Chartwell Retirement Residences (CSHUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Chartwell Retirement Residences Q2 2021 Financial Results Conference Call. I would now like to turn the meeting over to the CEO, Vlad Volodarski. Please go ahead.

Thank you, Melanie. Good morning, and thank you for joining us today. There is a slide presentation to accompany this conference call available on our website at chartwell.com under the Investor Relations tab. Joining me today are Karen Sullivan, President, and Chief Operating Officer; Sheri Harris, Chief Financial Officer; and Jonathan Boulakia, Chief Investment, and Chief Legal 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 securities filings for information about the assumptions, risks, uncertainties inherent in such forward-looking information, and details of such non-GAAP measures. More specifically, I direct you to the added disclosures in our Q2 2021 MD&A under the heading COVID-19 Business Impact and Related Risks for a discussion of risks and uncertainties related to the pandemic. These documents can be found on our website or at sedar.com. For the last 17 months, our focus has been on keeping our residents, their families, and our staff safe during the most significant public health challenge of our lives, the COVID-19 pandemic. With the new variants of the virus still posing heightened risk, this pandemic is not over, and we continue to be vigilant and careful. Having said that, it is refreshing to see that high vaccination rates in the Canadian society overall and in our residences specifically contributed to a reduction of new COVID-19 cases, hospitalizations, and deaths. I am optimistic that the resulting relaxation of various public health restrictions, combined with the pent-up demand for our services will support a strong occupancy recovery in the coming months. We have already begun to see the signs of this upcoming recovery. Our leading indicators, web traffic, website traffic, initial contact, and personalized tours as well as the volume of move-ins have been gradually improving for several months and now reaching pre-pandemic levels. I'm also confident that numerous initiatives, our operations, marketing, and sales teams are putting in place across the country will continue to position Chartwell as the national leader in our sector, manifest in better services and care delivered to our residents and ultimately translate to improving financial results. Karen and Sheri will provide you more color on these trends and initiatives. And I will now turn the call over to Karen to do just that. Karen?

Thanks, Vlad. Turning to Slide 4. I'm pleased to report that we currently do not have any long-term care homes or retirement residences and outbreak. This has been made possible due to the high vaccination rates and the efficacy and effectiveness of the vaccine. I'm also pleased to report that 96% of our residents have received one dose with 95% having received both shots. Our long-term care staff lead the way with a vaccination rate of 90% with at least one dose, and 86% of our retirement residents staff have had at least one shot. Quebec staff vaccination rates are slightly lower at 79% because these essential workers got access to the vaccines later than in the rest of Canada. We expect these percentages to continue to increase and are currently implementing a policy whereby staff who are not vaccinated will be tested prior to every shift, and we'll have to wear additional PPE. We also require all new staff and agency staff to be vaccinated. A high vaccination rates among residents and staff and retirement residences and long-term care homes as well as high immunization rates in society overall have led to a significant reduction in restrictions for our residences across the country. We are now able to have residents eat in larger groups in our dining rooms, resume group activities, welcome more visitors, and leave for overnight stays. The return to a more normal resident experience will no doubt, assist us in improving the number of resident referrals that we receive, which have the highest conversion rates of any of our initial contacts. To support this, we've developed a comprehensive new referral program called Club Chartwell. It is directed at residents' family members and staff with an emphasis on the advantages of living in a socially engaging environment and the benefits of recommending this lifestyle for those who would thrive in a retirement residents. Our call to action, make a friend a neighbor, is focused on earning referrals, not buying them. We strongly believe, given the product and service we are offering to our residents that this is a much more genuine and compelling approach. The easing of restrictions has allowed us to open up to offer in-person, personalized tours across the country, which more and more of our prospects are taking advantage of. All of this has led to improvements in our leading indicators, including a 14% increase in initial contacts in Q2 compared to Q1 and 141% increase compared to Q2 2020. Overall, in Q2, we have had the highest initial contact since before the pandemic, and we have seen 3 straight quarters of growth. In addition, our personalized tours are up substantially compared to last year. Our permanent move-ins were close to double that of Q1 and are at 70% of Q2 2019 volumes. Our move-outs in Q2 decreased by 9% compared to Q1 and are 18% lower than Q2 2019. Our occupancy remained flat in July and is forecasted to grow slightly in August, and we expect, based on these leading indicators that we will see this in the early fall. Working with our health system partners, we have also been gradually increasing occupancy in our long-term care homes. Turning to Slide 5. To support our recovery efforts, our marketing campaign remains multifaceted and agile. This includes our -- it's time to live again multimedia campaign, which will be followed by a new campaign beginning the last week of August and running until mid-November, which is our peak leasing season. Our customer experience strategy continues to roll out, including recently produced online and virtual training sessions on the Chartwell experience to augment our in-person sessions delivered by our directors of customer experience. Throughout the pandemic, we believe this focused effort has helped us to stand out from the competition, as evidenced by our increasing number of Google reviews and an increased in our score from 4.56 out of 5 in 2019 to 4.7 in 2021, with an increase in 5-star reviews from 83% to 88% in that same period. Finally, turning to Slide 6. The operations team is also focused on enhancing our care services to assist our residents to stay with us longer as their health needs change and to welcome more residents who need these services. With the launch of our new Care Assist Program in Ontario earlier this year, we are now better positioned to deliver more much-needed care and assistance to our residents. And as a result, we are beginning to see steady growth in care revenue month-over-month. In addition, all of our residents in Ontario will soon have access to virtual physician services. We're also working on a staff scheduled project in order to create more full-time positions in our residences across the country and better align staff based on occupancy and care service offerings in each home. Finally, we're beginning to see a reduction in some of our expenses such as PPE and additional staffing that was previously required to deliver meals to suites and provide additional meal seatings in our dining rooms based on reduced capacity requirements. Overall, with the success of the vaccination program in our sector, combined with the easing of restrictions, we believe we are now on the road to recovery. I'd now like to turn it over to Sheri to discuss our financial results.

Thank you, Karen. As shown on Slide 7, in Q2 2021, net loss was $4.6 million compared to a net loss of $1.9 million in Q2 2020. For Q2 2021. FFO was $34.8 million or $0.16 per unit compared to $39 million or $0.18 per unit in Q2 2020. The decrease is primarily due to lower occupancy, continued investments in resident care and infection prevention and control measures, and lower interest income, which were partially offset by lower finance costs and general and administrative interest expenses. Turning to Slide 8. I will discuss our same-property operating platform results. Our same property adjusted NOI decreased $4.4 million or 6.5% in Q2 2021 compared to Q2 2020. Same property occupancy was 77.5% in Q2 2021 compared to 85.6% in Q2 2020. Same property retirement occupancy was 76.6% for Q2 2021 compared to 84.5% for Q2 2020 or a decline of 7.9 percentage points, which resulted in lower revenue of approximately $14.5 million compared to Q2 2020. We are pleased that with the continued lifting of pandemic-related restrictions occupancy stabilized in June 2021. Move-ins have significantly rebounded compared to Q2 2020 and improved since Q1 2021. Move-outs remain slightly below pre-pandemic levels. Move-ins still remained lower than move-outs in Q2 2021, which resulted in declining occupancy for the quarter overall. In addition to the impact of lower occupancies on our Q2 2021 results, the following factors affected our same property retirement operations results. We continue to make investments and initiatives to enhance residents and staff safety. We have maintained and enhanced our staffing levels, and we have experienced higher repairs and maintenance, and insurance expenses. We partially offset these negative impacts by generating increased revenue from inflationary and market-based rental and service increases and also from the provision of additional care and services as residents age in place longer with fewer departures during the pandemic to long-term care, their needs have increased. Our food and supplies costs also continue to be lower due to lower occupancies. Our net pandemic expense recoveries were $3.2 million in Q2 2021 compared to net pandemic expenses of $4.6 million in Q2 2020. Our same property long-term care home occupancy was 83.1% compared to 92.6% in Q2 2020, a decrease of 9.5 percentage points as a result of reduced move-in activity during the pandemic as well as government directives limiting occupancy in our Class B- and C-bed long-term care homes. Occupancy protection provided by the Ontario government remains in place until the end of August 2021. There continue to be significant waiting lists for admission with approximately 38,000 people on the waiting list for long-term care requiring these essential services. That is about 8.6% higher than pre-pandemic levels. Compared to Q1 2021, our long-term care occupancy increased by 4.3 percentage points, with June 2021 occupancy at 85.2% of total capacity. For Q2 2021, same property adjusted long-term care NOI increased $0.8 million or 14.2% as Q2 2020 NOI was affected by unfunded incremental pandemic expenses. This was partially offset by lower preferred accommodation revenues of $0.2 million in Q2 2021. Turning to Slide 9, you will see our monthly occupancies. Pandemic-related restrictions and government directives affecting operations have resulted in reduced move-in activity in our retirement residences compared to normal pre-pandemic levels and as a result, have resulted in lower occupancy. With the large-scale vaccination program, the efficacy of which has proven highly effective, current public health agency of Canada modeling projects the pandemic related restrictions can be gradually lifted without exceeding hospital capacity this fall. Through July 2021, restrictions have been significantly reduced in all 4 provinces in which we operate, and we've seen a corresponding increase in personal tour bookings, lease signings, and permanent move-ins, which are approaching pre-pandemic levels. And as a result, occupancy stabilized in June 2021 at 76.3%. We believe that these pandemic-related restrictions continue to ease as expected, move-ins and occupancy in our retirement residences will begin to rebound in the fall. As restrictions and directives are lifted, government support has also begun to decline, and this is likely to result in higher direct property operating expenses in the short term while we gradually phase out the associated additional staffing and supply costs. We collected substantially all rent and service fees for July and August, consistent with our past experience. As you can see on Slide 10, our interest coverage ratio was 2.8x at June 30, 2021. Our debt to gross book value, calculated using the historical cost of our assets was 52.8% at June 30, 2021. Our net debt to adjusted EBITDA ratio was 10.2x. Turning to Slide 11. At August 5, 2021, liquidity amounted to $439.8 million, which included $75.4 million of cash and cash equivalents and $364.4 million of borrowing capacity on our credit facilities. In addition, our share of cash and cash equivalents held in our Equity-Accounted JVs was $15.5 million. As of August 5, 2021, we have $48.2 million of mortgage maturities remaining in 2021 that are proceeding in the normal course. In addition, Chartwell share of remaining mortgage maturities held in its Equity-Accounted JVs as at August 5, 2021, is $15.1 million, refinancing, which is also proceeding in the normal course. Our mortgage maturities remain well staggered with an average term to maturity of 6.5 years at June 30, 2021. At June 30, 2021, our unencumbered assets had a value of approximately $1 billion. We currently have 4 projects under construction, which are budgeted to require an additional $100.2 million, as noted on Slide 12. We are recommencing our construction of the 90 suite addition to Ridgepointe Retirement Residence in Kamloops, BC. In addition, we regularly reinvest capital in our owned property portfolio with the goal of growing our property NOI and protecting and maintaining our properties. We expect to continue to be selective in our capital allocation in 2021. As noted on Slide 13, our Distribution Reinvestment Program, the DRIP, which was temporarily suspended in March 2020 was reinstated effective with the May 2021 distribution paid on June 15, 2021. Our DRIP offers unitholders the opportunity to receive their distributions in new Chartwell units with a 3% discount and no commissions. Unitholders can contact their investment adviser to enroll. Our participation rate for the June 30, 2021 distribution paid on July 15 was 24%. I will now turn the call back to Vlad to wrap up.

Thank you, Sheri. I'm proud of how Chartwell responded and persevered through this pandemic. This response, which continues today, is a clear testament to our people in our culture, making people's lives better is our purpose. It is why we exist. The heroism with which our people have been living our culture and our values through these trying times has been extraordinary. We are now ready and excited to welcome new residents to Chartwell properties across the country and create personalized, memorable experiences for each one of them. Our culture and our people give me confidence that we will overcome this pandemic and will emerge from it stronger than before. I'm optimistic that we have begun our path to recovery with a strong leading indicators and numerous initiatives being put in place in our homes. The long-term prospects of our sector remain bright. We deliver much-needed services and care to Canada's seniors. This need has not gone away. Likely, it has been exacerbated by the pandemic, creating a pent-up demand for our services, which will support continuing occupancy recovery. The growth in population of people over the age of 75 is beginning to accelerate with 2022 growth projected at 5.3%. This growth will remain robust over the next 20-plus years, supporting demand for our services. There continues to be a shortage of LTC beds across the country. And while various governments are taking steps to reduce the shortage, it is unlikely that they will be able to fund new bets to fully satisfy this existing and growing demand. Retirement residences are well-positioned to fulfill this void. In the medium term, the slowdown of new construction starts during the pandemic will result in fewer new residence openings in 2022 and 2023, further supporting occupancy recovery. Housing markets remain robust across the country, which makes it easier for our prospective residents to sell their homes and finance their retirement living. I want to finish by thanking our employees and our residences and corporate offices for everything you have and continue to do in supporting and serving our residents, their families, and each other in this time of great need. For your courage and sacrifice, for your kindness and empathy, for your resilience and tenacity, and for doing the right thing all the time, every time. Thank you for everything. Thank you for your time and attention this morning, and we would now be pleased to answer your questions. Melanie, over to you.

[Operator Instructions] We will now take our first question. Please go ahead.

Jonathan Kelcher. First question, just, I guess, to lead off on the retirement, do you expect to get any more government funding in the back half of the year?

Jonathan, I think it will be significantly reduced as the directives have lifted. There are reduced supports for some of those incremental expenses. So we do expect those to come down through Q3 and Q4 and not be material into 2022.

Okay. And I guess in the -- I guess, just sticking with costs on the retirement side, you guys -- in the MD&A, you talked about them remaining elevated for the time being. But I guess, Karen, in your remarks, you were talking about expenses coming down. Could you maybe walk us through what you expect? And I think what I'm really trying to get at is, if we look forward to 2022, or how far do we have to look forward? Do you think you can sort of get back to 2019 cost levels?

So the expenses that are already reducing our PPE because we don't -- when you have outbreaks, you just use so much more of that. So that we've seen reducing over the last number of weeks, several weeks, where we haven't had an outbreak. And then the other big change with the restrictions has been around dining. So where we were having to have people sit at a table for 2 instead of the typical 4. That meant we had to add additional shifts to cover that off. We don't have to do that anymore. And so we're starting to see a reduction in our dining staff, for example. Even disinfection is slightly down in terms of requirements, although it's still higher than what we would have done pre-pandemic.

Jonathan, I think it's fair to say that the expenses will remain elevated in 2021. We will be gradually bringing them down, but we will not do anything to compromise the safety of our residents. So the expectations should be that they're gradually coming down throughout 2021, and assuming there's no other waves or other outbreaks should come back to close to pre-pandemic levels in 2022.

Okay. That's helpful. And then just lastly, on the long-term care. I guess the funding guarantee runs out, the end of this month. And in June, you guys said you're at 85% or so occupancy. Do you think you get most of your homes to 97% by the end of this month?

Yes. They're mostly on track to do that. Absolutely.

We will take the next question.

Himanshu Gupta. So just on retirement home occupancy. So August occupancy is expected to be flat with respect to July and June. Any markets or province where you think August occupancy is trending higher than the previous 2 months? I mean, the question is, are there any regions which are leading the recovery charge here?

Yes. So as we would have expected, the Western Canada platform is leading the way on recovery, followed by Ontario. Quebec is a little slower due to the more independent nature of our residents, which makes it somewhat more discretionary. So it's going in that order.

Yes. And would you say Western Canada or British Columbia, or Alberta, have they seen like positive month-over-month in August versus July, for example?

Yes, yes.

Okay. Okay. That's great. And then on the same lines, I mean, if we look at the U.S., operators had seen some recovery in Q2 over Q1. So any read-across for Canada? Like what needs to happen here to see that kind of recovery?

I think it's as we expected, Himanshu, we knew that we would be sort of in that 3 to 4 months lag behind the U.S. in the summer months in Canada, which is where we felt that occupancy recovery for Canada was going to really start in the fall of 2021. And I think our expectation continues to support that. Our leading indicators have been increasing through July up to pre-pandemic levels. So we're quite pleased with that.

Okay. Got it. And maybe on the restriction side, I mean, we understand most of the restrictions have been lifted. Any new restriction expected with respect to Delta variants? I mean anything you have heard from public health, which would further delay the recovery here?