Extendicare Inc.

Welcome to the Extendicare, Inc. First Quarter 2025 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 0. I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Extended Care's 2025 First Quarter Results Conference Call. Joining me today are Extended Care's President and CEO, Michael Greer, and Executive Vice President and Chief Financial Officer, David Bacon. Our Q1 results were released yesterday and are available on our website, as is a live audio recording webcast of today's call, along with an accompanying slide presentation. An archive recording will also be available on our website following the call today. As well, replay numbers and passcodes have been provided in our press release to access an archived recording until midnight on May 23rd. 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.

Thank you, Gillian, and good morning. We were pleased to report another strong quarter marked by revenue and earnings growth with strong contributions from all our business segments. This performance reflects the growing demand for our services fueled by demographic trends, the focused execution of our strategy, and the tireless efforts of our dedicated team. Adjusted EBITDA increased to $35.6 million, up 18.2% over the prior year. If we exclude out-of-period items, it increased by 42.7% to $29 million, with NOI and margin growth in all three business segments. In home healthcare, Q1 average daily volumes were up 8.9% from the same period last year. Excluding out-of-period items, Q1 NOI margin improved by 200 basis points, driven by rate increases and the operating leverage that results when higher volumes are supported by our scalable back office. In our long-term care segment, Q1 NOI margin improved by 150 basis points over the prior year after adjusting for out-of-period items. This growth was largely driven by increased funding, improved preferred occupancy, and reduced operating costs. In managed services, We delivered a year-over-year growth in revenue in NOI, largely attributable to the opening of three homes in the Axiom JV, and organic growth in beds serviced by SGP, which were up 7.2% from Q1 24. We are now servicing over 148,000 beds through our purchasing network. Given the results we've achieved with our Capital Light business model, and our prospects for sustainable growth, our board declared a 5% increase to the monthly dividend on common shares to 4.2 cents per share, which commenced with the dividend declared in March. Subsequent to quarter end, we completed the previously announced sale of three long-term care redevelopment projects into the Axiom joint venture. And last week, we announced an agreement to acquire Closing the Gap Healthcare, a recognized provider of home health care services in Ontario and Nova Scotia. On the next page, we outline the details of the transaction. We are acquiring Closing the Gap for total cash consideration of approximately $75.5 million, which will be funded through cash on hand and existing credit facilities. The transaction also includes an earn-out tied to new business revenue growth in the 12 months after closing. Based on Closing the Gap's financial performance for calendar year 2024, the acquisition would have added approximately $84.2 million in revenue to our home healthcare segment with margins very similar to our own. The transaction is accretive to earnings in AFFO. Based on a Closing the Gaps results last year, it would have increased our 2024 AFFO per share by approximately $0.06. And we anticipate integrating Closing the Gap into Paramed will result in approximately $1.1 million in annualized cost synergies in the first year following closing. Closing the Gaps proven capabilities in rehab services, and experience innovating and delivering integrated care models are highly complementary to our existing home healthcare operations, adding new channels for future growth. The acquisition is anticipated to close in Q3 this year, subject to customary closing conditions and regulatory approvals. Now we'll turn to our progress in long-term care redevelopment on slide five. In February, we opened Crossing Bridge, a new 256-bed long-term care home in Stittsville, Ontario. The third home opened in the Axiom Joint Venture within a year. As we did in Sudbury and Kingston, we've initiated a process to sell the vacated C-bed home that it replaces. As mentioned, subsequent to quarter end, we closed the previously announced sale of three long-term care projects under construction, in St. Catharines, Orange Stanley, and London, Ontario, to the Axiom Joint Venture for cash proceeds of $56.3 million and an estimated net after-tax gain of $11.1 million that we will record in Q2, with Extendicare retaining a 15% managed interest in the homes. These milestones demonstrate our approach to replacing older homes and adding long-term care capacity, which allows us to recycle significant capital into advancing the balance of our redevelopment program and other compelling growth opportunities. We currently have six homes under construction, which will bring 1,408 new beds into operation to replace 1,097 Class C beds. We continue to progress 12 additional projects to replace our remaining C homes in anticipation of future capital funding programs. The previously announced acquisition of nine homes from Rivera for $60.3 million is awaiting regulatory approval, with close expected later in Q2. With this transaction, we would add six additional redevelopment projects to our redevelopment pipeline, comprising 1,100 beds. While we remain focused on driving organic growth to keep pace with the needs of the aging demographic, we will pursue opportunities to augment that growth with acquisitions and new long-term care redevelopment opportunities where value and strategic alignment warrant. Now I'll turn it over to our CFO, David Bacon, to discuss our financial results in more detail.

Thanks, Michael. I'll start by reviewing the consolidated results for the quarter and our balance sheet and liquidity position before commenting on our individual business segments. As mentioned, our Q1 results were impacted by out-of-period funding and operating costs, and we've summarized these in the appendix to this presentation and have referenced them on the applicable segment financial results slides. Our consolidated Q1 revenue increased by 2.1% to $374.7 million, driven by LTC funding increases, growth in our home care volumes and increased bill rates, and expansion in our managed services. This was partially offset by the closure of three Class C LTC homes that were vacated following the opening of the newly developed long-term care homes in the Axiom joint venture. Excluding out-of-period items, our Q1 NOI improved by $8.7 million or 24.9% to $43.6 million, with growth across all segments. Excluding the impact of out-of-period items, our Q1 adjusted EBITDA increased by $8.7 million, or 42.7%, reflecting the improvement in NOI and flat administrative costs. Growth in AFFO continues to be strong, with Q1 AFFO of $0.235, up from 21 cents in the same period last year, supported by stronger after-tax earnings. When adjusted to remove the out-of-period items, our AFFO per share improved by 6.1 cents year-over-year to 17.7 cents. Turning to our next slide and our liquidity position, which remains strong with cash on hand of $110 million and access to a further $108 million under our new $275 million secured credit facility, and a favorable debt maturity profile with no maturities until 2027. Subsequent to the quarter end, the company completed the sale of the three long-term care redevelopment projects to the Axiom JV, as Michael covered in his presentation, adding net cash proceeds of $56.3 million to our liquidity position. The sale of these homes into the joint venture aligns with our strategy of recycling capital into new projects, advancing our redevelopment agenda while providing us flexibility to address other strategic capital needs. Given our liquidity position exiting Q1 and the added proceeds from the sale, we are well positioned to close both the nine long-term care homes that we're buying from Rivera and closing the GAAP transaction in the coming months, utilizing our liquidity position and our existing credit facilities. Turning now to our individual segments, starting with home health care, As previously disclosed in November 2024, Ontario confirmed a 4% bill rate increase for the sector that was retroactive to April 1st of 2024. As a result, we recognized retroactive revenue of $4.4 million in Q4 of 2024 as a recovery of eligible costs that were incurred in those retroactive periods. The 4% rate increase enabled us to make further enhancements to our compensation programs and investments in recruiting, retention, and technology this quarter. The net impact resulted in an out-of-period revenue and expense item of $11 million with no impact to NOI that we recorded this quarter. You may recall in the same quarter a year ago, we recognized a similar out-of-period revenue and expense of $13.6 million. in connection with the retroactive rate increases in 2023-24. Our home healthcare operations also benefited from workers' compensation rebates this quarter of $3.9 million. Excluding the net impact of retroactive funding, our home healthcare revenue increased by $17.3 million, or 13.3% year-over-year, driven by growth in volumes and our rate increases. Excluding out-of-period items, NOI improved by 4.4 million, or 41%, reflecting the 8.9% volume growth, rate increases, and the benefit of one less statutory holiday this quarter, with an NOI margin of 10.3%, up 200 basis points from the prior year. Turning to our long-term care segment, Q1 results were impacted last year by out-of-period funding of 9.8 million, and this year by workers' compensation rebates of $2.7 million. Excluding these out-of-period funding impacts, our revenue increased by $1.1 million, driven by funding increases and the timing of envelope spending, partially offset by $9.8 million in lower revenue resulting from the closure of the three redeveloped Class C long-term care homes that were replaced by new homes in the JV. Excluding out-of-period items, NOI increased by $3 million, driven by increases in revenue, the impact of the Easter falling in the second quarter of this year. This was partially offset by higher operating costs and an NOI reduction of approximately $1 million related to the closure of the three redeveloped homes. Corresponding NOI margins increased to 9.4% in the quarter from 7.9% last year. Finally, turning to our managed service segment, our revenue increased $1.6 million in the quarter to $18.6 million, largely due to organic growth in our SGP clients and changes in the mix of assist services, including management fees from the newly opened homes in the JV. NOI increased by $1.3 million to $10 million, with an NOI margin of 53.4% within our expected range for this segment of between 50% and 55%. On May 1st, 2025, Rivera completed the sale of the 21 Class C homes managed by Extended Care Assist to a third party. As a result, our existing management development agreements for these 21 homes were terminated. On a combined pro forma basis, giving effect to both the third party sale of the 21 homes and our pending acquisition of the nine long-term care homes from Rivera, Extended Care would operate 101 long-term care homes consisting of 59 homes wholly owned by Extended Care with approximately 8,100 beds and 42 homes with approximately 64 beds being managed through our Extended Care Assist group. Of these, 28 are operating homes within the Axiom Joint Ventures in which we hold a 15% managed interest. With that, I'll pass the call back to Michael for his closing remarks.

Thank you, David. The momentum across all our business segments combined with the strength of our balance sheet and robust demand for our services, position Extendicare to build on our track record of growth. Our health system continues to be challenged by the demographic reality of an aging population. Home care and long-term care are fundamental to addressing the rapidly increasing needs of seniors across the country. We're focused on obtaining the necessary regulatory approvals to close the nine long-term care home acquisition from Riviera in Q2 and welcome Closing the Gap and their team to Paramed in Q3. Finally, our annual shareholders meeting will be held on May 27th in Toronto. Further details are available on our website and we hope to see you there. As always, I want to end by expressing my sincere gratitude to each and every member of our team for their hard work and commitment to helping people live better. Our success would not be possible without their dedication to providing quality care to the people we serve. And with that, we're happy to take any questions that you might have.

We will now begin the question and answer session. To join the question queue, you may press star then one 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 and then two. Our first question comes from Kylie McPhee with Cormark Securities. Please go ahead.

Hi, everyone. First from me, on your home health care platform, one of your two asset-like organic growth engines, You delivered another round of good organic volume growth in Q1. We can see that in your metrics, hours of service, average daily volume, both up high single digit. I'm curious if you see any issues holding onto this level of organic volume growth for home healthcare, or if any organic bottlenecks are popping up like your labor supply situation. And maybe this is a good time to describe your relative ability to supply labor in the home healthcare space versus other players in the market that maybe have less resources.

Thanks, Kyle. We are not seeing any change in the momentum in terms of paramed growth. The demand continues to be quite robust and our ability to hire and train new caregivers is is well keeping up with with with the demand so there's there's no constraint there we've invested quite a lot in our back office capabilities to automate the recruiting and onboarding activities and we've also invested a lot in training facilities across the organization in many different locations, which allow us to partner with colleges and universities and have students completing part of their training in our organization, which puts us on a very competitive footing in recruiting new graduates. We have about 3,000 students in total spending part of their year at Extendicare and Paramed. So that gives us a very significant pool to recruit from. So we're quite confident about that and the pace of growth in Paramed seems to be continuing as it has for the last couple of years.

It's fair to say you're winning share of wallet in the home healthcare space. Our provincial payer is increasingly leaning on you because of your supply capabilities. Maybe you can describe your home healthcare growth rate, which is in and around 10% versus what the broader market is growing at for home healthcare.

Yeah, we have some insight, but not complete visibility to what's happening across the market. We do believe that we're growing a little bit faster than the broader market, but the overall market for home care has been increasing at a similar pace. So we're not sure that we're that much faster than the rest of the market. We think we are in some parts. But really, this is the one sector of healthcare that can be expanded relatively quickly without a significant capital investment. And so we're seeing governments leaning on it quite heavily to take pressure off hospitals and also to compensate for the fact that the pace of long-term care bed, you know, bed construction is, you know, is not keeping up with the demographic requirements.

Okay. Thanks for those comments. And last one for me on your growth capital deployment runway. You did the Creative Rivera deal that's closing, you know, probably this quarter, you did the nicely creative closing the gap home healthcare deal, closing Q3. Still seems like you have a lot of excess capital and leverage capacity beyond these deals. Do you have a very active pipeline of deals to match this excess capital position? And specifically, do you think there's a lot more to do in home healthcare?

Yeah, Kyle. I think that, yeah, we are well positioned from a liquidity perspective. With selling the three projects in after quarter end into the JV gives us another $56 million. So I think coming out of this, closing those two deals, we'll still be in quite a strong position from that perspective. We've said on past calls and continue to believe that the home care industry sector in particular is quite fragmented. And we do, you know, we'll continue to look for accretive opportunities in that space. So, you know, wouldn't talk today about pipelines near term or anything to any kind of detail, but we are going to remain active. And again, as we've said in the past, very focused on buying opportunities that would continue the growth agenda. So not volume for the sake of volume, but really complimentary assets in terms of geographic mix or service level mix. So I'd say we're still open for business from an acquisition point of view, but we'll be very prudent in terms of what we look at on that respect. And then on the long-term care side, As well on the redevelopment, I think as we're demonstrating, our redevelopment agenda needs quite minimal capital needs, given being able to recycle into the JV. But we still do believe that there's opportunities on a longer-term outlook for potential for net new greenfield long-term care, like brand new projects that are not tied to our redevelopment. So that's just another area that we keep our eyes open for as well.

Okay, thank you for that, David. I'll pass it on.

And the next question comes from Jonathan Kelcher with TD Securities. Please go ahead.

Thanks. I guess just sticking with sort of growth through acquisition, I see that the majority of your home health care business pyramids in Ontario, and I guess closing the gap sort of expands your geographic reach. But what about other parts of the country? Are there opportunities on the home health care side there?

Yes, there definitely are. and uh so just as david said that that's what we would be looking to do is to find other platforms for growth that would take advantage of the back office uh technology stack that we've created uh so very you know very similar services but provided in a different uh you know in a different geography uh you know as you know we're in we're in three provinces But the majority of our volume is in Ontario. One of the things about closing the gap that was appealing is they have footprint as well in Nova Scotia, which fits very nicely with what we've been doing there. So, yes, we're very interested in looking at acquisitions that would take us into other provinces.

Okay. And I guess semi-related to that, you guys are pushing the margins on the home health care business. Do you have, and I get Q1 had a little bump from Easter moving, which will obviously negatively impact Q2, but do you have a target, an annualized target that you want to get to?

Well, we think that there's more opportunity to to expand margins in home care. So, you know, we continue to leverage technology for back office efficiency. And, you know, as you can see in the results this quarter, you know, our G&A has been quite flat despite the growth that we've put forward. And so, you know, we're going to see continuing operating leverage and expanding margins as we add volume. So we don't have a target other than to continually look for ways to expand the margin, but we think that there's potential there for another one or 200 basis points over the next period of time, but part of that depends on how fast we grow and the nature of the acquisitions that we might look at.

Okay, so it's really just I guess margin expansion will largely come from economies of scale as you ramp up hours?

Yes, and the efficiencies that we're able to drive out of the back office. I mean, every time we increase volume by 10% without increasing the back office, that represents quite a lot of work behind the scenes to increase the efficiency of the back office operations.

Yeah, for sure. That's what I was trying to get at. So in buying the closing the gap, I'm assuming you don't have to add much, if any, to the back office to kind of bring that on, and that would be the majority of the synergies in that deal?

Yes, that's where it'll come from. The moving... All of those operations to one technology platform will be the majority of that lift.

Okay, thanks. I'll turn it back.

And the next question comes from Tom Callaghan with BMO Capital Markets. Please go ahead.

Thanks. Morning, guys. Maybe just to follow up on the train of thought around closing the gap, wondering if you could just kind of provide some color more broadly. Obviously, most of the operators in this space are private. So just in relation to kind of that $75.5 million acquisition cost, you know, how should we think about kind of the size of opportunities going forward? Is this, you know, a bigger one, kind of midsize, or any commentary there would be helpful?

Yeah, I'd characterize this as a midsize space. Acquisition, there may be some larger ones possible in the future. And then I'd say there are tends to close to 100 smaller operators across the country that would be quite a bit smaller than closing the gap. So I think there's a variety there. And, you know, we'll look at each one of those just on the criteria that we talked about in terms of fit and providing us with an additional opportunity to grow. As David said, we're not looking to buy volume just to buy volume. We're looking to make acquisitions that are going to help us to continue our organic growth path and to accelerate it.

Okay, thanks. That's very helpful. And then I guess just on the balance sheet, you know, under leveraged coming in the year, lots of capacity. As you think kind of towards the back half of the year, post-closing of these two deals, is there any type of targeted metric, whether debt to EBITDA or otherwise, that you're kind of thinking about in terms of the balance sheet?

Yeah, there's no specific target that we're looking for. Tom, we have, as you mentioned, we have, you know, would be viewed as being under levered. I think we'll close these two transactions with the liquidity we have on hand. There's probably room there to maybe reintroduce some leverage related to some of the acquisitions, especially given there's a real estate component there with the nine homes. But we still view, probably continue to take a conservative view of the balance sheet. So I don't think there's any, you know, no plans to kind of lever up the existing. I think we like having the flexibility in the liquidity and in our facilities to look at more acquisitions as we've talked about. So we don't really have a target, but I'd say that you'd see us remaining more on the conservative side like we have been. And really that positions us to be, you know, both strategic and potentially opportunistic, as opportunities could come to market on the M&A side.

Got it. Thanks, David. That's it for me.

And the next question comes from Tania Armstrong-Whitworth with Canaccord Genuity.

Good morning. Thanks, David. A couple more for me here. I guess just following up on closing the gap, If you could provide some color on how quickly those back office synergies that you highlighted can be realized. I think you said it was the first year after close. But I'm wondering if that's pretty easily where it's at.

Donnie, that last bit broke up a little bit. So I missed it. I think you were asking whether it would take a full year or whether it might be faster. Is that what you were getting at?

You got it, Michael.

Okay. So I actually think we'll see some of those synergies coming in in the first year, so I don't think we have to wait for an entire year before we start to see some of those benefits. But at the same time, in terms of achieving the full run rate, I think we are looking at a full 12 months before we get there.

Okay, that's fair. And then secondly, I'm wondering if there has been any increase on those long-term care funding envelopes effective April 1st of this year. I didn't see any new numbers come out, and I know these usually take effect on April 1st.

Yes, they usually do, but they also usually get communicated to us sometime later than April 1st, typically later in the summer. or in the early fall. But this year is an unusual year, given that there was an election in Ontario and the Ontario budget is not due until May 15th. So we expect the whole process to be delayed this year to some extent. So we're hoping to have some information in the fall, but we really don't have any any transparency yet on the timelines as to when we'll hear. And similar in Manitoba and Alberta, we haven't heard anything yet. But typically, we wouldn't know at this time of year. It's usually a later summer into September exercise.

Okay, that's good to know. I appreciate that color. And then lastly, on the acquisition of those nine Rivera homes, I'm wondering if you can provide any more color on exactly what we're waiting on in terms of regulatory approvals, if there are, if these are just kind of standard course approvals that we're waiting on, or if there's any one or two items holding this up.

No, this is pretty, this is par for the course from our perspective in terms of timelines. It takes a while to go through the process, and it's more than one province, and because there's retirement beds, we have, you know, more than one authority in the province of Ontario that we're talking to. But all that said, it's been an entirely routine process from our perspective so far.

Excellent. That's all for me. Thank you, gentlemen.

And the next question comes from Kyle McPhee with Coremark Securities. Please go ahead.

Hi, everyone. Just a couple quick follow-ups. Do you have any insight on the next round of enhanced funding windows in Ontario with the construction funding subsidies that will pop up and allow you to continue your Class C redevelopment playbook using the JV structure, effectively feeding ongoing growth of your managed services segments?

Yeah, no, Kyle, at the moment, we don't have any new perspective. As Mike mentioned, we suspect that any new announcements around the capital funding are going to be tied into the budget. And then, as Mike said, usually what happens, the budget will come out on May 15th, and it may take some time for the details and the clarity to come after that. The sector, us and a number of the other operators through the OLTCA has been quite active on the capital side of the equation in terms of working with the ministry and our advocacy work around it. We've all fed in information into the ministry to consider around the current climate, construction costs, outlook, etc. We're hopeful that that they'll turn back on the subsidy, whether it's the same $35 top-up or they go a bit more broad. We'll have to wait and see. We're hoping it's a bit more broad so that it can open up some additional projects in certain markets where to date the top-up hadn't been sufficient for the sector to build. So it's tied up into the into the budget timing and then, as Mike mentioned, into the summer months until we hopefully bring clarity there.

Got it. Okay. And last one, in Q1, you had a large tax payment outflow on your cash flow statement. Can you explain, give us some color on why it was such an abnormally high number in Q1?

Yeah, the biggest sort of new impact there from a run rate perspective is the cash taxes that get factored into that on our settlement of our annual PSU grants and director DSUs with a director retirement. So probably had between a million, million and a half of the incremental cash taxes on the PSUs and DSUs are in that 7 million plus number. So that's not a recurring item. And then we do call out kind of our outlook for FFO effective tax rate for the years in the 23% to 25% range. So we're still comfortable with that full year guidance, but there was some additional taxes in the quarter tied into the settlement of the PSUs and the DSUs with the director of retirement.

Okay, that's it for me. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks.

Thank you, Operator. That concludes our call for today. This presentation is available on our website, along with a link to a replay of the call. Thank you all for joining us, and please don't hesitate to reach out if you have any questions. Goodbye.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.