Chartwell Retirement Residences (CSHUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Chartwell Retirement Residences Q1 2024 Financial Results Conference Call. I would now like to turn the meeting over to the CEO, Vlad Volodarski, please go ahead.

Thank you, Giselle. 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; Jeff Brown, Chief Financial Officer; and Jonathan Boulakia, Chief Investment Officer and Chief League 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 Q1 2024 MD&A under the heading 2024 Outlook and Risks and Uncertainties and Forward-looking Information for a discussion of risks and uncertainties. These documents can be found on our website and on the SEDAR+ website. Turning to Slide 3. Our teams successfully carried the strong momentum of occupancy and cash flow growth into Q1 2024, with occupancy increasing 610 basis points year-over-year; same property NOI growing 24.7%, generating FFO increase of 61.2%. We expect this occupancy growth momentum to continue and forecast June 2024 same property occupancy of 87.3%. Our teams continue to methodically execute our operational, sales and marketing strategies, focusing, as always, on delivering personalized, memorable experiences to our residents, peace of mind to their loved ones and supporting each other. As I meet with our residents and team members in our residences across the country, I feel firsthand the kindness, warmth and dedication to the residents' well-being that are the key components of the Chartwell experience. It makes me proud to be part of this great team. I will now turn the call to Karen to provide an operational update.

Thanks, Vlad. Moving on to Slide 4. In Q1 2024, our marketing strategies led to an increase in personal tours from marketing sources of 33% compared to Q1 2023. Total personal tours from all sources increased by 13% quarter-over-quarter. In Q1, we had 9 weeks of net positive activity, leases minus notices, eliminating our typical winter occupancy dip. We saw an increase in all sales KPIs in Q1 2024 compared to Q1 2023. Initial contacts were up 16%; personal tours, up 13%; permanent move-ins, up 16%; and signed leases, up 13%. Since our website launched last year, we have consistently driven better quality conversions. Our new digital strategies, including continuous optimization of Google Search and Analytics resulted in higher quality of calls to our contact center. We've improved our website performance, particularly in content, speed, security, accessibility and search engine optimization. Our open house in January was very successful in driving new leads. ICs generated from this event were 1,384, an increase of 400 prospects in comparison to January 2023. We've already held our first open house of Q2 in April, with very strong traffic, further increasing our pool of qualified prospects. Plans are underway for another open house event in June. We continue to use a diverse range of digital and traditional media channels to support our open house campaigns. In order to continue to enhance our cross-back pool, our dedicated business development managers are working with hospital discharge planners and local seniors groups. Other strategies for the coming months include exclusive presentations at several key conferences, including the Economic Development in Alberta conference, the Independent Financial Brokers of Canada conference, the Elder Planning Issues Conference and the Alberta Retired Teachers' Association. Turning to Slide 5. We reduced our staffing agency costs by 60% in Q1 2024 compared to Q1 2023 through focused recruitment and retention activities. We continue to concentrate on a targeted nursing strategy that incorporates a referral bonus program, agency staff conversions, reaching out to nonpracticing nurses that recently left the profession, exploring strategic partnerships with expert immigration organizations and campus outreach activities for recent graduates. We have now fully implemented an electronic health record in our residences in Ontario and BC and have begun the process to roll this out in our Quebec homes, which should be completed by the end of the year. Not only will this assist our frontline care staff with assessments and care plans, but is already having a positive impact on our care revenue, which increased by 23% in Q1 2024 compared to Q1 2023. We announced the closure of Heritage Glen Retirement Residence on March 19. And to date, we have found alternative accommodation for 155 of the 187 residents. We are continuing to work with our third-party placement consultants on plans for the remaining residents. We also continue to focus on locally driven, property-specific strategies to improve occupancy and drive overall performance of each of our residences. One example of this is the repositioning of Chartwell Rouge Valley in Markham, Ontario to better serve the Chinese community. We have made changes to our programs and activities in dining services and have a number of staff and managers who are able to speak Cantonese and/or Mandarin. This strategy resulted in a 2,900 basis point occupancy growth in the last 12 months, with current occupancy at 96%. I'll now turn it over to Jeff to take you through our financial results.

Thank you, Karen. As shown on Slide 6, in Q1 2024, net loss was $2 million compared to a $9.3 million loss in Q1 2023, primarily due to higher resident revenue; lower depreciation of property, plant and equipment; higher net income from joint ventures; and lower G&A expenses, partially offset by deferred tax expense in Q1 2024 as compared to a deferred tax benefit in Q1 2023; higher direct property operating expenses; absence of income from discontinued operations due to the completed LTC transactions; lower gain on asset sales; and higher negative changes in fair value of financial instruments, primarily due to increases in trading prices of our Trust Units. FFO from continuing operations increased 87.6% and FFO from total operations increased 61.2% in Q1 2024 compared to Q1 2023 as operating results in our core property portfolio continued to show strong improvement. In Q1 2024, our same property occupancy increased 610 basis points to 86.1%, and our same property adjusted NOI increased by $11.3 million or 24.7%. FFO growth benefited from $1 million of lower G&A expenses, primarily due to lower compensation costs, as we continue to execute on our plan to achieve efficiency improvements. Q1 2024 G&A included $0.6 million of severance related to these efficiency initiatives. Slide 7 summarizes our same property operating platform results. All our platforms posted occupancy gains in Q1 2024 compared to Q1 2023, which positively impacted our results. Our Western Canada platform same property adjusted NOI increased $3.1 million or 20.1%. Our Ontario platform same property adjusted NOI increased $6.5 million or 25.8%. Our Quebec platform same property adjusted NOI increased $1.7 million or 33.3%. Turning to Slide 8. At May 9, 2024, liquidity amounted to approximately $279.5 million, which included $37.5 million of cash and cash equivalents and $242 million of borrowing capacity on our credit facilities. For the remainder of 2024, we have $141.1 million of mortgage debt maturing at the weighted average interest rate of 3.32%. We expect to renew or refinance these loans during the year. We also have a $125 million term loan maturing in May 2024. We expect to refinance or repay this loan with proceeds from CMHC financing on our unencumbered properties. At May 9, 2024, 10-year CMHC-insured mortgage rates are estimated at approximately 4.57%, and 5-year conventional mortgage financing is available at approximately 5.75%. Moving to Slide 9. With the continuing strong prospect traffic and leasing activity, we expect occupancy to continue to grow in 2024. We now forecast to achieve 87.3% same property occupancy by June of this year. We've been using targeted incentives in certain markets to support this rapid occupancy growth. As more residences achieve higher occupancy rates, we expect to gradually reduce the use of these incentives. We believe that improving occupancies, combined with lower new supply coming to market, will support higher-than-historical market rate increases over the next several years. We expect these dynamics will result in the growth of our adjusted operating margins above the current levels. I would now turn the call back to Vlad to wrap up.

Thank you, Jeff. There has never been a better time to be in the senior living business in Canada. With strong demand for our services, driven by the demographic growth of the senior population, slower pace of construction activity, continuing shortages of long-term care beds and the obsolescence of some of the existing inventory, our sector is poised for sustainable long-term growth. Our teams are hard at work to position Chartwell to be at the forefront of this growth. As illustrated on Slide 10, our company continues to focus on 3 key areas to accelerate this growth. We are in business of providing seniors with a great place to live. We strive to provide our residents with personalized, memorable experiences because we believe that these experiences will result in high resident satisfaction rates. Very satisfied residents are 4x more likely to refer their friends to Chartwell. With over 50% of our move-ins coming from referrals, increasing the volume of referrals will drive and sustain high occupancy rates, which, in turn, will improve profitability. We believe that only highly engaged, caring and dedicated employees can deliver these personalized number of experiences to their residents. That is why we focus most of our time and investments on employee engagement, resident satisfaction and occupancy growth. We're also in the process of transitioning our management operations to a more agile and scalable platform. Over the last 4 challenging years, we learned that we could do things faster. We're doing more to empower those closest to the customer to make decisions, to take actions and experiment. We are leveraging our platform to provide them with the necessary tools, including various technology solutions, training and targeted support to help them outperform. We are reviewing all our corporate support processes and eliminating low value at work, implementing technology solutions to enhance efficiency of our support services and reimagining our corporate support functions to align with this new way of working. We continue driving our portfolio optimization and growth initiatives, investing in our existing properties to ensure their long-term competitiveness, pursuing acquisitions of newer, high-growth properties in strong markets and divesting noncore residences. To date, in 2024, we completed the acquisition of 1 property and expect to close on the second acquisition from Batimo in the next few weeks and announce an operational closure of another noncore property. We continue to investigate several other strategic growth opportunities in our markets. I will now close our prepared remarks with a story from one of our residences, as pictured on Slide 11. I'm thrilled to share a recent media story about our incredible residents at Chartwell Allandale Station in Barrie. Residents Shirley Monger, Christine Maxamenko and Eleanor Ball put their baking skills to test, turning out more than a dozen apple pies as a thank you to local first-responders. With the assistance of General Manager, Kyla Krawczyk, and armed with their freshly baked goods, the group set out to hand-deliver these pies to the local fire halls, police stations, hospital and ambulance stations. This act of kindness is part of Chartwell Allendale Station's H.O.P.E. initiative, Helping Others through Purposeful Engagement, allowing residents to utilize their skills and lifelong hobbies while giving back to their communities. Kyla said it best, "When our seniors give to our community, it allows them to experience fulfillment, autonomy and connection to their community." This is just one example of the amazing contributions that our residents and employees are making in their communities across the country. I invite you to visit our Media Center page on chartwell.com to read more stories about our residents making headlines across the country. Thank you for your attention this morning. We will now be pleased to answer your questions.

[Operator Instructions] The first question is from Lorne Kalmar from Desjardins.

On the Heritage Glen closure, and apologies if I might have missed it, what type of pricing do you expect? And I believe you're selling it. And what would be the NOI impact on -- once it's closed?

Thanks for the question. It's Jonathan here. So you would know that we were operating it as a retirement residence at less than 60% occupancy for many years, and so it's being repurposed and renovated as a multi-residential building. The property wasn't well suited to continue as a retirement home. And when you look at the vacancy rate in the region of retirement homes versus multi-res, it made a lot of sense for everyone for it to be repurposed as multi-residential. But the sale was still conditional. And as such, we're not giving details just yet on price and impact.

Fair enough. And then I think there was a mention of another operational closure. Could you maybe give us a little bit of detail around that? And maybe also just some -- an outlook in terms of how many of these are kind of left in the portfolio and the pace at which you expect to close them maybe on an annual basis, if you can?

There was no other operational closures that we mentioned. We meant Heritage Glen, that's the only 1 that is in progress now. And in terms of the future, there are no immediate plans of doing any other closures of the homes. And we continue to look at our portfolio and performance and continue to evaluate each assets on its merit. At this time, there are no other plans.

Okay. Fair enough. And then lastly, just on the announcement around the Ballycliffe sale. I think the original disposition proceeds were $64.5 million. Can you give us an idea of what you think you can get now with the revisions to the LTC funding model?

Yes. So the building is still not fully constructed or handed over to operations. We will relaunch the sale process, as we said, once it is. And we are in discussions with the original buyer in terms of their interest to buy it. Like you said, we think it's going to be worth more than the $64 million that was in the forward purchase agreement. I don't have a number for you now, but the new funding model is going to positively affect its value. Other considerations also come into play for a buyer, including financing costs and what other considerations they might have. But certainly, the funding model is going to help the value.

The next question is from Jonathan Kelcher from TD Cowen.

Just to close out on Heritage Glen, I guess, at 60% occupancy, it wouldn't have been contributing much, if any, NOI. Is that fair to say?

That's correct.

Okay. On the Batimo, you're acquiring the 2 properties this quarter. There's 2 more where they have the right to put that -- put the assets to you. Do you expect to be acquiring those later this year?

We're working with Batimo, we have been continuously, on finding the right strategy and the right timing to acquire these properties. Right now, we're focused on the one that we just closed last week and the one that we expect to close in the next few days. There might be one more down the pipe, but we're not actively working on anything that's imminent.

Okay. And then the -- I think, if I recall correctly, in the MD&A, one -- like both those ones you're acquiring have north of 8% debt. I think on the one you've acquired, you said the debt is due December 1, and you can refinance it. But what about the other assets? Should we think about that as a similar time frame in terms of refinancing?

We're going to be pursuing -- Jonathan, we're going to be pursuing financing with CMHC on both of those. And so we'll kickstart that as soon as the second closes. So the timing may even be earlier than December. That's just the maturing of the existing facility.

Okay. But both will get done this year, it's fair to say?

Yes. We anticipate both being done this year.

Okay. And then last for me, just on the -- Karen, on the electronic health records, and could you maybe walk us through how you sort of translate to more use of that is increasing the care revenue? And then what's the potential going forward there? And lastly, like how material is it? What's sort of the dollar amount we're talking about?

So because we're capturing it electronically, we can track it so much better. And we do assessments on a regular basis, and that's when we can determine whether people need additional care services, and then add those to the assessment, which hooks directly to the billing. So that's what I think is helping us rather than it all being paper-based and more disjointed from the billing portion. So that's sort of the practical application of that.

And Jonathan, it's a combination of electronic health records and the Care Assist program that Karen and team rolled out over the last couple of years. There are homes that makes access to this additional care a lot easier for the consumer. It's much more clear than what ourselves and other competitors had in place in the past. And so I think the pickup in the care revenue is a combination of those two things, not just electronic health records. And in terms of materiality, it is not a significant portion of our overall revenue, but it is significant for improving the lives of our residents and helping them to stay longer with us, which is very important.

[Operator Instructions] The next question is from Himanshu Gupta from Scotiabank.

So on the same KPI, I think you mentioned permanent move-ins were up 13% in Q1. Can you tell how many actual move-ins were there in the quarter? And then how they are trending in Q2 so far?

We don't have the absolute numbers, so there are fingertips. In terms of the trends, they continue to be very positive, and we continue to see pretty strong traffic. Karen mentioned the open houses, both January and April saw the highest number of initial contacts and people coming and checking us out that we've ever seen. And that gives us a lot of encouragement that the positive trends will continue for the remainder of the year and beyond.

Got it. Okay. So I think in Q4, you disclosed something like, I think, 2,200. Would that be in the ballpark or maybe even higher than that? Or you can come back to me on that?

Yes. We'll have to come back to you on that.

Fair enough, fair enough. Okay. And then on the -- sticking to occupancy, good occupancy momentum on the same property portfolio. But is there a reason why there was no occupancy growth in the growth portfolio in Q1?