022. Underlying the significant recovery of unfunded COVID costs in the first quarter, we continue to experience staffing challenges and inflationary pressures that impact our operating costs.
The Ontario government increased long-term care funding by 2% effective April 1, lagging the inflationary cost increases of the past few years that are weighing on long-term care margins. We continue to work with other sector participants and the government to identify solutions and align funding to better address continued cost pressures.
In our home healthcare segment, we experienced a 2% sequential quarterly increase in our average daily volumes, representing growth of 6.1% from the prior-year period. While labor market shortages remain our most significant challenge, our retention and recruiting programs have enabled our return to growth. We are experiencing strong demand for our services, driven by demographic trends and health services backlog, which developed over the course of the pandemic.
Accordingly, in its March budget, the Ontario government announced that it's accelerating a $569 million investment in home healthcare funding, including $300 million allocated for contract rate increases to help stabilize staffing in the sector. Although we are not yet clear on the exact details and timing of this rate increase, the funding will help us to meet the growing needs for home health services across the province.
Finally, in our managed services segment, we continue to experience strong growth in our SGP customer base, which increased 1.9% from Q4 and 13.1% from the prior-year period.
With that, I'll turn it over to our CFO, David Bacon, to discuss our first quarter results in more detail.
David Bacon
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 position.
On a year-over-year basis, Q1 consolidated revenue increased 6.2% to $324.7 million. This increase was driven primarily by long-term care flow-through funding enhancements and prior period funding, home healthcare rate increases and a 6.1% increase in average daily volumes and managed services growth. This was partially offset by lower COVID funding of $25.9 million.
Our Q1 NOI improved by $11.6 million to $44.6 million, with an NOI margin of 13.7% compared to 10.8% in the prior year. This was driven primarily by $13.1 million in COVID funding related to 2022 that was recognized in Q1, resulting in the year-over-year increase in net COVID recoveries of $3.5 million, prior period long-term care funding of $3.7 million and long-term care funding enhancements and occupancy improvements, home healthcare volume growth and billing rate increases and growth in our managed services. This was partially offset by higher operating costs across our segments.
Q1 adjusted EBITDA improved by $10.8 million to $31 million, reflecting the improvement in NOI, partially offset by higher administrative costs of $0.8 million.
As a reminder, we report one-time costs related to the strategic transformation of the company in connection with the Revera and Axium transactions as a separate line item in other expense, which is excluded from AFFO and EBITDA. This quarter, we reported $3.6 million in strategic transformation costs.
AFFO per basic share was $0.24 in Q1, up from $0.14 in the prior year, driven by the improvement in earnings and the impact of our share buyback activity in 2022. Excluding the year-over-year impact of the net COVID cost recoveries and prior period LTC funding, our AFFO per basic share increased by $0.03 from Q1 of 2022.
We expect the volatility in our quarterly results will stabilize going forward given the end of pandemic funding, easing of COVID protocols and the next step-up in direct care hours in Ontario as of April 1. Our payout ratio for the quarter was 49%. Excluding the COVID recovery and out-of-period LTC funding, our payout ratio remains elevated. However, the estimated annualized AFFO per share contribution from the pending Revera and Axium transactions and our NCIB activity will improve our payout ratio going forward.
Turning to our individual business segments, beginning with long-term care. We saw revenue increase by 3.9% in Q1, driven by funding enhancements and timing of flow-through spending, improvements in occupancy and prior period funding adjustments.
NOI increased by $7.2 million in Q1 to $33.8 million, representing NOI margins of 16.3%. Excluding an increase in COVID recoveries of $1.3 million, NOI increased by $5.9 million, which included the benefit of $3.7 million in prior period funding adjustments, funding enhancements and improvements in occupancy, partially offset by higher operating costs.
Occupancy in our long-term care homes continues to recover as the number of COVID-19 outbreaks declined throughout the quarter.
In addition, flow-through care envelope funding for ward-style beds no longer in service is being phased out over the next two years starting April 1. However, 100% of the accommodation envelope funding will be preserved through this phase-out period, which will provide support to our NOI for those homes impacted.
As a reminder, we closed 185 ward-style beds in our Ontario homes, of which 84 will be reopened as private and semi-private rooms in the redevelopment projects currently under construction and scheduled to open between Q3 of 2023 and the first quarter of 2024.
The net impact of the 2% April 1 funding increase Michael mentioned earlier and the phase-out of the flow-through funding for the closed ward beds represents incremental annual revenue of approximately $4 million, of which $2.2 million is a combination of envelope funding.
Turning now to our home healthcare segment. Revenue was up $8.8 million or 8.9% in Q1, driven by growth in average daily volumes, billing rate increases and additional funding to support the permanent $3 per hour PSW wage enhancement of $6.5 million, partially offset by reduced COVID funding of $6.9 million.
NOI increased by $3.7 million to $6.4 million, with an NOI margin of 6%, up 50 basis points from the prior year when adjusted for COVID impacts. The improvement in NOI reflects these higher volumes and rate increases, partially offset by higher wages and benefits, travel and technology costs, including the costs associated with our recruitment and retention and training programs to address our staffing capacity challenges. On a sequential basis, our average daily volumes increased 2% due to the continued strong demand and modest easing of our staffing capacity challenges. Excluding the impact of our net COVID costs, our NOI margin declined 60 basis points from Q4 2022 due to seasonal impacts.
Turning now to Slide 11 and we continue to see strong growth in our managed services segment comprised of our Extendicare Assist and SGP Group purchasing divisions. SGP now supports over 111,000 third-party beds as of the end of Q1, up 13.1% from a year ago and up 1.9% sequentially. Q1 revenue increased by 33.4% to $9.7 million, largely due to timing and mix of Assist Consulting Services in the quarter and growth in our SGP clients served, which resulted in a $700,000 increase in NOI compared to the prior year. Higher costs related to the mix of Assist Consulting Services this quarter contributed to the lower NOI margins.
Finally, turning to our financial position. Extendicare remains well-positioned with strong liquidity, including cash and cash equivalents of $105 million and access to a further $77 million in undrawn credit facilities at the end of the quarter. In addition, we have $107 million in undrawn construction financing available to fund the balance of the costs associated with our ongoing redevelopment projects.
Our maturity profile remains strong with only modest debt maturities coming due prior to 2025. Our liquidity position continues to provide us with the flexibility to allocate capital strategically, whether in respect of our long-term care redevelopment program, the pending Revera transaction or other potential acquisitions and capital structure initiatives.
As Michael mentioned, with the common shares we acquired subsequent to the first quarter under our NCIB, we have now acquired a total of approximately 5.5 million shares at an average cost of $6.94. Our current issuer bid provides us with the ability to purchase up to 7.8 million common shares through to the end of Q2 of 2023, and any decisions regarding purchases continue to be based on market conditions, share price and the outlook of our capital needs.
With that, I'll pass the call back to Michael for his closing remarks.
Michael Guerriere
Thanks, David.
With growth returning across all business segments and clear signs that the pandemic is transitioning to endemic status, we have a renewed sense of optimism. We emerged from the pandemic with a clear strategy that leverages our scale and expertise to deliver high-quality, long-term care and home healthcare services using a less capital-intensive and higher-margin business model. The Axium and Revera transactions, breaking ground on our Peterborough redevelopment project and ongoing investments to expand home healthcare staffing capacity are all important steps in growing our ability to meet the needs of an aging population.
I'd be remiss if I did not take this opportunity to extend my deep gratitude to all of the caregivers and team members across our organization whose steadfast efforts over the last three years have helped keep our residents and clients safe during this trying time. I thank them for their continued commitment to helping people live better.
And lastly, a reminder that our first in-person Annual Shareholders Meeting since 2019 will be held on May 29 in Toronto. Further details are available on our website, and we hope to see you there.
With that, we'd be happy to take any questions that you may have. Operator?
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jonathan Kelcher from TD Cowen. Please go ahead.
Jonathan Kelcher
Thanks. Good morning. Just starting with the -- your development program. I guess this project submission period to get the extra $35 a diem in Ontario is done, and it sounds like you guys got three more projects in on time for that. Are there talks of similar programs going forward for the Ontario government?
Michael Guerriere
So Jonathan, the government has announced their intent to fund 30,000 new beds and 28,000 replacement beds over the next five to seven years. So they've announced this first year, and we're working to get further projects through that program. As far as what happens after this year's program, we're -- there's been no announcement about that. So we're waiting to hear what that might be. But just looking at what's happened in the past, the government seems to be assessing the market and inflation and construction costs and setting its funding program on that basis. So, while we expect that there will be further programs coming after this one, we really don't have any information -- any detailed information as to what that might look like.
Jonathan Kelcher
Okay. And do you think like the 2% increase on other accommodation -- I guess, is lower than everybody in the industry was hoping for, do you think that has any relation to the amount of commitment the government is making for the 30,000 new beds and 28,000 replacement beds?
Michael Guerriere
I'm not sure how they would be related. So I'm not sure, Jonathan, what your question is, that because they're putting a lot into capital, they haven't put as much into operating, I'm not sure exactly what you mean.
Jonathan Kelcher
Like the 2% seems kind of low to me. I'm just curious as to some of the reasons why, and is that something that the Ministry understands, and you think they'll make it up over time or how are those discussions going?
Michael Guerriere
Well, we're continuing to share with the government what our inflationary pressures are taken with the capital investments and the flow-through funding that they're providing, they've invested a lot in long-term care over the last few years. It's really a historic level of investment compared to what we've seen in the last few decades. I think there's some fine-tuning about how they're allocating funding that still needs to be done, and that's the nature of the conversations that we're having, as to what costs might be funded in the occupancy envelope versus some of the other care envelopes.
So, I'm not sure how those talks will play out, but certainly, we're having conversations with government to make them aware. I mean, again, looking at history over the long term, the government has a very good track record of funding long-term care appropriately to cover costs. So we do expect that in the long term that this will sort itself out.
Jonathan Kelcher
Okay. And then just lastly, on your development project, I guess there's -- if my math is right, you've got about $163 million to spend and maybe $107 million left under undrawn construction financing. Can I sort of think of the balance there is the sort of equity that you need to contribute to the projects? Is that a fair way to look at it?
David Bacon
Yeah, I'd say on the three that are already in flight, Jonathan, those are -- all of our equity is in those projects. So the cost for the balance to complete those through to opening is through the credit facilities that are undrawn. On the Peterborough project that's starting, we will have an equity commitment to fund initially before we get into financing on that project. So as we've disclosed the adjusted sort of cost outlook on that project is around $96 million. So if you think of our equity needs on that for construction in the 15% range that would be the equity commitment over, I'd say, the next couple of quarters until we get into financing.
Jonathan Kelcher
Okay. So you don't have a construction financing in place on that yet?
David Bacon
No, not yet. Yeah, correct.
Jonathan Kelcher
Okay. That's it for me. I'll turn it back. Thanks.
Operator
[Operator Instructions] There are no more questions in the queue. This concludes the question-and-answer session.
The next question comes from Tal Woolley from National Bank Financial. I'm sorry for the confusion. Please go ahead.
Tal Woolley
Hey, good morning.
Michael Guerriere
Good morning, Tal.
Tal Woolley
Just to go back to the funding question on LTC, I think one of the other publicly traded peers have sort of said 10% was kind of the number that they thought needed to be achieved in the fullness of time to sort of balance out the inflationary impacts borne on the accommodation side. Does that sort of scan with your perspective?
David Bacon
Yeah, I think you're -- just to confirm, you're talking there about what type of increase they were thinking we would need to recover from the inflation of recent years. I think that's the 10% you're referring to?
Tal Woolley
Yeah.
David Bacon
Yeah. I think that there's, as Mike mentioned, a lot of discussions going on with the ministry and our -- and the other operators around this that if you did go back over the last three years, we had a 9% to 10% gap between the rate increases we did experience and the -- and what we've been receiving. So there is a gap there. That is about the size of the gap of the last three years. And as Mike said, over the fullness of time and long term, historically, the government has gotten those costs, the funding in line with the costs. But there is a gap given the high inflation we've experienced in the last two, three years. So we continue to talk to the government with our partners about other ways to address that shortfall. But there is going to be some short-term pressure here on margins as we work through that.
Tal Woolley
Okay. And then my understanding is coming out of, I believe, it was the budgetary process that the government assembled, I think something called like a technical table or something like that to sort of study this issue further. Can you just talk a little bit more about that and what that might mean going forward?
Michael Guerriere
Well, I think one of the things that's been a strength of the sector for many years is the open dialogue with the government and sharing what our cost pressures are so that the government understands them and can set funding policy appropriately. And when you look at what's been happening in the last few years, although the inflationary increases have been below inflation, the funding in our flow-through envelopes to move us to the four hours of care, which was announced a few years ago, is actually quite large. It's close to 30% over a three- to four-year period.
So there is a balanced problem in terms of the way the various envelopes are funded. And so the technical table is being assembled to look at that and look at whether there's some rebalancing in the various funding elements that has to happen to make sure that the homes can operate appropriately into the future.
So my view is that if the government has the funding at a macro level, largely right. There's some technical details that are important in terms of which envelopes it's flowing through and the technical table will set its mind to looking at that and working to sort it out.
Tal Woolley
And do you have an idea of the timeframe for that?
Michael Guerriere
I think the intent is to get this done in the next few months so that in the fall timeframe, some adjustments could be made, but that's a guess on my part, it's not anything that I've seen published anywhere.
Tal Woolley
Okay. And then just on the long-term care NOI this quarter, so you reported close to $34 million. If I'm sitting on the outside trying to work that down to kind of a normalized number, I would deduct the $12 million in -- that are in prior pandemic net of the pandemic cost. And then I think there was a $6 million wage settlement. And then I think another prior period expense reimbursement in Manitoba. When I take all that out, I guess, a number sort of in the low $15 million range. Is that kind of like what we should be thinking about as sort of the working number on a go-forward basis once all these programs start to fall off?
David Bacon
Yes. I think that's the right sort of view of Q1 and the adjustments. In terms of launching off point for the year, our -- the rate increases that we did get kick-in in April, the 2%. We're still waiting for Manitoba and Alberta's decisions on rate increases, and they generally kick-in in April as well. And there is always some seasonal pressure on margins in Q1 just with timing of non -- rate increases and some employee benefits type costs that kind of restart in the first quarter. So 8.5% is the right number. You've got your adjustments right there for Q1, and that's the starting point, but we are going to have some -- we're still waiting for the rest of the rate increases from the west to come in on top of the 2% we got in Ontario.
Tal Woolley
Okay. And then as we get closer to the closing of these Revera and Axium transactions, look, are we expecting all of these -- because there's a bunch of different transactions, will all of these close -- are they submitted for review like kind of like together and do you expect them to all kind of close at the same time, or do they potentially happen in stages?
Michael Guerriere
Well, we've submitted them all together to be considered together. At this point, we're hopeful that we're going to see approval in Q3, but we can't be sure until the government finishes its process. So, we know that there's activity going on in evaluating our applications. We know that all of them are proceeding through in both provinces. So -- but until the government renders its decision, we can't be sure of all of them coming through together, but we are hopeful that they will.
Tal Woolley
Okay. And the -- look, you're obviously scaling up like your management platform for this, and you highlighted in the initial announcement, I think it's about $17 million in annualized revenue for picking up Revera's Class C beds. You'll earn some more management fees on the Class A joint venture with Revera. Should we anticipate all of that falling to the bottom line? Like can you do that in the context of your current staff level? Or is there -- do you need to like add some bodies to take on these management agreements?
David Bacon
Yeah. No, there will be costs with that and infrastructure related. So if you think about it taking on the management of 56 homes, there is going to be some investment in the support services for that. So I think when we talked -- when we first announced around the $17 million in sort of revenue and management fees, we did talk also that some sort of NOI contribution from that would be in the 40%, 45% range, which is what we spoke about at the time of the announcement. So there is a cost to support an incremental 56 homes for sure.
Tal Woolley
Okay. And the Axium development JV, is the plan then to shift the stuff you already have sort of in process into those JVs, or is it going to be on future projects only?
David Bacon
No. We have already committed to selling into the joint venture the three projects that are under construction, and we'd be working towards moving Peterborough in as well. The desired outcome and the way we operate going forward on redevelopment would be to -- as projects get to construction-ready, tendered stage full approval, we'd be looking to move those into the JV and have them actually being constructed within the joint venture as opposed to having those on our own balance sheet through construction. The goal is to have them constructed within the JV going forward.
Tal Woolley
And so, look, we would expect -- like, will those types of transactions happen fairly quickly at Q3 or is that something that comes in the time thereafter? I'm just trying to understand like overall change we should be expecting by the end of Q3 once all those stuff closes.
David Bacon
Yeah. I think as Mike mentioned, I mean, our -- we've submitted approving these all as a package and we're working toward -- our ideal would be that everything comes together in Q3. So, the view would be that the JV is -- the first four development projects would go into the JV in Q3, and we'd also close on the management contract and the existing 15% interest in the Axium -- the existing Axium JV as well. All of that ideally would come together within the same quarter.
Tal Woolley
Okay. Got it. All right, thanks very much, gentlemen. I appreciate it.
Michael Guerriere
Thanks, Tal.
Operator
[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks.
Jillian Fountain
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 again for joining us, and please don't hesitate to give us a call if you have any questions. Thank you.
Operator
This concludes the conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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Extendicare Inc. (EXETF) Q1 2023 Earnings Call Transcript