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Operator
Welcome to the Extendicare Inc. 3rd Quarter 2022 Analyst Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Gillian Fountain, Vice President, Investor Relations. Please go ahead.
spk02
Thank you, operator. And good morning, everyone. Welcome to Extended Care's third quarter 2022 results conference call. With me today are Extended Care's President and CEO, Michael Greer, and our Senior Vice President and CFO, David Bacon. Our Q3 results were disseminated yesterday and are available on our websites. The audio webcast of today's call is also available on our website, along with an accompanied slide presentation, which viewers may advance themselves. A replay of the call will be available later this afternoon until November 25th. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call will also be 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 Greer
Thank you, and good morning. Before we begin on this November 11th, it is important that we take a moment to acknowledge and remember those who have served our country and had the courage to defend our shared ideals and values in the face of immense personal risk. In our capacity as a seniors care provider, it has been our profound privilege to know and serve many veterans who sacrificed much to defend our freedom and way of life. Today, we honor those heroes for their service to our country and remind ourselves that we owe them our gratitude and respect. Now let's turn to our results for the quarter. Our sector continues to be impacted by multiple challenges. COVID-19 remains an ever-present concern in our homes, even as our society moves on from pandemic-related restrictions. High levels of COVID transmission in the community continue to result in outbreaks in our homes. These outbreaks drive higher costs related to infection control and slow the pace of our occupancy recovery. Also, increased sick leave due to infection or isolation protocols exacerbates sector-wide staffing challenges. Fortunately, widespread vaccination has dramatically reduced the incidence of severe illness. The introduction of bivalent COVID vaccines in September offers a new tool to protect our residents, and uptake of boosters continues to be robust. Throughout the quarter, most of our homes experienced an outbreak. As of yesterday, 12 of our 53 long-term care homes were in outbreak. The shortage of caregivers continues to create challenges for the whole health system. In home healthcare, record low unemployment and labor shortages are making it difficult to grow average daily volume despite the continued strong demand for our services. Staff shortages are also driving increased costs from higher wages and benefits over time and travel costs. Increased spending on recruitment, retention, and training is also adding to pressure on our home healthcare NOI margins. We continue to invest in educating new caregivers through college partnerships and in-house training programs. In addition, various provincial and federal government programs are providing funding to increase staff capacity. However, it will take time for the impacts of these programs to be felt. We will continue to incur elevated COVID-related costs in our ongoing efforts to protect our residents, patients, clients, and staff. until the threat of the pandemic has abated. We have received funding to cover 90% of these costs, leaving a cumulative unfunded COVID cost for continual operations at $22.9 million. As of the end of Q3, the Ontario Ministry of Long-Term Care had fully allocated all the prevention and containment funding it has announced today. While additional funding has not been announced as yet, we expect provincial support for COVID costs to continue as long as outbreaks persist across the LTC sector. Alberta and Manitoba have already indicated their intention to continue to provide pandemic funding support for the foreseeable future. While we are grateful for the support we have received, we will likely continue to experience volatility in our financial and operating results until pandemic impacts recede and the labor market returns to a more balanced state. Turning to slide four, in October, we completed the transition of ownership and operations of our five Saskatchewan long-term care homes to the Saskatchewan Health Authority. The aggregate purchase price of $13.1 million will result in a gain on sale, net of taxes, and closing costs of approximately $4.9 million in Q4. Work continues to prepare for the close of our previously announced transactions with Rivera and Axiom. These transactions will enable us to transition our long-term care operations to a more capital-efficient platform for growth. Regulatory approvals in Ontario and Manitoba are still in progress. In the meantime, we are working with Riviera and Axiom on a comprehensive integration plan to ensure a smooth and expedient transition following approval. We have incurred approximately $5.2 million year to date in strategic transformation costs related to these activities. The aggregate consideration to be paid on closing of these transactions remains an estimated $70 million. At the same time, we continue to return capital to shareholders by purchasing shares under the NCIB that we initiated in June, following the completion of the sale of our retirement living segment. As at November 9th, we had purchased for cancellation approximately 3.6 million common shares at a cost of $25.5 million and representing a weighted average price per share of $7.08. Moving to slide five, we continue to make progress on our 20 long-term care redevelopment projects, which represent 4,248 new or replacement beds. Three of these projects are currently under construction and are progressing toward opening between the third quarter of 23 and the first quarter of 24. Labor shortages and supply chain disruptions did delay our Kingston project into Q4 of 23, and rising construction costs and interest rates have made it challenging to start construction on any additional projects. We remain fully committed to redeveloping our older seabed homes. We are actively engaged with industry partners in the Ontario government to enhance the government's capital funding program to address construction inflation and make these projects economically feasible. We are working to have up to six more projects ready to break ground before the end of 2023 if business conditions are favorable. Now we'll turn to a few operational highlights in slide six. Despite the prevalence of COVID in the community and outbreaks in our homes, long-term care average occupancy improved 90 basis points in the quarter. While navigating the challenges of the pandemic and the tight labor market, we are also faced with inflationary pressures that are significantly impacting our operating costs. Funding rate increases have lagged inflation in our long-term care segment negatively impacting our financial performance with LTC NOI margins down 230 basis points from the prior year. In our home health care segment, an extremely tight labor market, combined with ongoing pandemic-related staff absenteeism and seasonal impacts, resulted in lower average daily volumes of 25% on a sequential basis. In our SGP customer base, we continued to see strong growth during the quarter, up 4.7% from Q2 and up 21% year-over-year. The pandemic continued to cause volatility in our results with ongoing mismatches between costs and funding. Pandemic-related spending increased during the quarter to $22.5 million, up $400,000 from Q2, as outbreaks continued in our long-term care homes throughout the quarter. Our COVID costs were largely funded and included $1.1 million for the prior year, resulting in net unfunded costs of $500,000 in the quarter. With that, I'll turn it over to our CFO, David Bacon, who will comment on our consolidated and segmented financial results for the third quarter. David.
COVID-19
Thanks, Michael. I'll start by providing an overview of our consolidated results for the quarter, followed by some financial highlights of our individual business segments and our liquidity position. As a reminder, our retirement living communities that were disposed of in May and the Saskatchewan long-term care operations sold after quarter end have been classified as discontinued in our financial results. This quarter, we reported $3.6 million in costs related to the strategic transformation of the company in connection with the Rivera and Axiom transactions, bringing the total cost to date to $5.2 million. We have reported these costs as a separate line item in other expense and will continue to track these costs on a go-forward basis, which will be excluded from AFFO and EBITDA. Turning now to slide eight in our consolidated results, We continue to receive COVID funding support under various provincial programs. Our net unfunded COVID costs impacted our consolidated adjusted EBITDA from continuing operations by 500,000 this quarter. On a year-over-year basis, our consolidated revenue increased 8.7% for $24.6 million to $308.9 million. This increase was driven primarily by long-term care funding enhancements, including funding for additional hours of care timing of spending in the flow-through care envelopes, home health care billing rate increases, and growth in other operations. This was partially offset by lower COVID funding support of $9 million and a 1.2% decline in home health care average daily volumes. NOI decreased by 18.9% or $5.5 million to $23.5 million, with a margin of 7.6% compared to 10.2% in the prior year quarter. driven by higher operating costs across our segments, lower home health care daily volumes, and a net increase in unfunded COVID-19 costs of $1.3 million. Our consolidated adjusted EBITDA decreased 40% for $6.8 million to $10 million due to the lower NOI and increased administrative costs of $1.3 million. AFFO per share was $0.02 in Q3, down from $0.11 per share in the prior year period, reflecting the decline in earnings, including the loss of approximately $0.02 per share from the disposed retirement living segment and higher maintenance capex. Turning to our individual business segments on slide 9, long-term care operations saw revenue increase by $16.6 million, or 9.5% in Q3, driven by funding enhancements and timing of flow-through spending, including 19.5 million in Ontario flow-through funding. This was partially offset by lower COVID expense funding of 4.6 million. NOI decreased by 3 million in Q3 to 13.9 million and represented 7.2% of revenue. Excluding a reduction in COVID recoveries of 1.1 million, NOI declined by 1.9 million, reflecting the significant inflationary impacts on operating costs, including labor, utilities, supplies, and insurance. These inflationary impacts have not been offset by sufficient increases in funding, including the lack of an OA rate increase in Ontario long-term care in April of this year. Our NOI margins adjusted to exclude the impact of COVID were 7.8% compared to 10.1% in Q3 of 2021. In addition to the inflationary pressures, margin percentages are down approximately 100 basis points from the impact of the Ontario flow-through funding increases, including the phase-in of the four hours of care and the now permanent $3 per hour wage increase for PSWs. The persistence of outbreaks is hampering the pace of our occupancy recovery and long-term care. With the removal of Occupancy Protection Ontario earlier this year, we are required to achieve 97% occupancy for the 11 months ending December 31, 2022, excluding closed ward-style beds no longer in use and isolation beds. On this basis, our average adjusted occupancy for the eight months ended September 30 was 96.5%, up 50 basis points for the five months ended June 30th. We continue to track a handful of Ontario long-term care homes that may not fully recover to the required 97% and have recorded an $800,000 reduction in NOI for the shortfall in our year-to-date results. In August, the Ontario government confirmed its plans to permanently close third and fourth ward-style beds and announced its intention to phase out funding over a two-year period starting in 2023. We have 185 ward-style beds in Ontario, of which 76 will be reopened when they are replaced by single rooms in our new Kingston and Sudbury projects currently under construction. We estimate the potential NOI impact in 2023 of the proposed work style funding reduction to be approximately 1.1 million. Turning to slide 10, revenue in our home healthcare segment grew 5.7 million or 5.6% in Q3, driven by billing rating increases and additional funding to support the government's permanent wage increase for PSWs. The increase in revenue was partially offset by lower COVID and pandemic funding of $4.4 million, and a decline in our average daily volumes of 1.2% from the prior year quarter. Paramed's NOI decreased by $3.5 million to $5.2 million, with an NOI margin of 4.8% compared to an 8.5% margin in the same period last year. The decline in NOI reflects billing rate increases offset by higher wages and benefits, travel and technology costs, including costs associated with the elevated levels of recruitment, retention, and training costs to address our staff capacity challenges. On a sequential basis, excluding the impact of the net COVID costs and the workers' compensation rebate received last quarter, our NOI margin was down 160 basis points, reflecting these higher operating costs. from increased overtime and travel, including a temporary mileage premium provided to staff to address high fuel costs and higher back office costs to address the staffing challenges and the rise of COVID-related staff absenteeism during the quarter. Turning now to slide 11, the demand for our assist services and SGP purchasing service continues to be strong. SGP now supports 107,000 third-party beds as of the end of Q3 up 21% from a year ago, and up 4.7% sequentially. Q3 app revenue increased by $2.3 million, or 34.6% to $8.8 million from Q3 2021, largely due to growth in our SGP clients and the timing and mix of our assist services, which resulted in a $1 million increase in our NOI to $4.5 million. Finally, turning to slide 12, ExtenderCare remains well positioned with strong liquidity with cash and cash equivalents increasing to $175 million and access to a further $77 million in undrawn demand credit facilities at the end of the quarter. In addition, the company has undrawn construction financing available in the aggregate of $142 million for our ongoing redevelopment construction projects. Our maturity profile remains strong with only modest debt maturities coming due over the next two years. and a debt to gross book value of 35.2%. Our liquidity position provides us with flexibility to allocate capital strategically, whether in respect of our long-term care redevelopment program, the pending Rivera transaction, and other potential acquisitions and capital structure initiatives. As Michael mentioned, we have been actively purchasing common shares through our issuer bid we initiated in June. The NCIB provides us the ability to purchase up to 7.8 million common shares for cancellation through to the end of June of 2023. And decisions regarding purchases of common shares will continue to be based on market conditions, share price, and our outlook for our capital needs. With that, I will pass the call back to Michael for his closing remarks.
Michael Greer
Thanks, David. Extended care remains focused on providing high-quality care for our residents, patients, and clients. as we advance our transition to a growth-oriented long-term care and home health care provider. We continue to face challenges from the pandemic and its aftermath, including inflationary pressures and a very tight labor market. Accordingly, our financial performance will continue to be uneven due to the timing of government funding increases and COVID-related support. Our strategic transactions with Revera and Axiom will position us well to leverage our significant experience and scale to meet the growing demand for seniors care, which is being driven by demographic trends. Despite near-term volatility related to the pandemic, we remain optimistic about our positioning for growth and at the same time, sustainable value creation for our shareholders. Finally, we want to thank everyone across our organization for their dedication and commitment to our residents' patients and our mission to help people live better. With that, we'll be happy to take any questions 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 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, Please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Jonathan Kelcher of TD Securities. Please go ahead.
Jonathan Kelcher
Thanks. Good morning. First question, just on, I guess, on LTC and just to start, I just want to clarify, like, You had 0.8 million for not being full occupancy. That's a hit you took in Q3. Is that correct?
COVID-19
That's the year-to-date total. Jonathan? Yeah. We've provided 800. We look at it every quarter. So year-to-date, it's cumulative 800,000.
Jonathan Kelcher
Okay. So you've been providing for it all along. It wasn't Wasn't just a cost in Q3?
COVID-19
Wasn't all in the quarter.
Jonathan Kelcher
Yeah, not all in the quarter. Okay. That helps. And then on the estimated cost of phasing out the ward-style beds of $1.1 million, how did you come to that? Is that just all the funding for those beds?
COVID-19
Yeah, that is our best view of the proposed – phase out. It's really focused on the OA side of the equation on the homes. So it's basically looking at what the OA funding is for those beds and then the timing of our construction projects, because as I mentioned, 76 of the 185 beds do come back into service in our two new homes that are expected to be finished by the end of next year. So it's a focus on kind of the OA funding and the timing of when we think we'd be phasing out the 76 beds or so into the new homes.
Jonathan Kelcher
Okay. And then just flipping over the home health care, the 5.7% margin that you showed as adjusted is, like, if you guys are sort of stuck on $25,000 hours which it seems just given all the labor issues that uh it's hard to see it going much higher than that over the near term is sort of five and a half to six percent how we should think about margins or is there it should they can they trend up from there yeah i think a couple of thoughts on that um
COVID-19
I guess two things. There's a number of cost elements in our structure today with the sort of magnitude of the staffing capacity challenges and the turnover that we've spoken about in the staffing. So there's a lot of inefficiency in our system in terms of scheduling, rescheduling, book offs, sick leave, pay, given we have you know, we're still, you know, sending our staff a little further. We have a temporary, you know, fuel surcharge or fuel rebate that we've given our employees to try and combat the cost of fuel. So a lot of that is temporary and transient. I guess my best view of that, because, you know, outlook and guidance is hard here, but if you go back to 2021 and you look at sort of our pattern as we were able to recover out of that and some of that, you know, inflationary pressure wasn't there. You could see kind of a progression in the margins as we recovered our volumes. So, you know, there's a lot of cost inefficiencies, but there is a lot of leverage there to see margin improvements as the volume comes back up again. So, hard to say for Q4 and Q1 as we're still dealing with you know, sheer number of cases out there in terms of COVID and impacts to staffing and the broader, you know, tightness in the labor market. So, you know, longer term, we do think we should see margin progression back, you know, towards those levels that we were seeing back in 21 as we were coming out of the depths of the first waves of the pandemic. But exactly the trajectory of that and how fast we can start to see some of that return and improvement above these levels, it's going to take a bit of time into next year.
Jonathan Kelcher
Okay. And then the margins you show on slide 10 of your deck, that's sort of your best guess on, or I don't want to say best guess, but that's sort of what you think they would be excluding sort of COVID and all sort of one-time type of things.
COVID-19
Well, that adjusted margin in the little table is adjusted out for COVID and workers' comp one time, so that takes out some of the effects of the costs.
Jonathan Kelcher
Yeah, so more your true long-term. Yes. Okay, that's it for me. I'll turn it back. Thanks.
Operator
Once again, if you have a question, please press star, then 1. Our next question comes from Tal Woolley of National Bank Financial. Please go ahead.
Tal Woolley
Hey, good morning, everybody. Or good afternoon, I should say now. I guess, Michael, my first question is this. This absenteeism issue, you know, continues to be a lingering challenge coming out of COVID. You're a CEO of a commercial enterprise. You are a medical doctor. I guess what I'm asking is, are the COVID protocols we've got right? Are we getting the balance right between patient protection and the cost to deliver services, in your opinion?
Michael Greer
Yeah. Look, I guess I got a couple of perspectives on this. Good question. A lot of what we're seeing right now is still lingering pandemic effect, but also the aftermath of the pandemic, you know, particularly in terms of the surge in inflation and the very, very tight labor market. Obviously, central banks around the world are working on that. And so, this is, these are conditions that will subside, you know, probably in 2023. It's anybody's guess how quickly that'll happen. In the meantime, much is happening to bring new caregivers into the health sector. So, you know, the governments are responding to this challenge with expanded college programs, higher immigration targets, revised credentialing rules, and these things will materially improve the availability of clinical professionals, but it will take some time for those to have their effect. In the meantime, we're focusing our efforts on our retention programs to complement the recruiting that we've been doing, to try to increase utilization of existing staff, and to improve conditions for staff in the form of things like guaranteed hours, more full-time positions, stronger relationships with supervisors, enhanced training, et cetera. Really, when you net it out, you know, we're experiencing a challenge that is really directly related to the pandemic and its aftermath. And we do believe that as these conditions abate, we'll return to growth. And as David was saying, we, you know, we delivered a 9.7% margin last year at this time. And we're confident that we'll get there again. and return to growth as the market normalizes. You know, as far as whether, just to directly address your question about, you know, whether our pandemic response is appropriate, I think you can always quibble with when things are initiated and when things are ending. But broadly, I think we've got it right. The test of that is really the pressure that we're seeing on hospitals and whether the healthcare system is able to manage the level of infections that we're seeing in the community. And, you know, I think we're running that pretty close to the red line. So I think we're, you know, going to continue to have, some challenge over the, you know, and debate over the next four or five months as to what is the appropriate public health response to this situation as we come out of the pandemic and get to more normal kind of flu season and other viral, you know, pathogens that are always there but are coming back with a bit of a vengeance this year because they've been absent for the last couple of years.
Tal Woolley
Um, you know, when you think about the earth itself, like what's your sort of working theory for how long it could take, um, for it to really sort of be, uh, you know, kind of squashed, like in terms of like, just not seeing the, you know, the case volume and stuff and stuff like that. I appreciate that, you know, there has come along and there may be less, you know, less harmful. but it's still obviously having, you know, an impact on service delivery in the healthcare system. What's sort of the best thinking you know of right now in terms of like how long it will take for this to kind of really wind down?
Michael Greer
So, look, the first thing I would say in answer to that question is there's a lot of other people much better qualified to predict that than me. For sure. And I would also say that those better qualified people have been getting it wrong for a couple of years. So far be it for me to, you know, to make that kind of a prediction. But I would point to a data point that just came out this week. You know, the World Health Organization, you know, has been looking at COVID-related death rates worldwide. And, you know, this year they're down 90% from where they were last year. So we are clearly in, you know, the waning phase of the pandemic in that period when it becomes endemic and when, you know, the whole population develops resistance to the virus. You know, we're definitely in that declining phase. Exactly how long that'll take, I think most people feel that we're going to have a bit of a challenging winter, although the debate is whether the winter issue is really COVID or it's going to be more other viruses like influenza, respiratory syncytial viruses has been quite significant this year. You know, I think all the indicators are that we're getting back to normal, although still reacting to, you know, the wide swath that the pandemic has cut into the whole kind of healthcare dynamic. So, we're, you know, we're getting there. It's, you know, we've reflected on the fact that this is our 11th quarter of reporting COVID impacts on the business. uh you know i think we've got a couple more quarters to go certainly um you know q4 q1 and then after that um it's anybody's guess but but you know i do think we're on the declining uh side of this curve okay that's helpful i appreciate that um and then just some uh i'm wondering if and i apologize i missed some of the preambles so this is covered um but uh
Tal Woolley
Just with respect to the strategic transactions with Rivera and Axiom, you know, can you give us just some ideas on what's your best estimate on the timing of the acquisition of the Rivera Class A equity interest, the transition of the Rivera Class C beds, and the beginning of the drop-downs to Axiom?
Michael Greer
Yeah, we do not have good visibility on that. You know, I'd remind you of a couple of things. So, first of all, we're looking for approval from two different provinces. So, we've got two different kind of regulatory processes that we are navigating. We don't have any indication of what the timing might be. You know, we're certainly hoping to get approval early in 2023, But that's, you know, that's not a prediction. So, you know, unfortunately, I can't really provide much more clarity than that. Certainly, when we get some clarity, we'll let the market know.
Tal Woolley
Is the expectation that all of these things will get approved simultaneously, or does it happen in pieces?
Michael Greer
We've proposed it as a single – That's the nature of our application, because all of these things are very much related to each other. But, you know, again, can't really predict, you know, how the government might want to parse through the elements of our transactions.
Tal Woolley
And with the Class C JV with Axiom, I'm just wondering, like, can you sort of get like a blanket approval for that structure? Or does each dropdown have to get approved?
Michael Greer
Well, I think there's probably two elements there. So You know, the first is that any license transfer is going to require a separate approval. So, you know, that doesn't necessarily involve significant delays for a single home. And, you know, certainly the thinking is that once the framework has been approved, that individual transactions will not be a heavy lift. And we actually have a precedent for that because, you know, we've seen this kind of capital structure joint venture before. Certainly, Rivera has had that with Axiom for some years. And that has not introduced any significant delays in the ability to redevelop homes. we would anticipate that that's the way it would continue going forward.
Tal Woolley
Okay. That's great. Appreciate your perspective, Michael. Thank you.
COVID-19
Thank you.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Gillian Fountain for any closing remarks.
spk02
Thank you, Operator. That concludes our call for today. This presentation is available on our website, as are the call-in numbers for an archive recording. Thank you everyone for joining us today. Please don't hesitate to give us a call if you have any questions.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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