Lois Cormack - President & CEO Nitin Jain - CFO & CIO

Jonathan Kelcher - TD Securities Michael Smith - RBC Capital Markets Troy MacLean - BMO Capital Markets

Ladies and gentlemen welcome to Sienna Senior Living Inc's Q2 2018 Conference Call. Today's call is hosted by Lois Cormack, President and Chief Executive Officer; and Nitin Jain, Chief Financial Officer and Chief Investment Officer of Sienna Senior Living Inc. Please be aware that certain statements or information discussed today are forward-looking and actual results could differ materially. The company does not undertake to update any forward-looking statements or information. Please refer to the forward-looking information in Risk Factors sections of the Company's public filings, including it's most recent MD&A for more information. You will also find a more fulsome discussion of the Company's results and it's MD&A and financial statements for the period, which are posted on SEDAR and can be found on the Company's website, siennaliving.ca. Today's call is being recorded and a replay will be available. Instructions for accessing the call are posted on the Company's website and the details are provided in the Company's news release. The Company has posted slides, which accompany the host's remarks on the Company's website under Events & Presentations. With that, I will now turn the call to Ms. Cormack. Please go ahead, Ms. Cormack.

Thank you Sherry. Good morning everyone and thank you for joining us this morning. I'm pleased to share the highlights of another strong quarter for Sienna. Total net operating income grew by 33.9% from Q2 in 2017. Q2 solid results were driven by same property net operating income growth of 6.2% in retirement and 2.8% in long-term care. For a total same property growth of 3.7%. The remaining growth was from significant investments that we have made in retirement living. In the second quarter, Sienna's diluted OFFO per share increased by 12.7%, and AFFO increased 4.1% from the prior year period. We have continued to strengthen our balance sheet and ended the quarter with a debt to gross book value 210 basis points below the second quarter of 2017 at 49.4%. Building on a successful execution of our strategic priorities I'm pleased to share that we have approached a 2% increase in Sienna's monthly dividend. Our operations team delivered same property strong occupancy results in our retirement residences finishing the quarter with average occupancy of 93.2%. The recently acquired property finished the quarter with average occupancy of 90.3%, including the properties in lease up. We expect that occupancy will increase overtime in these residences as the lease up property stabilize and we fully integrate our 12 newest residences into Sienna's operating platform. Now moving to Slide 9, as a result of executing our growth strategy over the past year we have expanded our retirement portfolio increasing the NOI mix from 27% at the end of 2016 to now 44% of the overall business. This is outstanding progress on our goal of achieving a balanced portfolio with 50% private pay NOI mix. The integration of the newly acquired retirement residences is proceeding well. These 12 new residences are all high quality, are at key locations, and have further strengthened our operating platform with the addition of over 1,000 experienced team members. Sienna's development projects are on-track and we are pleased to report that the retrofit for Bloomington Kop [ph] has been completed, the residents have now moved in, are enjoying their new accommodation. The 55 suite expansion of Island Park is on-track for completion in early 2019. We are extremely pleased with our residential care communities in British Columbia receiving a four-year accreditation award with exemplary standing. This is the highest distinction awarded by accreditation candidate. Sienna has exceeded all of accreditation Canada's requirement; this speaks to the dedication and expertise of our team members who achieved quality results and helped residents to live fully every day. Quality and resident safety remained our top priority and Sienna continues to outperform provincial and national averages on publicly recorded quality indicators. As part of seniors month in June, Sienna's residents hosted a number of fund raising events in support of Sienna for seniors, our charitable giving program which support marginalized seniors living in the community. More than 100,000 have been raised so far this year, this money provides programs and services for seniors in need living in communities across Canada. At our recent leadership conference we were honored to recognize a number of Sienna's top performing teams with awards for achieving excellence in the categories of residence experience, team member experience and financial performance. These are further examples of ways that we continue to strengthen our culture which was named one of Canada's most admired corporate cultures by one of strong human capital last year. We were pleased that the Ontario's new government has reaffirmed it's campaign products about 15,000 new launch [indiscernible] in five years with a total of 30,000 over the next decade. We are optimistic that this government's policies will be favorable for the seniors living sector. Our hope is that the government's commitment to reducing hallway medicine for instance will translate into greater investment in seniors living sector where a large number of hospitalized seniors need better med. I will now turn the call over to Nitin to discuss our financial results.

Thank you Lois, and good morning everyone. I will start on Slide 14. Net operating income for the second quarter of 2018 grew by 33.9% or $10 million compared to the same period last year with a total NOI of $39.4 million. The retirement division achieved strong organic growth generating same property NOI of 6.2% which was driven by a combination of market rate adjustments, occupational efficiencies and annual rate increases. Sienna's safe property non-compared residential care NOI increased by 2.8% for the same period last year to $22.2 million driven from the stable funding environment, lower utility expenses and timing impact of holiday [ph]. We are pleased by the strong future results. For the quarter, Sienna has achieved 47.6% same property NOI margin in either time of division continuing the consistent thread of solid performance over the last three years. The Company total second quarter 2018 NOI margin is 24.3%. This is an increase of 290 basis point from second quarter 2017. The margin expansion reflects Sienna's growth in achieving an expanded and balanced portfolio whereby retirement now represents 44% of the Company's total NOI. Moving to Slide 16; in the second quarter of 2018 diluted OFFO per share increased by 12.7% to $0.37 which was driven by strong operating results, lower G&A due retirement and favorable mark-to-market adjustments on DSUs. Q2 2018 diluted AFFO per share increased by 4.1% to $0.38 driven by the OFFO variances offset by the DSU adjustment. Due better streamline reporting starting in third quarter of 2018 we will not adjusting to put share compensation charges to AFFO. Now moving to a strong financial position; executing on a debt strategy at the end of Q2 2018 Sienna's debt to gross book value finished 210 basis point below second quarter 2017 metrics at 49.4%. Sienna's interest coverage ratio for the spend in the quarter to 4.1 times versus 3.8 times in the prior year which is an increase of 0.3 turns. We ended the second quarter with approximately $130 million in undrawn credit lines of cash which is an increase of approximately 20% over the prior year period. During the quarter, Sienna exercised it's right to redeem all of it's outstanding convertible debentures which were due June 30, 2018. 33 million or 72% of those debentures were converted into common shares at $16.75 per share and the remaining debentures were redeemed for cash. In addition, Sienna take down it's $115 million acquisition term loan facility ahead of schedule. The facility was used to finance our recent retirement portfolio acquisition and was repaid with proceeds from new mortgages. The weighted average from the maturity of the new mortgages is 9.5 years and the weighted average interest rate is 3.5%. As a strong vote of confidence on the execution of our Company's strategy, the Board of Directors have approved an increase of 2% in Sienna's monthly dividend from $0.075 per share to $0.0765 per share which would be $0.918 per share annualized. The increase will commence on September 14, 2018 tabled to shareholders of record on August 31, 2018. With that, I'll turn the call back to Lois.

Thank you, Nitin. In late May we were honored to open the Toronto Stock Exchange celebrating Sienna's addition to the S&P/TSX Composite Index. This is a reflection of the team's success in executing the Company's growth strategy, shareholder value creation and this is the testament of the Sienna brand and it's strong operating platform. Looking ahead, we believe the outlook for Sienna is very strong and we expect to continue the progress that we have made on our strategic priority which are; growing the company, enhancing the operating platform, and maintaining a strong balance sheet. Our focus on these priorities should continue to translate into launch of our previous growth for the Company's shareholders. 44% of the portfolio is private pay retirement and we are committed to continue to expansion of Sienna's retirement portfolio. In fiscal 2018, I mean just to say mid-single digit growth from the retirement segment and consistent performance from the funded part of the business; we're pleased with the progress on the integration of our recent investments. Going forward, we will continue to remain strategic and disciplined in our approach to acquisitions and believe that tremendous efforts to date have positioned us very well for future growth through our national platform. We continue to progress on Phase 1 development strategy renewing over 1,000 older long-term care bed; additionally, we will be adding over 500 new retirement suite to create seniors living campuses. Thank you for your participation on the call today. Nitin and I will be pleased to answer your questions.

[Operator Instructions] Our first question comes from Jonathan Kelcher with TD Securities.

First question, just -- I know it's early days for the new government in Ontario but do you expect to see any changes in funding or development or anything along those lines?

Well, we're just trying to -- we're setting up some meetings, we have one actually next week but we're very optimistic with it -- with the government, we think that they've got a very strong team, some minister and deputy all of the people at house, they have a senior secretary as well; so we believe it's a very strong team that will be very friendly to the seniors living sector because of the issues with respect to the hospital overcrowding and somewhat; so we do expect to get some traction and maybe quicker approval processes and some traction on the redevelopment project.

And speaking of the redevelopment projects, I think the 1,000 class B&C beds that you've put in your slide deck this quarter -- is that new or did I miss something along the way?

No, those are Phase 1 projects we've announced previously, there is a couple that are moving ahead more quickly than the others, the two that hasn't previously approached but we have a number of others in the half awaiting approval as well.

And how many projects would that 1,000 be?

It will be closer to five to six projects Jonathan, specific on-site and again as Lois mentioned, they are in the approval process both from a regulatory perspective and also just ensuring that we have the [indiscernible] as conception cost continue to rise. So you know, it's on both our regulatory review and also internal financial review.

The cash balance increased pretty good this quarter, maybe give us a little color on that and any plans with that?

We ended the quarter with around $56 million in cash which was more related to timing because we had a property which we got some proceeds for and in a couple of days later when we retail our bridge financing, so it was more related to timing. We ended our Q1 cash at around $19 million and that's probably good going forward adjusted for Company size.

Our next question comes from Michael Smith with RBC Capital Markets.

I wonder if you could just give us some color into your thinking on the dividend, I don't think you've increased it since 2002 and -- I mean it's good news for income oriented investors but I think I just wanted to get your -- what your thinking was?

As we've talked previously, we review our dividend policy every quarter, our objective is to pay a sustainable dividend to investors while using some of our retained cash to execute on Company strategy in which we have continued to do so and to further improve our platform. As we have transformed the Company into retirement and continue to grow which is inflected an operational results we feel confident about the increase at this time and going forward we'll do the same, we'll continue to monitor our dividend policy and make adjustments as appropriate.

And Michael, just a clarification; the last dividend increase was 2012.

2012, yes.

As you know, we've been working on the balance sheet and then our growth strategies.

And is it safe to say that you're now at a payout ratio that you're comfortable and you don't really have to lower it as much although you may increase the dividend at lower rate than your growth rate in AFFO?

I mean our focus Michael has never been on payout ratio, our focus is really -- we talked about reducing our leverage and increasing our platform which we have done. So we feel we'll continue to see growth, we feel our leverage is at a good place and looking at the best coaches [ph] of cash we'll continue to monitor on a quarterly basis but not really -- not a specific ratio that we are targeting, more what's the best use of cash.

And just finally, one more on the dividend. So some other reuse [ph] what they've done is they went to a period of many years, five, six, seven years where they kept it flat and then once they initiated a small dividend increase, the goal was subject to -- performance of the business was to increase it by a small amount every year. Is that factored into your thinking as well or you want -- you're thinking about it differently?

I think that's a reasonable approach Michael, we wouldn't want to make any commitment at this point but I think that's a very reasonable approach.

And just switching gears, so the 15,000 new LTC beds that was promised for Ontario, could you talk about how that might affect your business?

I mean there is significant demand for additional long-term care bed stock as well as redeveloping a 30,000 older beds in the process. So there is just demand and particularly in the urban and GTA area, there is huge demand with significant [indiscernible] 32,000; so I think it's just -- it would be great news for the profits if we can get some of these beds built [ph].

And would some of these beds be built by you or like you need to expansions or is it -- do you plan on participating or is it -- that would go against your long-term goal of 50-50 mix I guess or your medium term goal?

Yes, on these investments we would look at any additional bed in order to assist our redevelopment strategy. So we have a number of projects and if you recall, in the last call I think we shared that we had received some additional licenses which will enable some of those projects to work to get to the right size if we'd like to build. So that's how we would do it more on enabling our redevelopment to get those projects to work.

Our next question comes from Brendon Abrahams [ph] with Cannacord Genuity.

When am I getting your outlook on margins? Obviously, there is a nice bump in the quarter, I expected the same property portfolio complete at the end of Q1 but if you could just provide some color on your margin outlook and whether you're seeing any cost inflation creeping in?

I think if you look at our margin, you would look at long-term care and residential care as consistent going forward. When you look at the timing, we really need to breakdown margin into two, one of the same property. So for the same property our Q1 margin was around 46.5% and then Q2 that margin is around 47.6%, so we've seen -- definitely see good consistent growth in the time and margin for same property. We wouldn't expect more, like I don't think you should reflect a higher margin for same property because this is very good result. On our acquisition -- in Q1 our margin was around 42% roughly, and that is because of the acquisitions we've done last year. The big acquisition that we did which closed in March 28 so it had minimum impact on the first quarter, that portfolio margin is around 39% as we've disclosed it when we brought that portfolio. And it's due to the sizes of the properties and locations as well, so overtime as we put it in our platform we expect those margins to expand but we don't expect them to go to 47.6% just because they are different product in different markets. So I think what you see today is from same property, that 46.5% to 47% is from the good way of thinking about them, and for acquisitions what we did in Q2 which is on 42.5% is probably a good mix because it includes some property with high margin which were the two water-front properties we brought last year, and then the 10 property portfolio which we brought in Q1 which has been on the 39% margin.

And how would you adjust your outlook on the overall retirement market as a whole? How would characterize that? Is there room for -- is there pricing power or is increased supply factor; how would you kind of characterize here the market as a whole?

There is always new supply coming on, and supply is always very market specific. So overall, we don't see supply catching [ph] the overall portfolio, it may from time to time as new residents is open in certain communities, so it may impact one community in a certain area when new product comes online. So overall, we don't see a significant impact as of late to supply in terms of the overall growth portfolio.

Our next question comes from Troy MacLean with BMO Capital Markets.

For the Class A LTC portfolio, I was wondering if you could provide what percentage of the private rooms are at the current private rate? And what percentage your [indiscernible] under the -- any prior lower rate? I know that maybe a tough question to answer on the call but it's going to care as [ph] you had any color on that?

Sure, but they won't look like the answer, we do have some numbers. So there is -- the Class C beds which is around 16% of our private stock, that number would not change substantially. And then the balance which is around 84% or so -- they are at different ranges of the private paid premium, the current one is nearly 25.63. So now I would say around 60% of our beds are at the highest private pay rate and then the balance 24% would be in the range of when people move in but we just -- till the time period that can be redeemed. So there is another 24% which can eventually go up to the current rate overtime.

And then just to the acquisition market, is it becoming competitive or would say that cap rates are probably, acquisition capital rates you're looking at at the market are relatively stable versus the last couple of quarters.

We think there is still very strong demand in this space whose loss of interest in the Phase or lots of people don't came in for good asset. So we would saw they're competitive than competitive CAP rates, again depending on Mia, the product sites and location and agents a lot of different variable the would go into our capillary.

Have you seen any new buy groups spitting on assets so be kind of the same player as it was last year.

I think overall the players have been seeing for retirement -- long-term care, there have been some new buyers as well, so there is a different market for that and we've seen cap rates compression on long-term care, you know, some of the study with CBRE and few one of those have done are now looking more close to subset cap rates for good market long-term care rates which frankly is not really market specific because the funding is nearly the same. So that has been a change as well.

Our next question comes from [indiscernible].

I had to reconnect, so sorry in advance if my questions were answered. I've got three questions for you. First, it looks like your NOI margin continues to improve as you mentioned year-to-date. And how do you feel for the rest of the year and next year and more specifically in terms of your joint cost structure?

Again, I think we would at least kind of talk about what we have said in the script and the question that was previously asked. I think our margin for long-term care, residential care have been consistent, we don't feel there is any cost pressure more than mentioned and the funding goes with inflation as well; so it would be -- it has been enough in the past to cover it and we expect the same. Our retirement, again, I would break it down into two buckets; same property which -- again we would have some of the higher margins, so we expect them to stay consistent. And for acquisitions, it's a combination of two bigger properties that we brought in end of December, the two [indiscernible], their margins would be similar to our portfolio. And then the May-April portfolio, the 10 property portfolio and on Ontario [ph], that was around a 39% margin. We do expect to increase it overtime but it will take some time to put it on our platform. But now I would assume similar margin at what we brought it for.

And quickly in terms of the lawsuits, I was wondering if you had any update at this point and if you are possibly in a better situation at this time to assess the credibility of it?

Yes, well we -- you know, we would serve them from May 2 and we certainly do not believe that the client has marriage, we are vigorously depending, it will take time and you'll have to go to the court process. We do have a standing quality and safety results and inside of the team we continue to outperform provincial national averages on our indicators, our quality indicators, all of our residences are fully incardinated by the third-party including accreditation in Canada which we just received an exemplary award for and Ontario properties are due another body called KAR [ph], and they entrust quality of care against best practices. All of our residences are highly regulated and inspected by health authorities, all withstanding and we do have our insurance coverage and we believe that any -- it would not be an immature lazars [ph] impact on the business operating results or financial condition of the company as a result of this.

And lastly, you mentioned in MD&A that you have received preliminary approval on two additional development projects. I was wondering if you could either remind us or give us a bit more details on these projects?

We're just really waiting now because there was kind of highly-ness [ph] with the election cycle, so there was a period before the election where nothing could happen and post-election, now with the new government they are just getting [indiscernible] in place and some process in place, so it's been a bit of a hiatus but we do expect that they will get some traction moving quickly because we know that this culinary is a priority to this government.

Our next question comes from [indiscernible].

So the first question is on your retirement home, same property occupancy. I see that your occupancy was down 100 bips year-over-year but your margins were up 100 bips year-over-year. So maybe you could explain what caused that divergence? That will be great.

Well, the occupancy is down because as you know, Q1 was a horrific flu [ph] season, so -- and this often happens in Q2 when you're actually leasing off all of the decline in occupancy from Q1, so that's often what happens in Q2, so that's the case. And we've continued to get good rent increases or rate increases on suite chart offers; so when we're charting over as residents move out, we're able to get -- readjust the market rate in many cases and that happens to drive our -- at least to maintain our margins.

Another question is on -- like, in a typical target home, what percentage of the staff is personal support workers versus like nursing staff?

Sorry?

So in a typical retirement home, say 100-bed retirement home, what percentage of the staff is -- like our personal support workers?

It depends on the community, and -- like, in some communities we have [indiscernible] assisted living areas, in most we don't, we do it in suite. But it might be 20%.

And what would that percentage be in a typical long-term care facility?

Sorry?

What will be the percentage of personal support workers in a long-term care facility?

On a long-term care, it's about 75%.

So 75% of the staff is personal support workers?

Yes, in long-term care about 75% of the staff would be personal support workers.

That seems calculated in 2Q right, because in the long-term care facility you would need more nursing staff because of the amount of care that is provided?

No, the majority of the care is provided by our personal support workers in long-term care. And then we have the other highest group would be registered practical nurses in long-term care.

And our final question comes from Chris [ph] with CIBC.

So in Q1 we kind of called out the Easter shift and how it had a kind of negative impact on the results and you had a number of ex-Easter shift. I'm just wondering if 2Q had any benefit because of Easter going into Q1 this year?

Yes, this quarter we saw long-term care, residential care, same property like growth from 2.8%, and then the Q1 it was negative; but if you look at Q2 year-to-date which is 1.8%, and that's what we've always talked about this business as being 1% to 1.5% consistent performance year-over-year, so we did see some benefit in Q2 and that's why if you look at this business looking at -- if we see year-to-date, it would be a better way of looking at these numbers.

And retirement homes, there was no impact?

That's right, no material impact on that.

And when we look at the development pipeline, in terms of the sights that you're going to be tagging on the retirement homes; how did you select the sites that you choose? And do you have to -- do you have the land available on the existing site or do you need to acquire new land in order to proceed with that expansion and adding new retirement homes?

Yes. So in each case, each of our projects will be campuses, each will be greenfield so new site. And in most cases we do have land or an option on land for the Phase 1 projects.

On acquisitions, in Ontario and D.C. would you consider other provinces?

Definitely, we're always looking at across Canada.

Thank you. Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I would now like to turn the call back over to management for any closing remarks.

Well, thank you everyone for joining our call this morning for your support of Sienna. Have a great day and enjoy the rest of your summer.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect and have a wonderful day.