Chartwell Retirement Residences (CSHUN) Earnings Call Transcript & Summary

Please stand by. Your meeting is ready to begin. Good morning ladies and gentlemen. Welcome to the Chartwell Retirement Residences Q4 and Year-End 2019 Financial Results Conference Call. Following the formal comments, we will hold a question and answer session. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residences. Please go ahead Mr. Binions.

Thank you. Good morning, and thank you for joining us today. There's a slide presentation to accompany this conference call available on our website at Chartwell.com under the Investor Relations tab. Joining me are Vlad Volodarski, Chief Financial Officer and Chief Investment Officer; and Karen Sullivan Chief Operating Officer. Let me remind everyone that during this call, we may make statements containing forward-looking information and non-GAAP measures. I direct you to our MD&A and other security filings for information about the assumptions, risks and uncertainties inherent in such forward-looking information and details of such non-GAAP measures. These documents can be found on our website or at sedar.com. Before we discuss our Q4 results, I'd like to take a few minutes to reflect on the progress we have made in 2019 in executing on our strategy. Our strategy statement is, in 2023 we will achieve in our retirement residences, employee engagement of 55%, highly engaged; resident satisfaction of 67%, very satisfied; and same property occupancy of 95% to drive strong IFFO per unit growth by providing exceptional resident experiences through personalized services in our upscale and mid-market residences in urban and suburban locations. The sequence of the key targets in our strategy statement is deliberate. We believe that only highly engaged employees will deliver the exceptional resident experiences that will drive high resident satisfaction. Exceptional experiences are always personal. We get to know our residents before they come in to reside with us and tailor our service offering to their individual preference and needs. Only very satisfied residents and their friends and families will become Chartwell ambassadors in their communities and will generate a growing number of referrals. Referrals is our most important source of new resident move-ins. Operating our properties at high occupancy rates will drive strong cash flow per unit growth. And lastly, an even more focused geographical footprint and service offering will make us more efficient in our ability to deliver exceptional services to our residents and deliver on a vision of making people's lives better. In 2019, we made solid progress towards achievement of our 2023 goals in our retirement residences. Our employee engagement scores increased to 48% highly engaged from 47% highly engaged in 2018. And we were extremely pleased with the significant improvement in our resident satisfaction score to 63% very satisfied in 2019, up from 58% very satisfied in 2018. In 2019, we continue to put the building blocks in place to drive results in these 2 areas. The most important one being the development of our proprietary multiyear Customer Experience Program, which I have no doubt will set us apart from competition and help us deliver on our goals. The first phase of the customer experience training for our corporate and retirement residents is in progress and will be completed by the end of Q3. The second phase is in development now and the training will begin later this year. We are moving ahead with the implementation of our human capital management system, which when fully rolled out over the next few years, will allow us to standardize payroll, improve our ability to analyze employee-related data and enhance our ability to recruit, train and develop our employees. In early 2020, we completed the development of our new corporate office, the Chartwell Hub, a 130,000 square foot state-of-the-art building with numerous green features and training and collaboration spaces and our own Bistro 7070, which serves as a training kitchen for our residences' chefs. We are already seeing how this new space changes the way we work, making us more creative and efficient. I'd also like to highlight the great results that our long-term care achieved in 2019. Our long-term care operations provide Chartwell stable cash flows, meaningful economies of scale and significant operating expertise, particularly in the area of nursing care and infection control and remain important part of our business. Our Long-term care team has been consistently implementing programs to drive employee engagement and residence satisfaction, which is especially difficult to do in their highly regulated environment, that's heavily dependent on government funding. These rising above the regs programs include our innovative Imagine training program for management and frontline staff and they're producing exceptional results. In 2019, our long-term care team achieved a 59% resident satisfaction score, an 8 percentage point increase from their 2018 score of 51%, which exceeded their initial 2023 target to 57% and we have now reset that target to 67%. Their employee engagement score increased to 43% in '19 from 42% and in '18 and all quality and compliance metrics in our Ontario Long-Term Care residencies are better than provincial averages. In 2019, our teams opened 7 new residencies, including 2 residencies managed for Batimo in Quebec and the newly acquired Chartwell Emerald Hills Retirement Residence in Edmonton, Alberta. In addition, our partner, Signature Living, commenced operations at Kingsbridge Retirement residence in which we owned a 60% interest. These new state-of-the-art projects will add significant cash flows and value to our portfolio over time. We also continued to streamline our property portfolio in accordance with our strategy. And in 2019, completed sales of 3 non-core assets and entered into a definitive agreement to sell 4 non-core older LTC residences. I would now like to turn it over to Karen Sullivan, our Chief Operating Officer to talk about some operational initiatives that she and her team are working on. Karen?

Thanks, Brent. Turning to Slide 7, as I reported last quarter, despite increasing competition in some markets, we started to see improvements in our leading indicators. This improvement continued with a 12% increase in initial contacts and a 7% increase in personal visits compared to Q4 of last year. Our contact center also continues to be a very effective differentiator, including now having contact center agents in our Vancouver office to add to those working in our Mississauga and Montreal offices. This will allow us to have coverage over a longer period each day and will also enhance the personalized service for our Western Canada prospects. Our concerted efforts to focus on business development strategies have led to agreements with a number of national and provincial organizations that will enhance our opportunity to increase referrals. We now have much more purposeful plans for business development and community engagement in our properties. Our 2019 brand awareness survey conducted by Ipsos Reid shows that awareness of Chartwell is at an all-time high, including top of mind awareness, known as unaided awareness. Our most statistically significant gains have been in the last 2 years. Against the competition, Chartwell dominates in English Canada and since 2015 our unaided awareness has tripled in Quebec where we now rank second. Based on all of these encouraging results, we believe that our sales, business development and marketing efforts are effectively helping us to stand out from the competition and will lead to increased occupancy going forward. Turning to Slide 8. In Q4, we also continued to focus on the customer experience as our unique value proposition, this included completing a 2-day training session for all of our retirement home managers across Canada and beginning our frontline training program that is delivered directly in our retirement homes by one of our 4 directors of cultural experience. To date, we have trained over 3,000 employees and expect to have all 9,000 employees trained on this first unit by the end of Q2. Ongoing training of both our managers and frontline staff is a key element of this multifaceted approach that is designed to improve employee engagement and resident satisfaction with the goal of increasing both resident and employee referrals. In addition, on the long-term care side of the business, we have developed a program called Imagine, which is being delivered to managers and frontline employees in our Ontario Long-term Care Homes. This 4-day training program helps participants understand and support those living with dementia, introduces Montessori techniques, helps make [ fans ] of families, assist in overcoming resistance and improves leadership skills. Finally, with respect to controlling expenses, our supply chain management team negotiated a number of national contracts in 2019 that led to annual savings of $2.8 million. Also, recently, we entered into a new contract that begins on March 1, which will yield future savings with respect to the purchase of medical supplies and equipment and incontinence products. I would now like to turn it over to Vlad Volodarski, our Chief Financial Officer to talk about our financial results. Vlad?

Thank you, Karen. As you can see on Slide 9, in 2019, we continued to build financial flexibility. We increased our unencumbered asset pool, which at December 31, 2019, had value of $915.6 million compared to $676.9 million at December 31, 2018. This allowed us to add a new $125 million unsecured loan, further expanding options to finance our growth. In 2019, our real estate finance team arranged $269.2 million of new mortgages, which carried interest at the weighted average rate of 2.92% and had a 10.1-year term to maturity. The majority of these new mortgages are CMHC insured. Our mortgage maturities remained well staggered with an average term to maturity of 6.8 years at December 31, 2019. At the December 31, 2019, our liquidity amounted to $414.7 million, which included $22.9 million of cash and cash equivalents and $391.8 million of available borrowing capacity on our credit facilities. In addition, at December 31, 2019, our share of cash and cash equivalents held in our equity-accounted at JVs was $5 million. Interest coverage ratio was 3.1 on December 31, 2019, compared to 3.2 at December 31, 2018. Our indebtedness percentage calculated using historical costs of assets was 51.7% at December 31, 2019, and our debt to capitalization was 45%. Net debt to adjusted EBITDA ratio increased to 8.3x compared 7.8x at December 31, 2018. The increase in this ratio is primarily due to financing of 5 new developed and one acquired properties, those have not yet achieved stabilized occupancy and EBITDA contribution. In 2019, these properties collectively contributed negative $1.7 million of adjusted NOI. Upon achievement of stabilized occupancy of 96%, these properties are expected to contribute $22 million of adjusted NOI. Our result in 2019 continue to be impacted by new competition in certain markets. We expect the pace of new construction to moderate in second half of 2020. In the meantime, as Karen discussed, the implementation of our branding, sales and marketing strategies resulted in a strong improvement in our leading indicators, which positions us well to begin occupancy recovery in 2020. As shown on Slide 10, in 2019 net income was $1.1 million compared to $18.5 million in 2018, primarily due to higher direct property operating expenses, finance costs, depreciation, amortization expenses, impairment losses, lower gains and asset sales, partially offset by higher revenues remeasurement gains and lower deferred tax expenses. In 2019, FFO was $199.7 million or $0.92 per unit compared to $193.6 million or $0.90 per unit in 2018. The increase in FFO was primarily due to higher adjusted NOI of $11.7 million, including a $3.9 million increase in our same property portfolio, higher interest income, lower G&A expenses, lower lease and lease termination costs, partially offset by the increase in finance costs and other and higher corporate depreciation of PP&E and intangible assets. 2019 FFO was impacted by $8.2 million of lease-up losses and imputed cost of debt related to our development projects compared to 2018 amount of $4.1 million. Included in 2019 FFO is $1.6 million of recovery of prior year's property taxes and related interest income. Same property occupancy was 90% in 2019 compared to 91.2% in 2018. As shown on Slide 11, in Q4 2019, net loss $11.5 million compared to loss of $13.1 million in Q4 2018 primarily due to lower deferred tax expenses, impairment losses and higher contributions from property operations. For Q4 2019, FFO was $51.9 million or $0.24 per unit compared to $48.5 million or $0.23 per unit in Q4 2018. The increase in FFO was primarily due to higher adjusted NOI of $2.1 million consisting of $0.2 million increase in same property adjusted NOI and $1.9 million increase in contributions from acquisitions and development, higher management fee revenue, lower G&A expenses, lower lease termination and lease expenses, partially offset by higher finance cost and higher corporate depreciation of PP&E and intangible assets. In Q4 2019, FFO was impacted by $1.8 million of lease-up losses and imputed cost of debt related to our development projects compared to 2018 amount of $1.3 million. Same property occupancy was 89.9% compared to 91.4% in Q4 2008. Turning to our operating platform results. As shown on Slide 12, in 2019 -- in Q4 2019, our Ontario platform same property adjusted NOI increased by $3.4 million and $0.6 million or 2.4% and 1.7% respectively as rental rate increases in line with competitive market conditions were partially offset by lower occupancies and higher staffing costs. Occupancy in both '19 in Q4 2019 of 84.8% compared to 86.5% and 86.7% in 2018 and Q4 2018 respectively. In 2019, our Western Canada same property adjusted NOI decreased $0.1 million or 0.1%, primarily due to lower occupancies and higher staffing costs, partially offset by rental rate increases, in line with competitive market conditions. In Q4 2019, our Western Canada same property adjusted NOI increased $0.1 million or 0.9% primarily due to rental rate increases, in line with competitive market conditions, partially offset by lower occupancies and higher staffing costs. Occupancy in 2019 and Q4 2019 was 95.1% and 95% respectively compared to 96.2% and 96.3% for the respective periods in 2018. In 2019, our Quebec same property adjusted NOI decreased $0.3 million or 0.6% primarily due to lower occupancies, higher staffing costs, further repairs and maintenance expenses, partially offset by rental rate increases in line with competitive market conditions and lower property tax expenses as a result of successful appeal of certain prior years' assessments. In Q4 2019, our Quebec same property adjusted NOI decreased $0.2 million or 1.8% primarily due to lower occupancies and higher staffing costs, partially offset by rental rate increases in line with competitive market conditions and lower utilities expenses. In 2019 and Q4 '19, same property occupancy was 90.9% and 90.6% respectively compared to 92.2% and 92.3% for respective periods in 2018. Our Ontario LTC platform same property adjusted NOI increased $0.8 million or 2.9% in 2019, primarily due to higher preferred accommodation revenue. Adjusted NOI decreased $0.3 million or 3.5% in Q4 2019 compared to the same period in '18, primarily due to timing of expenses. 2019 and Q4 2019 same property occupancy was 98.6% and 98.5% respectively compared to 98.3% and 98.5% for the respective periods in 2018. While we expect that competition in some of our markets will continue to be robust in the near term, we are looking to 2020 with optimism. We believe that our initiatives in employee engagement, customer experience, branding, sales, marketing, recruitment and information technology will continue to move Chartwell forward. Our 2020 Outlook is based on our expectation of a stable Canadian economy and housing market, and continuing strong labor market and slowly rising interest rates. We expect our operating platforms to deliver solid operating results in 2020 with gradually improving occupancies, rental rate growth in line with competitive market conditions between 2% and 3% and ongoing expense optimization through our centralized supply chain management progress. We expect G&A expenses to grow in line with inflation as we fund new corporate initiatives within the existing cost footprint. Development will continue to be one of our core growth strategies. Of the 3 projects currently in construction one is scheduled for delivery in 2020 and 2 in 2021. We expect to commence construction of 3 to 4 new project in 2020 and number of other projects are undergoing design municipal approval and feasibility activities. We continue to source and evaluate other opportunities, including development opportunities, in our own lands with an estimated development and redevelopment potential of close to 2,500 additional suites. We will continue to search for opportunistic acquisitions and we'll continue to evaluate our property portfolio and sell properties that do not fit our strategic direction. 2 of Chartwell's Batimo developments in Quebec have now achieved stabilized occupancy and we expect to acquire interests in these projects in the coming months. And other, Chartwell Le Teasdale Phase 2 is expected to achieve stabilized occupancy later this year. Slide 17 shows the history of our distribution increases and I am pleased to report that yesterday our Board approved Chartwell's sixth consecutive annual increase in monthly distributions. Monthly cash distributions will increase by 2% from $0.05 per unit $0.60 per unit on an annualized basis to $0.051 per unit, $0.612 on an annualized basis effective for the March 31, 2020 distribution payable on April 15, 2020. In 2019, 100% of our distributions were classified as return of capital for tax purposes. Based on our current forecast, we expect to have sufficient deductions and losses carried forward to eliminate any cash SIFT taxes in 2020. Long-term prospects of our industry, in general and Chartwell in particular, are very promising. In the 4 provinces Chartwell currently operates, the sector needs to add 262,000 retirement suites by 2039 as you can see on Slide 18. We believe that the retirement living industry has a great opportunity to create and service additional demand over and above the demand resulting from the seniors population grows along. The demand for government-funded long-term care is similar to the demand for retirement accommodation. If governments are unable to fully address such demand growth, retirement operators will need to step up to serve people who cannot access government-funded LTCs. As an example of such opportunity. In Ontario, today there are approximately 36,000 people on the wait list for LTC accommodation, many of whom reside in retirement residences. The existing inventory of 232,000 retirement suites in our 4 provinces, includes a number of smaller, older homes, which are likely to become obsolete over time, further increasing the need for new retirement suites. The acceptance retirement living is significantly higher in Quebec than the rest of the country with the penetration rate, defined as a ratio of available retirement suites due to number of people over the age of 75, of 18.4%. This compares to 5.5% penetration rate in Ontario; 5.7% in Alberta and 8% in B.C. We believe the introduction of more flexible service offerings and pricing options, including à la carte services across the country may increase the acceptance of retirement living and further drive demand. So we see many opportunities to leverage our leading position in the Canadian retirement living market to continue to make people's lives better and to create sustainable value for all our stakeholders. I will now turn the call back to Brent to wrap up.

Thanks, Vlad. As previous announced, I will be retiring in 2 weeks. I recently sold my family business to Chartwell in 2003 and after holding several positions with the company, I was appointed as President and CEO in 2009. It has been a great run. I'm proud of our achievement, not only in bringing the company back to health after it's tough early years and financial crisis, but more importantly, in putting solid building blocks in place for its future success. I know I leave the company with an exceptional culture, clear vision, mission and strategy. A company with world-class corporate governance and a strong and committed Board, a company with experienced and dedicated senior leadership team, and most importantly, a company of 15,300 engaged and dedicated people that come to work every day with a goal of making people's lives better. I know that I'm very pleased that I will continue to serve Chartwell as a Board member. Thank you for your time and attention this morning. We would now be pleased to answer any questions you may have.

[Operator instructions] And the first question is from Jonathan Kelcher with TD Securities.

Congrats, Brent, and hope you enjoy the retirement.

Thank you very much.

First question is just on your outlook. I guess you are looking for a little bit of occupancy gain in 2020, and in 2% to 3% revenue growth. Is there anything on the costs side or any costs pressures that would prevent that from translating into same property NOI growth in the 3% plus range?

We do not expect that there'll be anything on the cost side that would preclude us from achieving that kind of NOI growth. We spoke before about some pressures in certain markets in terms of recruitment, and we're incurring additional overtime and agency costs. We expect these pressures will continue in 2020, but that should not be driving a significant growth in the labor costs.

And then just on the occupancy, you're talking about the increasing leading indicators, and that translated into some occupancy growth in Q4. Are you seeing further occupancy growth into Q1 or is there a seasonal slowdown there?

Yes. No, we are seeing the same types of trends with respect to our initial contacts and personal visits and the number of leases is up January 2020 over January 2019.

And then just lastly on the longer-term 95% occupancy target. Is that -- do you see that as being sort of a linear progression or more back end weighted as new supply slows down and demand picks up?

It's -- we see it as a more back end weighted not just because of the supply slow down and demand picking up, but because the initiatives that we're putting in place right now will take time to help to take hold. We're confident that they will make a huge difference in our resident satisfaction, employee engagement and by extension occupancy. It will take time for us to roll all these things out that we have planned to do. So the growth in occupancy, we see more robust at the back end of this now 4-year period.

The next question is from Himanshu Gupta with Scotiabank.

On the outlook for Ontario region, you expect around 3% rent growth in 2020. So are the market rents growing at the similar rate or do you expect to be higher, or lower than the market?

No, this will be in line with what our expectation for the markets would be.

And what rental growth rate did you achieve in 2019?

About the same.

And then on the new supply and the projects in preconstruction. So if I look at a disclosure Chartwell at Oshawa is no longer in the consideration, so what has changed your decision and, yes, any color there.

Yes, we've been talking about it for a while that we have delayed a number of projects that we thought would be in construction by now and we are revisiting them again because of the acceleration in the pace of construction cost, and in some cases the competitiveness of the markets. So the projects that we're showing in preconstruction, we still expect to commence construction, it's just going to be a little later. There is a number of projects that are not on this chart that we're working through municipal approvals and feasibility analysis that we might also begin construction in 2020. But this is really just out of abundance of caution and making sure that we're comfortable with the cost and projected returns.

And on the same subject of new supply, so with respect to the new supply data information which was released yesterday. So now earlier there were 40 projects which were competing with your properties and now there only 30 projects. So do you know if these 10 projects they got cancelled or they got postponed compared to the last year?

No. So what we're showing in this chart, Himanshu, is the projects that are currently in construction. So whatever was in construction last year, some of these projects have been completed and so they're off that chart. And then some new projects have started, so they were added to the chart, so it's a fluid situation. But if you start analyzing it from year-to-year, you will see the impact that it has on these -- on our properties in these top 15 markets. So you correctly pointed out that last year, we had 7,200 competing suites within 5-kilometer radius of our properties in those markets. And this year, that number is, I think, 5,200. So there's a little lower number or quite a bit lower of competing suites in those markets. Having said all that, you'll see that Durham and Ottawa markets continue to be competitive.

And just staying on the new supply data, so it's focused on 5-kilometer radius of your existing chartered properties, do you internally track, like, new supply with respect to say 10-kilometer or a broader radius as well?

Yes, we absolutely do track internally all supply around our properties. In terms of disclosure, it's -- the rule of thumb that about 70% of the people that come to live with you come within 5-kilometer radius of the properties. So this is pretty indicative of the immediate competition for these properties. So that's why we selected that that reporting.

And maybe just last question, like, development continues to be an important priority in this year as well. So are you looking for some disposition of older properties in your portfolio in this year?

Yes, this is an ongoing program where we analyze and review our property portfolio every year. And as part of those reviews, we may determine that some assets do not fit strategic direction of the company and we'll dispose them. You'll see our track record. We've been pretty active seller every year of the properties that you should expect that that will continue.

The next question is from Chris Couprie with CIBC.

Couple of questions. First on the Batimo projects. Couple of them have seen their stabilization dates pushed out a little bit. Are these related to delays in construction or is lease-up going slower than expected?

Probably a combination of both. The ones that been open for a while are because of the lease-up going slower. The ones that recently opened there were few -- some delays in construction.

And then the 2 that L'Unique and St-Gabriel, what's the timing for you guys with respect to your requirement to acquire those properties?

Our expectation is that St-Gabriel will close shortly in the next week or so, and L'Unique probably shortly thereafter in the next month or so.

And then a question on The Sumach. So I think, we're 51% leased compared to 48% in the prior quarter. Just curious, if the leasing is going according to your expectations? And with the -- what you've kind of experienced so far, what your eagerness is to do more of these same types of properties?

Yes. We started, I guess, a little bit behind. Our expectation is that on opening we would have a bit higher preleasing ratios. We had some issues with construction delays on this project that impacted that. The current lease velocity is satisfactory, in line with what our expectations are, and our desire to build more of these is pretty big. We want to continue to do that. We think there is a big potential for this type of model outside of Quebec and we are searching for more sites to do more of these.

And how much of your portfolio could you see these type of asset be coming?

Well, I mean it takes time to build these projects. So everything -- almost everything that we build now has some component of these apartments. They may not necessarily all be as large as Sumach, but everything that we're building has some components of these apartments within à la carte service offering. So we expect that that part of the portfolio will continue to grow and we will continue to own and operate 160 other retirement residences. Those are not going away.

The next question is from Troy MacLean with BMO Capital Markets.

You mentioned an increase in leading indicators, is that true for markets where you're seeing a lot of oversupply?

Yes. It's a pretty consistent, absolutely.

And then he mentioned -- I was kind of curious, with the rising construction costs, are you starting to see -- how are other developers dealing with that? Are you seeing any accepting lower development yields just to get a project started? Or is most of the industry taking the same approach that you are then holding off on getting on the ground?

I think if we do the averages, we see the same sort of reaction from the rest of the people who are developing. As we mentioned numerous times, majority of development at the present time is being done by experienced developers and/or operators. And so people are more disciplined in this development cycle than they were in the past development cycle. So we're seeing people deferring their projects as well when they see the acceleration of construction costs or occupancy pressure on the existing inventory given the competitiveness of the markets.

And then what's the biggest driver of employee engagement in a survey, is it wages, opportunities for advancement, training? What do you think, where do you get the best bang for your buck in trying to improve the score?

I would tell you, it's all about leadership. And we put a lot of effort into developing our local leaders and making sure that they are very good at recognizing and communicating with our employees and allowing them to make a difference in homes. And we see those scores going -- being important, and also increasing year-over-year.