Brent Binions - President & CEO Karen Sullivan - COO Vlad Volodarski - CFO & Chief Investment Officer

Jonathan Kelcher - TD Securities Heather Kirk - BMO Capital Markets Pammi Bir - Scotia Capital Yash Sankpal - CIBC Neil Downey - RBC Capital Markets Jenny Ma - Canaccord Genuity

Welcome to the Chartwell Retirement Residence's Third Quarter 2016 Results Call. Following the formal comments we will hold a question-and-answer session. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residence. Please go ahead, sir.

Thank you. Good morning, 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 Vlad Volodarski, Chief Financial Officer and Chief Investment Officer and Karen Sullivan, Chief Operating Officer. Let me remind everyone that during this call, we may make statements containing forward-looking information and non-GAAP measures. I direct you to our MD&A and other security filings for information about the assumptions, risks, and uncertainties inherent in such forward-looking information and details with such non-GAAP measures. These documents can be found on our website or at SEDAR.com. Our strategy is centered on enhancing the resident experience on our properties through delivery of exceptional services and quality care. We believe that this focus, combined with ongoing investments in our people, systems and processes, strategic capital allocations to our properties and external growth opportunities, prudent management of our financial resources and liquidity, will all result in creation of sustainable long-term value for investors as shown on Slide 3. Building on the impressive results in the first six months of the year, our operating teams with the support of our corporate office departments delivered exceptional performance in the third quarter of 2016. Same-property NOI increased CAD3.8 million or 7.3% in Q3, driving year-to-date growth to CAD12.2 million or 8.1%. Same-property occupancy improved to 93.6% in Q3 from 92.7% a year ago. Of the many corporate initiatives in progress three are especially of note. Improved brand awareness and online and social media strategies continued to drive initial contacts and personal visits, which contributed to occupancy growth. Our newly established internal business support services center, At Your Service, delivers improved business process support to our operating teams and our homes. And the implementation of our core human capital management system is on track with its established time frames and budgets. Our financial position and liquidity remained strong. Earnings growth, debt refinancings and non-core asset sales all contributed to improved debt leverage and coverage metrics, as shown on Slide 4. At September 30, 2016, we had cash on hand of CAD11.3 million and CAD56.2 million available borrowing capacity under our credit facilities. Our interest coverage ratio increased to 3.5 times in 2016 year-to-date compared to 2.8 times in 2015. Net debt to adjusted EBITDA ratio was 7.3 at September 30, 2016, compared to 7.6 at December 31, 2015. Our indebtedness ratio was 49% at September 30, 2016 compared to 49.7% at the December 31, 2015. This gives us sufficient liquidity and balance sheet capacity to execute on our strategic priorities over the next 12 months. We continue to build value through portfolio and asset management programs, development of new properties and opportunistic acquisitions, all as shown on Slide 5. These value-add activities are supported by extensive industry and market research and by rigorous risk management practices. Year-to-date 2016, we have completed and announced five acquisitions for a total of CAD211.7 million and work continues on our development pipeline of 2,438 suites with two projects now complete, eight projects in construction and three projects in pre-construction. I would now like to turn it over to Karen Sullivan, our Chief Operating Officer, to talk about some operational initiatives that she and her team are working on. Karen?

Thanks, Brent. Turning to Slide 6, the operation sales and marketing teams continue integrating our recently acquired properties as well as focusing on our development projects in all four provinces, where we're operating. In addition, we continue to focus on sales activity in all of our retirement homes across Canada. This included our fall sales training workshops, which were held in Q3 and attended by 160 of our sales force personnel from across the country. In addition, we held our fall open house and follow-up sales blitz in September. The marketing team has been busy updating our new sales collateral, which we expect to launch in Q4. In addition, they are negotiating unique sponsorship opportunities to enhance Chartwell's brand. This includes a new exclusive partnership with the Ottawa Senators for the 2016/2017 hockey season, recognizing that Ottawa is one of our most concentrated markets. This agreement will directly benefit our 27 homes in the Greater Ottawa area. It includes advertising and promotional opportunities as well as the unique seniors' friendly box suite that promotes Chartwell's brand. Turning to Slide 7, as part of our ongoing journey to focus on the customer experience, we are pilot testing our, Welcome to Chartwell program in 15 of our retirement homes. The program focuses on the first 90 days of a resident's stay with us. Knowing how important referrals are to our success, we believe this program will be a unique value proposition in Chartwell Homes. We expect to roll it out across the country in 2017. The other key to our success in our business is to have engaged employees providing care, assistance and support to our residents. In 2016, we changed our approach to collecting data from our employees to better understand their level of engagement. The new survey and data analysis will allow our homes to pinpoint specific action plans to continuously improve their results. We were extremely pleased with not only our overall score on the survey but also with the quality of the information we can now provide to our homes. I will now turn it over to Vlad to discuss our Q3 2016 financial performance.

Thanks, Karen. As shown on Slide 9, for Q3 2016, we delivered adjusted funds from continuing operations of CAD43.3 million or CAD0.22 per unit diluted, 30.9% increase from CAD33 million or CAD0.18 per unit diluted in Q3 2015. The following items contributed to growth in AFFO: higher net operating income of CAD11.9 million, consisting of a CAD3.8 million higher contribution from same-property portfolio; and CAD8.1 million higher contribution from acquisitions and developments, net of dispositions; higher NOI guarantees of CAD0.2 million. This was partially offset by higher G&A expenses of CAD1.3 million, primarily due to staffing, costs incurred to support newly acquired and developed properties and higher cost of unit base compensation resulting from the appreciation in Value of Our Trust units. Higher capital maintenance reserve for CAD0.4 million primarily due to growth in resident revenue and other items combined of CAD0.1 million. For the nine months ended September 30, 2016, AFFO from continuing operations was CAD121.5 million or CAD0.64 per unit diluted compared to CAD82.2 million or CAD0.46 per unit diluted in the same period of last year. Total AFFO increased CAD10.2 million or 30.9% in Q3 2016 and increased CAD23 million or 23.4% in 2016 year-to-date. In Q3 2016, combined same-property occupancy was 93.6% compared to 92.7% in Q3 2015 and same-property NOI increased CAD3.8 million or 7.3%. Turning to our operating platform results, as shown on Slide 10, our Ontario retirement platform operating team delivered strong same-property NOI growth of 4.1%, primarily through higher occupancies and regular annual rent or rate increases in line with competitive market conditions, which were partially offset by occupancy driven higher staffing costs and higher utility expenses. In Q3 2016, occupancy increased by one percentage point to 88.6% from 87.6% in Q3 2015. In the fourth quarter of 2015, we have seen exceptionally strong policing activity in our Ontario platform, which positioned it well for 2016 success. At this time, our full 2016 leasing, while remaining healthy has not matched 2015 levels. Acceleration in seniors' population growth and increasing demand for quality accommodation is driving new construction activity in select markets in Ontario. In Q3 2016, our Western Canada operating team delivered exceptionally strong same-property NOI growth of CAD1.3 million or 12%, as a result of increased occupancies, regular annual rent or rate increases in line with competitive market conditions and lower utilities expenses, partially offset by higher staffing expenses to enhance services delivered to our residents and to support occupancy growth, as shown on Slide 11. Occupancy reached 95.8% in Q3 2016, a 2.4 percentage points increase from the Q3 2015 occupancy of 93.4%. Market conditions remain favorable in most of our markets and we expect to maintain higher occupancies in our Western Canada platform. On Slide 12, you will see that our Quebec operating team delivered very strong same-property NOI growth of CAD1.6 million or 10.6%. This growth, primarily a result of higher occupancies, regular, annual rental rate increases in line with competitive market conditions and a one-time positive adjustment of certain staffing expenses. Occupancy improved to 94.6%, a 0.9 percentage point increase from Q3 2015 occupancy of 93.7%. Accelerated growth in seniors' population and the resulting increase in demand for quality accommodation have begun to drive higher construction activity in a number of our Quebec markets. As shown on Slide 13, our Canadian LTC operations team continued to deliver consistent financial results while providing quality care to our residents and managing operating risks. Same-property NOI increased 2.1% in Q3 2016 primarily due to higher preferred accommodation revenues, partially offset by timing of other expenses. Occupancy remained high at 98.4% compared to 99.1% in Q3 2015. I will now turn the call back to Brent to wrap-up.

Thanks, Vlad. As shown on Slide 15, we intend to continue to build lasting value for our unitholders through four strategic priorities. We fundamentally believe that if we are successful in enhancing customer experience in each of our residences through exceptional services and quality care and if we continue to strive for excellence in our branding, marketing, and sales, we will grow occupancies in the future as well as rental rates and by extension AFFO. We will continue to invest in recruitment training, and development of our people. It's only through the right people with the right skills, and a sense of purpose that we can deliver an excellent customer experience to our residents and our families. We will continue to improve corporate services to our operating teams and to implement new information technology solutions to better understand our customers, communicate with our employees, and reduce administrative time commitment in the field. We have put in place appropriate infrastructure to build on our past successes and development of new residences and to execute on the important development program we have set for ourselves in 2016/2017. And we're confident that these new state of the art properties will generate growing value for our unitholders. We also remain open to and proactively seek additional acquisition and development opportunities in our core markets. Thank you for your time and attention this morning, we'd now be pleased to answer any questions you may have.

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. We have a question from Jonathan Kelcher from TD Securities. Please go ahead. Your line is now open.

First on Ontario occupancy, I guess it's obviously moving in the right direction. Vlad, I think you said Q4 is off to a pretty good leasing start. Do you expect 2017 to be another year like 2016 where you see gains, basically year-over-year?

Thanks, Jonathan. I just want to clarify, what I said is that we had exceptionally robust leasing activity in Q4 of 2015. In 2016 Q4, while the leasing remains healthy, it has not reached 2015 levels. So we are seeing good occupancy growth in Ontario but not to the level that we've seen in last year fourth quarter. And looking forward, we do expect to continue to move in the right direction. As I mentioned in my remarks, there is some competition coming up in select markets in Ontario. So we are a bit more cautious about that, but we still expect to move in the right direction.

Okay. So higher, but not probably at the same rate as you did this year.

Right.

Are there any markets where you're more worried about new supply? Like which markets are being impacted?

In Ontario, it's may be a handful of the markets. Hamilton would be one. Some markets in Peel region, Oshawa would be another one. So there is a handful of markets where new competition's coming in. I will tell you that from our perspective, the new construction activity is really addressing the existing demand in these markets and building to the demand that is coming in the next couple of years, where the acceleration in the seniors' population growth is now a bit more than it used to be in the past. So we do not expect that this new competition will have take some structural changes to how these markets operate. But always when the newer competition comes to market it puts some pressures on getting new residents particular in turnover because now they have a bit more options to explore before they move in.

Okay. Thanks. I will turn it back.

Thank you. We have a question from Heather Kirk from BMO Capital Markets. Please go ahead. Your line is now open.

I know is a smaller part of the portfolio, but in terms of the 15% that isn't in the same-property bucket, can you comment on how some of the recent acquisitions are performing and Tiffin, which you just acquired in particular?

The acquisitions on average are performing in line with underwriting expectations, some significantly better, some somewhat worse. Tiffin specifically is moving in line with the underwriting may be a bit better.

And so how do you see that contributing as that comes on to same-property next year?

At the time of the acquisition, Heather, we communicated to you our expectations with respect to the cap rates on these acquisitions. In most cases, those were either first year capitalization rates, or what we call stabilized capitalization rates, which would be one or in some cases two years away. So in Tiffin case in particular we would have underwritten a bit longer lease-up period. But we expect that these acquisitions will come in within the metrics that we communicated at the time that we announced the acquisitions.

Okay. And in terms of CapEx, can you give us a sense you've been pretty active this year, what does it look like in terms of your pipeline of projects on the CapEx front?

Are you asking about development projects?

Both. Both just the building improvement, the mechanicals, and the development spend as well?

We feel that our capital investments in assets is a critical part of us being successful in driving occupancies and attracting residents. We've seen significant occupancy growth in the properties where we've invested capital, particularly in the suite upgrades and common area upgrades. And our full intention is to continue to invest in our properties, both to maintain them but also to drive occupancy and rate over time. And so you should see us continue to do what we have been doing this year and in the past year. And those are the levels that we will expect to continue to invest in the existing property portfolio. With respect to the development activities, we have a list of the projects that's been announced, that is disclosed in the MD&A and the volume of it. We have quite a robust pipeline of other projects that we are working on at the present time. Some of them, we expect to start in 2017. Some will be a bit longer time horizon. But we're pretty happy with the size of that pipeline. There is always a limitation of how much developments we will do at any given point in time because of the organizational capacity to handle that many development activities. And we do want to do them right. So we will not compromise quality for quantity. But the level of development activities that you're seeing as announced today, that is probably at the higher end of what we'll be handling in any one point in time.

So in terms of the -- I guess it was about 2,000 units are you saying that you are adding to that? There's additional or that you're moving more forward into the active pipeline?

We will be moving more to the active pipeline. Out of 2,400 units that is on the list, two of the projects that Batawa has that are already completed and we're leasing them up. So as other projects are being completed they will be effectively removed from that table and replaced with new projects that we will be starting.

Okay. And just back to the Ontario, clearly that's where you have the most upside in terms of the occupancy at this point. As you look out over the next couple of years given what you've commented on, on development, how do you see that evolving? Do you have targets in terms of where you expect that occupancy number to go?

Yes, Heather, it's Brent. The unknown is always the pace of development. It has picked up. We see it out there. But so has the demographics. So it's fine at the moment. We expect to continue to move that number up over the next couple years. We still think over the next 2.5 years that 92, 93 is a reasonable target for us to shoot for. If the pace of development moves faster then we foresee it, then that could have some impact on it. But over the longer haul, the demographics just keep getting better. And I don't think we'll ever be able to keep up fully with the demand growth. But in the short-term, it could be a little quicker than we expect. Right now, it's in decent shape but ticking up.

Thank you. [Operator Instructions]. We have a question from Pammi Bir from Scotia Capital. Please go ahead. Your line is now open.

Brent, could you may be just -- do you have a sense or may be if you could quantify what you're seeing in terms of the new supply growth over the next, let's call it, 12 to 24 months, what are you seeing in either as a portfolio as a whole or just market wise?

It's -- it's -- this is very market driven, I can say, nationally it's X, but it doesn't really help very much. We look at each market, certainly there's a fair bit coming into the Alberta market, although it's been the most underserved, and so needs capacity, badly. VC is very slow, some coming in, but not a lot. Ontario and Quebec seem to have the higher growth rates at the present time. They're running under 2% of supply, may be 1.5 % to 2%. And now, we'd say it's may be 2%, 2.5% on supply. So it has ticked-up a little bit, not outrageously. This is not an American phenomenon that you're seeing south of the border, but it has ticked up a little bit.

So if we think about just again, maybe the next couple years or so, at what point do you expect that some of these new projects will start to have an impact on the occupancy rates in the sector, or on your portfolio? But, again, recognizing that demand is also accelerating. But is it a couple years before we start to see it being felt? Or is it 12 months or 36, any sort of thoughts there?

At the current rate of supply, I don't think it will have any significant impact on occupancy growth. It's not significantly divorce the growth in supply is not significantly divorced from the growth in demand from what we can see. What we see in the ground and what we see in the works at the present time. I was referring to the possibility that -- it's always a possibility, I suppose, that there could that rate could grow more quickly. Go back to -- at one point in time back in 2009, I think the growth was 7% of supply. That would definitely have -- there is no outlook that suggests we are going back there. I am merely being cautious in case it happens. At the present time, current supply, we do not think will indeed, over the next 12 months, what we can see, will impact occupancy negatively. It will continue to grow it.

And is financing readily available for developers out there?

The good part of the current development activities that we are seeing, that is unlike what Brent was referring to, was in 2009 or 2010, is that most of the development that's being done today is done by experienced owners and operators, people who have done it before. And financing for those people is available.

Thank you. We have a question from Yash Sankpal from CIBC. Please go ahead. Your line is now open.

On your retirement home NOI margins, they were quite strong this quarter, 40% and about 150 bips higher than the last quarter. So just wondering if you could provide some color around that? And do you think they are sustainable?

All I can tell you, Yash, there's nothing structurally different on how we operate our portfolio. Yet, as we always point out, looking at the margins is not the most appropriate way to look at this business, particularly looking at them quarter-over-quarter. I can tell you that there were some variances in marketing cost or utilities that could have created the increase in the margins. We really are focused on absolute numbers NOI growth and NOI growth per occupied units. And clearly, the increase in occupancy and rate and reflective of the revenue also contributed significantly to the improvements in the margin. So if we can continue to grow occupancy and rate, the margins will continue to expand.

Thank you. There are no further questions registered at this time. Oh, we have a question from Neil Downey from RBC Capital Markets. Please go ahead. Your line is now open.

Brent, just to clarify, when you make reference to a statistic like Ontario and Quebec now seeing 2% to 2.5% new supply, are you making reference to the total number of beds that you see in the ground under construction, relative to the current inventory? Or are you making reference to, let's say, annual supply growth? And I guess I differentiate the two, given that it may typically take two to three years to deliver a project.

Yes. We're talking about what we see in the ground at the present time that we think will come on in the next 12 months. Does that answer your question or? We're trying to look at, the growth of supply to current -- the new stuff in the ground, to current supply that's already open and operating. And we are looking at what new is coming over the next -- what we think is coming over the next 12 months.

I see. So if you used a statistic like, let's say, 2%, presumably that would imply that the total number of beds in the ground today is in fact larger than that number because something that's in the ground today may not be delivered necessarily within 12 months.

Generally speaking, we look at about a 12 to 14-month build. If you're in the ground today, we think you're going to show up in 12 months.

Thank you. We have a question from Jenny Ma from Canaccord Genuity. Please go ahead. Your line is now open.

Congratulations on a great quarter.

Thank you.

Just a quick question on your debt. It looks like there's some rolling over in 2017 and 2018. I'm wondering if you could talk about what kind of rates you're seeing in the market? And if your bias is towards terming out as long as possible? And whether you take up some -- if there's opportunity to take up some more that is CMHC financed -- CMHC, insured, rather?

Sure. Thanks, Jenny. Yes. Absolutely, the first preferred source of financing for us is long-term CMHC insured mortgages. Every mortgage that comes due that is not CMHC insured to the extent the property is at stabilized occupancy, we would finance with CMHC insured mortgage. What's rolling in, in 2017, is not a lot of mortgages. And most of them are either already CMHC insured or will be converted to CMHC insured mortgages. I'll point out that some of the maturities in 2019 and 2020, where we have higher than sort of our target maturities, are as a result of some of the acquisitions that we did and assumed debt on those acquisitions, or bridge financings that we put in place for non-stabilized properties that we either acquired or developed. And these bridge mortgages, while we fixed interest rate on these mortgages through interest swaps, we can prepay them and refinance them earlier. And our full intention is as soon as the property achieves stabilized occupancy and we can roll it over to CMHC we would do so. In terms of the rates that we're seeing today, the spread to government of Canada bond is between 100 and 120 basis points. So all-in rate would be under 2.5% today for 10 years.

Thank you. We have a follow-up question from Heather Kirk from BMO Capital Markets. Please go ahead.

I just wanted to follow-up on your NOI per suite comment. I guess, simple math, given that you don't disclose it, it looks like it is something in the range of CAD3,600. It looks like it is growing 3% to 4%. Does that sound accurate? Is that something that you expect to sustain?

Yes, 3% to 4% sounds about right. Not the -- I can't tell you exactly the absolute number, but the growth on average -- I'm not sure which period of time you are looking at, but 3% to 4% is exactly what would be our target over a period of time.

Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to you, Mr. Binions.

Thank you. That wraps up today's conference call. Thanks again to everybody for joining us. As always, if you have any further questions, please do not hesitate to give us a call. Thanks and goodbye.

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.