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Operator
Thank you for standing by. This is the conference operator. Welcome to Extendicare, Inc.' 's fourth quarter 2023 analyst conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will 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 zero. I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.
spk05
Thank you, Operator, and good morning, everyone. Welcome to Extended Care's 2023 Fourth Quarter and Year-End Results Conference Call. With me today are Extended Care's President and CEO, Michael Greer, and our Senior Vice President and CFO, David Bacon. Q4 results were released yesterday and are available on our website. The live audio webcast of today's call is available on our website, along with an accompanying slide presentation, and an archived recording will also be available on the site following today's call. As well, weekly numbers and passcodes for this call have been provided in our press release to access an archived recording until March 22nd. Before we get started, please be reminded that today's call may include forward-looking statements and non-GAAP and other financial measures. Such forward-looking 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 as well as details of non-GAAP and other financial measures 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, Gillian, and good morning. I'll begin my remarks today with a few words about a significant milestone in the history of Extendicare. Last month, we celebrated 50 years of trading on the Toronto Stock Exchange by ringing the opening bell. It was a moment of great pride and an opportunity to reflect on our legacy and to look forward with optimism to the future. It was also a wonderful opportunity to recognize the achievements of our team and their commitment to our shared mission of helping people with better. Their commitment is exemplified in our fourth quarter results. They reflect the various strategic initiatives we've taken in recent years to transform extended care into a growth platform that addresses the care needs of the aging demographic. 2023 was truly a transformational year. In our results, you can see a number of significant trends. Robot growth in our home healthcare volumes with a double-digit increase over Q4 last year. Continued growth in our SGP client base. Another step in the recovery of the long-term care segment with occupancy returning to pre-pandemic levels. And significant progress in our redevelopment program. These developments, along with the full quarter impact of the Riviera acquisition, resulted in strong financial results across all of our operating segments. Long-term care occupancy returned to historical levels, coming in at 97.8%, 330 basis points higher than Q4 last year and above the threshold for full funding at the home level. We continue to show margin improvement in long-term care segment from a combination of occupancy recovery, lower use of agency staff, and moderating inflation. We believe there's further opportunity for margin improvement as the funding gap that opened up in recent years due to funding increases lagging inflation has been the subject of discussions with government and sector partners. We are hopeful that this will be addressed to some degree in the Ontario government budget to come later this month. On the home healthcare front, we see continuing strength. This segment continues to benefit from strong demand, delivering its fifth consecutive quarter of volume growth. Average daily volumes in Q4 increased by 2.8% from the prior quarter, and we're up 10.2% from the prior year. As service volumes continue to expand, we benefit from a scalable back office and improvements in our recruiting, training, and retention programs to increase capacity. This operating leverage combined with strong demand for our services and government rate increases drove another year-over-year increase in our operating margin. In the quarter, the Government of Ontario announced a further 6.7% rate increase for the home healthcare sector, retroactive to April 1, 2023, on top of the 3% announced earlier in the year. This new funding will enable compensation increases and investments in training and technology to expand the available workforce and support the delivery of home healthcare services. We are very grateful for this boost to the home care sector and will leverage this funding to drive further growth. We delivered nearly 10 million hours of home care in 2023, and we expect this figure to grow as home care is critical to ensure the sustainability of the healthcare system. We are positioned to outpace the 4% demographic growth in the short and medium term as we continue to expand to address the care backlog that opened up during the pandemic. Looking at our managed services segment, we reported Q4 revenue and net operating income almost double that of the prior year period. This was the first complete quarter where we see the impact of the Riviera and Axiom transactions, which added 7,000 beds to our assist and SGP operations. SGP also broadened its market reach organically, increasing third-party and joint venture bets served by another 5.6% from Q3, up 24.1% from the prior year. Turning to slide four, 2023 marked a significant milestone in Extendicare's repositioning. with the completion of our strategic transactions that started with the sale of our retirement operations in 2022 and culminated in the closing of the Revere and Axiom transactions in Q3 of 23. These transactions established a foundation that we will use to drive growth and value creation using a less capital intensive higher margin business model. We are focused on expanding managed services, building new long-term care homes in partnership with Axiom, and growing home healthcare services. Several elements of this strategy came into focus in the quarter. Q4 is the first time we see the full financial impact of the Rivera and Axiom transactions, adding approximately $3 million in incremental NOI to our managed services segments. Our joint ventures with Axiom underpin our redevelopment program, evidenced by the acquisition of a 320-bed long-term care redevelopment project in the Ottawa region through our Axiom JV, where we have a 15% managed interest. This was the first project we acquired under our right to purchase, either alone or with Axiom, any Revera redevelopment project that advances to construction. Subsequent to year-end, we entered into a purchase and sale agreement to sell our fifth redevelopment project into the Axiom JV, a 256-bed long-term care home currently under construction in the Ottawa area. The transaction is subject to customary closing conditions, including regulatory approval, and we expect it to close in the second quarter. We also entered into separate agreements to sell the land and buildings associated with the soon to be shuttered Sudbury and Kingston seabed homes for estimated aggregate net proceeds after tax and closing costs $8.5 million. These legacy homes are scheduled to cease operations when the corresponding redevelopment projects in the Axiom JV open later this year. The ability to sell the legacy seahome properties once they are replaced by joint venture redevelopment projects provides us with added liquidity and increased flexibility in considering our capital allocation priorities. Such transactions, along with the proceeds from the 2022 sale of our retirement operations, enabled us to return $46.1 million to shareholders under our NCIB since 2022 while still maintaining a strong liquidity position and improving our payout ratio. Our strong balance sheet, low debt ratios, increasing cash flows from operations, and partnership with Axiom give us lots of optionality as we seek to drive growth and shareholder returns. Moving to the next slide. we continue to advance our redevelopment program with two new homes commencing construction in the quarter, both of which benefited from the supplemental capital funding subsidy that expired in August 2023. As I mentioned earlier, our Axiom JV acquired its first project from Revera during the quarter. Revera is responsible for development and construction And Extendicare will manage the 320-bed home when it opens in Q2 26, replacing a nearby 303-bed home currently also managed by Extendicare. Additionally, in the quarter, we commenced construction on another 256-bed home in Ottawa, which will replace a 240-bed home nearby. This project is expected to be sold into the Axiom JV in the second quarter. Together with the four homes already under construction in Sudbury, Kingston, Stittsville, and Peterborough, these six projects will replace 1,377 Class C beds with 1,536 new beds. We are on track to open three of these homes in 2024, with our 256-bed Sudbury project being the first to open later this month. We continue to advance the balance of our redevelopment projects to be ready to participate in any future enhancements to the capital funding program in Ontario. We are hopeful funding will enable up to four new projects to begin construction in 2024. Construction costs, interest rates, and applicable regulatory approvals will be pivotal in determining whether and when our other projects might meet the financial conditions necessary to proceed. At this point, I will turn it over to David Bacon to discuss our results in more detail.
Gillian
Thanks, Michael. I'll start by reviewing our consolidated results for the quarter. On a year-over-year basis, all of our business segments are up strongly. On a consolidated basis, Our Q4 revenue increased 12.8% to $350.2 million. This increase was driven primarily by growth in our managed services segment, largely attributable to the impact of the recurring management fees earned from our Rivera and Axiom transactions Michael spoke about. 10.2% year-over-year increase in home health care average daily volumes and improved long-term care occupancy levels. Revenue also benefited from long-term care flow through funding enhancements and rate increases in home health care. Our Q4 NOI nearly doubled to $42.8 million, and we achieved an NOI margin of 12.2% compared to 7% in the prior year. Excluding the impact of unfunded COVID costs in Q4 of 2022 and prior period items impacting both quarters, our NOI improved year over year by $9.7 million. reflecting growth in home health care volumes and billing rate increases, improved alignment of our LTC costs with funding, and growth in our managed services offset by higher operating costs. Adjusted EBITDA for Q4 increased by $19.5 million to $28.7 million, reflecting the improvement in NOI partially offset by modestly higher administrative costs. Our AFFO per basic share in Q4 was $0.23, up dramatically from $0.02 in the prior year, reflecting the improvement in adjusted EBITDA and lower maintenance CAPEX. For the full year, AFFO for basic share improved to $0.72, with a payout ratio of 66%. When adjusted for the impact of COVID recoveries and prior period funding adjustments, our AFFO for the full year was $0.56 for basic share, reflecting a payout ratio of 86%, a significant improvement over our 2022 levels. Turning to our individual segments starting with long-term care, excluding the impact of $14.4 million in COVID funding received in Q4 2022, our revenue increased by $27.5 million year-over-year, driven by funding increases, timing of flow through spending, and improvements in occupancy. NOI, as reported, improved by $7.1 million to $17.6 million with an NOI margin of 8.5%. Excluding the net impact in 22 of COVID costs, prior period funding and worker comp rebates, the year-over-year increase in NOI was $1.9 million. This improvement reflects lower use of agency staff, timing of spending, funding enhancements and increased occupancy offset by higher operating costs. While we are seeing improvements in our LTC NOI, we continue to face pressures on our operating margins stemming from the elevated cost inflation experienced in recent years. As Michael mentioned, we are hopeful rate increases in the Ontario government budget this spring will include some catch-up for inflation to help alleviate some of this margin pressure, which is also critical to support the advancement of redevelopment. Turning now to our home health care segment, revenue in the fourth quarter increased by $18.8 million, or 17.3%, driven by growth in our volumes and rate increases. This also includes the benefit of $5.4 million in retroactive funding recognized during the quarter in connection with a 6.7% billing rate increase announced in Q4 that was retroactive to April 1st of 2023. The $5.4 million relates to the recovery of prior wage and benefit increases for staff and eligible investments in recruiting, retention, training, and technology to support our home healthcare operations. NOI increased by $9.7 million to $16.1 million, with an NOI margin of 12.6 compared with 5.9 last year. Adjusting for last year's COVID impact and the retroactive funding recognized in Q4, NOI increased by 3.5 million, and NOI margin was up 220 basis points over last year. In addition to the billing rate increases, the improvement in NOI is driven by the growth in volumes, as our recruiting and retention programs continue to help stabilize our staffing capacity and expand our workforce. Turning to our managed services segment, revenue in NOI nearly doubled thanks to the addition of new managed homes and SGP clients related to the Rivera and Axiom transactions. Our Q4 revenue increased by $8 million, or 92.5%, to $16.5 million, leading to an increase of $4.3 million over last year's NOI. The Rivera transactions contributed approximately $7 million in revenue and $3 million in NOI this quarter. At the end of Q4, Extended Care Assist had management contracts supporting 9,800 beds, up 64.2% from a year ago. SGP supported over 136,000 third-party beds at year end, up 24.1% from prior year. Finally, turning to our financial position, closing the Axiom Rivera transaction has enhanced our financial stability and provided added flexibility. We ended 2023 with a solid liquidity position, with cash and cash equivalents of $75 million and access to a further $71 million in undrawn credit facilities. Our maturity profile is favorable with no debt maturities before the second quarter of 2025. We do expect to generate additional proceeds in 2024 from the sale of our Sudbury and Kingston legacy seabed properties and the sale of our new 256-bed project in Ottawa into the Axiom Joint Venture in Q2. The improvement in our operating results, added flexibility from our strategic transactions, and the proceeds from the sale of our retirement operations in 2022 have allowed us to return capital to shareholders under our NCIB. During 2023, we repurchased for cancellation approximately 1.7 million shares at a cost of $11.1 million, representing a weighted average price per share of $6.34. bringing the total shares repurchased under our NCIB since June of 2022 to 6.8 million shares. We will continue to consider strategic repurchases of common shares, depending on market conditions, share price, and our outlook for capital needs for redevelopment and other growth initiatives. With that, I'll pass the call back to Michael for his closing remarks. Thanks, David.
Michael Greer
We are truly delighted with our Q4 results and the momentum we have entering 2024. We are seeing the evidence of our strategy in action with improved performance across all operating segments. The transactions are delivering immediate benefits in the form of improved financial performance and a more sustainable operating model. This validates our decision to focus our efforts on those areas in which we lead the market. With compelling demand for services, a scalable platform, and a talented team of dedicated professionals, we are well positioned for strong growth and value creation. We have effectively positioned ourselves to pursue our mission of helping people live better every day, whether in long-term care or in their own homes. residents and patients and their families rely on us to provide high quality care made possible by the professionalism and hard work of our team. We have over 22,000 dedicated care professionals working in our homes and home care districts. On behalf of the entire management team, I thank them for their outstanding efforts and steadfast dedication to our shared mission. I'm proud of our achievements over the past 50 years as a public company, and we look forward to continuing to build on this legacy for many years to come. With that, we're 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 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're 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 Kelter with TD Cowan. Please go ahead.
Jonathan Kelter
Thanks. Good morning. First question, just on the home health care, good sequential growth in volume there. How should we think about that growth going forward into 2024?
Michael Greer
Well, Jonathan, the care gap that I mentioned earlier that opened up during the pandemic is still quite significant. So the way we look at this is that, you know, the underlying kind of demographic growth of the seniors population is about 4%. So you might think of that 4% as being kind of a natural growth rate of the sector in the long term. But there's quite a gap to close before we get to, let's say, a more steady state. So hard for us to quantify exactly what that gap is, but we see no letting up in our growth rate. the market seems to be able to absorb all the capacity that we can deliver. So we're, you know, we're expecting that to continue for the foreseeable future.
Jonathan Kelter
Okay. Well, I guess another way of asking that question is how much capacity do you think you can add over the course of, because it's close to 3% in Q4. So how much capacity can you add in 2024?
Michael Greer
Well, the pace that we've set out over the last five quarters, you know, is a pace that we're now configured for in terms of our recruiting teams, our training teams, you know, onboarding and management. The back office is very scalable, so we don't have any limitations there. So we'll continue at this kind of a pace until the market is saturated.
Jonathan Kelter
Okay, fair enough. And then David, just on the margins, I guess there's a note in your presentation talking about an additional stat holiday. How does that impact? Is that just pay is 1.5 times and does it really hit the quarterly margins by 120 basis points or am I reading that incorrectly?
Gillian
No, it is sizable if you think of the business, Jonathan. It's all labor, right, from a cost perspective, highly variable. So that comment is on the sequential quarter. So I know we've been focused on sequential trends as we've been through this recovery. I think we can probably next year start moving to year-over-year comparisons, and then we don't have to get into these quarter-by-quarter seasonal differences, but – When comparing to Q3, there is an impact of about $1.5 million of additional hit to NOI for having an additional stat holiday for our staff. So it is on a sequential quarter basis. It is a sizable impact. So if you excluded that from our quarter, our margins would have been closer to 10%, which would have been a slight uptick, which you'd expect to see given the volume growth in Q4 over Q3. So it's more of a seasonal quarter-to-quarter thing, Jonathan, as opposed to kind of an annual impact.
Jonathan Kelter
Okay. And then the retrofunding you got in the second six and change increase from the government, should we think about that as mostly flow-through? Or will you guys get a little bit of margin on some of that?
Gillian
Yeah, it's largely going to be flow-through. There's probably a little bit of one-time pickup in that Q4 5.4 for some, I'd say, some recovery of one-time investments we made earlier in the year with the new funding. But largely going forward, we are going to be trying to direct most of that into staff wages, benefits, and programs, which I think to Michael's earlier comments about Our confidence in driving capacity and staffing, part of that comes through this much-needed adjustment to our rates, which we can get flowed into compensation for our staff. So I think of it as largely flow-through, and the real growth in our margins is going to come through volume next year.
Jonathan Kelter
Okay. And then on managed services... first full quarter with everything closed. Was there any consulting fees or one-time items in there? I think in the past you've sort of guided to a 50% margin. You're a little bit higher this quarter.
Gillian
Yeah, there's still nothing unusual this quarter on that front. I think the biggest impact is the full quarter of the management fees coming through Rivera. The things that do create variability for us, which is why we would still say in that we've talked between 50-55 range in the past, and that would still be what we would say today. The things that do drive a bit of variability occasionally are going to be consulting assignments in the assist business, which tend to be non-recurring, and we're doing those assignments to hopefully lead to a recurring type engagement of some kind, whether it's full management or back office. And we are helping people with their redevelopment as well, which again, potentially leads to us becoming a permanent manager. The other thing, whether it be a bit of variability in there is the, the, um, level of ongoing construction redevelopment projects uh in the jv with our projects because we do earn some development fees so um but in this quarter it's quite there wasn't much in the way of consulting uh and they're affecting it but we still we still think of our margins in that segment in that 50 55 because there will be some occasional variability okay and then just lastly um if you as you guys have uh transition to more of an asset light strategy how should we think about your your balance sheet your leverage targets yeah i think um i think we i think we have some flexibility uh as you can see from where we are on on leverage targets i think um you know, I think where we think of the capacity that that gives us is more maybe potential future other growth opportunities outside of organic. So that just gives us flexibility there. And, you know, we do have the convert coming up in 2025, which is still, you know, five, six, five quarters away. So we are turning our minds to that. But, We don't really have a targeted leverage ratio at the moment. I think we're happy with the flexibility we have today, but it does position us to be both strategic and potentially opportunistic if certain acquisition opportunities come along in addition to having the capital we need to fund our share of the redevelopment, which is dramatically lower than what historically has been given the partnership with Axiom.
Jonathan Kelter
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. The next question comes from Pammy Burr with RBC Capital Markets. Please go ahead.
Pammy Burr
Thanks. Good morning. David and Michael, just coming back to that last comment that David made in terms of maybe stuff that would be opportunistic or something of interest from a capital deployment standpoint. What would that be aside from, you know, obviously the redevelopment program? I'm just curious, you know, where you'd like to sort of expand the footprint.
Michael Greer
Well, Tommy, that's, you know, that's a great question. Something that, you know, we're discussing. I mean, the reality is that the healthcare system is struggling to keep up with the need for services. The pandemic really resulted in us getting behind the curve of keeping up with the demographics. And so we're seeing really significant demand. We've got a waiting list for long-term care in the province of Ontario, 46,000 patients. people. The home care situation is such that almost 25% of all the referrals that come to the various service providers in home care are turned down because people don't have enough capacity to meet them. So there's this, you know, huge unmet demand situation. across the sector. So we're waiting to see now what the reaction to that might be in terms of a next step. I think the 6.7% rate increase to home care on top of the 3% that was already announced is the kind of government reaction that we're seeing to this situation. Governments are really trying to address this and are moving quite aggressively. At the same time, we've seen so far in the province of Ontario about 10 long-term care homes shut their doors for various reasons, perhaps because the land underneath could be redeveloped in different ways, or some of the smaller homes in rural areas having financial difficulty kind of operating in the current market. So the point of all of that is that we expect that there might be other operators that are looking for scale. I mean, we see how people are seeking scale just by the growth in our purchasing partnership. It's just been explosive growth. People are looking for ways to operate more efficiently. But I also think people are realizing that the smaller operators are just going to have more challenges given the complexity of the market. So we do think that, you know, there may be assets that come on the market that are, you know, looking for, you know, better leverage, looking for a different approach. We've already seen that with Chartwell and Riviera exiting long-term care, but I think there might be other developments in that regard. So I think we'll be very careful and very selective. We're very happy with our organic growth, but there may be some opportunities to advance what we're doing through acquisitions. But our strategy of focusing on services, focusing on redevelopment, home care, and managed services is our plan. So we won't be considering any acquisitions that go outside of that strategic direction. It would only be things that accelerated and are accretive to our earnings.
Pammy Burr
That's helpful. I guess maybe just on that, is there anything maybe in any sort of more advanced stages of discussions or all sort of just kind of sitting tight with, you know, a balance sheet that maybe has the opportunity to act if you wanted to?
Michael Greer
Yeah, I think it's the latter. You know, we see the opportunity there, but frankly, our first instinct is is to accelerate our own organic growth to be as fast as we can. From our mission perspective of caring for people, access to care is one of the key quality measures. If you can't get access to care, it's a significant failure of our health system. So we're really focusing on doing everything we can to accelerate our organic growth first.
Pammy Burr
Okay, thanks for that. Last one for me on long-term care. A decent, I think, sequential pickup in the quarter in terms of the NOI. But as far as you think about 2024, I think we've talked about this in the past, But coming back to your comments around maybe the budget for the Ontario budget and thoughts on funding, just curious whether you see 2024 maybe getting back, or is it still too early to sort of get back to those pre-COVID levels?
Michael Greer
Well, we think, yeah, it's a good question. So two or three things to point out on that. First of all, we are... undertaking some significant cost and efficiency programs in our homes, and so we expect to be able to improve our margins somewhat from where they are now. And we can do that just on our own. But as we've pointed out before, and as others have pointed out, there's quite a lag in our funding compared to lag in our funding compared to inflation. I mentioned that some smaller homes are closing. Part of that is just the financial pressure that that inflationary gap is creating for the sector. But that inflationary gap is also constraining redevelopment. And it's not moving as fast as the government had originally envisioned when they announced the program a couple of years ago. So there's a number of policy reasons that I think the government needs to act on this to be able to advance the capacity building that we need to achieve. So I'm, that's why I'm cautiously optimistic, but of course we don't know until we see what's in the budget a few weeks from now. So, you know, I think there's opportunity for us to make some improvement on our own, but I do expect that we'll get some help. And then the last thing, Pommy, just to remember is that the flow through care funding envelope is increasing quite a lot. It increases again in April. so that we can provide four hours of direct care per resident day. And as those flow-through amounts increase, just the math reduces the margin. So the margin looks a little lower than those historical numbers, but in absolute dollars, I do think that that over the next year or two, it's very likely that we will return to those more historic levels.
Pammy Burr
Got it. Thanks very much, Michael. I'll turn it back.
Operator
Once again, if you have a question, please press star, then 1. Since there are no more questions, this concludes the question and answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks. Please go ahead.
spk05
Thank you, Operator. That concludes our call for today. This presentation is available on our website, as are the call-in numbers for an ICAR-certified recording. Thank you for joining us, and 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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