Chartwell Retirement Residences (CSHUN) Earnings Call Transcript

And welcome to the Chartwell Third Quarter 2026 Results Conference Call. [Operator Instructions] I will now hand the conference over to Vlad Volodarski, CEO. Please go ahead.

Thank you, Christine. Good morning, and 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 Karen Sullivan, President and Chief Operating Officer; Jeffrey Brown, Chief Financial Officer; Jonathan Boulakia, Chief Investment Officer and Chief Legal Officer; and Gordon Chiu, Chief Technology Officer. Before we begin, I direct you to the cautionary statements on Slide 2 because during this call, we will make statements containing forward-looking information and non-GAAP and other financial measures. Our MD&A and other securities filings contain information about the assumptions, risks and uncertainties inherent in such forward-looking statements and details of such non-GAAP and other financial measures. More specifically, I direct you to the disclosures in our Q3 2026 MD&A under the heading Risks and Uncertainties and forward-looking information for a discussion of such risks and uncertainties. These documents can be found on our website or on the SEDAR+ website. Turning to Slide 3. We delivered another quarter of strong financial performance. FFO per unit increased 25% to CAD 0.30 per unit. It marks our 13th consecutive quarter of double-digit FFO per unit growth. Our teams delivered strong results in our same-property portfolio with adjusted NOI increasing 14.1%, adjusted operating margin improving to 43.4% and same-property occupancy growing to 94.8%. At the same time, we continue to invest in our residences, integrate newly acquired properties and advance our portfolio optimization initiatives. I am grateful to our teams across Chartwell for their tremendous commitment and hard work. Delivering these results while welcoming new residents and employees into Chartwell demonstrates both the strength of our culture and the scalability of our management platform. Turning to slide -- turning to our 2028 strategy scorecard as pictured on Slide 4. Our 2026 year-to-date results demonstrate strong progress against the objectives we established in our 3-year strategy. Same-property occupancy averaged 94.6% year-to-date. Revenue per occupied suite growth of 5.1% is ahead of our target and same-property adjusted NOI increased 13.9% year-to-date. Our balance sheet metrics also remain within our strategic targets. Net debt to adjusted EBITDA was 6.8x, interest coverage was 3.5x, and our FFO payout ratio was 54.5%. We are also making meaningful progress renewing and growing our portfolio. Completed acquisitions and developments totaled CAD 1.4 billion towards our CAD 2 billion 3-year objective, while completed dispositions totaled CAD 307.7 million towards our CAD 1 billion target. We've built a strong operating business with significant embedded growth in our recently acquired portfolio, a growing development pipeline and a scalable platform that is converting growth in NOI into increasingly strong FFO per unit. My partners will now provide you with more insights in each of these areas. We will start with Karen's operating update. Karen?

Thanks, Vlad. Moving on to Slide 5. We had another strong quarter of leasing activity with a positive net permanent move-in to permanent move-out of plus 234 units with contributions from all operating platforms. Our marketing strategies continue to be effective with a 26% increase in personalized tours for marketing sources quarter-over-quarter. Our conversion ratio of marketing initial contacts to personalized tours was 50% in Q3 of this year compared to 44% in Q3 2025. Our September open house event strengthened our prospect funnel leading into what is typically our best selling season. The event provided an opportunity to showcase our residences, including the many new additions to the portfolio participating in their first ever open house. The event brought many new initial contacts with nearly 8 in 10 of the personalized tours being new prospects to the residents. Our Joy is Ageless campaign continued to build national brand visibility with the fall campaign running across TV, out-of-home, radio, Facebook and website takeover placements. The campaign reinforces Chartwell's active aging positioning through broad market reach and lifestyle-led storytelling. We also partnered with La Presse, Quebec's leading digital news platform to publish a resident story from Chartwell Rosemont, highlighting joy, wellness and community living through premium editorial content and multimedia assets. The campaign generated nearly 700,000 impressions, over 120,000 article reads and 5,900 website visitors. Turning to Slide 6. In terms of expense control, we reduced our staffing agency costs by 37% year-to-date 2026 compared to 2025 through our continued focus on recruitment and retention activities. We also continue to focus on resident satisfaction and employee engagement. This year, we moved to using the internationally recognized Net Promoter Score, or NPS, and employee Net Promoter Score, or eNPS, as our measure. It's based on an 11-point scale of 0 to 10. Those who provide a score of 9 or 10 are considered promoters and those who provide a score of 0 to 6 are considered detractors. The NPS score is determined by the percentage of promoters minus the percentage of distractors with scores ranging from minus 100 to plus 100. I'm pleased to report that our NPS score was 58, which is considered excellent by international standards and was 16 points higher than the baseline score we received in 2025. Although there are less international comparison benchmarks available, our eNPS score of 42 was also impressive and was 3 points higher than our 2025 baseline score. Throughout Q3, the operations teams with support from cross-functional departments have been focused on integration activities for the 6 homes previously owned by Sifton, the 17 Chartwell Fengate previously seasons property as well as the newly acquired Chartwell Palermo and Chartwell Greenway. We've also offboarded 3 non-core residences. Finally, I want to share a new collaboration that began in Q3 with Sprout, a popular Canadian media brand that shares older adult experiences, advice and perspectives through social media video interviews. A dozen Chartwell residents shared their wisdom on topics such as the advice they would give their younger adults. The videos generated more than 1 million views on their YouTube channel and another 500,000 views on Instagram. I'll now turn it over to Jeff to take you through our financial results.

Great. Thank you, Karen. As shown on Slide 7, in Q3 2026, net income was CAD 115 million compared with a net loss of CAD 5.2 million in Q3 2025, primarily reflecting a CAD 113.3 million gain on disposal of assets and from higher property revenue and other items. This was partially offset by current tax expense, higher depreciation, property operating expenses, finance costs and transaction costs related to dispositions. FFO increased 38% to CAD 100.8 million or CAD 0.30 per unit compared with CAD 73.1 million or CAD 0.24 per unit in Q3 2025. Reported FFO excludes CAD 1.4 million or CAD 0.01 per unit of income guarantees related to recently acquired properties. The increase in FFO primarily reflected CAD 34.9 million of higher adjusted NOI, CAD 1.2 million of lower G&A expenses and CAD 1.1 million of higher other income. These benefits were partially offset by CAD 6.5 million of higher finance costs, CAD 1.9 million of lower management fees and CAD 1.2 million of lower interest income. For the first 9 months of 2026, FFO increased 40.7% to CAD 276.9 million and FFO per unit increased 25% to CAD 0.85. Year-to-date, FFO excludes CAD 7.5 million or CAD 0.02 per unit of income guarantees related to recently acquired properties. Same-property adjusted NOI increased CAD 11.2 million or 14.1% in Q3. Weighted average occupancy increased 230 basis points to 94.8%. Adjusted operating margin increased 230 basis points to 43.4%. Revenue per occupied suite increased 5.8% and NOI per occupied suite increased 11.3%. Turning to Slide 8. Our stabilized same-property portfolio continues to deliver strong growth. Year-to-date, revenue per occupied suite was CAD 4,936, an increase of 5.1%, while DOE per occupied suite was CAD 2,879, an increase of only 1.8%. The result was NOI per occupied suite of CAD 2,141, up 10.1% and a 190 basis point improvement in adjusted operating margin to 42.7%. At this level of occupancy, our focus is increasingly on revenue and margin growth. For the 2026 same-property portfolio, we estimate that each 1 percentage point change in occupancy represents approximately CAD 8.7 million of annual revenue, while each 1% change in rate represents approximately CAD 8.2 million. Beyond the continued growth in our stabilized same-property portfolio, we have another important source of embedded growth in properties acquired more recently as pictured on Slide 9. Our growth portfolio consists of 52 properties and approximately 9,300 suites at our ownership share, representing approximately 35% of our total suites. These are generally newer and larger residences. In Q3, the growth portfolio operated at an average occupancy of 91.6% compared with our same property target of greater than 95%. Closing that occupancy gap represents approximately CAD 14.7 million of annualized revenue opportunity. Importantly, despite lower occupancy, the growth portfolio is already generating a 46% adjusted operating margin compared with 43.4% for the same property portfolio. This demonstrates both the quality of the assets and the operating leverage available as occupancy increases. As these residences move towards stabilized occupancy, the growth portfolio provides a meaningful runway for NOI and FFO growth without additional acquisition capital. Turning to Slide 10. At November 5, 2026, liquidity was CAD 573.4 million, consisting of CAD 178.3 million of cash and cash equivalents and CAD 395.1 million of available borrowing capacity. Net debt to adjusted EBITDA was 6.8x. Interest coverage was 3.5x and the consolidated weighted average interest rate was 4.03%. During Q3, we did not issue trust units under our 2026 at-the-market program. For the first 9 months of 2026, we issued approximately 3.3 million trust units under the program at an average price of CAD 21.74 per unit for gross proceeds of CAD 72.7 million. One final point I would highlight is how effectively growth in property level earnings is translating into FFO. As shown on Slide 11, our NOI to FFO conversion has improved significantly over the last several years. In 2023, each dollar of NOI per unit generated approximately CAD 0.48 of FFO per unit. This increased to CAD 0.58 in 2024 and CAD 0.62 in 2025. Over the same period, FFO per unit increased from CAD 0.55 to CAD 0.95. The improvement demonstrates the scalability of our management platform as we generate incremental NOI through occupancy, rate growth, margin improvement and stabilization of acquired properties and increasing proportion flows through to FFO. This operating leverage is an important part of our growth story. I will now turn the call to Jonathan to discuss acquisition and development activities.

Thank you, Jeff. Turning to Slide 12. Our Greater Montreal area portfolio provides a compelling example of how Chartwell's management platform can create value following an acquisition. We acquired 5 high-quality residences in June 2024 with an average age of approximately 6 years. Since acquisition, occupancy has increased by 600 basis points. Revenue per occupied suite has grown at a 6.6% compound annual rate. Operating margin has improved by 8.1 percentage points and adjusted NOI has grown at an 18.1% compounded annual rate. Based on the methodology outlined on the slide, we estimate that this operating performance has created over CAD 100 million of value since acquisition, and the portfolio is now generating an implied NOI yield of 7.7%. There is further opportunity ahead. The acquired portfolio contains 1,428 suites. With 93 suites in development, 285 in predevelopment and a further 202-suite opportunity, the portfolio could ultimately grow to approximately 2,008 suites. This case study illustrates our acquisition strategy. We're not simply acquiring real estate. We're applying our operating, asset management and development capabilities to improve performance and create additional value over time. We continue to execute on our portfolio optimization strategy by acquiring newer properties in core markets, selling noncore assets, repositioning selected residences and developing a pipeline of future growth as pictured on Slide 13. On September 1, we completed the acquisition of Greenway Retirement Residence, a 237 suite residence in Brampton, Ontario for CAD 136 million. On the same date, we completed the sale of Ontario property for CAD 91 million. On October 1, we completed the sale of a noncore property in Victoriaville, Quebec for CAD 8 million and another property in Kitchener, Ontario for CAD 41.8 million. Our objective is to continue recycling capital from assets that no longer fit in our long-term strategy into newer, larger and more operationally efficient residences in Canada's principal retirement markets. Moving to Slide 14. Acquisitions remains an important part of our growth strategy, and we are increasingly complementing them with a substantial development pipeline. Today, that pipeline comprises 38 projects, representing approximately 9,456 suites in high-demand core markets across British Columbia, Alberta, Ontario and Quebec. 8 projects representing 1,466 suites are under construction, while 30 projects representing 7,990 suites are in predevelopment. The pipeline is geographically diversified with approximately 2,600 suites in British Columbia, 1,200 suites in Alberta, 2,050 suites in Ontario and 3,600 suites in Quebec. Our approach is to work with experienced development partners, combining their development capabilities with our market knowledge, operating platform and our brand. This can give Chartwell access to new purpose-built residences in the markets where we want to grow while managing development and balance sheet risk prudently. We remain disciplined in our underwriting, due diligence, integration plans and capital commitments. Our focus is on opportunities that enhance the quality of our portfolio, strengthen our long-term growth profile and meet our required investment returns. I'll turn the call back to Vlad to wrap it up.

Thank you, Jonathan. Turning to Slide 15. Our Q3 results and opportunities described today reinforce my confidence in Chartwell's momentum and long-term growth prospects. The fundamentals supporting retirement living in Canada remains very strong. Demand is accelerating as the population ages, while the new supply remains constrained. This creates a favorable backdrop for occupancy revenue and NOI growth. We are well positioned to benefit from these trends. Our stabilized portfolio is performing strongly. Our recently acquired growth portfolio has meaningful occupancy and earnings upside. Our development partnerships are building a long-term pipeline of modern residences in attractive markets. And our scalable management platform is converting incremental NOI into strong FFO per unit growth. At the same time, we remain focused on what matters most, delivering exceptional experiences to our residents and peace of mind for their families. We are continuing to enhance wellness, dining activities, care and support services while making our organization more agile and efficient through simpler processes and responsible use of technology, automation and AI-enabled tools. What gives me the greatest confidence is our people. I am grateful to our residences teams and support teams for their tremendous commitment, especially as they continue to integrate newly acquired properties and strengthen our growing portfolio. Their dedication to residents and to one another is the foundation of our success. I will now close our prepared remarks with a story of how we're bringing wellness to life for our residents in Quebec. It's pictured on Slide 16. For the past 6 years, we brought residents together at Beach Club in Pointe-Calumet for a day dedicated to fitness, wellness and connection. The event has grown into something our residents look forward to each year, bringing together hundreds of participants for activities ranging from aqua dancing, aerobic to yoga and relaxation with support from our wellness partner, Kinelite. What makes this event meaningful is not just the physical activity, but the opportunity it creates for residents to come together, try new things and enjoy an active lifestyle. It's a great example of our approach to wellness at Chartwell. We are creating opportunities for residents to stay healthy, connected and engaged while continuing to enjoy the experiences that bring enjoy and contribute to their quality of life. Thank you for your attention this morning. We would now be pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Lorne Kalmar with Desjardins.

Congrats on a good result here. Just on the direct operating cost side of things, it looks like you guys have done pretty well in the quarter and year-to-date. I was just wondering what's sort of the upside risk on the cost front given that you've given the guidance of sub-4%? I assume the idea was to be somewhere around there. Just wondering what's the upside risk? And is this a level you think is repeatable for the near and medium term?

Yes. We think that level of staying below 4% on a DOE per occupied suite basis is achievable over the period and demonstrated that in the quarter and year-to-date basis.

Is there -- I mean, obviously, you've got a pretty nice buffer here between whatever it is 1.8% and the 4%. Like what would be, in your guys' view, like risk to cost moving close to that 4%? Or is there nothing really foreseeable?

There's still some -- that is our 3-year target is to achieve that goal over the 3 years. We still have -- our overall DOE was up 4.1% in the quarter. So there's still some benefit from the occupancy increase that's driving the per occupied suite number down. So I think as we stabilize at these higher occupancy levels, you'll see that number get closer to the 4% level.

Okay. That's very helpful. And then with the expectation for a less severe winter here, which I think we deserve after the last couple we had, does that typically lead to a less severe flu season? And if so, could that eliminate some of the seasonality impact you would normally see in Q1 and, I guess, early Q2?

This is always a puzzle, Lorne. We really can't predict with accuracy whether warmer weather translates into fewer flu outbreaks and cases. We are hearing that the current strain of the vaccine is effective. So hopefully, that will help to mitigate the usual seasonal impact. But to be definitive about it is not really possible.

Can I just add, though, when the weather is nicer, it does make it easier for people to come out for personalized tours. So not related to the flu, but just sort of the acceptability for older people to visit our homes in those winter months.

Okay. That's very helpful. And then just maybe last one. I think both in Canada and the U.S., we haven't really seen much in the way of new construction starts, certainly nothing that was close to what was anticipated at the beginning of the year. Any idea of maybe what's behind that and when we can expect to see a more meaningful pickup in activity?

Well, we certainly are doing our part. But I think in terms of general activity, clearly, the recent rise in interest rates doesn't help many of the pro formas. And so I think that certainly is the most obvious reason for some of the deferral of previously expected construction starts for 2026. So we'll see what happens in 2027. But from our perspective, the projects that we have on the go, they continue to be economical, and so we're proceeding with those.

Your next question comes from the line of Jonathan Kelcher with TD Cowen.

Just to follow along on that. With the increase in interest rates, are there any of your projects that are in predevelopment that might be getting pushed back?

Yes. Jonathan, there's -- obviously, you see the pipeline that we have on that slide. It's pretty large. And there's a different variety of projects and economics that we see. Some have a lot more cushion than others in terms of the profitability and return. And the ones that are thinner, then they become harder to commence at this point in time. So for sure, some of these will be deferred.

Okay. And if we look at the 30, how many do you think start next year?

30. So next -- well, we've announced what we are starting and the rest of them will continue to evaluate. We think that there's going to be additional projects started next year. But right now, talking about quantum is a bit premature.

Okay. Fair enough. And then secondly, you guys have a pretty large cash balance, lots of liquidity. What's the acquisition pipeline looking like for the next couple of quarters?

We're seeing a strong acquisition pipeline for the next few quarters. We're constantly evaluating a number of different opportunities. And we're, as you just discussed, enhancing that pipeline with our own pipeline of development.

Okay. Any particular markets that you're seeing more or less in?

We're actually seeing a fair bit of activity in all of the markets that we operate in.

Your next question comes from the line of Tom Callaghan with BMO Capital Markets.

Maybe just sticking on Jonathan's line, a question just with respect to the acquisition pipeline and I guess really the disposition side, too. Any kind of movement pricing expectation-wise bid-ask spread just given the rate volatility we've seen or no, just given the demand level for this product?

We're still continuing to see really strong demand, both in the Class A assets and the -- what we would consider our noncore bank of assets. So we have not seen much adjustments in pricing.

Got it. Okay. Next one for me was just maybe if you can talk a bit about the revenue per occupied suite into 2027. Like obviously, the metric continues to move higher quarter-over-quarter. I think it was 5.8% in Q3, maybe there's a small contribution there for prior period funding, but it's quite comfortably covering the greater than 4% over the 3-year outlook. And I guess just given the broader fundamental backdrop where your occupancy is, is there any reason to think why this wouldn't kind of be another mid- to high 5 percentage number next year in '27?

Thomas, just to put some numbers around that adjustment, it's about 5.5%, excluding that prior period funding for the quarter. But our pricing strategy remains very much the same. Our in-place increases are all targeted to be just above inflation. And then the market pricing is very locally driven. So we are pushing market pricing as much as we're able to. And we're also now having some success in bringing down the incentives. So those came in at 4.5% of revenue -- resident revenue in the quarter. And so that's what's helping also sort of push the REVPOS up to that above 5% range.

Okay. Got it. So presumably still some kind of tailwind for burn of incentive as we go forward here?

Yes, correct.

Okay. And then last one on my end, just housekeeping. In terms of the fees on the seasons portfolio and the Fengate, I think there's about CAD 0.5 million of asset management-related costs and then the CAD 2.1 million transition fee. I assume the CAD 2.1 million is kind of a onetime nonrecurring, but that CAD 0.5 million of asset management costs, is that a good kind of run rate to put through the model?

Yes. Yes, that's the right run rate. And those transition costs were onetime and were only in Q3.

Okay. So nothing for Q4.

Your next question comes from the line of Brad Sturges with Raymond James.

Just going to your Slide 9 here on the growth portfolio and the upside available to you on the revenue side. As you push occupancy higher towards your target stabilized level, like what's the time line you expect for that to occur? Is that over the next 12 months? Or is it a little bit of a longer time line?

We've seen -- it's a little bit because that portfolio does change as we have new acquisitions come in. So it won't be a static portfolio next quarter. But we are seeing similar occupancy growth in that portfolio as we have in our same-property portfolio. So we think there's good traction to get towards that 95% plus target.

Okay. And then on the same property bucket, I guess, expectations to reach 96% by December. Just where do you see the gains coming from? I think there's some room to push in Ontario, but just curious to get a bit more color in terms of where those gains are concentrated in the portfolio today.

Clearly, there's a bit more room in Ontario than in other provinces that are at close to 96% now. But we have properties that operated with 100% occupancy for a very long period of time. So every one of the properties, at least from my perspective, that is not at 100% has room to grow. So our expectation is that both platforms will contribute to that occupancy growth to get to 96% on portfolio-wide.

And last question for me, just on the ATM program. Given where the balance sheet is today and the organic growth in the business, how do you envision the usage of the ATM program on a go-forward basis? Do you see it being less active than what we've seen over the last 12, 12 months or plus?

I mean it's really dependent on our capital needs. So we do have funding priorities. So we always prioritize retained cash flow first, disposition proceeds second. And then we look at equity and debt third and fourth, depending on our leverage levels. And we -- during the quarter, we were able to satisfy our capital needs between that retained cash flow and disposition proceeds. So it's really a function of what we're seeing in terms of requirements going forward.

Your next question comes from the line of Himanshu Gupta with Scotiabank. [Operator Instructions] Your next question comes from the line of Pammi Bir with RBC Capital Markets.

Just maybe coming back to the commentary around the growth portfolio. You mentioned similar traction from an occupancy standpoint as, I guess, the same property assets. So would it be fair to assume that you're basically looking at potential 300 basis points of occupancy pickup over the next year or so?

I'll take this, Pammi. That portfolio has a wide range of different properties. So some of them are stabilized and some of them are in early days of lease-up. And so like 50%, 60% occupied. So our expectation is that those properties that have more room will go -- contribute more, obviously, to the occupancy growth. And our expectation is that within 12 months or so, we should see at least this growth portfolio as it stands today to achieve 95% average occupancy.

And just one thing to note, Pammi, that -- as I mentioned earlier, that will change. So any acquisitions we closed in Q4 will join that portfolio that will drive the occupancy. And then some of those properties will move into same property for Q1 next year. What some of the embedded growth that exists within the portfolio today.

Yes. I'm just thinking more so what's on the balance sheet today as a -- in the growth bucket. Okay. Maybe just coming back to -- there is obviously some commentary coming out of the unions. Can you talk about maybe what's happening there and any anticipated maybe labor cost pressures or any issues with any labor availability at all?

Sure. I mean we continue working with all over 20 unions that we have across the country, and there is a normal sort of cycle of bargaining processes that our teams undertake with the unions. Our increases in terms of the total compensation on average, you see that in our numbers that we've been talking about it for the last several years have been between 4% and 5%. We expect that we'll continue to see those kind of increases in 2027, and we'll see where it goes after that. Historically, the increases in our compensation were between 2% and 3%. So we are now being in a period 4, 5 years of above historical normative increases. And as I said, we expect that to continue for 2027.

Okay. Just there's some very good color on the scalability of the platform. And on the G&A side, we did see a pretty sizable drop in Q3. And I think some of that maybe was just the unit-based comp and maybe some timing as well. But just maybe stepping back, do you expect sort of G&A to hover near year-to-date sort of levels as a percentage of revenue? Or are there still some further efficiencies you think you can generate?

Yes. I think there are -- I mean, the way we've developed the management platform is we should be able to scale revenue faster than we need to add G&A. So there always are some G&A requirements, but it should not be at the same rate growth that we're seeing revenue grow at.

Okay. All right. Last one for me. Just on the incentives. I think, Jeff, you mentioned it was 4.5% of revenue in Q3. What did that figure drop from, I guess, last quarter or maybe the start of the year?

It was 4.8%.

Sorry, it was 4.8% in Q2 or --

Q3 last year was 4.8%.