Mr. Nitin Jain reports

SIENNA SENIOR LIVING INC. REPORTS STRONG SECOND QUARTER 2023 FINANCIAL RESULTS AS OPERATING FUNDAMENTALS CONTINUE TO IMPROVE

Sienna Senior Living Inc. has released its financial results for the three and six months ended June 30, 2023. The consolidated financial statements and accompanying management's discussion and analysis (MD&A) are available on the company's website and on SEDAR.

Sienna's strong second quarter underscores an improving operating environment in the senior living sector and highlights the significant growth potential in the company's business.

"Our second quarter results emphasize the strength of our diversified portfolio, which is reflected in the notable improvements of many key performance indicators, including a 9.3-per-cent increase in our same-property NOI," said Nitin Jain, president and chief executive officer. "In addition, our effective cost-reduction strategy and the continued stabilization of the operating environment further added to the strength of our results."

Operating highlights:

• Same-property net operating income (NOI) increased by 9.3 per cent to $37.1-million in Q2 2023, compared with Q2 2022, including:
  • A 13.9-per-cent increase in the long-term care segment;
  • A 4.0-per-cent increase in the retirement segment.
• Long-term-care (LTC) occupancy: Average occupancy increased by 330 basis points (bps) year over year to 98.0 per cent in Q2 2023.
• Retirement same-property occupancy: Average same-property occupancy increased by 10 basis points year over year to 86.9 per cent in Q2 2023 as a result of high levels of resident move-ins and the improved performance of 12 joint venture (JV) properties acquired in Q2 2022; quarter over quarter, same-property occupancy declined by 130 basis points in Q2 2023, compared with Q1 2023:
  • Consistently high levels of resident move-ins of approximately 96 move-ins on average per month in the company's 100-per-cent-owned portfolio in 2023 were offset by an elevated level of resident moveouts predominantly to long-term care facilities of approximately 104 moveouts, representing an 18-per-cent year-over-year increase in average monthly moveouts in 2023.
  • Resident moveouts expected to stabilize in second half of 2023 as a result of long-term care facilities returning to full occupancy levels.
• Annual rate increases: Average annual rate increases of approximately 5 per cent in the company's retirement segment in Q2 2023 continue to offset cost pressures.
• The company had focused cost management, resulting in:
  • A reduction in agency staffing cost to $6.0-million in Q2 2023, compared with $10.3-million in Q1 2023 and $10.0-million Q2 2022;
  • A substantial decrease in general and administrative expenses through a restructuring at the company's corporate office in Q1 2023.
• It had growth in key performance indicators, including:
  • A 24.1-per-cent increase in operating funds from operations (OFFO) per share;
  • A 13.6-per-cent increase in adjusted funds from operations (AFFO) per share, resulting in the continued improvement of the AFFO payout ratio to 87.3 per cent in Q2 2023.

Sustainability highlights

Today, Sienna released its 2022-2023 environmental, social and governance (ESG) report, providing updates on how Sienna incorporates sustainable business practices into its overall strategy and operations. Sienna's ESG initiatives and stories highlighted in this report are deeply aligned with the company's key values to act positively, be accountable, create community and demonstrate caring.

Financial performance -- Q2 2023:

• Total adjusted revenue increased by 10.1 per cent in Q2 2023 to $198.3-million, compared with Q2 2022. In the retirement segment, the increase is mainly driven by rental rate increases and additional revenue generated from a full quarter of contributions from the 12 JV properties acquired in Q2 2022. In the LTC segment, increased flow-through funding for direct care and annual inflationary funding increases contributed to the increase in total adjusted revenue.
• Total NOI increased by 13.7 per cent to $38.9-million, compared with Q2 2022, resulting from a $1.8-million increase in the retirement segment, driven by same-property NOI growth, a full quarter of NOI from the 12 JV properties acquired in Q2 2022 and the acquisition of a new retirement property in Q1 2023. Total NOI increased by $2.9-million in the LTC segment, mainly due to lower net pandemic expenses, which included retroactive funding of $1.4-million.
• Same-property NOI increased by 9.3 per cent to $37.1-million, compared with Q2 2022, including a 13.9-per-cent increase to $20.5-million in the LTC segment and a 4.0-per-cent increase to $16.6-million in the retirement segment.
• OFFO per share increased by 24.1 per cent in Q2 2023 or 5.7 cents to 29.4 cents. The increase was primarily due to higher NOI and a favourable tax adjustment of approximately $1.5-million relating to 2022, partially offset by higher current income taxes and lower general and administrative expenses, partially offset by higher interest expense.
• AFFO per share increased by 13.6 per cent in Q2 2023 or 3.2 cents to 26.8 cents. The increase was primarily related to higher OFFO, partially offset by higher maintenance capital expenditures and a decrease in construction funding.
• AFFO payout ratio was 87.3 per cent for Q2 2023.

Financial performance in the six months ended June 30, 2023:

• Total adjusted revenue increased by 12.3 per cent or $43.5-million to $398.0-million, compared with the six months ended June 30, 2022. In the retirement segment, the increase is mainly driven by rental rate increases, occupancy growth and additional revenue generated from a full quarter of contributions from the 12 JV properties acquired in Q2 2022. In the LTC segment, flow-through funding for increased direct care and annual inflationary funding increases contributed to the increase in total adjusted revenue.
• Total NOI increased by 13.3 per cent to $75.2-million, compared with Q2 2022, resulting from a $5.7-million increase in the retirement segment, driven by same-property NOI growth, a full quarter of contributions from the 12 JV properties acquired in Q2 2022 and the acquisition of a retirement property in Q1 2023. Total NOI increased by $3.2-million in the LTC segment, mainly due to lower net pandemic expenses, which included retroactive funding of $3.4-million.
• Same-property NOI increased by 9.6 per cent to $71.8-million, compared with Q2 2022, including an 11.5-per-cent increase to $39.9-million in the LTC segment and a 7.3-per-cent increase to $31.9-million in the retirement segment.
• OFFO per share increased by 14.9 per cent or 7.1 cents to 54.7 cents, compared with the six months ended June 30, 2022. The increase was primarily due to higher NOI, a favourable tax adjustment of approximately $1.5-million relating to 2022, and lower general and administrative expenses, offset by higher interest expense.
• AFFO per share increased by 8.4 per cent or 4.0 cents to 51.8 cents, compared with the six months ended June 30, 2022. The increase was primarily related to higher OFFO, partially offset by higher maintenance capital expenditures and a decrease in construction funding.
• AFFO payout ratio was 90.3 per cent for the six months ended June 30, 2023.

Financial position

The company maintained a strong financial position during Q2 2023:

• Paid off the unsecured term loan and entered into financings with lower-cost CMHC-insured (Canada Mortgage & Housing Corporation) mortgages;
• Maintained high liquidity at $276-million as at June 30, 2023, compared with $271-million as at June 30, 2022;
• Increased interest coverage ratio to 3.5 for the three months ended June 30, 2023, compared with 3.2 for the three months ended March 31, 2023.

Outlook

Long-term demand fundamentals in Canadian senior living remain strong, driven by the rising needs of seniors, who make up the fastest-growing demographic in Canada. Despite rising interest rates, the Canadian economy remained resilient, with home prices rising across Canada throughout the spring and inflation continuing to slow. These positive factors in combination with Sienna's successful cost-reduction strategy give reason for an optimistic outlook for the balance of 2023 and beyond.

Retirement

Average occupancy in the company's same-property portfolio was 86.9 per cent in Q2 2023, up marginally by 10 basis points year over year compared with Q2 2022. Consistently high resident move-ins and the improved performance of the 12 joint venture retirement residences Sienna acquired in Q2 2022 were offset by an elevated level of resident moveouts predominantly to long-term care since the beginning of the year.

Lead indicators have strengthened significantly in recent months and occupancy levels have stabilized. The company's community outreach efforts, combined with a robust sales platform, will continue to support occupancy during the second half of the year. Average same-property occupancy growth in July, with further growth anticipated in August, indicates an improving occupancy trend for the balance of 2023.

Based on the company's updated occupancy forecast, average same-property occupancy is expected to reach approximately 88 per cent for the full year in 2023.

Considering all factors, Sienna anticipates growth of approximately 100 basis points to 150 basis points in the 2023 operating margin for the full year of 2023, compared with 2022, primarily driven by increased average annual rates upon renewal, continued improvements with respect to labour market conditions and the results of its focused cost management.

Long-term care

A stable postpandemic operating environment supported the strong performance of Sienna's LTC portfolio during Q2 2023. Average same-property occupancy reached 98.0 per cent during the second quarter and supported year-over-year NOI growth in Q2 2023.

Although the operating environment has improved significantly and the company has made great strides in reducing costs wherever possible, Sienna is still facing funding shortfalls in its long-term-care segment as a result of high inflation in recent years. Together with other sector participants, the company continues to work with the government to address these shortfalls.

For the balance of the year, the company expects to benefit from a stable operating environment, its focused cost management and continued improvements with respect to staffing. It anticipates that current occupancy trends will continue for the balance of 2023 and expects LTC NOI growth for the second half of 2023 to be in the low-single-digit-percentage range compared with the same period in 2022.

Developments

Sienna's three projects currently under construction, including the redevelopment of an LTC community in North Bay, the development of a campus of care in Brantford and the development of a joint venture retirement residence in Niagara Falls, are expected to lower the company's AFFO payout ratio by mid-to-high-single-digit percentage, once completed and fully operational.

Significant potential for growth in NOI

Sienna sees significant growth potential in its business over the next several years and is actively working on a number initiatives that may contribute to the company's NOI expansion, including:

• Occupancy growth in the company's retirement segment, including incremental NOI should the company's target for stabilized average occupancy of 92.5 per cent in its same-property portfolio be reached, which would represent a 560-basis-point increase from the average occupancy of 86.9 per cent in Q2 2023;
• Contributions from acquisitions and new developments, including incremental NOI from:
  • The company's acquisition of a 50-per-cent joint venture interest in 12 retirement properties in 2022 for $189.8-million;
  • The company's acquisition of Woods Park in early 2023 for $26.3-million, which is expected to generate an unlevered yield of 6.75 per cent;
  • The completion of the company's 70-per-cent joint venture interest in the development of a 150-suite retirement residence in Niagara Falls for $38.5-million, which has an expected development yield of approximately 7.5 per cent;
• Substantial reduction of net pandemic expenses and incremental agency costs, which were $8.2-million in 2022, as the pandemic subsides and the company actively manages incremental agency costs, while working with governments to ensure that operators are fully funded for all costs of resident care;
• Catch-up funding from the Ontario government to address funding shortfalls to offset the significant inflationary and cost pressures operators have experienced over the past years. Each percentage point in additional other accommodations funding would represent an approximate annual funding increase of $1.2-million for Sienna.

These initiatives, individually and collectively, could have a significant positive impact on the value of the company's business, enhancing its financial performance with growth in NOI and OFFO, and supporting Sienna's AFFO payout ratio.

Conference call

Sienna will host a conference call on Friday, Aug. 11, 2023, at 9 a.m. ET. The toll-free dial-in number for participants is 1-800-715-9871, conference ID No. 4521527. A webcast of the call will be accessible via Sienna's website. It will be available for replay until Aug. 10, 2024, and archived on Sienna's website.

About Sienna Senior Living Inc.

Sienna offers a full range of seniors' living options, including independent living, assisted living, memory care, long-term care, and specialized programs and services. Sienna's approximately 12,000 employees are passionate about cultivating happiness in daily life.

We seek Safe Harbor.