Sienna Senior Living Inc. (SIA.TO) Q3 2016 Earnings Call Transcript
Published at 2016-11-11 00:37:15
Lois Cormack - President & CEO Nitin Jain - EVP & CFO
Jonathan Kelcher - TD Securities Michael Smith - RBC Capital Markets Yash Sankpal - CIBC World Markets Troy McLean - BMO Capital Markets
Welcome to Sienna Senior Living Inc's Q3 2016 conference call. Today's call is hosted by Lois Cormack, President CEO; and Nitin Jain, Executive Vice President and CFO. Please be aware that certain information discussed today is forward-looking. Actual results could differ materially. The Company does not undertake any duty to update any forward-looking statement. Please refer to the forward-looking information and risk factor section in the Company's public filing for more information. You will also find a more fulsome discussion of the Company's results in its MD&A and financial statements for the period which are posted on SEDAR and can be found on the Company's website. Today's call is being recorded and the replay will be available. Instructions for accessing the call are posted on the Company's website, siennaliving.ca and details are provided in the Company's news release. The Company has posted slides which accompanies the host's remarks on the Company's website under Events and Presentations. With that, I would like to turn the call over to Ms. Cormack, please go ahead.
Thank you, Catherine. Good morning, everyone and thank you for joining us on our call this morning. With me on the call is Nitin Jain, Chief Financial Officer. I am going to begin by reviewing some of the key highlights and Nitin will discuss our financial results in more detail. To start off, we're very pleased to report another strong quarter of financial and operating results for Sienna. During the quarter, we continue to execute on our strategic priorities. Our remarks will touch on some of the programs that we continue to make on each of these objectives. Now, turning to slide 5, for the Q3 highlight. We're pleased to report that same property net operating income for Sienna's retirement residences was up 14.4% over the same period of last year. While same property long term care NOI remained relatively stable, contributing to an overall NOI growth of 2.6% in the quarter and a 4.5% increase year to date. As seen on slide 6, total net operating income was up 17.7% for the third quarter of 2016 compared to the same period last year as we continued to execute on our growth strategy. The Company experienced a 14.1% increase in diluted OFFO per share for the quarter and an 11.7% increase year to date. Now moving on to slide 7. We continue to experience strong occupancy at Sienna's retirement residences, finishing the quarter with over occupancy of 95%. This is up 2.7% over the third quarter of last year and is up 1.5% compared to Q2. Additionally, total net operating income for the retirement residences was up 38.8% over the same period last year and is related to the continued growth and expansion of our retirement portfolio. We believe that the strong same property and total results are also a result of the strong operating platform and the teams that we have built. Turning to slide 8. A key component of the Company's operating platform is investing in important programs for its employees to continuously develop new knowledge and skills and to adopt leading practices. We were very pleased to recently recognize eight of our retirement residences and care communities for excelling in the areas of resident experience, employee engagement and overall performance. Resident and family feedback is an important part of how Sienna measures the resident experience and our 2016 annual satisfaction survey has just been completed. The results showed an improvement in all areas, with an overall rating of 81% and a noticeable 54% increase in family participation. We have also recently received the result of Sienna's 2016 team member engagement survey and are delighted with the overall participation rate of 85% and an engagement score of 87.7%. Both of these figures are up from the previous year. We believe that these results are indicative of the significant progress that Sienna is making on building a positive workplace culture and the many initiatives focused on the Company's most important resource, our team of 9,000 employees who help residents live fully every day. As part of Sienna's focus on enhancing the resident experience, the Company continued to perform very well on key resident quality outcome indicators, outperforming the provincial average on 100% it of the publicly reported quality outcome indicators. Now turning to slide 10. Another key highlight for the quarter was the closing of the BC Acquisition. This includes a portfolio of eight high-quality residences and the subsequent purchase of a 40% interest in Nicola Lodge. This is a 256 bed seniors resident in Port Coquitlam, providing funded and private residential care as well as specialized services. We also exercised our option to acquire a 40% interest in Glenmore Lodge which is a 118 bed seniors residence in Kelowna and we look forward to the closing of this auction in Q2 2017 when the residence opens. As a result of the acquisition, we also welcomed over 1,300 dedicated and experienced employees to the Sienna team. This grows our workforce by approximately 20%. The integration of the BC Acquisition further strengthens Sienna's operations and our growth profile in British Columbia, with a total of 12 high-quality assets representing almost 1,400 suites as well as a local office in the greater Vancouver area to support our growing BC operations. 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 13. Net operating income for the third quarter of 2016 was CAD26.4 million, representing an increase of 17.7% or CAD4 million compared to the same period last year. Same property NOI from continuing operations increased by 2.6% or CAD0.6 million over the same period last year. Our retirement division saw another strong quarter with same property NOI growth of 14.4% over Q3 2015 driven by strong occupancy gains. Sienna's same property long term care NOI for Q3 2016 was in line with the same period last year. We're very pleased with the overall operations and financial performance. In the third quarter of 2016, diluted operating funds from operations per share was up 14.1% or CAD0.04 and diluted adjusted funds from operations per share was up 10.3% or CAD0.04, over the third quarter of 2015. These increases are primarily attributable to the strong year-over-year operating results and acquisitions. Now, moving to our strong financial position on slide 15. At the end of Q3 2016, Sienna's debt-to-gross book value was 52.2% which is 250 basis points below third quarter 2015 metrics. The decline is a result of the execution of Sienna's debt strategy. Sienna is looking to refinance properties with the goal of increasing liquidity, creating a 10-year debt ladder and creating unencumbered assets for future flexibility and growth. The interest coverage ratio increased by 0.2 turns from 3.5 at the end of Q3 2015, to 3.7 at the end of Q3 2016. Sienna's year-over-year liquidity was increased from CAD68 million to CAD87 million which represents an increase of CAD19 million or 29%. We believe Sienna is in healthy financial position and we remain committed to maintaining a strong balance sheet and liquidity. We're very pleased with the acquisition of the initial 40% interest in Nicola Lodge. Sienna's 40% interest was purchased for CAD28 million which is at a discount to fair market value. The purchase price was financed with cash and assuming the existing mortgage of CAD18 million which bears an interest rate of 5% and matures in August 2041. Alongside the acquisition of Nicola Lodge, Sienna also exercised its first option to acquire an initial 40% interest in Glenmore Lodge which is expected to close in Q2 2017. The Company's purchase price is expected to be CAD13 million which is at a discount to fair market value. The purchase price will be financed with cash and assuming the existing mortgage with an expected value CAD9 million maturing in 15 years. Sienna has option to acquire to 100% interest in each of Nicola Lodge and Glenmore Lodge with the initial 50% interest being at a discount to fair market value. With that, I would like to turn it back to Lois.
Thank you, Nitin. Looking ahead, we intend to maintain our focus on Sienna's strategic objectives which includes strengthening our operating platform, building our brand recognition, maintaining a strong balance sheet and growing the Company. We look forward to continuing the excellent progress that we're making in each of these areas. Overall, we believe that the strong Q3 and year-to-date performance and the successful closing and integration of the BC Acquisition demonstrates our ability to consistently execute on Sienna's strategic growth plan and deliver shareholder value. In terms of organic growth, with the increase in total private pay suites by 31%, we believe that Sienna is well positioned for growth through occupancy, rate increases and disciplined cost management. In the Ontario care committees, approximately 74% of the private rooms have converted to the higher rate, ranging from CAD1,997 to CAD2,528 which is the new rate effective July 2016. We anticipate further organic growth with the conversion of rooms to the current rate. With respect to acquisitions, we continue to be strategic and disciplined in our approach and we remain focused on integrating our strategic acquisitions and growing Sienna's portfolio in key markets in Canada. We're looking forward to the addition of Glenmore Lodge to the BC portfolio when it opens in Q2 of 2017. We believe that these previous achievements, along with the continued strengthening of Sienna's operating platform position the Company very well for future opportunities. Thank you for your participation on the call today and we will be pleased to answer your questions.
[Operator Instructions]. Our first question is from Jonathan Kelcher of TD Securities. Please go ahead.
First, on the retirement home occupancy, that is -- 95% is obviously very good. How has that trended into Q4?
Good morning, Jonathan. We're doing well with occupancy, consistent with where we ended the quarter. We do, as always, expect some attrition through the fall and winter months, that sort of happens normally every fall and winter. Overall, I would say we expect to continue to end where we did, on average, over the next quarter and year.
Okay. You are basically stabilize here, right or do you think there is room to move it up?
I would say where we ended, at the end of the quarter, would be our average over the next year.
Okay. Are you seeing any new supply in any of the markets where you are in?
Not immediately. There are some additional product coming on over the next couple of years in certain markets, some in the white rock area which would be close to our communities in Surrey, but they are slated to come on a little later. Other than that, there is nothing specific on our radar in each of our specific markets that we're in.
Okay. Then just one for Nitin, G&A next year, would CAD19 million to CAD20 million be a fair estimate where you think it might come in?
Yes, that is a good estimate, Jonathan. As a percentage of revenue, we had around 3.25% to 3.4% and that is a good estimate for next year as well.
[Operator Instructions]. Our next question is from Troy McLean of BMO. Please go ahead.
With the come down in the payout ratio and your leverage is now kind of where you were initially targeting, how do you feel about the dividend here? Is that something you would look to make a change or do you want to keep the cash flow for investment? What are your general thoughts on that?
Sure, Troy. Our Q3 payout ratio was a little bit lower than where we think the whole year would be, just because of the impact of timing, so our full-year payout ratio, we expect to be low 60%s. This year we have been committed to reducing leverage, now and in the future as well, so we're very happy with where we're now. As you know our debt is to gross book value not fair market value, so our 52.3% on a fair market value basis, if you compares to other REITs, would actually even be lower. We're happy with that as headed. In this area we put cash to good use. We did a couple of good acquisitions, starting end of last year. At this point, we continue to believe we have good use of cash. This is something our Board and us will look at on a quarterly basis and see that again in the next time to see what's the best use of cash. If the best use is to return it to the shareholders, than we will look at it at that point.
Then just on potential pricing for new acquisitions. What's your hurdle rate or hurdle going in yield for new acquisitions? Would it be in the mid 6%s or would you buy something that is maybe a little newer at a lower cap rate? Just kind of curious on your thoughts on that.
Troy, I think what is most important to us is that the acquisition is strategic and accretive over the long term. I don't think we could comment on a specific cap rate or what we would be prepared to do. For us, it is more important that it works operationally, that it is in the area and it is the type of product that is consistent with our portfolio.
Our next question is from Yash Sankpal of CIBC. Please go ahead.
The two former Amica properties that you bought recently, are those included in that occupancy number, the 95% number?
That's correct. They are included.
I remember those properties when they were with Amica quite -- for almost 100% occupancy rates. Are they still performing like that?
Actually, one was full, the other was not and they are performing -- we're very pleased with the performance of both.
[Operator Instructions]. Our next question is from Michael Smith of RBC Capital Markets. Please go ahead.
Can you give us any thoughts on the rebuilding efforts for the class C properties?
Yes, we're progressing well with the one project that we have underway; that is well in hand. We're optimistic that in 2017 we will see a little more traction. We're working very closely with the Ministry on some approvals to get something going, so working hard on that front. Nothing right now that's been approved that we can commit to other than that we're optimistic we will get some traction 2017 and beyond.
Has the Ministry been easy to deal with?
Yes. They have got a full team now, a full team prepared to work with operators that are going ahead with the program. It is really just a matter of getting the decisions made and getting things lined up because there is a number of things that have to work together and a lot of people that you have to work with, including the local health integration networks and the Ministry and municipalities. It is just a little more complicated than just building a retirement community.
Our next question is from Yash Sankpal of CIBC. Please go ahead.
Just one follow-up question. What percentage of your -- or what was the NOI contribution of the BC Acquisition and the Nicola Lodge during the quarter?
Sure. If you look at our NOI table which we published, it actually breaks down the acquisition separately from our same property NOI. I don't have the metrics like in terms of percentage right in front of me. If you look at the timing, for example, for the third quarter we have around total retirement NOI of CAD12 million and the transaction was CAD1 million, so call it less than 10%. For Baltic, we actually break it down as a separate segment, so the Baltic NOI for the third quarter was CAD2.2 million.
Where was the Nicola contribution?
Nicola is only for 15 days, so it will be a pretty small aspect of that, but it will be included in the Baltic portion.
Thank you. I have no further questions registered at this time. I would like to return the meeting over to Ms. Cormack.
Thank you, everyone, for joining our call, for your support. Have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.