Chartwell Announces Third Quarter 2022 Results

MISSISSAUGA, ON, Nov. 9, 2022 /CNW/ - Chartwell Retirement Residences ("Chartwell") (TSX: CSH.UN) announced today its results for the third quarter ended September 30, 2022.

• In Q3 2022 same property Retirement Operations average occupancy increased 60 basis points from Q2 2022 and 50 basis points from Q3 2021, led by strong growth in Western Canada.
• Execution of operating, sales, marketing, and portfolio optimization strategies is underway. Further occupancy growth of 40 basis points was achieved in October 2022.
• In Q3 2022, net income was $4.3 million compared to $0.9 million in Q3 2021 primarily due to higher resident revenue, higher positive changes in fair values of financial instruments and higher net income from discontinued operations partially offset by higher pandemic-related expenses due in part to lower government reimbursements and higher General and Administrative ("G&A") expenses.

"We continue to focus on occupancy and cash flow recovery. Various operational, sales and marketing strategies are in place to support our residences' leadership teams and staff in their efforts to drive faster recovery in 2023 and beyond," commented Vlad Volodarski, CEO. "We are also building on the strength of our management platform to become an even more agile and scalable organization to support the future growth of our portfolio, through stronger empowerment of our managers and front-line employees, streamlining our corporate support and deploying specialized teams to execute complex operating and capital allocation strategies. Such strategies may include service model changes, capital upgrades, changes in use or dispositions of properties identified as non-core. We believe that these strategies, combined with pent-up demand for retirement accommodation, driven by Canada's increasingly ageing population, slower new construction starts, and the persistent shortage of long term care beds will support sustainable long-term value for all our stakeholders."

• For Q3 2022 compared to Q3 2021, same property adjusted Net Operating Income ("NOI") decreased $0.5 million or 1.1% primarily due to higher net pandemic expenses of $3.7 million, in part due to lower government reimbursements, higher agency staffing, and food and utilities expenses, partially offset by higher revenue from regular annual and market-based rental and service rate increases and higher occupancy.
• Same property retirement leasing activity and permanent move-ins exceeded Q3 2021 by 12.8% and 6.3% respectively.

For Q3 2022, net income was $4.3 million compared to $0.9 million in Q3 2021 primarily due to:

• higher resident revenue,
• higher positive changes in fair values of financial instruments, and
• higher net income from LTC Discontinued Operations,

partially offset by:

• higher direct operating expenses,
• higher depreciation of property, plant and equipment ("PP&E"),
• higher finance costs,
• higher G&A expenses, and
• lower deferred tax benefit.

For Q3 2022, Funds from Operations ("FFO") from continuing operations was $28.3 million or $0.12 per unit compared to $28.8 million or $0.13 per unit for Q3 2021. The following items impacted the change in FFO from continuing operations:

• higher G&A expenses of $1.6 million primarily due to higher severance, cloud-based information technology system implementations, education, and travel expenses partially offset by lower performance-based compensation expense, and
• higher finance costs of $1.5 million,

partially offset by:

• higher adjusted NOI from continuing operations of $2.3 million which is comprised of changes as follows:
• higher adjusted NOI of $4.6 million due to higher contributions from our acquisitions and development portfolio, and
• lower same property adjusted NOI of $0.5 million due to the following:
• higher net pandemic expenses of $3.7 million due to lower government reimbursements and higher pandemic expenses, and
• and higher agency staffing, food and utilities expenses,

partially offset by:

• higher revenue from both regular annual and market-based rental and service rate increases and increased occupancy,
• lower NOI of $1.8 million from our dispositions, repositioning and other portfolio,
• lower depreciation of PP&E and amortization of intangible assets used for administrative purposes of $0.2 million, and
• higher interest income of $0.2 million.

FFO from continuing operations for Q3 2022 includes $1.2 million of Lease-up-Losses and Imputed Cost of Debt related to our development projects (Q3 2021 – $1.5 million).

Total FFO for Q3 2022 was $31.9 million or $0.13 per unit, compared to $33.9 million or $0.15 per unit in Q3 2021. Effective March 31, 2022, our Long Term Care Operations segment was reclassified as discontinued operations. Total FFO per unit includes $0.01 per unit in Q3 2022 and $0.02 per unit in Q3 2021, respectively from LTC Discontinued Operations or a decrease of $0.01 per unit in Q3 2022 due to lower preferred accommodation revenue, timing of flow through funding envelope expenditures and incremental pandemic expense funding partially offset by higher retirement accommodation and ancillary revenue.

For Q3 2022, resident revenue increased $12.3 million or 7.9% primarily due to revenue growth in our same property portfolio and contributions from our acquisitions and development portfolio partially offset by our dispositions, repositioning and other portfolio.

For Q3 2022, direct property operating expense increased $10.4 million or 9.7% primarily due to higher expenses in our same property portfolio and our acquisitions and development portfolio partially offset by our dispositions, repositioning and other portfolio.

In Q3 2022, weighted average occupancy in our same property portfolio was 77.6%, compared to 77.1% in Q3 2021 an increase of 0.5 percentage points. In Q3 2022, move-ins exceeded Q3 2021 by 6.0% and move outs were 3.3% lower than Q3 2021. All platforms experienced occupancy gains in Q3 2022 compared to Q2 2022.

For 2022 YTD, net income was $2.1 million compared to net loss of $8.6 million in 2021 YTD primarily due to:

• higher resident revenue,
• positive changes in fair values of financial instruments,
• higher net income from LTC Discontinued Operations,
• lower net loss from joint ventures,

partially offset by:

• higher direct operating expenses,
• higher G&A expenses,
• lower gain on disposal of assets,
• lower deferred tax benefit and,
• higher finance costs.

For 2022 YTD, FFO from continuing operations was $74.3 million or $0.31 per unit compared to $94.0 million or $0.43 per unit for YTD 2021. The following items impacted the change in FFO from continuing operations:

• lower adjusted NOI from continuing operations of $13.2 million which is comprised of changes as follows:
• lower same property adjusted NOI of $16.6 million primarily due to the following items:
• net pandemic expense of $12.0 million in 2022 YTD compared to net pandemic expense recoveries of $5.5 million in YTD 2021, or higher net pandemic expenses of $17.5 million due to lower government subsidies and higher pandemic expense,
• lower occupancy, and
• higher agency staffing, utilities, food and supplies expenses,

partially offset by:

• increased revenue from regular market-based rental and service rate increases,
• lower NOI of $5.9 million from our dispositions, repositioning and other portfolio, and
• higher adjusted NOI of $9.3 million due to higher contribution from our acquisitions and development portfolio,
• higher G&A expenses of $5.6 million primarily due to lower government subsidies and higher cloud-based information technology system implementations, severance, travel and education expenses partially offset by lower performance-based compensation expense,
• higher finance costs of $0.8 million, and
• lower management fee revenue of $0.6 million,

partially offset by:

• lower depreciation of PP&E and amortization of intangible assets used for administrative purposes of $0.4 million.

FFO from continuing operations for 2022 YTD includes $3.3 million of Lease-up-Losses and Imputed Cost of Debt related to our development projects (2021 YTD – $3.7 million).

Total FFO for 2022 YTD was $93.6 million or $0.39 per unit, compared to $103.8 million or $0.47 per unit in 2021 YTD. Total FFO per unit for 2022 YTD includes $0.08 per unit from LTC Discontinued Operations compared to $0.04 per unit in 2021 YTD, due to higher adjusted NOI from Long Term Care Operations primarily as a result of government reimbursements for prior years direct operating expenses and higher ancillary, preferred and retirement accommodation revenues.

For 2022 YTD, resident revenue increased $22.3 million or 4.8% primarily due to revenue growth in our same property portfolio and contributions from our acquisitions and development portfolio, partially offset by our dispositions, repositioning and other portfolio.

For 2022 YTD, direct property operating expense increased $33.0 million or 10.6% primarily due to higher expenses in our same property portfolio and our acquisitions and development portfolio, partially offset by our dispositions, repositioning and other portfolio.

The following table summarizes select financial and operating performance measures:

Debt leverage and interest coverage metrics

The interest coverage ratio (1) on a rolling 12-month basis was 2.6 at September 30, 2022 compared to 2.9 at September 30, 2021. The net debt to adjusted EBITDA ratio (1) at September, 2022 was 11.2 compared to 9.6 at September 30, 2021.

Outlook

Operations

Our same property weighted average occupancy rate increased 0.4 percentage point to 78.1% in October 2022. Same property leasing activity and permanent move-ins were higher than October 2021 by 5.5% and 7.1%, respectively. Our same property weighted average occupancy rate (based on leases and notices on hand as at October 31, 2022) is forecast to increase 0.1 percentage points in November and ending December at 78.2%. We have consistently experienced mid-month move ins, particularly in our Ontario platform, which are not accounted for in our forecasts.

From April 2022 to September 2022 our total portfolio occupancy increased 1.6% percentage points. Our properties in 11 of our top 15 markets experienced average occupancy increases of 2.8 percentage points in this period. Our properties in the highly competitive Ottawa, Calgary, Durham and Quebec City markets, experienced average occupancy declines of 1.3 percentage points. Property and region-specific sales and marketing strategies such as multi-channel advertising, select use of tailored promotions and incentives, business development and resident referral programs, open houses and other prospect nurturing events are being implemented to support occupancy recovery across our portfolio with the enhanced support available in underperforming markets.

We believe that there is a pent-up demand for retirement accommodation and services, driven by the increased ageing population, disruptions of community-based support services for seniors during the pandemic and a persistent shortage of long term care beds. Accelerated growth in the population of seniors over the age of 75 over the next 20 plus years, as well as the slowdown of construction activity in the last two years should support occupancy recovery in the short term and growth from pre-pandemic levels over the long term. Pandemic-related restrictions have eased, and assuming this continues, we expect our occupancy to continue to recover into 2023 and beyond across all platforms.

Our 2021 MD&A provided our expected combined rental and services rate growth of approximately 3.0% for 2022 for our retirement operations. In light of current inflationary conditions, beginning in August 2022 we are increasing our combined rental and services rates, on renewal, by 75 basis points on average higher than previously expected.

We expect the elevation in direct operating expenses in our retirement residences experienced through the Omicron Waves of the pandemic to continue due to higher-than-normal staffing costs as a result of increased agency staffing used to augment vacancies. Staffing shortages continue in select markets in Ontario and Quebec and as a result we continue to incur agency costs to maintain resident services. In Q4 2022, we expect that net pandemic and incremental agency staffing costs will range from $3 to $5 million. We expect that our initiatives to reduce staff vacancies by improving our recruitment and retention and to optimize staff levels to better align to occupancy and service levels, along with lower usage of agency staffing will bring these costs down gradually through Q4 2022 and into 2023 subject to labour market and outbreak conditions.

Our 2021 MD&A provided our expected G&A growth in 2022. We expect G&A for Q4 2022 to be approximately $10.0 to $11.0 million.

Liquidity and Financing Update

As at November 9, 2022 liquidity amounted to $182.4 million, which included $24.9 million of cash and cash equivalents and $157.5 million of available borrowing capacity on our credit facilities. In addition, Chartwell's share of cash and cash equivalents held in its equity-accounted joint ventures was $11.2 million.

As at November 9, 2022, our remaining maturities in 2022 are $24.0 million and are expected to be refinanced in the normal course. As at November 9, 2022 10-year Canada Mortgage and Housing Corporation ("CMHC") insured mortgage rates are estimated at approximately 4.50% and five-year conventional mortgage financing is available at 5.65%.

The previously announced sales of two LTC homes in B.C. which is expected to close in Q4 2022, and our Ontario LTC platform, expected to close in the spring of 2023, are estimated to generate net cash proceeds of $334.2 million, which will be initially deployed to reduce debt.

Taxation

Based on our current forecasts, the previously announced sales of two B.C LTC homes, expected to close in Q4 2022 and Ontario LTC platform, expected to close in spring of 2023 are estimated to result in specified investment flow-through ("SIFT") taxes of approximately $34.0 million in 2023. As a result of these sales the majority of our 2023 distributions are expected to be classified as eligible dividends. We expect to have sufficient deductions and losses carried forward to offset any other SIFT taxes in 2022 and 2023.

Quarterly Investor Materials and Conference Call

We invite you to review our Q3 2022 investor materials on our website at investors.chartwell.com

Q3 2022 Financial Statements
Q3 2022 Management's Discussion and Analysis
Third Quarter 2022 Investor Presentation

A conference call hosted by Chartwell's senior management team will be held Thursday, November 10, 2022, at 9:00 AM ET. The telephone numbers for the conference call are: Local: (416) 340-2217 or Toll Free: 1-800-898-3989. The passcode for the conference call is: 6479378#. The conference call can also be heard over the Internet by accessing the Chartwell website at www.chartwell.com, clicking on "Investor Relations" and following the link at the top of the page. A slide presentation to accompany management's comments during the conference call will be available on the website. Please log on at least 15 minutes before the call commences.

The telephone numbers to listen to the call after it is completed (Instant Replay) are: Local (905) 694-9451 or Toll-Free: 1-800-408-3053. The Passcode for the Instant Replay is 3331531#. These numbers will be available for 30 days following the call. An audio file recording of the call, along with the accompanying slides, will also be archived on the Chartwell website at www.chartwell.com.

Footnotes

COVID-19 Risk Factors

Please refer to the 2021 MD&A to review risk factors to Chartwell relating to COVID-19.

Forward-Looking Information

This press release contains forward-looking information that reflects the current expectations, estimates and projections of management about the future results, performance, achievements, prospects or opportunities for Chartwell and the seniors housing industry. Forward-looking statements are based upon a number of assumptions and are subject to a number of known and unknown risks and uncertainties, many of which are beyond our control, and that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking statements. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. These factors are more fully described in the "COVID-19 Business Impacts and Related Risks" section, and the "Risks and Uncertainties and Forward-Looking Information" section in Chartwell's 2021 MD&A, and in materials filed with the securities regulatory authorities in Canada from time to time, including but not limited to our most recent Annual Information Form.

Non-GAAP Financial Measures

Chartwell's condensed consolidated interim financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). Management uses certain financial measures to assess Chartwell's operating and financial performance, which are measures not defined in generally accepted accounting principles ("GAAP") under IFRS. The following measures: FFO, FFO per unit, same property adjusted NOI, adjusted NOI, liquidity, interest coverage ratio and net debt to adjusted EBITDA ratio as well as other measures discussed elsewhere in this release, do not have a standardized definition prescribed by IFRS. They are presented because management believes these non-GAAP l measures are relevant and meaningful measures of Chartwell's performance and as computed may differ from similar computations as reported by other issuers and may not be comparable to similarly titled measures reported by such issuers. For a full definition of these measures, please refer to the 2021 MD&A available on Chartwell's website and at www.sedar.com.

The following table reconciles resident revenue and direct property operating expense from our financial statements to adjusted resident revenue and adjusted direct property operating expense and NOI to Adjusted NOI from continuing operations and Adjusted NOI and identifies contributions from our same property portfolio and our acquisition, development, dispositions, repositioning and other portfolio:

The following table provides a reconciliation of net income/(loss) to FFO for continuing operations:

The following table provides a reconciliation of net income/(loss) to FFO for total operations:

About Chartwell
Chartwell is an unincorporated, open-ended real estate trust which indirectly owns and operates a complete range of seniors housing communities, from independent supportive living through assisted living to long term care. It is the largest operator in the Canadian seniors living sector with nearly 200 quality retirement communities in four provinces including properties under development. Chartwell is committed to its vision of Making People's Lives BETTER and to providing a happier, healthier, and more fulfilling life experience for its residents. For more information, visit www.chartwell.com

For more information, please contact:
Chartwell Retirement Residences
Sheri Harris, Chief Financial Officer
Tel: (905) 501-6777
slharris@chartwell.com

SOURCE Chartwell Retirement Residences

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