Sienna Senior Living Inc.

Ladies and gentlemen, welcome to Ciena Senior Living Incorporated third quarter 2023 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 Incorporated. 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 MDNA and AIF for more information. You will also find a more fulsome discussion of the company's results in its MDNA 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's website under Events and Presentations. With that, I will now turn the call over to Mr. Jain. Please go ahead, Mr. Jain.

Thank you, Krista. Good morning, everyone, and thank you for joining us on our call today. Our third quarter marks Ciena's fourth consecutive quarter of improvements in AFFO per share. Our relentless efforts to bring down agency costs, improve team member engagement, and growing occupancy are all reflected in a strong third quarter. Our results, which include a 7% increase in same property net operating income, And a nearly 12% increase in our operating funds from operations per share highlight that our initiatives are effective. Agency costs have essentially returned to pre-pandemic levels. Team member engagement improved for the third consecutive year. Our long-term care operations ran at full occupancy and are now fully stabilized. And our retirement occupancy is growing, with rental rates increasing in line with inflation. At the same time, our balance sheet remains strong, and essentially all of our debt and key financial metrics have improved year over year. This has allowed us to act on strategic growth projects and opportunities despite a challenging capital markets environment. Focusing on strategic growth and expansion, on November 1st, we made our inaugural entry into the Alberta market. We entered into a management contract for a 70-suite retirement residence in a prime location in Calgary, which is owned by Sabra Healthcare REIT. Sabra is the largest joint venture partner, and this transaction underscores a strong relationship. We are also in the process of increasing our ownership interest in Nicola Lodge in the greater Vancouver area. We currently own 40% of this 256-bed, best-in-class long-term care community, and we will acquire the remaining 60% in two separate transactions. The first tranche is expected to take place in Q1 2024. with the second transaction to close between November 2024 and March 2026. Nicola Lodge was built in 2016 and offers long-term care with specialized services for bariatric care, dementia, and mental health care. In addition, we are making good progress on the development front in Ontario. We are approaching the finish line with respect to our retirement residence in Niagara Falls. We own 70% of this project in partnership with the Reichman Group. Construction will be completed later this month, and the first residents are expected to move into the beginning of 2024. With respect to the long-term care developments, we are on track with the construction of long-term care redevelopment in North Bay and our campus of care project in Brantford, Ontario. Regarding additional long-term care redevelopment in Ontario, we continue to advocate for government funding that is aligned with the significant cost pressures we've been experiencing in both capital and operating platforms. Moving to slide six, our long-term care operations are benefiting from a stabilizing operating environment. Average occupancy has reached 98.4% in the third quarter, with occupancy exceeding the required level for full government funding. Further support are results for annual government funding increases with higher preferred accommodation revenues. In addition, significant reduced agency cost as a result of better rates and our ability to fill vacant positions within our own team members have further improved our results. Same property NOI in a long-term care segment increased by 6.1 percent in Q3 2023 compared to last year. We expect long-term care same property NOI growth to be in the mid to high single digits for the full year in 2023. Moving to retirement, average occupancy in our same property retirement portfolio has improved by four consecutive months since the middle of the year and reached 88 percent in October. Consistently high levels of resident move-ins have supported this positive trend. After two quarters of elevated levels of resident move-outs to LPC, we are making steady progress towards fully stabilizing same-property occupancy. CN also continues to lead Canadian and U.S. peers in terms of our retirement occupancy performance. On average, we are approximately 470 basis points ahead of our North American peers in the listed senior living sector. Same property NOI in our retirement segment increased by 7.9% in Q3 compared to prior year, largely as a result of rental rate increases as well as a successful cost management strategy. Annual rent increases in line with inflation will further help offset the cost pressures we have been experiencing. Our marketing and sales teams continue to generate strong interest in our retirement residences. Qualified leads are up approximately 30% year over year in Q3. Based on the positive occupancy trends in July, our targeted average same property occupancy for Q4 is approximately 88%. We further anticipate an approximate 100 to 150 basis point increase year over year in the retirement operating margins for the full year in 2023. Moving to our team members, our continued focus on team culture, which while reducing our reliance on agencies, is reflected in our operating results. The investments we have made in our team, like SOAR, which is our stock ownership program, SPARK, our program that empowered team members to share their ideas on how to grow and improve the company, our recognition program through SPOT Awards, and a continued focus on team member communication through a team member app and our quarterly town halls held across every shift, have all played a significant role in our improving team culture. In our most recent team member engagement survey in October, two things stood out. Our team members' engagement score improved for a third year in a row with improvements across all drivers of engagement. And second, the participation rate increased by 10 percentage points to 72% this year, the highest participation we have ever had since we started conducting surveys. A key driver for our team members is their ability to do meaningful work, for which they gave an average score of 9.1 out of 10. Feedback from these surveys provide important insights and allows us to build and implement action plans to improve engagement and team member experience. Moving to slide nine, with a highly engaged team and a significant improved operating environment, we have been able to make major headways to bring down agency costs. Year over year, we reduced costs by nearly 60% in the third quarter. At 4.8 million, agency costs have essentially returned to pre-pandemic levels in Q3 2023. Over the past year, we also drastically reduced the number of agencies we are working with and negotiated improved contract terms, such as enforcing a minimum fill rate threshold while reducing hourly rates. But most importantly, we are filling vacancies with permanent team members rather than temporary agency staff. Our investment in an automated centralized scheduling and call-out system has significantly improved our ability to fill staffing gaps with our own team members before shifts go to external agency staff. It also provides tighter controls on overtime and offers insight into future staffing needs. And with that, I'll turn it over to David for an update to our results.

Thank you, Nitin, and good morning, everyone. I will start on slide 11 for financial results. In Q3 2023, total adjusted revenues increased by 5.6% year-over-year to $199.8 million. This increase was largely due to rental rate growth and increased care revenue in our retirement segment, as well as flow-through funding for direct care, annual inflationary funding increases, and higher occupancy in our long-term care segment. Total net operating income increased by 8% to $37.8 million this quarter compared to Q3 2022, mainly due to same property NOI growth and the acquisition of a campus of care in Q1 2023. Same property NOI in our long-term care segment increased by 6.1% to $19.2 million in Q3 2023 due to funding increases, high occupancy levels in our long-term care homes, which enable us to receive full funding, and higher preferred accommodation revenues. Our retirement same property NOI increased by 7.9% to $18.3 million in Q3 2023 compared to the last year, primarily as a result of rate growth as well as an increase in care revenue and was further supported by lower net pandemic and incremental agency expenses. Moving to slide 12, during Q3 2023, operating funds from operations increased by 11.8% to $20.1 million compared to the last year, primarily due to higher NOI and lower general and administrative costs as a result of restructuring initiatives that we completed in Q1. offset by current higher taxes as a result of higher income as well as interest expenses. OSFO per share increased by 11.8% to 27.5 cents in Q3 2023. Adjusted funds from operations increased by 18.4% to $19.6 million compared to last year. The increase was due to higher OFFO, lower spend on maintenance capital as a result of timing, partly offset by a decrease in construction funding income. ASFO per share increased by 18.5% to 26.9 cents in Q3 2023. In line with our strong results, we significantly improved our ASFO payout ratio to 87.0% in Q3 2023. Moving to slide 13, strengthening of our balance sheet. We entered into financings with lower cost CMHC insured mortgages and paid down credit facilities. We maintained ample liquidity at $324 million at the end of Q3. We increased our debt service coverage ratio to two times per year, year over year from 1.8 times in Q3 2022. We decreased our debt to adjusted EBITDA to 8.3 times from nine times in Q3 2022. And we extended the weighted average term to maturity of our debt to 5.7 years from 4.9 years in Q3 2022. We ended Q3 with a debt to gross book value of 44.4% and $1 billion of unencumbered assets. With no major debt maturities until Q4 of 2024 and strengthening debt metrics, we are well positioned to execute on our strategic initiatives. With that, I will turn the call back to Nitin for his closing remarks.

Thank you, David. Our key performance indicators are all moving in a positive direction, which puts us in a strong position to take advantage of the favorable supply and demand fundamentals in our sector. We see significant growth potential in our business and will continue to add value through growing retirement occupancy, minimizing agency cost, and implementing efficiencies across our operating platforms. All of this is expected to support same property and OI growth. With respect to our expansion plans, our disciplined capital approach is opening up opportunities even during a more challenging economic backdrop. We'll continue to pursue select opportunities that are aligned with our objectives and allow us to further grow and improve our asset base. In all of this, we never lose sight of the immense responsibility we have at Ciena, and we aim to distinguish our company as an operator and employer of choice, always with a vision to become Canada's most trusted and most loved senior living provider. I couldn't be prouder of our team members who share this vision and demonstrate that what it means to live Siena's values each and every day. Team members like Fernanda, who is an activation aid at one of our communities in Brampton and a talented singer with experience in the music industry. When Fernanda found out that Art, one of her residents, who rediscovered his love for music and poetry during the pandemic, had written a song, she told him that she would help him make his song available for listening to everyone across the globe. Fernanda supported him in creating the cover art and guided him through the process of distribution. To the great joy of art, his song is now streaming on Spotify, YouTube, and Apple. By sharing her passion for music with her residents, Fernanda helped art start a new journey. What a great example of living our purpose, cultivating happiness in daily life. On behalf of our management team and our board of directors, I want to thank all of you for your continued support, and we are now pleased to answer any questions you may have.

If you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Jonathan Kelcher from TD Cowan. Please go ahead.

Thanks. Good morning. First question, just on the agency cost, good to see them decline back to pre-pandemic levels. But with all the investments you've made, is there an opportunity to get that lower than pre-pandemic? And if so, how much lower do you think you can go?

Hi, Jonathan. Good morning. And great question. And when you first started in the beginning of this year, Going down from $50 million a year to $20 million seemed like an impossible task. And I'm very proud to say that our team is actually ahead of on schedule because where we are in Q3, we expect it to be by end of the year. And what's even more exciting is that now our team figured out a way to do that. The goal is not to stop here. And its cost in most cases at this stage gets covered through government funding. But the bigger issue here also is resident experience and team member experience because, you know, there's a whole aspect of fairness and there's a whole aspect of providing continued services to residents. So our focus on this is not to bring it down here. Our focus would be to go to as close to zero as possible, knowing that is not always possible during shift changes at the very last minute.

Okay, so if you spent roughly, if I got it right, $5 million on agency costs in Q3, the majority of that would be covered by government?

Yeah, that's correct. That is correct, Jonathan. The majority of that would get covered by government funding.

Okay. Okay. Turning to operations, there's obviously COVID going through the community now, so I'm assuming you guys have had outbreaks in some of your homes. Can you maybe talk about the impact that is having and how that's being handled operationally versus, say, last year?

Jonathan, you know, long-term care communities and retirement residents in general always have outbreaks. So previously it was flu cases. Now it is COVID. I think the difference in the last three years versus now is, you know, especially when you look at 2020 and 2021, it wasn't that few communities with an outbreak. Nearly the whole world was in outbreak and everything was in short supply. So now with things back to normal, you know, it's the same protocol in most cases what we will do as a regular outbreak. So, you know, you would go into homes which had an outbreak. Obviously, there are more precautions people are wearing. More people are wearing masks in those homes. There are restrictions on people can dine. but it doesn't really impact things outside that home, and in a lot of cases, not even outside that home area of 32 beds if it's an A home, for example. So, you know, we continue to manage outbreaks, but there are no way, shape, or form anything close to what it used to be in 2020 and 21.

Okay, that's helpful. And then last question, just on the retirement occupancy issue. It's trending in the right direction, targeting 88% for Q4. So your 92.5% stabilized goal, is that something you think you can get to in 2024?

We haven't given out that forecast for 2024 at this stage, Jonathan, so can't really provide any color. Other than to say that we continue to see very good lease up. We see our leads continue to go up. And our four months have continued to increase. The only dip we have seen in our occupancy was due to people moving to long-term care. So we are optimistic of reaching to our goals. At this stage, I can't really talk about what, from a timing perspective.

Okay. Would it be fair to say that long-term care is essentially, like I know you guys are full up, but would it be fair to say that most long-term care is full up in the province and you're not you're not seeing move-outs to long-term care anymore?

That would be accurate. I mean, back to normal. That's correct. The residents still move out to long-term care, but it's at the same pace what it was. In summer, it was a pent-up demand of nearly two and a half years because many of the homes were closed due to outbreaks, and that has now changed.

Okay, thanks. We'll turn it back.

Thank you.

Your next question comes from the line of Himanshu Gupta from Scotiabank. Please go ahead.

Thank you and good morning. So just on LTC, looks like there was some small government retroactive funding this quarter. So what was the amount and should we expect any retroactive funding in the coming quarters?

Yeah, no, thanks for that question, Himanshu. We did receive some very small retroactive funding this quarter. It was less than $600,000. In terms of retroactive funding going forward, we may get some retroactive funding from the BC government, but really the timing and the amount of that is unknown at this point.

Okay, fair enough. And then, you know, like bigger picture on... LTC NOI, how's the visibility looking for the next year? And, I mean, let me compare 2024 LTC NOI versus 2023.

Sure, Himanshu, good morning. I would, you know, I can't really give out forecasts for next year yet, and a lot of it is contingent on government funding, which we continue to advocate for. I think what has changed, and before pandemics, we would always say that, you know, long-term care NOI might not might not increase considerably, but it also would not decrease. And it was hard to say that in 2020, 21, and 22. But, you know, we are back to that stage where unless something drastic happens, which no one can predict, we don't expect major volatility on NOI going down. And what we are waiting for and working with government is for the operating funding to go up more with inflation and do a bit of a catch-up because And it's also tied to how do we build more long-term care beds in Ontario which are badly needed until we fix that funding. So I think that the volatility on the negative has gone away. What we need to work with and continue to work with government is to catch up on some of the funding shortfalls from the last four years.

Okay. So fair to say that, you know, kind of established a floor as far as the LTCNY is concerned. And now we're kind of catching up with, like, 2019 NOI, which is still a very big gap. So is that still the goal, that, you know, we get closer to 2019 NOI levels?

That is our plan, and we expect to get there. And in most cases, government has caught up on most of the funding, you know, from a direct care hours funding and food and everything else. Those funding have been up by nearly 30%. So, you know, the... Many of the operational challenges in long-term care, this business continues to be extremely complex, but many of those operational challenges in matching operating funding for care to the complexity of residents have now gone away because that funding is going up by 30%, and nearly all of our operators are hiring more and more people to make up for that. So many of the structural challenges are going away. Frankly, one of the last ones left is the operating funding. which impacts directly to other accommodation.

Got it. Okay. Thanks for that. And G&A expenses, it looks like you've made some good progress there. So is this the new rubric, like the Q3 levels?

Yeah. So within our G&A costs, we did have a reversal of some of our restructuring provision in the quarter. But if you were to

wouldn't be an unreasonable run rate going forward also okay thank you and maybe on the on the debt financing I mean you did some CMS you did financing how much was done and what rate did you do it yeah so over the last 12 months we did about 150 million

was with CMHC debt, and the average rate was just above 4% for that debt. Okay.

So just to clarify, was anything done in the quarter in the last three months on the CMHC side?

In the last three months, yes. We had one property that was refinanced with CMHC debt, and with those proceeds, that was what helped us pay down some of our credit facilities.

Okay, fair enough. Thank you, and I'll turn it back.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Gaurav Mathur from Laurentian Bank Securities. Please go ahead.

Thank you, and good morning, everyone. Just with your partnership with Sabra Healthcare Raid, and the fact that a number of U.S. listed players are very active in Canada. Can we expect more such partnerships with this cohort as you look at 2024 and maybe even 2025?

Hi, Gaurav. Good morning. That is very much possible. We have a partnership with Sabra now for nearly five years. It started as a management contract for their portfolio in Canada, and now we have a joint venture with them already where we own and operate with them 12 sites where we co-own it and we operate all those 12. And as the right opportunities come along, you know, that certainly could be possible, obviously subject to Sabra's approval. You know, we are quite, you know, these are long partnerships. These are not by and self. So we are very careful in how we partner and how do we structure things for the long term. So I think we should see a way to growth is through partnership, but through a very distinctive selection process on both sides.

Okay, great. And then just switching gears here on your balance sheet for a moment, I noticed that your Unsecured Adventure Series A is coming due November 2024. I'm just wondering if that would be a like for like swap or how you're thinking about that and conversations with lenders have begun.

Yeah, that's a great question. Thank you for that. We're currently looking at all of our options at the moment between secured and unsecured. So we have not made a definitive decision in terms of how we will refinance. The good news is that we've got plenty of time and so we're currently looking at all of our options at the moment.

Okay, great. That's it at my end. I'll turn it back to the operator.

Your next question comes from the line of Tammy Burr from RBC Capital Markets. Please go ahead.

Thanks. Good morning. Just on the Nikola launch transaction, can you just maybe expand on the extended timing for the, I guess, the second phase or second stage of the closing?

Hi, Pammy. Good morning. So we bought our BC portfolio in 2015, and part of that purchase was two properties which were under development at that stage. So one of them is Nicola Lodge, which we own 40%, and we had options and put in options on both sides to buy the remaining 60%. So we bought 30% now, and given some of the challenges with capital markets, What we don't want to do is come up with just one firm date, so we bought ourselves a bit of flexibility on when we close the other 30%. So we are committed to buying the other 30%, but we have nearly 18 months to add that.

Okay, and this property is fully stabilized long-term care, and so pricing, I guess, parameters have already been set.

That's correct. It's fully stabilized. It has long-term debt on it. You know, it's... one of the newest and best properties in long-term care in BC, if I may say so. So it is all the right things that we would look for in an acquisition.

Okay. And then just lastly, looking at the entry into Alberta through the management contract on that property with Sabra, is this a market maybe where you're looking to establish a bigger ownership presence at some point, or?

That is correct. I mean, the whole idea, we have been, the two provinces we wanted to enter, one was Saskatchewan and one in Alberta. And just from a timing perspective, because of the SPRE portfolio, Saskatchewan happened first. So we always had Alberta in our sites. And this is a good way for us to get that, working with an existing partner. You know, we have operations in BC, so the management of this is not that difficult from a geography perspective. So And yes, and to answer your question directly, our intent is to grow in that province.

Okay, and just when you kind of think about maybe the opportunities there, or how you would sort of structure that expanding footprint over time, would it be through one-off type transactions or similar to what you did in Saskatchewan, acquiring a portfolio at some point?

I think that's very opportunity-driven and pricing-driven. So, you know, we have had over the last 10 years, we have bought nearly $1.5 billion in assets, and they have been one-off properties, you know, as small as $10 million to $15 million, and our last acquisition with the joint runs was nearly $400 million. So I think we have an ability to do both, and that's going to be our focus.

Thanks very much, Nitin. I'll turn it back. Thanks. Thank you.

Your next question comes from the line of Dean Wilkinson from CIBC. Please go ahead.

Thank you. Morning. David, just want to circle back on that Class A debenture or Series A debenture basically a year from now. How's the pricing differential look today between where you could go from a secured basis? And I guess on a secured basis, you'd have to probably do a bunch of cross-collateralized loans. versus just rolling that debt, given what we've seen with interest rates backing up to where they are?

What we're seeing in the market right now is not a lot of variability between spreads, between a secured and unsecured form of financing right now. It might be about, let's say, 20 or 30 basis points. But that being said, the environment has changed quite significantly over the last six months, so it could change again over the next year as well. That's why we want to keep all of our options fully open to us so that we take advantage of the best pricing when the time comes for renewal of that debenture.

Right, and I suppose if you did want to do something other than just build a debenture, given the backlog and how long it's taking to get sort of mortgages secured, that's something you'd have to turn your attention to in the spring?

Yeah, that's right. Yeah, we would certainly have to plan ahead for it. And we are keeping all of our options open. We are making different plans for it. But you're right, we would have to start that process probably in the springtime.

Okay, great. That's it. Thanks.

We have no further questions in our queue at this time, and this does conclude today's conference call. Thank you for your participation, and you may now disconnect.