Sienna Senior Living Inc.

Ladies and gentlemen, welcome to Ciena Senior Living Inc's Q3 2022 conference call. Today's call is hosted by Nitin Jain, President and Chief Executive Officer, and David Hung, Chief Financial Officer of Ciena Senior Living Inc. Please be aware that certain statements or information discussed today are forward-looking and actual results could differ materially. The company does not undertake to update any forward-looking statements or information. Please refer to the forward-looking information and risk factors section in the company's public filings, including its most recent MD&A and AIS, for more information. You will also find a more fulsome discussion of the company's results in its MD&A and financial statements for the period, which are posted on CDAR and can be found on the company's website, siennaliving.ca. Today's call is being recorded and a replay will be available. Instructions for accessing the call are posted on the company's website, and the details are provided in the company's news release. The company has posted slides, which accompany the host's remarks on the company website under events and presentations. With that, I will now turn the call over to Mr. Jain. Please go ahead, Mr. Jain.

Thank you, Josh. Good afternoon, everyone, and thank you for joining us on our call today. As we are heading into the final months of 2022, we are adjusting our business to a more challenging economic climate. While labor shortages and inflation are putting pressure on our operating margins, we continued to generate strong occupancy results, maintained a solid balance sheet, and increased our liquidity by $100 million. We also rolled out a number of initiatives that will help us stand apart as an operator and an employer of choice in Canadian senior living. Average same-property occupancy in a retirement portfolio grew for the fifth consecutive quarter to a level we have not seen in over three years, and a further increase to 88.6% in October. We expect to end the year at a similar occupancy level in our same property portfolio. With respect to our 2022 acquisitions, we achieved a 490 basis point occupancy increase during the third quarter, excluding one property in Lisa. This was the first full quarter of owning the 12 retirement residences we acquired in Ontario and Saskatchewan, and after experiencing some initial softness, the strong occupancy gains in Q3 is a clear indication of the successful integration of these residences into our platform. Going forward, we expect the occupancy trends for acquisition to be in line with the overall retirement portfolio. Our sales and marketing team continue to generate strong interest in our residences as we are heading into the late fall and winter months. Excellent relationships in the local communities and our Respira brand and signature programs help support our sales initiatives and qualified leads have increased by approximately 26% year over year. Moving to long-term care, in our long-term care communities, resident admissions progress steadily throughout the third quarter. Average occupancy reached 96.7% in the third quarter, and in February of 2022, the government of Ontario reinstated occupancy targets for 97% required for full funding, and we anticipate to meet the required targets at the vast majority of our care communities. We're currently closely monitoring a number of government funding changes and their potential impact on operating results. Ciena and other participants in our sector have been working with the Ontario government to funding increase to accommodate inflationary pressures, both for operating costs and construction costs of our redevelopment projects. While rising development costs have impacted the timing of our construction starts, we remain optimistic about our ability to redevelop Class C homes in Ontario. The implementation of a new long-term care platform is well underway. The platform changes are focused in four areas, the move-in experience, food and dining, well-being, and visits and connections. Our initial efforts have focused on how we help residents settle in. We have a new platform-wide standard aimed at decreasing anxiety of residents and families and making them feel welcome and at home. Early feedback to date has been positive. Our transformation of dining, what we call Savor It, is also an immediate area of focus. We have hired an executive chef to lead this work, And we also aim to bring more of a hospitality-like feel to our dining rooms. Staffing will likely remain one of our biggest challenges for some time, and we have been active on many fronts to bridge the existing labor gap. We are making significant investments in attracting and retaining employees who are passionate about working with seniors. We are currently implementing a new scheduling and call-out technology, which will help us fill staffing gaps more seamlessly and faster. It'll also help us to better monitor agency staffing and improve scheduling of our team members. The implementation is nearly complete across the long-term care communities with the rollout at our retirement residences to follow in 2023. We expect competition for talent to further intensify in the months and years ahead, and we've been working on a number of other initiatives. These include offering additional shifts to part-time team members and a pilot program that supports the placement of Ukrainian refugees at our communities. Moving to Spark, our team members have told us that they want to share their ideas on how to grow and improve Ciena. And as a result, we created our own version of Dragon's Den named Spark. During the first round of submissions last month, we received a total of 170 ideas. Not only did we get some outstanding submissions, it showed us a clear trend of what's top of mind for our team members. Over the coming weeks, we'll select the number of ideas to be piloted with the goal to implement the best at our company. With that, I'll turn it over to David for an update on our operating and financial results.

Thank you, Nitin, and good afternoon, everyone. I will start on slide 11 for financial results. Long-term care, long-term fundamentals in Canadian senior living and at Siena remain strong, as was reflected in the growth of our retirement occupancy and long wait lists supporting steady resident admissions in our long-term care segments. However, intense competition for talent, cost pressures and decades high inflation continue to affect our operations. In Q3 2022, total adjusted revenues increased by 11% year over year to $189.2 million. This increase was largely due to occupancy and rental rate growth and additional revenue from the 12 properties we acquired in Q2 in our retirement segment, as well as flow through funding for increased direct care provided to residents and higher preferred accommodation revenues from increased occupancy in our long-term care segment, partly offset by lower revenues as a result of a property that we sold earlier in 2022. Total net operating income increased by 4.8% to $35 million this quarter compared to last year. Our retirement segment contributed $3.7 million of this increase, mainly through same property NOI growth and additional NOI from our 12 new retirement properties. Our long-term care segment decreased by $2 million year over year, mainly due to higher operating costs and the sale of the long-term care community earlier in 2022. Retirement-same property NOI increased by 14% to $15 million compared to last year, primarily due to occupancy improvements and annual rental rate increases. This was partly offset by higher costs for agency staffing, food, utilities, insurance, and marketing. Rent collection levels remain high at approximately 99%. We expect continued cost pressures to remain for some time due to labor shortages, increased insurance premiums, higher utility rates, and high overall inflation. We also expect continued unfunded pandemic expenses in Q4 in our retirement portfolio of less than $1 million. At the same time, we anticipate that occupancy gains and rental rate increases will help mitigate some of these pressures in our retirement segment. Considering all factors, we expect Q4 operating margins in our retirement segment to be similar to Q3. CNS Long-Term Care's same property NOI decreased by 9% to $17.8 million in Q3 2022 compared to last year, primarily due to higher operating costs in particular with respect to labor, utilities, and insurance, as well as higher unfunded pandemic costs because of lower government funding. This was partly offset by an increase in preferred accommodation of revenues as a result of higher occupancy. We expect cost pressures to remain for some time in our long-term care operations and have been actively working with other sector participants and the Ontario government for funding to reflect the current inflationary conditions and offset significant cost increases. We are also working with the Ontario Ministry of Long-Term Care to better understand the full details of a recent announcement to not reopen the third and fourth beds in the Class C homes and its financial implications. We currently have approximately 350 third and fourth beds in Ontario which could be impacted by this announcement. The extent of the impact will depend on how the government will implement the funding reductions. In addition, we expect continued unfunded pandemic expenses of between $3 to $4 million in Q4 2022 in our long-term care segment. Moving to slide 12, during Q3 2022, operating funds from operations decreased by 1.8% to $17.9 million compared to last year, primarily due to higher administrative expenses, higher interest expenses, as well as higher income taxes. This was partly offset by an increase in NOI this year, mainly as a result of our acquisitions. Q3 OFFO per share decreased by 9.6% to $0.246. Adjusted funds from operations increased by 5.7% to $16.6 million compared to last year. The increase was due to the timing of maintenance costs, partly offset by lower OFFO. ASFO per share decreased by 3% to 22.7 cents in Q3 2022, largely as a result of our 2022 equity offerings. Looking at our debt metrics on slide 13, Our debt to gross book value decreased by 230 basis points to 43.3% at the end of Q3 2022, compared to 45.6% at the end of Q3 2021, mainly as a result of our 2022 equity offering to finance our acquisitions and mortgage repayments with proceeds from property dispositions earlier in the year. Debt to adjusted EBITDA increased to nine times in Q3 2022 compared to 7.8 times in Q3 2021. And the interest coverage ratio decreased marginally to 3.3 times in Q3 2022 compared to 3.4 times in Q3 2021. Our debt is well distributed between unsecured debentures, credit facilities, unsecured term loans, conventional mortgages, and mortgages insured by the Canada Mortgage and Housing Corporation. And our debt maturities are staggered within the next significant expiry being our $90 million unsecured term loan due in May 2023, which was used to support the acquisition of our 12 retirement residences. On October 26, 2022, we upsized our unsecured revolving credit facility by $100 million to $300 million and extended its maturity by two years to March 2027. This will provide additional financial flexibility as we refinance upcoming debt and support our strategic objectives in a more challenging operating environment. This has increased our current liquidity to approximately $350 million. I will now turn the call back to Nitin for his closing remarks.

Thank you, David. Throughout the pandemic, in a rapidly rising interest rate environment, we have maintained a strong balance sheet and ample liquidity. The recent upsizing and extension of our credit facilities are a word of confidence in the future of our company and our sector and underscores the resiliency of our business. As we finalize our business plan for 2023, we prepare for potential headwinds in a long-term care portfolio related to staffing and government funding and expect continued pressure on operating margins in our retirement segment. Despite these short-term challenges, we remain focused on executing a long-term strategy to maintain and grow a balanced portfolio in which our retirement and long-term care operations each make a significant contribution to the company's overall net operating income. With deep experience and scale in each segment, we'll put initiators into motion to stand apart and pursue our vision to become Canada's most trusted and most loved senior living provider. On behalf of our management team and our board of directors, I want to thank all of you on this call for your continued support. And with now, we'll be pleased to answer any questions you may have.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the list of questions.

Your first question comes from the line of Tal Woolley with National Bank Financial.

Your line is open.

Hi. Good afternoon, everyone. Hi, Tal. Good afternoon. Good afternoon. I guess, like, my first question would be this, is, you know, you're talking about cost pressures for, you know, that could persist for, you know, your words were some time. I guess, what is your definition, your working definition of some time? And then, because I noticed, like, at the end, and I'm not trying to play gotcha here, but you just sort of, at the end, you sort of called it a short-term challenge, too. So, I'm just trying to get a sense of what you think the timeframe here is we're looking at.

Thank you for that question, Tal, and I think it's the right question to ask. And I would maybe break it into two. So one, there's pandemic cost pressures, and you feel that you're nearly out of it, and then suddenly in Canada, we're talking about putting back masking on, and you saw some news coming out of there. So those things are obviously out of our control, and our goal is to react to them, keeping the health and well-being of both residents and team members in mind. So there's a pandemic aspect of it, which, you know, which we are, we continue to work with government to resolve it. And, you know, our view is that, you know, government funds us for pandemic funding and we need to find a backup way because David shared that we'd have $3 or $4 million of unfunded pandemic costs. So we have to find a way to stop that because, you know, really in long-term care, the government assumes what the amount of money that you need to manage pandemic and they have decided what that money is and we have to figure out a way to spend that. It is easy to say that, but obviously hard to do. So our goal is to figure out a way to do that over the next couple of quarters. On inflationary pressures, you know, that one, you know, that is, again, it's hard to predict what might happen with interest rates, what might happen with utility costs. So we do expect, we do keep saying short term because there's some consensus around a softening of the economy, then there's some you know, early indicators of that. So if that happens, the idea is, okay, well, that is going to decrease the expenses. So that's why we say short-term. I think at this stage, it is very hard to say on both of those things because both the pandemic and the economic uncertainty is obviously out of our control.

Okay. And I guess my question is this, because a lot of this, whether it's general cost pressures versus... you know, pandemic expenses, where does sort of like net pandemic expenses end and generalized labor kind of conditions begin? Because they're kind of intertwined as far as I can tell.

Yeah, thanks for that question, Tal. You know, you're right. Expenses, you know, expenses as we kind of move through the pandemic are getting a little bit blurred. Generally speaking, pandemic expenses would be related to agency costs when we have staffing shortages or homes that are in outbreak. Pandemic expenses would include PPE. So the pandemic expenses themselves would generally relate to homes that are either in outbreak or where we have significant staffing shortages.

Okay. And I guess, you know, like the other thing too is like, you know, the question that sort of came up to me today was like, you know, how useful is it now for us to sort of sitting there and be looking at like, you know, margins X net pandemic expenses? It's like, after three years, like I think maybe, you know, it's sort of like, this is kind of where we are. Like, I don't know sort of how, like, or if there's like a real legal difference definition there that you guys are working with because you think it is something that's recoverable from the government?

So maybe just break it into two, you know, both retirement and long-term care. So we do see a clear path of what is considered pandemic expenses. And even though it might be related to staffing, it is we're saying there's a shortage of staff because, you know, you have nurses who are working at vaccine clinics or hospital systems which are overvalued. So what we think is pandemic expense, in our mind, it truly is pandemic expense. And each public health union might have a different sense of outbreak. But at a company level, we are quite clear what goes into that bucket. So you're right. At some stage, they become stabilized. Our view is we do have homes which have figured out a way to go back to normal pre-pandemic levels, whether it's occupancy. So we have multiple homes, for example, a retirement home, which are at 100% occupancy. We have long-term care homes, which do not have significant pandemic expenses, and their margins are back to pre-pandemic levels, so pretty close to it. So we see a clear difference. However, again, it's hard to predict when everything will get back to that normalized level. But we continue to believe that there is a normalized level in homes which do not see those outbreaks are finding margins back to pre-COVID levels.

Got it. Okay. David, could you just repeat the number of third and fourth beds you thought might be exposed by this change?

Yeah, we have approximately 350 third and fourth beds.

Okay. And sorry, I was looking on the Ministry of LTC website. Was this like a public announcement or is it an internal bulletin that we wouldn't have seen from the outside?

It was an internal bulletin that would have been sent to a long-term care operator. So it wouldn't have been in the public domain. Okay.

And when would this theoretically take place? Like when would this new decision not to fund those beds take place?

So I think that's your last part of the question is key. That is why we do not have more information. So it is not a policy at the moment. What we are working with government is to get clear indication what does that mean because obviously there are areas which you would have less expenses. So if there are instead of 100 people in a home, if you have 70, you obviously would use less nursing hours. But if you have 70 people in 100 and if you change the roof, you still have to change the whole roof. You cannot change 70% of it or same could apply for housekeeping. You cannot mop half the floor. You have to mop the full home. So Based on our discussions with the government, people understand the issues with removing 3 and 4 funding, and we continue to remain optimistic that we'll find a way where costs that should be saved should be saved, and costs that should be reimbursed should be reimbursed.

Okay. I guess this, combined with the fact that there was no occupancy premium increase this year... Is there sort of like a shift in the government's perspective on the sector? Or is this sort of just part of the cycle of this business in terms of sometimes the funding is there and sometimes it's not?

Sure.

You know, I would say this is an inflection point for long-term care. And governments have been very supportive of long-term care, whether it's Ontario and BC, the two provinces we are in long-term care, and there has been significant amount of money allocated to long-term care, whether it's prevention containment funding, pandemic funding, all sorts of different things. But we also got into a high inflationary environment at the same time. So the government has done a good job of managing the first part, but I don't think we have had a good understanding of the inflationary pressures at all levels. So that's the piece that we have been working on because we see that pressure, we see the decline in margin in 2021, we see that in 2022. And if you don't see a good funding increase, it's obviously going to persist in 2023. And then it's going to start impacting really redevelopment, which is a big mandate for the government where we have to build new long-term care beds. So regardless of capital funding, if you don't have the right operating funding, the projects don't really work. So again, we found government to be understanding of the challenges. Obviously, these things will take some time to work through. It remains to be seen whether we are blindly optimistic or we are optimistic, so we will find that out in due course. But at this stage, we continue to be optimistic that there is going to be a viable solution because when we look back at the history of long-term care funding, There has been lags with inflation, but eventually it has always made up. And our hope is that that will be the case this time around as well.

Okay. And then just lastly, can you just talk a bit about then, if you're thinking about pulling back on some of the redevelopment stuff, what would you guess your sort of working capital budget would be for 23, 24 kind of time horizon? And Is there any appetite on M&A right now?

So we did a big M&A deal at the beginning of this year. We don't have specific M&A targets in any of our criteria, which is very helpful because it stops us from doing stupid deals. So we don't really are gunning for a certain amount, and we'll only do deals when they make sense. I would say on redevelopment, you know, we continue to be optimistic that there is going to be a viable construction program. And when we do get that program, we'll start construction work at three of our sites in North Bay, Keswick, and Brantford. Okay.

Perfect. Thanks very much, Alan.

Thank you. Thank you.

As a reminder, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. Your next question comes from Himanshu Gupta with Scotiabank. Your line is open.

Thank you, and good afternoon. So in terms of retirement home occupancy, are you already there? I mean, like 88%, 90% kind of levels. So has the corporate focus shifted to margins, or are you still pushing sales to get to like 90% and above levels?

Hi, Himanshu. Good afternoon. So our target has not changed. We think stabilize is low 90s, call it 92 to 94%. And we are very optimistic with our team's ability to get there. But our focus has changed to margin, I would say, two quarters back. So once you are in the 85, 86% range, and we have multiple homes which are 100% occupancy, we have multiple homes which are 95 plus. And at that time, you can start to now look at pricing. And from our experience, because when we went through rental rate increases across our portfolio, with an explanation of why they're increasing, food cost has gone up 20%, utilities have gone up. We found our residents, given the choice between reducing services and increasing rates, they gave us a very clear indication they would rather see rate increase. And that's what we have been doing. And we have not seen any significant pressure on it. The goal is not to overdo it because we can potentially try to get too much out of that, and then that might have some positive margin pressure, but would result into some negative issues with resident relationships, our ability to market more. So that's what we're watching at the moment. But as our occupancy get more stabilized, because we are not there yet, we should see our margin increase.

Correct, okay, that's helpful. And then, you know, again, like at 88, 90% kind of levels, what is the market vacancy in some of your anterior markets? I mean, do you see the whole market moving above 90% there or any color in terms of the market dynamics there?

Yeah, it's hard to, you know, there's been work that CBRE does, Bushman and Wakefield have done some market vacancy. There has not been a big increase you know, update on it for a period of time because of COVID. So I don't think views have changed. I mean, previously when we saw it, Ontario was, call it, 5% to 8% of vacancy rates, and we don't think that has changed because not a lot of new supply has come in. So we expect those rates to be similar, and that's why, you know, we think the stabilizers in the low 90s, call it 92% to 94%. All right. Thank you.

And then, you know, shifting to margins, and I know Tal has already covered a lot of expense questions. So simply on the retirement home NOI margin, I think in the MD&A you mentioned Q4 margin to be similar to Q3 margin. And if I recall, you know, previously you mentioned like 5,200 business point improvement in the second half of the year from Q2. Is that a change? Is that a reflection of all the discussion around the higher cost? What do you see?

Thanks for that question. That's right. In the MD&A, we did indicate that our Q4 margins would be similar to Q3. As you know, our Q3 margins are at 36.6%. We expect something similar in Q4. And with respect to, you know, a change in sort of the narrative, you know, it is a little bit of a change because we continue to see, you know, cost pressures around agency utilities and insurance.

Got it. Okay. That's fair enough. And then one more thing, again, in your MD&A, I see You mentioned about the funding of around $18 million, government funding. Had that already been received and reflected in the financials, or this is over and above what you're seeing here?

Sorry, can you repeat the number again, Hemanshu?

Yeah, so I'm looking at the financial, and I think you mentioned that in September... The Ministry of Long-Term Care, they announced some funding and CNR shares $18 million, which could be used towards eligible expenses. So is that over and above? Just trying to understand, is that like reflected or not reflected in the books?

That would, I believe, relate to the pandemic funding that the government has allocated to Ciena, and that would relate to the period of April 2022 to March 2023. And we would use those funds as we're incurring pandemic expenses. So the answer is yes, we have been reflecting that within our financial statements.

Okay. So when you say that LTC will have $3 to $4 million of unfunded pandemic expenses, this is over and above whatever funding, like $80 million or other funding you'll be receiving. So that is a very different step from our perspective.

That's correct. The $3 to $4 million would be in excess of the pandemic funding that we would receive.

Got it. Okay. Thank you. And final question on balance sheet. I think you mentioned that two adjusted a bit of around nine times. And just wondering what is your view on leverage in the next year or two? And are you looking for any disposition program or any non-core assets which could be disposed of you two?

Sure. So our view on leverage hasn't changed. We have a very conservative balance sheet and a lot of liquidity. Our debt-to-book value is in the low 40s. And we will take our leverage up if need be for redevelopment. That would probably be one of the only few reasons to take our leverage up. And we don't really have many assets which are not part of a core strategy. You might have one or two from time to time because of change in market, but nothing material.

Thank you very much.

Thank you.

There are no further questions at this time. This does conclude today's conference call. Thank you for joining. You may now disconnect.