Extendicare Inc. (EXE) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to Extendicare Inc. Second Quarter 2026 Analyst Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Extendicare's 2026 Second Quarter Results Conference Call. Joining me today are Extendicare's President and CEO, Michael Guerriere; and Executive Vice President and CFO, David Bacon. Our Q2 results were released yesterday and are available on our website as is a live audio webcast of today's call, along with the company's slide presentation. An archived recording will also be available on our website following the call today. As well, replay numbers and passcodes have been provided in our press release for those wishing to access an archived recording by phone until tonight on August 21. Before we get started, please be reminded that today's call may include forward-looking statements and non-GAAP and other financial measures. Such forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors as well as details of non-GAAP and other financial measures in our public filings with the securities regulators and suggest that you refer to those filings. With that, I'll turn the call over to Michael.

Thank you, Jillian, and good morning. Our second quarter results reflect the successful execution of our acquisition strategy over the last 18 months. On April 1, we closed a $570 million acquisition of CBI, making Q2 the first period that CBI contributes to our results. The year-over-year increase in our EBITDA of 71.7% also reflects the acquisition of 9 long-term care homes from Revera that closed June 1, 2025, and Closing the Gap that closed July 1, 2025. All 3 acquisitions are exceeding the originally underwritten adjusted EBITDA that we reported at the time they were announced, reflecting our focus on acquiring platforms that contribute to our organic growth. Q2 also featured Extendicare's inaugural unsecured notes offering with the issuance of $450 million of unsecured notes, supported by a BBB credit rating from DBRS. Together with a new $250 million unsecured senior credit facility, this new investment-grade capital structure gives us flexibility in making future capital allocation decisions, leaving our pro forma net debt to EBITDA at 2.5x, well ahead of our original leverage outlook when we announced the largest acquisition in our history. We are on track to complete the integration of Closing the Gap this year as we now focus our attention on integrating CBI. We achieved another strong quarter of organic growth in Home Health Care, which, coupled with the acquisitions, contributed to 133% year-over-year growth in Home Health Care volumes. Excluding CBI, our ADV increased 31.7% from the prior year, driven by the Closing the Gap acquisition and strong underlying growth of the market. As we previously noted, the unexpectedly rapid organic growth we have experienced recently in the Home Health Care segment has necessitated additional investments in technology and back-office teams to support frontline home health care operations. These investments, along with the lack of a 2026 rate increase in Ontario, contributed to the 60 basis point reduction in Home Health Care NOI margins from the prior year period. Despite the strong volume growth again this quarter, we continue to expect that the underlying market growth will moderate over time to a long-run average of approximately 6% to 8% on an annualized basis, reflecting the 4% demographic growth trend and the expectation that the shortfall in the availability of Long-Term Care beds will continue. Long-term Care occupancy remains strong, with announced funding enhancements and preferred occupancy rate increases contributing to NOI growth of $5.7 million and trailing 12-month NOI margins of 11.8%. Our Managed Services segment continues its record of strong performance, including 8.3% year-over-year growth in the SGP customer base and NOI margins at 57.6%. We continue to expect annualized margins of 50% to 55% for this segment. Driven by the strength of these results, our AFFO per share, adjusted to remove the impact of stock-based compensation payments, increased to $0.448 per share, an increase of 52.9% year-over-year. Stock-based compensation was unusually impactful this quarter due to the retirement of 2 long-tenured directors from our Board. Our payout ratio on a trailing 12-month basis, excluding the impact of out-of-period items, was 37%. Turning to Slide 4. We see updated information on CBI Home Health, as detailed in the business acquisition report we filed on May 12. CBI is tracking ahead of initial expectations with Q2 26 revenue of $145.7 million and adjusted EBITDA of $18.5 million. CBI contributed ADV of 33,609 in the quarter, approximating a run rate of 12 million hours of care annually, about 20% ahead of 2024 volumes, a very similar growth rate to what we experienced at ParaMed in the same period. CBI is highly complementary to ParaMed as it materially expands our presence in Western Canada and introduces business models that offer new avenues for organic growth. The added scale of the combined companies will enable further investment in technology and deliver significant synergies once the integration is complete. This is important to position us to provide reliable, high-quality services more efficiently to the thousands of people that rely on us for care every day. Turning to Slide 5. We continue to advance our Ontario long-term care redevelopment agenda through our joint venture with Axium Infrastructure. At the end of May, we welcomed residents to Extendicare Beauclaire, the new 320-bed home in Ottawa that we opened in the joint venture. We also completed the sale of the Sudbury project to Axium joint venture for net cash proceeds of $18.1 million, net of costs and our [ 15% ] retained managed interest, resulting in a $7.7 million gain after tax. We currently have 6 projects under construction, including Extendicare Forest Trail, a 256-bed home, which is scheduled to open next month in Peterborough. Looking ahead, we remain on track to open 4 new homes in 2027, representing a further 832 beds. We continue to progress an additional 17 projects that are at varying stages of planning and development under the Ontario Long-Term Care Home Capital Development Program, including a 256-bed home in Ottawa, where we hope to break ground by the end of 2026. We are actively working with the government on necessary funding and other elements required to fully realize our development agenda. I'll now turn the call over to our CFO, David Bacon, to discuss our financial results in more detail.

Thanks, Michael. I'll start with an overview of our consolidated results, review our individual business segment and provide an update on the recent changes to our balance sheet. This quarter's results reflect the full quarter impact from all of our acquisitions. Our consolidated Q2 revenue increased by 59.4% to $611 million, driven by the full quarter contribution of the CBI acquisition, which drove 132.6% growth in our home health volumes, the impact of Closing the GAAP acquisition on a year-over-year basis, and continued Home Health Care organic growth. It was also bolstered by the acquisition of the 9 LTC homes in June of 2025 and our Long-Term Care funding enhancements. Our Q2 adjusted EBITDA was $68.3 million, an increase of $28.5 million or 71% over the prior year, reflecting our acquisitions and strong underlying organic growth, particularly in our Home Health segment. The CBI acquisition contributed adjusted EBITDA of $18.5 million. It's important to note this quarter that both our net earnings and our AFFO were negatively impacted by certain onetime items that we believe should be adjusted for when considering our results. Our Q2 net earnings of $30.9 million, down $1.1 million from the prior year, were impacted by pretax costs of $8.1 million in connection with establishing our senior unsecured credit structure and the early prepayment of certain Long-Term Care home mortgages and loans. In addition, net earnings were further impacted by pretax costs of $8.7 million related to transaction and integration costs primarily related to the CBI acquisition. Additionally, we reported $3.6 million lower pretax gains on the sale of assets to the joint venture on a year-over-year basis. Adjusting for these impacts and certain fair value impacts, net of tax, our net earnings increased by $15.6 million to $36.4 million or $0.38 per basic share. Our Q2 AFFO improved by $11.7 million or 47% to $36.5 million. However, this quarter's AFFO was impacted by the settlement of deferred share units held by 2 long-standing directors who retired in April, resulting in payroll cash withholding taxes of $8.7 million or $6.4 million on an after-tax basis. When this is excluded, our Q2 AFFO increased by $18.1 million or 73% to $42.9 million or AFFO per basic share of $0.448, an increase of 2.9% from the prior year. Turning to our individual segments. Our Home Health Care continues to deliver strong performance, driven by the acquisitions and continued organic growth. Our Q2 revenue increased by $201.7 million year-over-year, while NOI increased by $25.2 million or 117.8%. CBI contributed approximately $145.7 million in revenue and $19.5 million in NOI during the quarter. As Mike indicated, our NOI margins declined 60 basis points to 12.9%, largely due to the increased investment in back office to address recent and future growth and the absence of a 2026 rate increase in Ontario to offset labor cost inflation. Turning to our Long-Term Care segment. Revenue increased by $26.5 million or 12.8%, driven primarily by the contribution of $18.8 million from the 9 LTC homes acquired last June, net of the closure of the Carlingview Manor following the opening of the Extendicare Beauclaire home in the joint venture in May. In addition, our LTC operations benefited from funding increases and improved preferred occupancy. Our NOI increased by $5.7 million or 23.9%, driven by the increases in revenue and the net contribution of approximately $2.5 million in NOI from the 9 LTC homes acquired. Q2 NOI margins increased 110 basis points over the prior year period to 12.7%. Our LTC NOI margins are typically higher in the second and third quarters due to the timing of funding increases and spending under the envelope funding system and the timing of wage rate increases under our union agreements. For the trailing 12-month period ended June, our LTC NOI margin, normalized for out-of-period items, was approximately 11.8%, which is more in line with our expectations that margins in LT will remain consistent with these levels in recent years. Turning to our Managed Services segment. The results were impacted by the loss of the Revera management contracts during Q2 of last year following Revera's sale of 30 LTC homes, 9 of which we acquired and are now included in our LTC segment. The number of management contract beds in Extendicare assist dropped 3.8% in Q2 as 2 third-party assist contracts were not renewed during the quarter, partially offset by the new 320-bed Beauclaire home opening in the JV in May. As a result, our Managed Services revenue decreased by $0.6 million to $17.1 million. Despite this reduction, our NOI improved by $0.2 million to $9.9 million, primarily from 8.3% organic growth in SGP clients and our increased management fees from the newly opened homes in the joint venture. Turning to Slide 11. We have significantly enhanced our balance sheet following the acquisition of CBI on April 1. This quarter, we established our new unsecured credit structure, including our successful inaugural senior secured investment-grade credit offering, where we issued $450 million senior unsecured notes priced at 4.345% on a 5-year term maturing in April of 2031. Both company and the notes received a BBB stable rating for Morningstar DBRS. In conjunction with the notes offering and the repayment of the senior secured delayed draw term loan, we amended our senior secured facilities to establish a new $250 million unsecured credit facility. This new facility provides us with lower credit spreads than the previous secured facility and extended the maturity to a new 3-year term ending in April 2029. In addition, we completed a series of repayments on certain Long-Term Care home-related mortgages and loans to address nearer-term maturities, floating rate interest and higher cost debt. This reduces our borrowing costs, improves our maturity profile and provides us with additional flexibility through lower mandatory payments associated with the mortgages and the term loan structures we retired. The result of these changes lowers our weighted average interest rate by 80 basis points to 4.4% and improves our weighted average term to maturity to 5.1 years. Lastly, turning to Slide 12. With the full impact from acquisitions and our capital structure changes now reflected, we exit Q2 in a strong financial position with $208 million in overall liquidity, comprised of $93 million in cash on hand and $115 million available on our unsecured revolving facility. Our pro forma debt to adjusted EBITDA is approximately 2.5x at quarter-end, reflecting the incremental debt in support of our recent acquisitions and the pro forma full year impact on adjusted EBITDA from CBI, which is well ahead of our original estimate of approximately 3.3x post the CBI acquisition at the time we announced the transaction last year. We're very comfortable with leverage at this level, and given our strong free cash flow profile and capital-efficient redevelopment model, we have significant flexibility in considering future capital allocation decisions while maintaining our leverage commensurate with our new BBB Stable rating. With that, I'll pass it back to Mike for his closing remarks.

Thank you, David. Our second quarter results reflect the strength of the platform we've built over the past number of years, including a Home Health Care segment that has more than doubled in size. We continue to be very confident about the potential of our Home Care and Long-Term Care platforms and our ability to expand access to care for the growing number of Canadians who depend on us. In the second half of 2026, we will be focused on disciplined execution. We will complete the integration of Closing the Gap, advance the integration of CBI, and continue to progress our redevelopment program, with 5 new homes opening in the next 4 quarters, all without losing sight of the quality imperative that is fundamental to the care we provide to thousands of people who rely on us every day. The demographic trends underpinning our business are relentless in driving demand for care. Our scale, technology platform and the flexibility of our capital structure position us well to meet that demand. Canada's health care system is under significant strain and our services allow us to ease pressure on hospital capacity by delivering care in the settings best suited to each person's needs at the most sustainable cost. We will keep building that capacity, so more Canadians can access the care they need wherever they call home. My sincere thanks to our team members for their unwavering commitment to the residents, patients and individuals we serve. And with that, we welcome any questions that you might have.

[Operator Instructions] Our first question comes from Kyle McPhee with ATB Cormark.

First one for me, just regarding your Home Health Care margins, I understand the small move down versus recent quarters as you go through a round of OpEx investments to support all the growth. Based on your investment needs that you would know, is there more transient margin pressure near term? Or are you kind of back on stable footing now and maybe climbing and leveraging the new cost base going forward from here? And then also, is any of the OpEx investment you're making in anticipation of more Home Health Care M&A that you're eyeing near and midterm?

Yes, Kyle. I'd say, to address the last part of your question right away, I think we have said, I think, in the last couple of quarters that we had been running quite hot on organic growth, as we all know. We had talked about the fact that that back office that supports the frontline operations, think of those as schedulers and coordinator supervisors, so not accountants and HR types, but the mid-office that supports the front lines, it's a bit of a step function from a cost perspective there. So we had grown quite significantly with a very rapid organic growth with largely an unchanged back office supporting that front line. So we have made investments. It's mostly people and the related technology costs that come with upsizing that back office. And so we've been doing that over the last couple of quarters. I don't think it's -- it's not in anticipation of any future M&A. It's more to support where we're at from the recent growth and future growth. From a margin perspective, I think the -- our view is unchanged. I think we've always felt that this margin, this business would run 50 to 100 basis points higher than where we were at. When we first started talking about that, we were in the high 12s, and we thought we could be into the -- up into the 13s. I think when that happens, part of it was a function of putting some additional investment in the back office, knowing how fast we are running on organic growth. And so I think there's not -- what I'd say is we still believe that this is a higher-margin business. The timing of when that 50 to 100 basis points will come in moderates with the investments we've had to make in the back office. Obviously, rate increases tie into that. And as we know, yet -- as of yet, there hasn't been an increase or an announcement in Ontario for this year on Home Care. So that obviously factors in. From a long-term perspective though, the largest single cost for the business is later, and we do feel that over time that always will even out from a rate increase perspective so that the businesses maintain an equilibrium with labor costs. So I think I wouldn't read too much into a 60 basis point decline year-over-year this 1 quarter. Our trailing 12 margins in the business are still above 13%. And I think that we still, on a medium-term basis to a longer-term basis, feel that there's margin expansion to come in this business. But I wouldn't get too focused on an individual quarter.

Yes. Got it. Is it fair to say the step-up -- the phase of the step-up in investment is done now? Or is there more...

We've made quite a significant move on the headcount. I mean I'd say there's probably not another big step coming. I think it was happening ratably over the first half of this year. So maybe a little bit of normalizing that out. But I think, yes, for the most part, we've made a fairly large step up in the last 6 months on the size of the back office. So I don't expect that trend to continue.

Got it. And then just on your onetime costs, they were high in Q2, understandably, given you closed the CBI deal and that had costs associated with it. But one of the components of your onetime cost was integration, which I assume is reoccurring near term as you integrate CBI. You broke that out, it was $1.5 million of integration costs. Is that a good kind of run rate to expect over the next year or so as you integrate CBI or will that step up or down?

No. I think -- I mean, that might be -- it's-- I think we're looking at $3 million to $4 million a year for the next couple of years. So the $1.5 million in the quarter probably a tad high if you try to annualize that. But it's not a bad -- be in that level of what we're looking at.

The next question comes from Jonathan Kelcher with TD Securities.

Just sticking on the Home Health Care. What sort of rate increases do you typically get from the Ontario government? And are those like -- has those been consistently annual and it's just delayed this year for whatever reason?

Jonathan, we tend to see, as David said, over the long term, that it tracks labor cost inflation. So in our current environment, that's in the 2%, 2.5% kind of range. The rate increases in Home Care in the different provinces don't happen like clockwork. It's not as kind of regular as we see in Long-Term Care where it tends to happen at the same time every year. So there can be some lumpiness. But what we have seen over the long term is that the rate increases track labor cost inflation quite closely.

Okay. And then are they -- do they work like the Long-Term Care one where you might get a retroactive increase?

Yes. We've certainly seen onetime like retroactive payments coming in the past. If you look into our past statements, you can see several examples of that.

Okay. And then just maybe a different way asking about M&A in the space. When you -- like you've now made these investments to be able to grow or scale up. Ultimately, how much do the investments you've just made let you scale?

Well, the technology platform that we've put in place gives us a lot of scalability. And that's the key element that really allows us to scale up. But to be candid, we modeled, a few years ago when we were looking at this, we modeled on that 6% to 8% annual growth. And we've exceeded that by a lot. And hence, the step function that David talked about that we needed to do. But we have been able to get quite significant annual productivity improvements in our back office because of the technology that we are continuing to introduce. AI is giving us a lot of flexibility now as well, in terms of introducing increased tools for our staff to be able to become more efficient. So we see that efficiency trend continuing. But that's been able to absorb volume growth of 10%, even 15% annually in the past without increasing the headcount in the back office. But when we started getting into the high teens and even up to 20%, that was just exceeding our ability to accommodate that based purely on efficiency gains. And so, hence, the step function head count that we added in the first couple of quarters of this year. But we expect that ability to continue to improve our back-office productivity to extend into the future.

And the next question comes from Lorne Kalmar with Desjardins.

Just back to the billing rate increases, has there ever been an instance where you haven't gotten one at all during a year and then you have a big patch the next year? Or are you still expecting to see something either this quarter or next?

Yes. Lorne, I think if you go back far enough, especially coming out of COVID, you would have seen examples both in LTC and Home Care where inflation ran quite hot emerging out of COVID. And there were years where we got a catch-up of -- in Home Care, 6.7% 1 year and then 4% the next. We got an 11% roughly increase catch-up. So there's been quite a bit of volatility with that. But I think that, pre-COVID, LTC was quite regular, as Mike alluded to, like an inflationary increase every year around the same time. We're feeling like we're back to that in LTC over the last couple of years. Home Care has always been a little bit more sporadic in terms of when they do the announcements, even a bit before COVID. So yes, there are conceivably a period of time where you'll have a gap where the increase doesn't come when you want it. But again, over time, we do feel that on a long-term basis, it takes care of itself, it finds that equilibrium, whether it's through a bigger catch-up versus regular. So that -- you would see that pattern if you went back far enough.

Yes. I was just trying to get at, like, have you ever had a year where they've given you -- like they just haven't announced an increase for Home Health and then done a big catch-up, versus doing one that's maybe below where inflation acts came in and doing a catch-up? Just trying to get an idea from a modeling standpoint and I guess an outlook standpoint what to expect in terms of top line for the Home Health business.

Yes. We have -- it's a bit of a hard question to answer because they make the announcement at different times. So sometimes, we've had announcements in November. Sometimes we've had announcements earlier in the year. So I guess, I would say, yes, is the answer to the question. But then we've always seen a catch-up of some sort when that happens.

Got to love the government. Okay. And then flipping over to the LTC developments. Obviously have a big tranche that's expected to be completed by the by 2Q '27 and you mentioned the Ottawa one you're working towards. Do you expect to announce more developments in the coming quarters to kind of keep that cadence in that 5% to 7% project range, or not?

Yes. I think we're definitely advancing projects into 17. As you mentioned, we're aiming to start another one by the end of this year. We are tracking, as we've said in the past, looking to start at least 3 a year on average. So there are -- I'd expect more starts towards the back half of next year just based on kind of our current cadence on moving through the development cycle on a few more of the near-term projects. So we still have that target of trying to have 3 to 4 started per year.

And the next question comes from Tania Armstrong with Canaccord Genuity.

A couple for me. So on now that it's closed and you've completed the investment-grade refinancing, how should we think about your appetite for additional Home Health Care acquisitions versus focusing on that integration over the next couple of years?

Well, at this point, the integration is front and center in our focus, and certainly, for the rest of 2026 will be a key focal point. I think it's going to take us some time to integrate this, and we want to make sure that we do that well. That said, our balance sheet gives us the flexibility to be opportunistic. So we'll certainly evaluate things that may come to our attention. But I'd say that likelihood is that further acquisition activity wouldn't be likely until later next year at the earliest. But never say never. I mean I think if something fits real well with our strategy and came to our attention, we would consider it.

Okay. Excellent. And now that you've had CBI under the umbrella for the quarter, can you just give us a little bit more detail, I guess, on where you are in the integration process? What's been completed? What are the next steps? And whether you're seeing opportunities for revenue or cost synergies beyond what you originally underwrote?

Yes. I'd say it's still early days. We are a quarter in. Most of our focus at the moment on the CBI side of things is planning for -- there are a couple of elements of that transaction where there's still some transitional services, a couple of our application platforms where we need separate. So our focus is trying to move off of any transition support, which we think is targeted for the start of next year. Behind the scenes, there's a significant amount of work going on now going through analyzing and breaking down their business region by region, office by office. As we've talked about in the past and what we're doing with CTG, we don't do a big-bang cutover. We move things in a very methodical way piece by piece. So the front, ahead of those integrations, you have to understand the nature of the workforce in those particular geographies, how the union versus nonunion grids might stack up, harmonizing wages and benefits, et cetera. So a lot of planning for that. It is 8, 9x the size [ of ETG ] and it's got some nuances with the SCS business and some other geographies that we need to work through. So the real focus now is all of the planning for that. The better you plan upfront, and we've learned this through lots of examples, the more planning you do upfront on the harmonization and the communications plans, the better the cutovers go. And the immediate focus will be on just weaning ourselves off the last couple of pieces of transitional services, is the focus. And some of this team is doing double duty on CTG and CBI, but we are on track to finish the CTG work by the end of the year. So then that same team gets freed up to then turn their minds to a very methodical process of cutting over the business sort of geography by geography, which will take us some time. And then second part of your question, any different view of revenue or cost synergies. I'd say, at this point, there was never really a revenue synergy aspect of these transactions as much as creating the growth platforms and putting ourselves in the right geographies and the right service types. On the cost side, we still have -- still looking at that target of the $7.4 million of cost side on -- from an exit perspective once the businesses are fully bought together. We still think that's a target that's achievable.

And the next question comes from Giuliano Thornhill with National Bank.

I just want to go to the funding announcement that recently have been in the collectively $2.2 billion. I know you haven't received details on how that's being [indiscernible] prior episodes, how was that? Like with that being earmarked for operators, I'm just a bit surprised that there was no rate increase this year or thus far.