Extendicare Inc.

Thank you for standing by. This is the conference operator. Welcome to Extendicare, Inc.' 's first quarter 2024 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 zero. I would now like to turn the conference over to Gillian Fountain, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Extended Care's 2024 First Quarter 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 Q1 results were released yesterday and are available on our website, as is a live audio webcast of today's call, along with an accompanied slide presentation. An archived recording will also be available on our website following today's call. As well, replay numbers and passcodes for this call have been provided in our press release to access an archived recording until May 31st. Before we get started, please be reminded that today's call may include forward-looking statements or non-GAAP and other financial measures. Such forward-looking statements involve known and unknown risks and certainties 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 files. With that, I'll turn the call over to Michael.

Thank you, Gillian, and good morning. We were very happy with our Q1 results. Our strong start to the year is a direct result of our strategy to grow our services business while leveraging our joint ventures with Axiom to support long-term care redevelopment. Year-over-year double-digit growth in our home care and managed services segments combined with the sale of another long-term care redevelopment project into the JV with Axiom, represent continued progress in our journey toward a less capital-intensive, higher margin business model. The strategic transformation that started in 2022 has strengthened our balance sheet, providing us with greater flexibility in our capital allocation decisions. The demand for our services is clear. with managed services segment NOI doubling to 8.7 million on a year-over-year basis. Our redevelopment program has good momentum with the opening of Countryside, our new 256-bed long-term care home in Sudbury in March, the sale of our 256-bed Orleans project into the Axiom joint venture in April, and the sale of the vacated Class C home in Sudbury following the opening of Sud Countryside. Taken together, these transactions demonstrate efficient capital allocation as we recycle capital from the sale of replaced legacy Class C homes into new redevelopment projects that we pursue through the Axiom Joint Venture, where we earn development fees during construction, then management fees to operate the home in addition to our 15% ownership interest. These transactions, supported by our strong operational performance, helped strengthen our balance sheet in the quarter and improved our payout ratio to 69% on a trailing 12-month basis. As we continue to execute on our strategic agenda and focus on delivering strong operating results, we are well positioned for growth across all our business segments in 2024. As you can see on slide four, we delivered strong growth across the business in Q1, driven by increasing demand for the services we provide. In long-term care, Q1 occupancy levels increased 90 basis points to 97.5%, above the threshold for full funding at the home level. This is a strong result considering the seasonal impact the winter months can have on occupancy. In home health care, we continue to drive strong growth, with average daily volumes increasing 11.4% from the prior year. Our volume growth continues to outpace demographic trends as we work to address significant unmet demand for services. We expect this to continue throughout the year as home health care services help to mitigate the significant capacity challenges faced by the rest of the health system. Our volume growth is a direct result of our focus on retention and recruiting to increase capacity. The success of these programs is evidenced by record high additions of new care staff in Q1, which gives us capacity for growth in future quarters. In our managed services segment, we also saw strong results following the Revere and Axiom transactions which closed last year. Net operating income doubled that of the prior year period, and the number of extended care assist beds grew 64% to just under 10,000 beds. The number of third-party and joint venture beds served by SGP increased year over year, by 23.7%, driven by both organic growth and the strategic transactions. After adjusting for one-time items, our managed services and home healthcare segments were responsible for 56% of NOI in the quarter. As we continue to execute on our redevelopment plan, we expect the proportion of NOI coming from services in these two segments to gradually increase. Rate increases are supporting margin recovery in long-term care as we recruit staff and reduce agency use. Increased care volumes combined with rate increases drove continued improvement in pyramid NOI margins. We expect these trends will continue to strengthen home care margins in the coming quarters. Managed services margins are in the 50 to 55 percent range that we expect will be the norm for this segment. Turning to long-term care funding on slide five, we've spoken for several quarters about the need to address the funding gap that arose from the significant inflationary pressures on our operating costs. This gap put a strain on our operating margins in long-term care in recent years. In March, the Ontario government announced a number of funding enhancements that go a long way to address the impact of inflation. On April 1st, the government implemented a 6.6% blended funding increase across all funding envelopes, resulting in incremental annual revenue of approximately $21.3 million. We estimate $12 million of this amount is applicable to the other accommodation envelopes. representing an 11.5% increase, sufficient to address most of the inflationary gap and help to restore our net operating income to historic levels. Additionally, in Q1, the Ontario government provided one-time funding of just over $2,500 per bed to help relieve financial pressures and address key priorities, including capital and operating needs in long-term care homes. As a result, we recognized one-time funding of approximately $12.2 million in the quarter, of which $9.2 million was retroactive to April 1 last year. In addition to the operating funding changes, Ontario reinstated the $35 per bed per day time limited enhancement to the capital funding subsidy. which is available for all new projects that receive government approval to construct before November 30th, 2024. A significant investment in home healthcare was also included in the Ontario budget, but RAID details have yet to be announced. All of these funding increases will help return the seniors care sector to long-term financial sustainability. On slide six, we detail the considerable progress we've made in recent months on our redevelopment program. We were delighted to open extended care countryside at the end of March. This is our new 256-bed home in Sudbury held in the Axiom Joint Venture. It was heartwarming to see the reactions of residents as we welcomed them to their new home. Subsequent to quarter end, We completed the sale of our fifth redevelopment project into the Axiom JV for cash proceeds of $20.1 million. This is a 256-bed home under construction in the Ottawa area. Additionally, in April, we completed the sale of the vacated Sudbury Class C home for cash proceeds of $5.3 million. We now have five homes in the joint ventures with Axiom. currently under construction in Ontario, consisting of 1,280 new beds slated to replace 1,121 Class C beds. We remain on track to open two of these homes later this year in Kingston and Stittsville and anticipate closing the sale of the vacated Kingston Class C building for estimated proceeds of $3.8 million later this year. We continue to advance our remaining 15 redevelopment projects in Ontario, consisting of 3,032 new beds that will replace 2,211 Class C beds. With the increased operating funding and the enhanced capital subsidy in place until November, we are targeting to begin construction on up to four new projects this year. Construction costs interest rates, and applicable regulatory approvals will be pivotal in determining whether and when new projects will meet the financial conditions necessary to proceed. Given the pace of long-term care redevelopment in Ontario, the government has acknowledged the need for the Class C long-term care homes to remain in service beyond June 2025, when the current licenses expire. Accordingly, it is offering license extensions of up to five years to qualified operators. As such, we have submitted our request for license extensions for all of our remaining Class C homes while we continue to progress our redevelopment agenda. At this point, I'll turn it over to David Bacon to discuss our results in more detail.