Extendicare Inc.

Thank you for standing by. This is the conference operator. Welcome to the Extendicare, Inc. second quarter of 2025 analyst conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded today. 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. And should you need any assistance during the conference call, you may signal Conference 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.

Thank you, Operator, and good morning, everyone. Welcome to Extendicare's 2025 Second Quarter Results Conference Call. Joining me today are Extendicare's President and CEO, Michael Greyer, and Executive Vice President and Chief Financial Officer, David Bacon. Our Q2 results were released yesterday and are available on our website, as is a live audio webcast of today's call, along with an accompanying slide presentation. An archived 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 by phone until midnight on August 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.

Thank you, Gillian, and good morning. At Extendicare, we strive to be Canada's leader in the delivery of high-quality long-term care and home care services, leveraging our deep expertise to drive growth in a capital-efficient manner. The results released yesterday exemplify several pillars of our strategy at work, including strong organic growth driven by execution excellence, strategic M&A to build scale and expand service capabilities, and disciplined capital allocation grounded in a strong balance sheet and our ability to recycle capital to advance long-term care redevelopment. The results also underscore the growing demand for our services driven by demographic trends. Adjusted EBITDA increased to $39.8 million, up 3% over the prior year. Excluding the out-of-period items recorded last year, adjusted EBITDA increased by 15.4%, with home health care leading the way. In Q2, average daily volumes were up 10.9% from the prior year, and NOI margin improved by 90 basis points to 13.5%. The widening margins reflect the operating leverage enabled by our highly scalable back office. In our long-term care segment, Q2 NOI margin improved by 30 basis points over the prior year after adjusting for the out-of-period items. In managed services, third-party and joint venture beds serviced by SGP grew 5.9% from last year, and we are now servicing over 149,000 beds. Driven by the strength of these results, AFFO increased to 29 cents per share, up 23.1% on a year-over-year basis, and our dividend payout ratio was 46% on a trailing 12-month basis. Our growing cash flow and strong balance sheet give us flexibility to pursue strategic growth opportunities. In a fragmented seniors care market underpinned by demographic demand, we see good acquisition opportunities. Our scalable back office helps make acquisitions accretive as we harvest the synergies that come from running higher volumes through our cloud-based technology platform. We closed two transactions in the quarter that will begin to demonstrate the value creation potential of our strategy. Turning to slide 4, on June 1st, we closed the previously announced acquisition of nine Class C long-term care homes and a parcel of land from Rivera for $41.9 million in cash and the assumption of certain liabilities of $27.4 million. This transaction adds 822 long-term care beds and 574 private pay retirement beds to the long-term care segment and is expected to add approximately $13 million in annualized NOI. This is partially offset by the departure of 30 Riviera homes from our assist managed services segment, nine of which were sold to us and the other 21 to a third party. The net impact of the two transactions is expected to increase NOI by an estimated $6.8 million, or two cents of AFFO per share. More importantly, the acquisition adds six new projects and close to 1,100 beds to our redevelopment pipeline, bolstering the future growth trajectory of the managed services segment. Our Q2 results included only one month of the acquisition So the full benefit will first be apparent in our Q3 results. On July 1st, we completed the previously announced acquisition of Closing the Gap for $75.1 million, welcoming more than 1,200 caregivers and adding an estimated 1.1 million service hours to our home health segment. Based on Closing the Gap's 2024 performance, we expect the acquisition to add approximately $9.8 million in annualized NOI to our home healthcare segment, or $0.06 of AFFO per share starting in Q3. As we integrate Closing the Gap into our Paramed operations, we expect operating efficiencies estimated at $1.1 million in the first year. The acquisition also gives us access to other integrated care models, such as direct contracts with hospitals, that provide us with new ways to meet the needs of the aging demographic, further augmenting opportunities for organic growth. We increased our senior secured credit facility by $100 million in the quarter, using $55 million to partially fund the Closing the Gap acquisition. The upsides in our credit facility allowed us to complete the two acquisitions and still maintain a very favorable liquidity position that provides us with significant flexibility to optimize capital allocation decisions to drive future growth. Turning to slide six, we continue to advance our redevelopment agenda. With six homes under construction, that will bring 1,408 new state-of-the-art beds into service, replacing 1,097 Class C beds. The total development cost of close to $570 million is funded through our joint venture platform with extended care retaining a 15% managed interest, thus preserving our balance sheet capacity. In April, we completed the sale of three long-term care projects under construction to the Axiom Joint Venture for cash proceeds of $56.3 million and an after-tax gain of $11.1 million. We will seek to redeploy these funds to progress the balance of our redevelopment projects with minimal impact on our balance sheet. With the addition of the six new projects from the Rivera acquisition, We now have 18 projects advancing through the planning and development stages in Ontario. Last week, the Ontario government announced a 2025 long-term care home capital funding policy to support new builds in the province. The new program provides greater funding flexibility as it more effectively addresses regional variation in building costs and expands the range of costs eligible for funding support. Notably, the new program is not time-limited, providing greater certainty that funding support for redevelopment will be available over a longer time horizon. The new program also makes a meaningful effort to recognize the particular cost challenges inherent in building in the Greater Toronto Area. Based on a preliminary assessment of our most advanced projects under the new program, we are aiming to start construction on one new project this year and up to three new projects in 2026. We remain committed to replacing the older homes in our portfolio and expanding long-term care capacity in Canada. As recent projects have demonstrated, pursuing the redevelopment through the joint venture structure enables our redevelopment program to be essentially self-funding. Proceeds from the sale of new projects into the joint venture and sales of vacated Class C buildings to third parties provide capital that we can redeploy into the next wave of redevelopment projects. This joint venture model enables us to modernize care, improve quality, and expand capacity, all while protecting our balance sheet and delivering long-term value to shareholders. I'll now turn the call over to our CFO, David Bacon, to discuss our financial results in more detail.

Thanks, Michael. I'll start with a brief review of our consolidated results, followed by our individual business segments and our liquidity position. Turning first to our consolidated results for the quarter, Our prior year comparable results were impacted by out-of-period long-term care funding of $4.1 million. The impact of out-of-period items is summarized in the appendix to the presentation, which is referenced on each of the financial results slides. Our consolidated Q2 revenue increased by 10% to $383.4 million, driven by the one-month contribution from the nine LTC homes acquired from Rivera, long-term care funding increases and organic growth in our home care volumes along with bill rate increases. This is partially offset by the closure of Class C LTC homes that were vacated following the opening of the newly redeveloped long-term care homes in the Axiom joint venture. Excluding out of period items, our Q2 NOI improved by 6.3 million or 12.9% to 55 million. reflecting the revenue growth partially offset by higher operating costs across all segments. Excluding the impact of out-of-period items, our Q2 adjusted EBITDA increased by $5.3 million, or 15.4%, reflecting the improvement in NOI partially offset by higher administrative costs. Growth in AFFO continues to be strong, with Q2 AFFO of 29.3 cents per share, up 6.9% from the same period last year, supported by our stronger after-tax earnings, including lower net interest costs, partially offset by higher maintenance capex. When out-of-period items are excluded, our AFFO per share improved by 5.5 cents, or 23.1% year over year. Turning to our individual segments, our home health care delivered another quarter of strong performance and continued growth. Revenue increased by 22.3 million, or 16.4% year-over-year, driven by 10.9% growth in volumes and a 4% Ontario rate increase in Q4 of last year. NOI improved by 4.3 million, or 21.5%, driven by the revenue growth partially offset by higher operating costs including the impact of Easter falling in the second quarter of this year. Despite the additional statutory holiday, our NOI margin improved to 13.5% this quarter, up 90 basis points compared to the prior year. These home healthcare segment results validate our multi-year investment in recruiting, retention, and technology. And looking ahead, we expect the closing of the gap acquisition to add approximately 1.1 million annual service hours, or 3,109 average daily volume, which provide us with additional scale and operating leverage as we integrate the businesses. As Mike mentioned, we are targeting approximately 1.1 million in synergies after the first year, which will further drive operating margin improvement. Turning to our long-term care segments, Recall that last year's Q2 results were impacted by out-of-period funding of $4.1 million. Our revenue increased by $17.1 million, driven by approximately $10.2 million from the one-month contribution from the nine LTC homes acquired from Rivera. Funding increases and the timing of envelope spending partially offset by a loss of approximately $7.7 million in revenue from the closure of the two redeveloped Class C homes that were replaced by new homes in the JV. Excluding out-of-period items, NOI increased by $2.5 million, or 11.4%, driven by the increases in revenue and approximately $1.3 million in NOI contribution from the nine LTC homes acquired from Rivera, partially offset by higher operating costs, including the impact of Easter falling in the second quarter of this year, and the loss of approximately $900,000 in NOI related to the closure of the redeveloped last-see homes. Corresponding NOI margins increased 30 basis points over the prior year period to 11.6% in the quarter. The shift of the Easter holiday impacted LTC margins unfavorably on a year-over-year basis by approximately 40 basis points. Finally, turning to our managed services segment, the decline in revenue in NOI this quarter reflects the loss of management fees resulting from the sale by Rivera of 30 homes, nine of which were acquired by Extendicare, and are now included in our LTC segment. Our managed services revenue decreased $300,000 to $17.7 million, and NOI declined $500,000 to $9.6 million. Despite the reduction in managed homes, earnings benefited from organic growth in our SGP clients and increased management fees from the newly opened homes in the Axiom JV. Our NOI margin of 54.3% for the quarter remains in line with our expectations for this segment, between 50 and 55%. Turning to our liquidity position, as Michael mentioned, in May we upsized our senior secure credit facility by $100 million to $375 million, which added $45 million to our revolver and $55 million to our delayed draw term loan. At quarter end, we had $152 million available on the revolver. In addition, we had $73 million of cash on hand to quarter end, which excluded the restricted cash of $75.1 million held in trust for the acquisition of Closing the Gap, which closed on July 1st. Subsequent to quarter end, we drew $55 million under the delayed draw term loan to partially fund the purchase of Closing the Gap, leaving us in a very strong liquidity position after funding both acquisitions. All of our credit metrics improved this quarter. We have no debt maturities until the first quarter of 2027. In short, we are well capitalized to pursue our growth agenda. Our disciplined approach to allocating capital will ensure we evaluate opportunities strategically and act when they align with our growth and shareholder value creation objectives. With that, I'll pass it back to Mike for his closing remarks.

Thank you, David. Our health system remains under pressure due to the demographic realities of an aging population. Home care and long-term care are essential components to address the rapidly growing needs of seniors nationwide. The strong operating performance demonstrated by all of our business segments, together with the stability of our balance sheet and rising demand for our services, positions ExtendaCare extremely well to pursue the strategic opportunities while continuing to drive organic growth. In closing, I sincerely thank every member of our team for their dedication and hard work. Their commitment to delivering quality care is at the heart of our success and enables us to help people live better every day. 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're using a speakerphone, please pick up your handset before pressing any keys. And to withdraw a question, you may press star, then two. We will pause for a moment as callers join the queue. And we will take our first question coming from Jonathan Kelcher with TD Securities. Please go ahead.

Thanks. Good morning. Just on the home health care, you guys keep pushing the margins higher. Where do you think they can get to on an annualized basis?

Well, Jonathan, I think the – Performance of that segment has really been driven by the technology that we've been putting in the back office. We're continuing to invest and improve that. And we're also going to see more scale from the acquisitions and continuing organic growth. I think it still has some room to move. At the same time, I always want to recognize that Q2 is our best quarter and that we see seasonal softness in the Q3 period and some seasonal impact on Q4 just because of the holiday season. So, you know, I think that... you know, for the next couple of quarters, you know, we won't see any major changes in the margins. In future years, there might be some opportunity for a little bit more growth in that margin. But at this point, I think it's more of a volume story now in terms of of just expanding our services and expanding access to those services in the markets that we service.

Okay. And I'm guessing you still see a fairly long runway in terms of volume growth?

Yeah, we do. I mean, we've always talked about demographic growth. you know, as being the primary driver, which, you know, in the segments that the age segments that we service, you know, the demographic trends are four or five percent growth annually in that group. But we're also seeing a significant contribution coming from the fact that long-term care services are not keeping pace with the demographic trend. And so, you know, what we're seeing is that governments are leaning on home care to pick up the slack. And with increasing numbers of people on the long-term care waiting list, we're seeing quite significant demand for home care just coming from the need to take care of those people in their own homes. So, you know, we're now thinking that, you know, a sustained period of growth that's in excess of the demographic drivers is likely for home care.

Okay, that's good. And then just switching gears, I think in your opening remarks, you referenced good acquisition opportunities. Are you seeing those across the board? What business lines do you think you'll be active in the back half of this year, given how busy you guys actually were in the first half?

Yeah, look, I think there's quite a bit of opportunity in home care. You know, the opportunity comes from a couple of things. One, the very fragmented market to geographies where we're not currently providing a full scope of services, but also we're seeing opportunities just from the perspective of, as I mentioned, the long-term care challenges and the need to make up the difference there. So there's quite a few opportunities in the market on this front. We're going to be careful in terms of making sure that we're pursuing things that, one, are accretive, but also are a basis for further organic growth. We want to be quite disciplined in not just buying volume, but actually looking for opportunities to expand our organic growth opportunities.

Okay, that's helpful. I'll turn it back. Thank you.

And our next question will come from Tanya Armstrong-Whitworth with Canaccord Genuity. Please go ahead.

Hey, good morning, guys. A couple for me. On the funding increase that you got for long-term care in Ontario, that's great news when it came into effect July 1st. Should we be modeling some out-of-period funding in Q3, given that debate when that kicked in?

Yeah, I think the Ontario increase was announced, but it is retro to April 1st. So it got announced in the quarter and the rate increase starts on April 1st. So it is in the quarter already. From an Ontario perspective, what we may see and hope to see in Q3, we have yet to get our current year rate increases in the West. It's not unusual for them to be delayed in being a bit slow with that announcement. we still are waiting for the Western long-term care rate increases, both in Manitoba and Alberta. So you may see some out of period in Q3 related to those rate increases because they typically are retroactive to April 1st as well.

Okay, perfect. And then on, and apologies if this wasn't your MDNA, I couldn't find it, but I think you guys had listed your Western Villa for sale earlier this year. Could you provide an update on where that stands?

Yeah, we have that home in the market to sell. We've had some interest expressed, so we're still tracking hopefully to have that sold by the end of the year. But there's nothing definitive yet to announce on that, but we're still targeting have that sold by the end of the year.

Perfect. And just lastly, on the new capital funding announced by the Ontario Ministry of Long-Term Care, You mentioned that they have recognized the cost challenges in Harrington, obviously the GTA. Could you maybe elaborate on that? What kind of benefits those homes are seeing?

Sure. I think there's a number of new features in the program. As I mentioned, it came out last week, so we're still digesting it. But I think principally the comment around GTA, there's a few things that we see in the new program. One is that the costs that are eligible for funding, not all the costs are sort of factored into the calculations of the upfront grant or CFS, but we are seeing them expanding the costs that are included in addition to effectively increasing the amount per bed they're willing to fund up to. So in the GTA category, you know, quite dramatic increase in sort of what I call the cap on costs that works a little bit different than the old program, but the spirit of it is they increase the caps on how much you can spend per bed in GTA And then I'd say the other element of the program now is it relates more to a sliding scale based on your costs, as opposed to being a fixed number on the CFS portion, regardless of how much you've spent. So now as your costs go up, there's a kind of rateable calculation that gives you a bit more per bed towards those increased costs. So we're still working through all of that, but on the surface, there's higher caps and a bit of a sliding scale concept that will increase the grant money up front and can increase the CFS amount you get as opposed to the old fixed $55 a bed.

Okay, excellent. I will get back into you. Thank you, guys.

Once again, if you have a question, please press star, then 1. Our next question will come from Rishika Bhatia with National Bank Financial. Please go ahead.

Hey, guys. This is Juliano. Just a couple of questions. Based on the CFP that was announced, and your kind of guidance of increasing the projects for one more in 2025 and three more in 2026, Do you know what kind of the change in the returns on those projects was? Or was it substantial? Was it a little or just enough based on that new funding dynamic?

Yeah, Giuliano, I think, again, it's early days, but I'd say our initial reaction in working through it is that the returns aren't going to be materially different than what they were under the original CFS from three, four years ago or the top-up that they introduced earlier. A couple of years back with the 35, I think the program is being designed to recognize sort of the elevated cost environment that we're in from a construction point of view and, you know, fact, you know, dovetailing into kind of the operating funding program. So I still think we're going to see things modeling out similar way from a, you know, cash on cash yield type perspective that we've talked about in the past and that sort of seven and a half, eight, I don't think they're going to be materially different. I just think the intent of the program is that it expands the applicability of the program to a wider cross-section of projects.

And you think you can come comfortably underneath the kind of cost per square foot they've outlined?

Yes.

Yeah. And then just, I guess, switching to home health care, what's like the biggest constraint for volume growth? Is it the labor side, the ministry funding, or is there something else that could constrain the volume growth there?

Right now, I would say the answer is a little bit different in different geographies. So, you know, in a number of regions where we operate, we are meeting all of the referrals that we receive from the various agencies that we work with. And so in that case, it's demand that's governing the volume. In some places, particularly rural settings, northern settings, we still have some labor constraints. And in those situations, we don't fulfill every referral that comes our way. But, you know, it's more a story now of us, you know, accurately tracking demand. I'd say overall in the sector, what we're seeing is the, you know, the wait lists for services have really dropped off so that we are, you know, providing very timely service. But what we're also seeing is the intensity, so the number of hours that we deliver to any individual person is increasing. And that's probably driven by the growing long-term care wait list and the need to provide long-term care-like services to people in their own homes. So that's really what's driving a lot of the volume increase that we're seeing right now.

And that wait list, like year over year, what's the change on that, or where has it trended over the past five years?

Well, in Ontario, the wait list for long-term care is about 48,000 people. It's a huge number. The rough rule of thumb in Ontario is that the demographic driver's add about 4,000 beds of demand per year. And, you know, in recent years, the redevelopment program, which is replacing a lot of older beds, has not been meeting that full 4,000 number, never mind eating into the long wait list. So, you know, I think that the opening of new beds is picking up in Ontario. So I think we may see the wait list leveling off. But I think it's unlikely that the wait list is going to drop significantly. So I think the dependence on home care for that particular population is going to continue. Hmm.

And then just lastly on the home health care margins, how much is the improvement related to just lower turnover in the segment versus scaling of the back office costs?

I'd say the majority of it is the scaling on the back office. I mean, our back office has been quite stable over the last couple of years, even as we've added about 20% to the volume. So that's been the primary driver of the the margin increases. We also had kind of a post-pandemic rate catch up to align with labor cost inflation, which, you know, which was also helpful. But that's, you know, that's, you know, more than a year ago now.

All right. Thanks, guys. I'll get back in the queue.

And this concludes our question and answer session. I'd like to turn the conference back over to Jillian Fountain for any closing remarks.

Thank you, Operator. That concludes our call for today. The 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.