Extendicare Inc. (EXE) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to Extendicare Inc. Third Quarter 2026 Analyst Conference Call. The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Extendicare's 2026 Third Quarter Results Conference Call. Joining me today are Extendicare's President and CEO, Michael Guerriere; and Executive Vice President and CFO, David Bacon. Our Q3 results were released yesterday and are available on our website, as is a live audio webcast of today's call, along with an accompanying slide presentation. An archived recording will also be available on our website following the call today. As well, replay numbers and passcodes have been provided in our press release for those wishing to access an archived recording by phone until midnight on November 20. Before we get started, please be reminded that today's call may include forward-looking statements and non-GAAP and other financial measures. Such forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors as well as details of non-GAAP and other financial measures in our public filings with the securities regulators and suggest that you refer to those filings. With that, I'll turn the call over to Mike.

Thank you, Jillian, and good morning. Our third quarter results reflect the continued execution of our strategy, with acquisitions and organic growth delivering adjusted EBITDA of $71.7 million, up 41% from the prior year and ahead of consensus. Net earnings of $0.354 per diluted share were up 26% over the prior year period. Our strong financial and operating results enabled us to pay down $53.7 million on our unsecured revolving credit facility this quarter, improving our pro forma net debt to EBITDA to 2.3x. We ended the quarter with $246 million in available liquidity, providing us with significant flexibility as we consider our options to allocate capital. Home health care delivered another strong quarter of organic growth. Combined with the acquisitions, volumes increased 111.5% year-over-year. Excluding CBI, ADV increased 18.8% from the prior year, driven by strong underlying growth of the market. NOI margins in our Home Health segment were 13.1% in Q3 after removing out-of-period revenue, up 20 basis points from Q2. As we noted last quarter, we invested in technology and back-office teams earlier this year to support the rapid growth in home care services. These investments and the absence of a 2026 rate increase in Ontario, contributed to a 50 basis point reduction in home health care NOI margins from the prior year. We continue to expect that underlying market growth will moderate over time to approximately 6% to 8% on an annualized basis, reflecting the 4% demographic growth trend and the unmet care needs driven by a shortfall in long-term care beds that is anticipated to persist for the foreseeable future. We also expect that over time, funding increases will substantially keep pace with inflation, supporting NOI margins. Long-term care occupancy remains strong and NOI margins were 11.8% for the quarter, adjusted to remove out-of-period funding. This quarter, we received retroactive rate increases in Alberta in both long-term care and home health, consistent with historical patterns that have seen funding increases keep pace with wage rate increases, ultimately supporting NOI margins. Our Managed Services segment continues its record of strong performance, including 9.4% year-over-year growth in the SGP customer base and NOI margins of 55.6%. We continue to expect annualized margins of 50% to 55% for this segment. Driven by the strength of these results, our diluted FFO per share, excluding out-of-period items, increased to $0.43 per share, up 35% year-over-year, driving our payout ratio down to 34% on a trailing 12-month basis. Turning to Slide 4. Our Home Health acquisitions continue to outperform our original underwriting. CBI delivered another strong quarter, contributing $153.3 million in revenue and $20.3 million in NOI. In the first 6 months after close, CBI is tracking approximately 23% on adjusted EBITDA and 25% ahead on volumes relative to our original underwriting. We are on-track to substantially complete the integration of Closing the Gap this year and to complete the finance and enterprise IT systems integration for CBI by January 1, '27. This establishes the requisite foundation for integration of frontline CBI care teams through 2027, using a phased approach similar to that used for CTG. We continue to expect annualized synergies to total approximately $7.4 million by the time CBI is fully integrated in 2028. Turning to Slide 5. We continue to advance our Ontario long-term care redevelopment program through our joint venture with Axium Infrastructure. At the end of September, we welcomed residents to Extendicare Forest Trail, the new 256-bed home in Peterborough, that opened in the joint venture. Subsequent to the quarter, we completed the sale of the vacated Peterborough Class C home for cash proceeds of $7 million, once again demonstrating the capital recycling advantages of our redevelopment partnership with Axium. We currently have 5 projects under construction with plans to open 4 of these new homes in 2027, bringing a further 832 beds online in the JV. We also continue to advance 17 additional projects at varying stages of planning and development under the Ontario Long-Term Care Home Capital development program, with our next construction start targeted for spring 2027. We are working to commence construction on additional new projects later next year, should conditions be favorable. We remain actively engaged with the government on necessary funding and other elements required to fully realize our redevelopment agenda and are closely monitoring construction costs and interest rates as we navigate a period of heightened economic uncertainty. I'll now turn to our CFO, David Bacon, to discuss our financial results in more detail.

Thanks, Michael. Before I review our consolidated and segment results for the quarter, I want to highlight that this quarter, we introduced a new non-GAAP measure, adjusted net earnings and the related adjusted earnings per share. Details of this reconciliation are included in the appendix to our Q3 results presentation and in our MD&A. This new measure is intended to present our net earnings and earnings per share on an adjusted basis to remove the impacts of items that are, by their nature, nonrecurring and difficult to predict, which can create volatility in our quarterly results. Gains and losses from our legacy C-bed home dispositions, gains on the sale of LTC redevelopment projects into the Axium joint ventures and acquisition integration costs are just a few examples of recent items that have impacted our quarterly results that can make it challenging to develop a consensus view of our performance on a net earnings and earnings per share basis. In addition, we will also adjust for the amortization of acquired intangibles in this adjustment to report adjusted net earnings results that are more closely aligned with the cash flows of the company. We believe this new measure provides additional insight into the underlying performance of the business and enhances comparability between reporting periods. Turning now to the consolidated results. Our Q3 results were impacted by $1.4 million reduction in net out-of-period retroactive funding on a year-over-year basis, which is more fully outlined in the appendix and MD&A. Excluding these out-of-period impacts, our consolidated Q3 revenue increased by 43.3% to $625.3 million, driven by the contribution of the CBI acquisition, which -- combined with organic growth in ParaMed -- drove 111.5% growth in Home Health volumes, long-term funding care increases, which were partially offset by the closure of 2 Class C long-term care homes following the opening of the newly developed homes in the joint venture. Our Q3 adjusted EBITDA, excluding out-of-period items, was $69.2 million, an increase of $22.3 million or 47.7% over the prior year, reflecting the CBI acquisition, which contributed $19.6 million and strong underlying organic growth in our Home Health segment. Net earnings were $34.2 million, up $10.1 million or 41.8% from the prior year. Adjusted net earnings were $39.6 million, up $11.4 million or 40.4% from the prior year and on a diluted per share basis were $0.41, up $0.08 from the prior year. Our diluted FFO and AFFO per share were both approximately $0.45 this quarter, with FFO growing nearly 26% year-over-year and AFFO increasing approximately 30%. The out-of-period items impacted both AFFO and FFO per share by approximately $0.02. Turning to our individual segments. Home health care continues to deliver strong performance driven by the acquisition and our continued organic growth. We did receive a retroactive rate increase of 3% in Alberta for Home Health, resulting in an out-of-period revenue and NOI impact of approximately $500,000 recognized this quarter. Excluding this out-of-period funding, our Q3 revenue increased by $186.3 million year-over-year, while NOI increased by $23.6 million or 92.8%. Turning to our long-term care segment. The Q3 results were impacted by out-of-period funding of $2 million from a retroactive rate increase in Alberta for long-term care. In the prior year quarter, we recognized $3.9 million in out-of-period funding. Excluding these out-of-period amounts, revenue increased by $1.7 million and NOI increased by $200,000, driven primarily by funding increases and improved occupancy, net of the closure of the Carlingview Manor and Extendicare Peterborough C-bed homes, which were replaced by new homes in the JV. NOI margins, excluding out-of-period items, were 11.8% for the quarter, unchanged from the prior year and in line with the trailing 12 months ended September 30, 2026. Turning to our Managed Service segment. At the end of Q3, management contract beds in Extendicare Assist were modestly higher than the prior year, reflecting the opening of the 2 new homes in the joint venture in May and September of this year, partially offset by the expiry of 2 third-party Assist contracts earlier this year in Q2. Together with 9.4% organic growth in SGP clients, our revenue increased by $1 million to $16.6 million, while NOI improved by $300,000 to $9.2 million. Turning to Slide 11. We exited Q3 in a strong financial position with $246 million in liquidity comprised of $75 million in cash on hand and $171 million available on our unsecured revolving facility. Our pro forma debt to adjusted EBITDA ratio improved from Q2 to approximately 2.3x, benefiting from the improved financial results and the $53.7 million reduction in our borrowing on our unsecured facilities. Our strong liquidity position, low payout ratio, and conservative leverage profile creates significant flexibility as we consider a range of capital allocation options, including further acquisitions, dividend policy and -- where appropriate -- share buybacks. With that, I'll pass it back to Mike, for his closing remarks.

Thank you, David. The strength of our platform was confirmed with another quarter of strong financial and operating performance. Our acquisitions have outperformed, and we continue to deliver strong organic growth in our home health care segment at a pace that exceeds our long-term expectations. We continue to be very confident about the potential of our home care and long-term care platforms and our ability to expand access to care for the growing number of Canadians who depend on us. As we enter the final quarter of 2026, we will maintain resolute focus on integrating CBI and executing our long-term care redevelopment program. We will be disciplined as we consider capital allocation options that build shareholder value. Our prudent approach to managing our balance sheet provides us with significant flexibility in this regard while also managing the risk inherent in a more volatile economic climate. We believe firmly in the opportunity ahead of us. Short-term movements in the share price or variability in the alignment of funding and wage increases do not take away from the relentless demographic trends underpinning our business that will drive demand growth for years to come, both in home health care and long-term care. Of course, our first priority is always the quality imperative that is fundamental to the care we provide to thousands of people who rely on us every day. Our scale, technology platform, and the flexibility of our capital structure position us to continue to build home health and long-term care capacity so more Canadians can access the care they need wherever they call home. My sincere thanks to our team members for their daily commitment to providing high-quality care and services for the residents, patients, and individuals we serve. So with that, we welcome any questions that you might have.

[Operator Instructions] Our first question comes from Kyle McPhee with ATB Cormark Securities.

Great quarter. The moving pieces all seem strong and pretty straightforward. So I just have one high-level question this quarter about what to do with all your excess capital you're generating. I know you generally addressed it in your prepared remarks, but I'm specifically interested in whether or not you may shift to doing some of your remaining Class C redevelopment in-house using the JV playbook to keep all the cash flow in your long-term care segment? Or is there still really ample opportunities to use your excess capital for things that are better return on capital versus your own Class C redevelopment, things like more home health care M&A or maybe even buybacks at the current valuation?

Yes. No, Kyle, thanks for the question. Yes, I think a few things I'd say on that. We do have flexibility as we pointed out in the prepared remarks. We think we're in a very strong position from that perspective. As we have said, we do think there is a significant opportunity in home care, in particular, on the roll-up there and continued M&A just given the fragmentation in that market. So we'll continue to pursue those opportunities. We have, in the last 2 years, increased the dividend. So we'll be looking at that again early in the first quarter with our year-end results, and that's an expectation, I think we've created and will follow through on. So the question you asked about, would we do C-bed redevelopment on our own balance sheet. I think our first intent would be to always drive it through the joint venture and drive the managed service revenue in that and keep that capital-light perspective, capital-light model going. I would not -- I'd say that it's not that we would never not do another project on our own balance sheet. But initially, at the moment, I think we've got a good pipeline going and certainly pushed through a lot of projects in partnership with Axium -- that have gone well. So I'd say that's our first priority to do development that way, but I wouldn't say it's an impossibility that we would consider it on our balance sheet. And your last part on issuer bid and shares, I'd just say we've been active in the past when we felt the share price didn't reflect sort of the prospects of the business, and we wouldn't be afraid to do that again if we thought that there was a disconnect to the fundamentals with the share price.

Okay. So it sounds like more home health care M&A is still among the priorities here for your capital. Would you consider doing more before you're fully done the CBI integration, especially given your Closing the Gap integration is done pretty soon and you likely have more capacity to integrate another target at that point?

We might consider that. We might consider an earlier acquisition, but we would want to be down the path in terms of the CBI integration. I mean, we've got a pretty good integration playbook. I was very happy with the Closing the Gap integration. There were no service interruptions. There was no increase in staff turnover. The whole thing went extremely smoothly, and we'll be using the same playbook for CBI. But I do want to acknowledge that CBI is 8x bigger. And so I just want to be very careful that -- we're well down the path, and we can see the end of that integration before we start taking on something else.

The next question comes from Lorne Kalmar with Desjardins.

Just wanted to talk a little bit more about the organic growth outlook for Home Health. And I know you said it can't go on like this forever, and I appreciate there's not a crystal ball. But could you maybe give us a rough idea of sort of how long you think this can carry on for? Is it another year? Is it 2 years? Just maybe to give us a bit better perspective on how we should be looking at this business over the next couple of years?

Well, Lorne, I have to caveat my answer by saying I've been wrong so many times in the past about this that I'm really not gaining confidence in my ability to predict. We -- I talked about the 6% to 8% range that we continue to talk about, which is really what the demographics are suggesting. And the LTC bed growth is not keeping pace. So the waiting list in Ontario, for instance, has been creeping up, over the last while. So it shows that that demand backlog is still there, but it is very hard to quantify. We really don't have good metrics around the sector to be able to tell us what to expect, how long to expect this. And part of it is because the growth that we're seeing is not just growth in the number of people we're serving. It's also growth in the number of hours that we're providing to those individuals. So we're seeing a higher acuity group of patients, presumably the people that we would otherwise have been managing in a long-term care setting. So you've got both a volume element in terms of the number of people that we're treating, but also a volume element in terms of the intensity of the needs of those individuals. And we really don't have a good crystal ball for being able to see when that will slow down. And of course, there's no magic to the 6% to 8% either. That's our conjecture. And perhaps that's an underestimate.

Okay. I guess maybe -- and I guess you alluded to it, like what do you think really needs to happen within the system for volumes to kind of normalize? Like is it the LTC, the shortage of LTC beds abating? Like what do you think really needs to happen?

Well, I think the best barometer of what's happening in the health care system is the emergency departments in the hospitals because they're the entry point to acute care, which gives you a sense of whether people are able to exit acute care. There's a lot of people that are in beds in hospitals that belong in other parts of the system, but there's no place for them to go, particularly long-term care beds. And over the summer period, there were a lot of news reports that the usual kind of lightening of load in emergency departments in hospitals in the summer didn't happen this year. So we do have some anecdotal evidence that the acute care part of the system is still under stress. So I think that's probably the best place to look. It's that whole hallway medicine issue in emergency departments, that is the best measure of stress on the system.

Okay. That's very helpful. And then maybe just switching over to back to acquisitions. As you're evaluating targets, what are the criteria you're looking at in acquiring? Is it geographies? Is it maybe services that you don't offer that could enhance the ParaMed service offering? How do you sort of weigh those? And what are you looking for?

Yes, Lorne, on the home care side, a few kind of key things that we follow. So one is, I think we've said and demonstrated, I think, with the deals we've done -- the 2 deals we've done to-date. We're looking to buy growth platforms when we're looking to buy. So we don't -- we're not just trying to pile volume into the same districts. We're looking for platforms where we can bring our -- we're not there today. We can bring our back office and technology and scale to it. So we are looking for -- in the case of CBI and CTG, you saw us buy new geographic markets. It gave us a presence in the West with CBI and Nova Scotia with CPG and CBI. With CBI, it gave us a new market vertical with the specialized commercial community service business. So that group home business, it's new to us. That gave us another new kind of market way to come to market. So we're looking for areas where we don't service. You'll recall our business is really 3 kind of service levels. There's the PSW -- personal support work, there's nursing, and then there's the therapies or allied parts of the business. So we'll look for markets where perhaps we have a strong PSW presence, but we don't do any nursing. And we'll look for a regional player that has a good concentration in nursing and we infill it in, say, in the Ontario context. Other markets, other geographies are of interest. We are in Nova Scotia, but there's the Maritimes. We now have a strong presence in Alberta. We have a toehold back in Manitoba and B.C. to think about. So it's really geography or service line augmentation, I'd call it, as opposed to just chasing volume in sort of a district or a region where we're already quite strong or have quite a lot of depth in a particular service type. And there seems to be a lot of before. Yes. It's still very fragmented. We've spoken about that in the past. Probably not another deal the size of CBI, but there's regional players that would be -- that would look a lot like Closing the Gap size, and there's dozens and dozens of small players that have a niche that might fit nicely with us. And notwithstanding Mike's earlier comments about when will we next look at something, CBI and integration is key, but it takes a long time to get to a point where you're going to execute on a deal, and we do have a pipeline, and we'll always be opportunistic as well in looking at what may come to market versus us seeking something out that we think would fit well.

The next question comes from Jonathan Kelcher with TD Cowen.

Just want to go back to the organic growth in home health care. Is staffing still really the sticking point? For example, if you could grow your staffing levels by 20%, you could -- just the demand would just be there for it?

No. I would say that the staffing constraint really passed 2 or 3 years ago. So for the most part, we are accepting all the referrals that are coming to us from government and able to fulfil them. The exception to that is in certain rural and remote parts of the provinces that we serve, where we have still constraints on staffing in the north and in areas of the provinces where it's not an urban environment. So our client population is very widely dispersed. But those constraints are really not very material from a volume perspective. Those are also areas of our business where the volumes tend to be quite low. So overall, I would say, no, there's not a constraint from a health human resources perspective. It's a matter of the volume of referrals that are coming our way.

So in other words, the referrals and I guess, just more hours per patient are really what's driving 18% year-over-year organic growth?

Yes. And our understanding of this, John, is that -- that growth is the whole market growing. So we're not taking market share from others. This is an expansion of the overall home care sector.

Okay. That's helpful. And then just secondly, on the LTC redevelopments. In your prepared remarks, you made some mention of just higher interest rates and construction costs. Have they increased enough that any of the projects you're looking at are no longer really feasible?

Yes. Jonathan, I'd say -- yes, I'd say it's -- we're just watching it, right? There's a lot of moving parts over the last few months with the tariff and counter tariff. Now with the election results, like I'm not sure what happens there. So we were definitely starting to hear about the impact of those counter tariffs increasing our structural steel and our kitchen equipment and HVAC equipment for new homes. We all have a view -- there's different views out there on rate increase environment. So what I'd just say is that we're just watching it. There's a lot of uncertainty right now. We'll see how the election thing in the states may change the perspective. And I think the truth is we're advancing all of these projects. We're committed to doing the pipeline. It may just happen at a different cadence if perhaps some of these factors we're watching had an impact. But the reality is until you tender a project, you do not have your final answer. You need to get to tender stage. So we are committed to driving all of our projects through to what we call shovel-ready and tender. And I think we've said this in the past, the project that we started in Sudbury last year or that project, we had on the books for a few years, and we waited until the tender results and the costs align where it made sense to proceed. So we're just watching it. I think the sector is watching it. And it's hard for us all to know how evolution of interest rate environment and the cost side could -- what that looks like over the next 6 to 8 months. I think it's -- there's a lot of uncertainty there. So we're just watching it.

The next question comes from Tom Callaghan with BMO Capital Markets.

Maybe on the Home Health side, just kind of curious for your thoughts and perspectives. There's been a bit in the press over the last couple of weeks just in terms of the federal government and provincial governments with respect to certain health care funding and transfer. So just interested in any of your thoughts in terms of implications for kind of the Home Health business at kind of over the medium-term basis on that piece.

Sure. Sure. Happy to address that. First, it's important to understand that Extendicare's contracts are all with the provinces. So none of our funding comes from the federal government nor are any of our contracts with the provinces contingent on federal funding. So federal health transfers to the provinces are a regular feature of the federal provincial political dynamic and obviously receive wide attention because they're the largest transfer of funds between the levels of government. So in theory, the magnitude of the transfers could affect the fiscal capacity of a provincial government to invest in health care, but the practical reality is that demand for service is really driven by demographics. So we remain the lowest cost option for meeting the needs of the aging population. So that keeps us front and centre in terms of dealing with that demographic challenge. I think any attempt to constrain the growth of community services would cause unmet demand to back up into hospitals, like I was talking about earlier. And so that's the highest cost, at least politically palatable option for dealing with the aging population. So all that said, I don't think that the federal provincial negotiations around transfers are really, in any way, an indicator of the demand curve for Extendicare.

Okay. Appreciate that. Maybe a bit of a housekeeping one on Home Health. David, nice to see the margins improve there on a sequential basis. And kind of obviously, you've talked about some of the reasons in Q2. How best to think about that cadence of recovery into '27 on the margin front today?

Yes. I think as we've said on margins, there's a little bit of -- in Q2, I think we did talk about that we had put some extra costs and investment in the back office because of the significant demand. And as we indicated, that there's a bit of a step function that happens in that back office. So we've put some costs back and resources in there. So -- and it played out as expected. We had good sequential growth in the quarter, and you can see that when the growth comes, there's some margin. So I think going forward, we do believe this is a 13% margin business that has an opportunity to grow over time, 50 to another 100 basis points. I think we've said that a number of times. Obviously, the trajectory of that is -- will be driven by the volume discussion we just had. And sort of just trying to crystal ball kind of the volume growth over the medium, long term, the rate increase -- rate increases keeping pace with wage inflation is key, but we firmly believe and demonstrate another example this quarter. Alberta gave us the rate increases, albeit later in the year, but they come. So the timing and quantum of rate increases can affect the patterns. But again, over the medium- to long-term, I believe this is a 13% margin business that has opportunities to grow both through organic growth and volumes. And there's the synergies coming when CBI is fully integrated. We've talked about those would be sort of more reflective in '28 than in '27. That's more of a -- when we get the full integration done. And all of that is the current picture. And we do expect to be active on the M&A front in home care in the future, which would augment that. So we still firmly believe that that's the outlook. I think as we go into '27, it's -- there's that 50 to 100 is that's more of a -- that is not a 2027 thing. That's more over the next couple of years as we get the integration done. And certainly, in the Ontario context, we expect rate increases in the future. So that will help as well. So...