Chartwell Retirement Residences (CSHUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Chartwell Retirement Residences Q1 2022 Financial Results Conference Call. I would now like to turn the meeting over to the CEO, Vlad Volodarski. Please go ahead, sir.

Thank you, Louise. 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 are Karen Sullivan, President and Chief Operating Officer; Sheri Harris, Chief Financial Officer; and Jonathan Boulakia, Chief Investment and Chief Legal Officer. Before we begin, I direct you to the cautionary statements on Slide 2, because during this call, we will make statements containing forward-looking information and non-GAAP and other financial measures. Our MD&A and other securities filings contain information about the assumptions, risks and uncertainties inherent in such forward-looking statements and details of such non-GAAP and other financial measures. More specifically, I direct you to the disclosures in our 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. Turning to Slide 3. Any company, to be successful, must make choices. At the end of March, we announced an agreement to transition our Ontario Long-Term Care business to Axium Infrastructure and Aged Care Health Services. This was a difficult decision, given the long and successful history of Chartwell LTC operations. It was even more difficult after experiencing how our Ontario Long-Term Care teams stepped up during the hardest days of the pandemic to support our residents, their families and each other. They did, and continue doing, everything possible for the comfort and well-being of our residents in most difficult conditions. We have full confidence in this team. They certainly have proven their dedication and that they can succeed in the most challenging circumstances. This decision is not a reflection of a lack of confidence in the Ontario Long-Term Care sector. The Ontario government has repeatedly demonstrated their commitment to the sector through the pandemic, including the announcements of the improved capital redevelopment program and commitment to achieve an average of 4 hours of care per resident day by 2025. We expect their commitment to continue to grow over time. Our decision is purely strategic and is driven by our desire to fully focus and grow our retirement operations across the country. Once this decision was made, it was critical for us to find strong quality partners for this transition who are aligned with our values and who are committed to continue the legacy of Chartwell Ontario LTC operations. I am confident that Age Care as the manager and Axium as an investor are exactly the right partners. They are fully dedicated to deliver complex acute care to their residents and are looking to expand their services to more seniors across the country. I know that our Ontario Long-Term Care team will be essential in helping them achieving these goals, and that our people will flourish and grow with them for many years to come. We expect the transition to be completed within 12 months, subject to required regulatory and other approvals. We expect to reinvest proceeds from this transaction in growing our retirement operations. In early April, we announced the acquisition of 3 new retirement residences in Ontario. This acquisition brings to our portfolio newer residences in the markets where we already operate and are able to generate significant management synergies. Upon achieving stabilized occupancy of 95%, we expect to generate stabilized NOI yield of 6.4% on this acquisition. Turning to Slide 4. Our financial results still reflect the challenges posed by the pandemic. The latest wave, driven by Omicron subvariant which began in April, continued to impact a large number of our residents across the country. Fortunately, most of the residents and employees who have contracted the virus have mild-to-moderate symptoms, if any, and generally, recovered quickly. The restrictions imposed by public health authorities on residences with active cases of exposure are now more tailored to individual residents' circumstances, and in many cases, are allowed -- we are allowed to continue with modified resident activities, social visits, including personalized tours. Having said that, this wave has slowed down and further delayed the pace of recovery we expected to see this spring. On a positive note, our leading sales indicators, website traffic, initial contacts and move-ins continue to trend positively with some reaching and exceeding prepandemic levels. We now forecast occupancy in our same property portfolio to increase slightly in May and continue to grow in June. Assuming no significant new restrictions and wave of the pandemic, we expect robust occupancy growth in the fall. Numerous marketing, sales and operational initiatives have been put in place, both nationally at the individual residence level to ensure that we are well positioned to accelerate this growth in the coming months. On that note, I will turn the call over to Karen to provide for operational update. Karen?

Thanks, Vlad. Turning to Slide 5. As Vlad said, our leading indicators are improving, including March lease signings reaching the highest number since the beginning of the pandemic. This will support higher permanent move-ins in Q2. Although our personalized tours and move-ins were impacted by Omicron in Q1 and April, same property leasing activity and permanent move-ins exceeded April 2021 by 27% and 35%, respectively. Due to these improvements, as Vlad said, we are projecting to increase occupancy slightly in May, with a further increase of 20 basis points in June, with both Western Canada and Quebec beginning to see occupancy growth in May. With restrictions in the community and in our homes and residences relaxed, life in our homes has a more regular routine, with resident dining and activities back to normal, families and loved ones visiting residents and prospects coming in for personalized tours. And even with higher numbers of outbreaks due to the 6th wave of the pandemic, we are clearly, as a society and as a sector, learning to live with COVID in its latest form rather than shutting down and implementing severe restrictions. This is in large part due to high vaccination rates of our residents, including booster shots, our mandatory vaccination policy for our staff, and as Vlad said, the reduced severity of this variant, with most people experiencing no symptoms or mild symptoms. Turning to Slide 6. Our marketing strategies in Q1 shifted towards an emphasis on the important connections and sense of community that exist in retirement residences, particularly after the isolation for seniors over the past 2 years. The campaign was in the voice of the adult daughters. Many of our marketing initiatives were in support of our time-limited promotion in specific regions, Quebec City, Ottawa and Calgary. Later in Q1, we focused our efforts to support our 4-day open house in April, which was very successful as evidenced by the number and quality of new contracts added to our database in the weeks following this event. We also recently completed spring sales training for our retirement living consultants across the country. Topics included working with our click-to-connect agents to drive consistent, exceptional customer experience, strategies to help maximize selling time, using our marketing toolkit and open doors sales environment and objection handling, including using business development partners, such as physicians and health care providers, realtors, financial planners, downsizing professionals, et cetera, to counter common objections. Finally, turning to Slide 7, the operations and people teams work together to continue to deliver strategies to focus on recognizing our employees, reducing turnover, decreasing agency use and improving recruitment outcomes. This includes continuing with our staffing optimization project to create more full-time positions in our residences and better aligning staffing levels to occupancy, care and service levels. We're also piloting shift vacancy fulfillment software, which is already in place in our long-term care homes in select retirement residences. We have a number of strategies in place to work with educational institutions and have added additional support to help our homes with frontline recruitment efforts. This is a people business, and we have also focused on recognizing and developing our leadership teams and frontline staff members. Their contribution over the past 2 years as well as their renewed focus on our recovery efforts has been nothing short of outstanding. On March 11, we celebrated Chartwell Strong Day to recognize our frontline staff. Also, we were recently able to spend time with our GMs and administrators, albeit virtually, for a very engaging Residences First Leadership Conference. Next week, we will do the same with our resident managers from across the country to provide them with continuing education, encouragement and recognition. Government funding continues in all provinces to assist us with our additional COVID costs, including new funding recently announced for retirement homes in Ontario as well as an extension of funded employee premiums in Quebec. Our supply chain team has been effective in helping us to manage our increasing food cost by entering into a number of new contracts with suppliers that will result in approximately $500,000 in annual savings related to dairy, bread, dry goods, et cetera, which will help to offset overall inflationary increases. We also entered into new contracts for our chemical suppliers, which will improve quality and reduce costs. And finally, although the announcement of the sale of our long-term care homes in Ontario was difficult for our administrators, managers and corporate office team members, we have already had a series of excellent meetings with Aged Care Senior Operations team. It continues to be very clear that there is a significant alignment with respect to our values and our collective commitment to provide quality care and services to our residents. The teams are now working together on our transition plan. Now I'd like to turn it over to Sheri to discuss our financial results.

Thank you, Karen. As shown on Slide 8, in Q1 2022, our net loss was $3.3 million compared to a net loss of $4.9 million in Q1 2021. For Q1 2022, FFO from continuing operations was $20.3 million or $0.09 per unit compared to $34.5 million or $0.16 per unit in Q1 2021. Total FFO was $31.3 million or $0.13 per unit for Q1 2022 compared to $35.1 million or $0.16 per unit in Q1 2021. The pandemic and associated government restrictions have continued to be the primary driver in the decline in our financial performance. To summarize, the decrease in total FFO per unit compared to Q1 2022 is primarily due to lower retirement operations, adjusted NOI of $13.6 million, as a result of lower same-property adjusted NOI of $13.2 million and lower contributions from our acquisitions, development and other portfolio due to the disposition of properties, with acquisition and development growth not yet fully offsetting the disposals. Our G&A expenses were higher by $1 million as a result of lower government subsidies and increased cloud-based information technology system implementation costs. Our management fee revenue was lower by $0.4 million due to lower performance-based fees. Additional units outstanding from the August 2021 equity offering, net of interest savings also resulted in dilution. These factors were offset by contributions from our long-term care operations. As Vlad and Karen noted, effective March 31, 2022, we entered into definitive agreements to substantially exit our long-term care operations in Ontario. 15 Ontario LTC properties and 1 retirement residence adjacent to one of these LTCs have been reclassified as discontinued operations in our financial statements and MD&A. Our long-term care discontinued operations contributed $0.04 per unit to total FFO for Q1 2022 compared to $0.00 per unit in Q1 2021 due to government reimbursements for prior year's direct operating expenses and higher ancillary preferred and retirement accommodation revenues in Q1 2022. Slide 9 summarizes our same-property operating platform's results. Our same property adjusted NOI decreased to $13.2 million or 22% in Q1 2022 compared to Q1 2021, primarily due to the following factors: in Q1 2022, net pandemic expenses in our same-property retirement operations were $5.8 million; in Q1 2021, we have been in a recovery position and our net recoveries were $3 million. The increase in net pandemic expense is primarily due to the Omicron wave and lower government reimbursements of pandemic expenses. Revenue growth in our same-property retirement operations was $2.1 million or 1.3% higher due to revenue from both regular annual and market-based rental and service rate increases, partially offset by lower occupancy of $3.2 million. Higher agency staffing costs in our same-property retirement residences as a result of staff shortages increased costs by approximately $2.9 million. Historically, our reliance on agencies has been very limited. We always prefer to have our own Chartwell staff who are fully trained in our programs and dedicated to our vision. Our staffing optimization project, which is focused on maximizing full-time jobs, ensuring predictable scheduling for our staff, matching staffing levels to occupancy, care and service levels will result in reducing reliance on agency staff over time. In addition, we are implementing technology and solutions to assist our residences to improve speed to hire and allow all our resident staff to be informed of the availability of additional shifts to ensure faster shift fulfillment. We also experienced higher utilities expenses due primarily to increases in natural gas prices. Overall, our trend on retirement operations net pandemic expenses have been improving significantly in the latter half of 2021, even with the significantly reduced government support. Net pandemic expenses in Q1 2022 primarily relate to temporary costs associated with restrictions and requirements with outbreaks, including additional staffing primarily for screening, and in these Omicron-driven waves, agency premiums due to replacing staff who are required to self isolate in order to ensure our safety and service levels are maintained. We are also incurring additional costs for PPE. Once restrictions are lifted and the wave recedes, we expect staffing levels to normalize and costs to decline. We expect that Q2 2022 net pandemic expenses will be in the range of $4 million to $6 million. The level of these costs will depend on how quickly the Omicron wave recedes, necessity to replace staff vacancies with agencies and overtime and the extent of government restrictions as well as government support for the costs associated with the restrictions. Same-property occupancy was 76.4% as compared to 78.7% in Q1 2021. Same-property retirement occupancy was 76.5% for Q1 2022 compared to 78.9% for Q1 2021 or a decline of 2.4 percentage points due primarily to lower move-in activity as a result of the pandemic. Move-in activity improved significantly in Q1 2022, increasing 46% compared to Q1 2021. Our occupancies declined, consistent with our historical seasonal trends despite the Omicron wave. Both our Ontario and Quebec retirement platforms experienced declines in occupancy of 170 and 600 basis points, respectively, and same-property adjusted NOI declined by 28.5% and 35.7%, respectively. Western Canada achieved strong growth in occupancy in the latter half of 2021. And in Q1 2022, occupancy increased 280 basis points compared to Q1 2021. Our long-term care same-property portfolio includes the 2 homes we will retain. Our total long-term care home occupancy based on total capacity of licensed beds was 88.7% compared to 78.7% in Q1 2021, an increase of 10 percentage points due to higher admissions. For Q1 2022, weighted average occupancy, excluding the beds that are not available due to reduced capacity in 3 and 4 bed ward rooms and rooms designated for isolation and cohorting was 95%. For Q1 2022, total long-term care adjusted NOI, including our discontinued operations, increased $10.2 million, primarily due to recoveries of prior year incremental pandemic expenses of $6.2 million, rebates in respect of workers' compensation costs for previous periods, higher ancillary revenue and higher preferred and retirement accommodation revenues. Turning to Slide 10, you will see our monthly same property retirement occupancies. Same-property occupancy decreased to 76% or 0.2 percentage points in April 2022 and is forecasted to increase slightly in May, an increase of further 0.2 percentage points for June 2022, achieving growth in our Quebec and Western platforms and stabilizing in our Ontario platform. Our forecast is based on known leases and notices on hand as of April 28, 2022. April 2022 same-property retirement leasing activity and permanent move-ins exceeded April 2021 by 27% and 35%, respectively. Our Western platform is forecast to deliver strong occupancy growth of 0.5 percentage points starting in June, consistent with the recovery experienced in 2021 in this platform. Our Ontario platform is forecasted to stabilize in June, and our Quebec platform is forecast to deliver occupancy growth of 0.5 percentage points in May, and occupancy is expected to continue to grow into June. We believe that there is pent-up demand for retirement accommodation and services driven by the increased aging population, disruptions of community-based support services for seniors during the pandemic and a persistent shortage of long-term care beds. Accelerated growth in the population of seniors over the age of 75 over the next 20-plus years as well as the slowdown in construction activity in the last 2 years should support occupancy recovery in the short term and growth from pre-pandemic levels over the longer term. Our leading sales indicators are trending positively. Our acquisition and development portfolio has continued to show lease-up progress. Pandemic-related restrictions have significantly eased, and assuming this continues, we expect our occupancy to continue to recover in 2022 across all platforms. Turning to Slide 11. At March 31, 2022, liquidity amounted to $374.8 million, which included $159.9 million of cash and cash equivalents, and $214.9 million of borrowing capacity on our credit facilities. In addition, our share of cash and cash equivalents held in our equity accounted JVs was $3.8 million. At March 31, 2022, we have $193.2 million of mortgage maturities remaining in 2022, of which $44.9 million are CMHC-insured. Scheduled refinancings of our mortgage maturities in 2022 are proceeding in the normal course. Our mortgage maturities remain well staggered, with an average term to maturity of 6 years at March 31, 2022. At May 5, 2022, liquidity amounted to $264.1 million, which included $68.2 million of cash and cash equivalents and $195.9 million of borrowing capacity on our credit facilities. In addition, our share of cash and cash equivalents held in our equity accounted JVs was $13.1 million. At May 5, 2022, our unencumbered assets had a value of approximately $1 billion. Our ratio of unencumbered assets to unsecured indebtedness increased to 2.2x at May 5, 2022. I will now turn the call back to Vlad to wrap up.

Thank you, Sheri. The potential growth embedded in our portfolio is significant, and we're committed to realizing it. As shown on Slide 12, getting back to the pre-pandemic occupancy of 88.6% in our same-property retirement portfolio is estimated to generate approximately $84 million of additional NOI, with an additional $76 million estimated to be generated over time from achieving our targeted 95% occupancy and retirement portfolio. While we expect that we will be able to complement this embedded growth with the new investments in acquisitions and development opportunities, our focus has been and will continue to be operating our existing portfolio to its full potential. We believe we will realize the significant value creation potential embedded in our portfolio through disciplined execution of our recovery and growth strategies, some of which Karen covered today. This recovery and growth will be supported by the strong demographic growth of senior population, continuing shortage of long-term care beds, and in the short term, slower pace of new developments. The rapid escalation of construction costs over the last several years means that new developments to be economically viable need to achieve accommodation and service rates significantly higher than current market rates. That means that as occupancies recover, there is likely to be an opportunity for higher than historical growth in market rates for existing residences. One percentage point growth in our rent and services rate is estimated to generate nearly $9 million of additional revenue. 2022 is going to be a transition year, transition from the pandemic to recovery and growth. Chartwell is a company with great culture, clear strategic direction and exceptional execution capabilities. We demonstrated this during the pandemic, and we'll keep building on this foundation through transition and beyond. The ingenuity drive and commitment of our people have proven to be incredible, and it is them who gives me confidence in our ability to realize this embedded growth in our portfolio and to deliver sustainable long-term value to our unitholders. To all nearly 16,000 Chartwell employees across the country, thank you for everything. Turning to Slide 13. We are privileged to work in a sector that generates tremendous positive societal impact by serving and caring for the most respected segment of our population, our seniors. As a leader in the retirement living sector in Canada, at Chartwell, we see it as our duty to continuously evolve, improve and grow our contribution to society. Our culture manifests itself in our results and lives in our stories. Stories about our residents, employees and communities in which we operate are heartwarming and inspirational. They deserve to be told. I invite you to read our recently released 2022 environmental, social and governance report, where you will find, in addition to statistics and key performance indicators, many of these great stories. We would now be pleased to answer your questions.

[Operator Instructions] First question is from...

Jonathan Kelcher. First question, just on sort of the Q1 pandemic costs of $5.8 million, and you talked about agency costs of $2.9 million. Is the $2.9 million in that $5.8 million or is that over and above?

It's over and above Jonathan. The $2.9 million relates to existing positions sort of the run rate that we were experiencing towards the latter half of 2021 that came into our system then.

Okay. So do extra pandemic costs include any agency costs?

Yes. The majority would be additional staffing and agency costs along with some costs for PPE.

Okay. So the $4 million to $6 million you're expecting for Q2 would be largely agency, and what about that $2.9 million run rate, is that something that can come down?

We are expecting to bring that down. I think Karen highlighted many of the initiatives that are in place in our operations team that will assist in bringing those down. I think that we'll see that decline starting in the latter half of 2022.

Specifically our staffing optimization project, I think, is going to yield some good results.

Okay. That is helpful. And then, Vlad, you talked about the embedded NOI gain that you can get. Like you guys, are you -- you've got good leading indicators. Like how long do you think until occupancy gets back to pre-pandemic levels?

Yes, that's, I guess, $160 million question or this particular one maybe $5 million question, Jonathan. The -- it's really hard to estimate the specific timing. We do expect a more robust recovery beginning in the second half of 2022, driven by all the factors that we discussed on this call, including the very encouraging, these leading indicators. I mean, we've seen them trending positively for a while now. Now the trend is significantly positive. And so that has to translate into higher occupancy in the second half of 2022, assuming we're not going to be hit with more of these waves of the pandemic and related restrictions. As Karen mentioned, even though many homes today are impacted by outbreaks, we still are able to conduct resident activities in some modified way but still conducting those activities and including personalized tours. So that's certainly helpful. So assuming all of that stays the same, we should see better recovery in the second half of 2022, and certainly into 2023, and then kind of macro factors, so demographic growth of the senior population, the slower construction starts that we've experienced in the last couple of years, shortage of long-term care beds all of these should support the growth in the occupancy in 2023.

Okay. That's helpful. And just on the restrictions and how it's working now, would it be, I guess, less restrictive than pre-pandemic if you had an influenza outbreak at a home? Like how would it compare to that?

Yes, it's sort of similar. So our dining rooms are necessarily closed. It can be different in different public health units, and that's what it was like in a pre-pandemic world. People who had the flu were in their rooms eating, but everybody else was able to go to the dining room and participate in activities and more cautionary approach to people being together. But it looks a lot like that in the sixth wave, which means it just feels so much more normal and people are still visiting and interacting, which I think is a huge part of this and a huge part of the change as these waves go on is we are -- based on the outcomes, we truly are learning to live with this.

Okay. That's good. And then just lastly for me, the word normal there kind of sparked it, but how was the flu season in Q1 this year?

It was much better than a typical flu season, for sure. With all the additional IPAC procedures that we're using, it is quite good compared to previous seasons.

Our next question is from...

Himanshu Gupta. Just on long-term care, I mean, obviously, large expense recovery in Q1. So have you recovered everything for the last year -- from the last year? Or do we expect another catch-up in Q2 as well?

No, we've recovered all of our investments from the previous year, Himanshu.

Got it. Okay. And then just turning to dynamic expenses, a follow-up to Jonathan's question. So just to clarify, $4 million to $6 million guidance in Q2, that includes agency staffing as well. Is that correct?

No, it does not include agency staffing. The $4.6 million includes agency staffing to the extent it is net pandemic related. The run rate elevation that we experienced that increased through 2021 for Q2 was $2.9 million. I expect that, that will continue to decline through Q2, Q3 and Q4, but probably be a consistent level for Q2.

Got it. So basically, your $4 million to $6 million is very similar to $5.8 million in Q1. So are you being conservative here, or do you see actually spending that much money in Q2 as well? Just trying to assess that.

Well, we're trying to kind of give the best estimates we can in the circumstances that are very uncertain. So it really depends on how many residences are going to be impacted by the outbreaks, how long this is going to continue. I mean still -- it felt actually that it was slowing down for a period of time, and then we had more residences going in. So the community spread of this particular variant is so wide that more residences are being affected. Assuming this number starts slowing down, hopefully, we'll be at the lower end of the range; if it doesn't, we should -- we'd probably be at the higher end of the range. So it's really hard for you -- for us right now to tell you exact number. But the range should be correct.

Okay. Okay. And then just turning to the occupancy side of things. So I'm looking at Ontario occupancy, still low recovery. Is Ontario market -- is that a market of have and have not? I mean -- and I know you have a very large portfolio. So are there markets which are 85% or plus, and then there are markets which are struggling like say, 60% or below? I mean, is that how it's panning out?

Yes. Yes. It's a big province, and it's -- definitely, there are areas that have higher occupancy than others. The other thing I would say in Ontario, with outbreaks, we often have needs-driven short stay. People who come to live with us, so during outbreaks, that has gone down. But I'd also say that recovers pretty quickly. So it's just a more needs-based province.

Got it. And then if I look at within Ontario, so are there certain markets which are struggling? Or are there certain residences which are struggling? I mean, can you like oversimplify saying that maybe 1 or 2 markets are struggling? Or is it like few residences which could be across many markets which are struggling?

Yes. So it's certainly more sort of struggles are more widespread than in the normal circumstances. Generalizing, it's still the Ottawa market that continues to experience oversupply. In fact, there's some more construction going on in the Ottawa market. And given sort of the composition of our portfolio there, where we have a lot of studios, we have lower occupancy in that market. At the present time, it will take a little longer to recover than the rest. Durham Region remains to be competitive, so our occupancies are depressed there. And Northern Ontario, for example, would be a better market where occupancy would be higher.

And Southwestern Ontario is showing quite low.

Yes.

Got it. And then the markets which are taking a bit of time to recover, so is that now a bigger push in terms of incentives in those markets? Like is -- are you changing any strategy from a sales and marketing perspective in those places?

Yes, we are. We're being much more targeted in our promotions. So they'd be more home-by-home. And even within the home, it might be a certain type of unit or a location in the building. And I would also say our marketing efforts are much more targeted to either groups of home in a region that are struggling or individual homes as well.

[Operator Instructions] Next question is from...

Pammi Bir. Just nice to see the occupancy start to turn again. But just maybe with respect to your comments on a more robust pickup in the fall, can you maybe just elaborate what you consider to be robust? And if you -- some of your peers have provided guidance for the year. So I'm just curious if that's something that you would consider or what might be a reasonable expectation for occupancy by year-end?

No, we will not be providing guidance because in this uncertain environment, it's, I would say, pegging a specific number would probably be not the right thing to do. The experience I can tell you that we had, for example, in the U.S., where we were operating there, which situation was very different, but it was a housing market impact on the occupancy. When things turned around, we saw occupancy growing by about 200, 300 basis points in the quarter. And that I would consider to be a very robust recovery. If we can get to those kind of numbers, I think we'll all be pleased.

Yes, that would be great to see. Maybe for Karen, just on the marketing initiatives. I'm just curious, it might be a tough comparison to last year, but what can you say -- in terms of some of the changes that have been made, what are you finding that's working now or changes that are actually starting to make a bit of an impact?

Yes. Well, certainly, having an open house was a big deal for us because we haven't been able to do that. So we did it a little differently. We had a shorter hours over 4 days so that we didn't have too many people and at the same time. And we had a good response to that. I'd also say those were quality contacts because you weren't just coming out. I just think people aren't willing to come out if they're as much tire kicking. So I think the quality of our initial contact from that were very good. And as I said, the other thing we're doing differently, it's still important to do brand marketing, and we'll continue to do that. But we are taking some of those funds and diverting them to be more specific for homes where, let's say, we do have a promotion, and we have a call to action, and we're trying to get information directly out to people within that radius around that home. So that's another piece that we're -- that would be different this year.

And some of the initiatives, I think, I recall maybe some changes to how staff or salespeople are compensated. Is it having an impact yet or is it...

It is. We're just about to pay out our first quarterly bonus program, and that goes, not just to our sales force, but also to the GMs and the management team, so that there's focus around sales in the home. So I do think -- we haven't had this before. We've certainly always compensated our sales force based on occupancy, but now the entire team, and there is more compensation for our LCs. So yes, we're starting to see that help.

Got it. Just not to hammer the point on here. But on the $4 million to $6 million of pandemic costs in Q2, I just wanted to clarify the language around that. I think the way you described it in the disclosure was net incremental $4 million to $6 million pandemic costs in the quarter. But to clarify that, that $4 to $6 million is basically in line with that, I guess, $5 million to $8 million in the last quarter. So it's not incremental, it's just kind of consistent with what you've incurred in Q1?

Yes, yes. Year-over-year incremental, yes, so that's an important clarification. And how we're distinguishing between those 2 cost classifications is the additional work and hours that need to be added when they're related to restrictions or outbreak versus existing staff complement hours where we're filling with agency.

Okay. Just a couple of quick ones left. In terms of maybe just redeploying the proceeds from long-term care, I mean, obviously, that transaction has not been closed yet. But you made the first move with the recent acquisitions. Can you just comment on maybe what's in the pipe at this stage? And then just secondly, any changes in terms of how maybe some of the buyers at the table or how deals are being underwritten just given how much volume we've done there?

Sure. It's Jonathan. I'll answer that. So we do continue and have been looking at opportunistic acquisitions. And as you've alluded to, our cost of capital is higher than some of our competition for assets. So we will win some of these assets and have, including the 3 we just bought in Ontario. Where we have a competitive advantage? So an example would be these 3 properties suited us very well because they hold it so nicely into our existing platform and our geographic footprint. So we are in the market, we are looking, but we remain cautious on these acquisitions and look for a competitive advantage where there is one.

Have you seen any maybe strategic or new entrants maybe looking for platforms that does that? Has that become visible at all in terms of what you're seeing out there?

Well, we've seen new entrants, new capital, maybe not so much looking for platforms. But we've seen capital investment.

Pammi, there's quite a bit of activity in the market where larger institutional investors like U.S. REITs and private equity funds investing in Canada now and partnering with various operators. There's also quite a few smaller firms now that are building their own management platforms and investing in what for us might be noncore assets. So we're seeing quite a bit -- a few groups like that, that are establishing in Canada potentially for future growth. So that's happening.

Next question is from...

Tal Woolley. Vlad, I'm just wondering with everything going on in the market right now and in terms of just like the investment market for seniors housing and then changes to interest rates, things like that, what kind of -- what do you think is more preferable right now in terms of deploying growth capital? Is it against acquiring assets? Or is it focusing on your existing development pipeline?

That's an excellent question, Tal. We've always looked at sort of what's #1, #2 and #3 in terms of the deploying capital. And frankly, the overall market conditions play maybe even a smaller role in those decisions than sort of our views on the returns, the potential returns. The first dollar always would go towards investment in the existing property portfolio. If we had opportunities to reposition a home where we can -- we believe we can generate better returns, that's where we are looking to invest first because that carries lower risk and generally provides better returns than anything sort of external. Development has always been core external growth strategy for us. Unfortunately, from what I'm seeing in the market now, underwriting needs to be done very aggressively in terms of the rate growth to justify most of the developments at the present time, given where the construction costs are. And so while we are set up, ready with a number of projects and want to build quite a few of them, I am -- we are all being cautious about kind of underwriting, I don't know, 6%, 7%, 8% rent growth over the next couple of years that you need to underwrite for these projects to happen. And part of our remarks today was about the fact that this big gap between what these projects need to generate in terms of the rate compared to the construction cost to be economically viable and the rates that we have in place today in the marketplace. And I think that creates quite a bit of opportunity over time once we recover the occupancy to grow the rate in the existing property portfolio. So development, unfortunately, right now cannot be a big user of our capital, given those constraints. But everything changes over time. And so acquisitions is then the next bucket where we are looking for opportunities that fit our portfolio, as Jonathan pointed out, where we can actually have some competitive advantage and could win the deal in their competitive environment.

Okay. And then just on the labor side. You're talking about the money you're spending on agency and how you hope it's going to -- how you think you've got strategy in place to kind of wind down your agency usage. Is that because you think like the labor market is going to get better? Or is that more like an internal reorg on your part that will help reduce labor expenses?

So the answer is both. The first one is a hope that the labor market will get better, and hope is not a strategy. So the internal things that we're trying to do, the initiatives that we're trying to put in place, that is the strategy that we're trying to deploy to alleviate the situation with agencies, and Karen spoke about what they are. But I do think that there's a possibility the labor market will improve a little bit post pandemic. But I think I spoke about this before at many calls that, structurally, this same demographic that makes us very optimistic about our ability to grow occupancy over time where the number of senior citizens in this country will continue to grow rapidly, same demographic will point out to that there are fewer younger people for each retired person going to be in the next 20 years. And so there needs to be additional considerations over and above what any company can do from the government and society to bring more people who will work in hospitality, in our sector, in health care, in entertainment into the country. That's probably the only solution that will systemically solve this problem.

I know like over the course of the pandemic, you were trying to draw other people from those sectors effectively trying to expand the labor -- the eligible labor pool. Like do you have some sort of sense of how successful that was through COVID? Like do you think you've actually sort of been able to draw from a larger pool? Or was it more kind of like piece-by-piece and no real trend there? Just wanted to get a sense of that.

Yes, I don't think we have seen any kind of trends in that. It's more piece-by-piece.

Okay. And then I'm just wondering how we should think about, if occupancy across the industry starts to improve, I mean, I think probably the industry would still be what we would call "underoccupied." How should we be thinking about rent growth in the context of that?

So there's 2 competing forces that are working when it comes to rent; one is there's inflationary pressures that are undeniable on many cost categories, including labor that we just talked about; on the other hand, you have the desire to drive occupancy from most players. And I know that in the U.S., people got over that and started growing rates at significantly higher clip even before they recovered the occupancy. I think Canadian experience is different. There may be incremental increases in rental rates that people will put through, including ourselves, who might consider that. I doubt that they will get to high -- at least in the short term to this high single-digit level that we are seeing in the U.S. But as I pointed out, once occupancy recover, this gap between what you need to achieve to build a new product and what's in place today will have to narrow and there will be opportunity to increase these market rates for new residents once occupancies are at more stabilized levels.

Okay. And then just lastly, like it's sort of a similar question, but for the service revenue piece. I know a lot of players in the industry have been looking at sort of reworking how they price these services and so -- like how they price -- push service packages to the customers. Do you think you'll be able to sort of see better pricing on this going forward or better take up post-COVID?

Yes. So in the midst of all this, somehow my team was able to do exactly what you're talking about. We've rationalized, and this is in Ontario, we're going to take this out more to the West and Quebec shortly. But we looked at our care programs and how we're pricing them, how we're bundling them and how we're selling them to our residents, and we call that Care Assist. And so we've clarified everything from the nomenclature that we use to what are the packages that sort of naturally go together. And I think that's helping a lot for both our health and wellness managers to speak to our current residents and our sales force to talk to prospects about care. So it's definitely a strategy for us, and we're kind of well underway with that here in Ontario, which is the most needs-based province.

Thank you. So we have no further questions at this time. I'll return the meeting back over to you, Mr. Volodarski.

Thank you, Louise. This wraps up today's conference call. Thanks again to everybody for joining us. A reminder that our Virtual Annual General Meeting will be held on Thursday, May 19, at 4:30. Further details will be posted on our website later today. We are looking forward to you joining us on the call then. As always, if you have any further questions, please do not hesitate to give us a call. Goodbye.

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