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Edited Transcript of CSH.UN.TO earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q3 2019 Chartwell Retirement Residences Earnings Call

Mississauga Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Chartwell Retirement Residences earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karen Sullivan

Chartwell Retirement Residences - COO

* Vlad Volodarski

Chartwell Retirement Residences - CFO & CIO

* W. Brent Binions

Chartwell Retirement Residences - President, CEO & Trustee

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Conference Call Participants

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* Brendon Abrams

Canaccord Genuity Corp., Research Division - Analyst of Real Estate

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Himanshu Gupta

Scotiabank Global Banking and Markets, Research Division - Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Pammi Bir

RBC Capital Markets, Research Division - Analyst

* Tal Woolley

National Bank Financial, Inc., Research Division - Research Analyst

* Troy Raymond MacLean

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Chartwell Retirement Residences Q3 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residences. Please go ahead, Mr. Binions.

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [2]

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Thank you. Good morning and thank you for joining us today. There's a slide presentation to accompany this conference call available on our website at chartwell.com under the Investor Relations tab. Joining me are Vlad Volodarski, Chief Financial Officer and Chief Investment Officer; and Karen Sullivan, Chief Operating Officer.

Let me remind everyone that during this call, we may make statements containing forward-looking information and non-GAAP measures. I direct you to our MD&A and other securities filings for information about the assumptions, risks and uncertainties inherent in such forward-looking information and details of such non-GAAP measures. These documents can be found on our website or at sedar.com.

Our results in the third quarter of 2019 have been impacted by new competition, particularly in certain Ontario and Québec markets. We expect this impact to be moderated in 2020 and future years by the expected growth in demand for senior living accommodation, resulting from the accelerating growth in population of people over the age of 75 years.

We are well on our way to executing on our 5-year strategy with the rollout of our newly developed customer experience training programs to our 1,200 leaders and to our front-line staff in late 2019 and early 2020. Continuing our successful development program in Q3 '19, operations commenced at Kingsbridge Retirement Community in Kingston, Ontario, which is comprised of 165 ILF and AL suites and is currently 41% leased.

In 2019 to date, we completed sales of 2 non-core (inaudible) and entered into a definitive agreement to sell 4 noncore long-term facilities in Ontario. Closing of that sale is expected in early 2020, subject to the receipt of regulatory approvals.

Our financial position remains strong, as you can see on Slide 4. At September 30, 2019, our liquidity amounted to $384.5 million, which included $17.3 million of cash and cash equivalents and $367.2 million of available borrowing capacity on our credit facilities. In addition, at September 30, 2019, our cash -- our share of cash and cash equivalents held in our equity accounted JVs was $7.1 million.

The interest coverage ratio on a rolling 12-month basis remained strong at 3.2% at December 30, 2019, consistent with -- at September 30, 2019, consistent with December 31, 2018. Our indebtedness percentage calculated using historical cost of our assets was 50% at September 30 '19, and our debt to capitalization ratio was 42.4%. Net debt to adjusted EBITDA ratio increased to 8.1x compared to 7.8x at December 31, '18.

We continue to build value in our real estate portfolio through portfolio and asset-managed programs, development of new properties and opportunistic acquisitions, as shown on Slide 5. These value-add activities are supported by extensive industry and market research and by rigorous risk management practices. Work continues on our development pipeline of 1,005 suites with 4 projects, 359 suites in construction in 4 projects, 646 suites in predevelopment. These projects are expected to generate meaningful development returns and allow us to grow our property portfolio with new, efficient, state-of-the-art residences. We continue to add future projects to our development pipeline. In addition, we have options to acquire close to 2,800 additional suites in Québec through our partnership with Batimo.

I'll now turn it over to Karen Sullivan, our Chief Operating Officer, to talk about some operational initiatives she and her team are working on. Karen?

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Karen Sullivan, Chartwell Retirement Residences - COO [3]

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Thanks, Brent. Turning to Slide 6. Despite the competitive landscape in several markets, we are starting to see some positive signs that our sales and marketing strategies are effectively positioning our homes for future occupancy gains. This includes improvements to important leading indicators such as initial contacts, which increased 9% quarter-over-quarter. We also saw improvement in our personal visits this quarter compared to our last 2 quarters.

Our September 22 open house generated almost 1,000 new initial contacts, an increase over our last 2 fall open houses and stronger than our 2019 spring open house, which is traditionally the higher attended of our 2 events each year. Our contact center forwarded 6,319 leads to our homes, an increase of 33% from Q3 last year. They also successfully scheduled 3,623 personal visits, an increase of 73% from Q3 2018, due in part to the addition of a new feature where prospects can utilize an online form on our website to schedule their own time to visit their chosen home.

In an effort to ensure that our sales process is effective and being adhered to, we utilized a third-party company that completed 30 mystery shops in Chartwell Homes and 23 in competitor homes in Q3. Based on these findings, on average, Chartwell outperformed its competition in most categories. In order to finish the year with a strong initial contract pipeline that can be utilized now as well as into 2020, we continue with a multimedia marketing strategy at the national and provincial level. This included the launch of our new campaign, Let's Live Together, in September across media platforms such as TV, newspaper, radio, digital and magazine, along with supporting waves of direct mail for homes and areas of the country with higher levels of competition.

Turning to Slide 7. In Q3, we received the results of our employee and resident satisfaction survey results. I am pleased to report that we met our employee engagement target for 2019, increasing our score from 47% very satisfied employees to 48% as we continue on our goal to get to 55% very satisfied by 2023. In addition, we are well on our way to our 2023 goal of 67% very satisfied residents, having moved an impressive 5 percentage points from 58% to 63% in 1 year. We remind everyone that we only look at the top box score for both employee engagement and customer satisfaction. We are not satisfied with a rating of satisfied, only very satisfied.

I believe this tremendous year-over-year increase is a result of our focus on the customer experience as our unique value proposition over the past several years. This has ramped up with our recent investment in the development of a Chartwell specific training program that was rolled out to our corporate office this summer and to all 1,300 general managers and their management teams over the past 6 weeks. This next step is to -- sorry, the next step is to use our newly hired directors of customer experience, who will be taking this training directly to our front-line employees on a regular basis in our retirement homes. We have no doubt, based on the feedback, that this will increase our referral base and help us with both occupancy and recruitment.

I will now turn it over to Vlad to discuss our Q3 2019 financial performance.

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [4]

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Thanks, Karen. As shown on Slide 8, in Q3 2019, net loss was $0.8 million compared to net income of $9.1 million in Q3 2018, primarily due to a write-down in the carrying value of 2 of our properties, higher direct property operating expenses and finance costs, partially offset by higher resident revenues, deferred tax recoveries and gains on disposal of assets.

For Q3 2019, FFO was $53.6 million or $0.25 per unit compared to $53.3 million or $0.25 per unit in Q3 2018. The following items impacted the change in FFO: higher adjusted NOI of $1.1 million, consisting of a $1.2 million increase in same-property adjusted NOI, partially offset by $0.10 million decrease in contributions from acquisitions and developments; lower G&A expenses of $0.8 million and other items combined $0.10 million, offset by higher finance costs of $1.6 million. Same-property occupancy was 89.6% in Q3 2019 compared to 91% in Q3 2018.

Turning to operating platform results. As shown on Slide 9, in Q3 2019, our Ontario platform same-property adjusted NOI increased $0.5 million or 1.4% and rental rate increases in line with competitive market conditions and higher ancillary revenues were partially offset by lower occupancies and higher staffing costs and office and general expenses. In Q3 2019, same-property occupancy was 83.9% compared to 85.9% in Q3 2018. In Q3 2019, our Western Canada same-property adjusted NOI increased $0.6 million or 4.6%, primarily due to rental rate increases in line with competitive market conditions, partially offset by lower occupancies and higher staffing costs, as shown on Slide 10. Occupancy in Q3 2018 was 95.2% compared to 96.2% in Q3 2018.

On Slide 11, you will see our Québec platform same-property adjusted NOI decreased $0.10 million or 0.6% in Q3, primarily due to higher staffing costs, office and general expenses and lower occupancies, partially offset by rental rate increases in line with competitive market conditions and lower property tax expenses as a result of the successful appeal of certain prior year's assessments. In Q3 2019, same-property occupancy was 90.7% compared to 92.3% in Q3 2018.

As shown on Slide 12, our Ontario long-term care platform same-property adjusted NOI increased $0.2 million or 2.5% in Q3 2019, primarily due to higher preferred accommodation revenue and lower repairs and maintenance expenses. Weighted average occupancy in the same-property portfolio was 98.8% in Q3 2019, compared to 98.4% in Q3 2018.

And I will now turn the call back to Brent to wrap up.

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [5]

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Thanks, Vlad. We believe that by focusing on enhancing our resident experience in our homes by delivering exceptional services and care to our residents, we will generate strong financial results and long-term sustainable value creation for our unitholders.

We recognize that only highly engaged employees can deliver exceptional services and quality care to our residents, and we continue to make significant investments in recruitment, training and development of our team members. We continue to improve corporate support delivered to our auditing team, including the implementation of new technology solutions to better understand our customers, communicate with our employees and reduce administrative time commitment in the field.

We have put the infrastructure in place to successfully execute on the significant development program we set for ourselves for 2019 and beyond, as we are confident that these new state-of-the-art properties will meaningfully contribute to enhancing the quality of our real estate portfolio and provide strong value creation for our unitholders over time.

Thank you for your time and attention this morning, and we would now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Brendon Abrams from Canaccord Genuity.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [2]

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Brent, in your opening remarks you speak about the expectation for kind of a balancing in the market or kind of competition moderating in 2020 based on growing demand. I'm wondering if you could just maybe speak to the other side of the ledger in terms of supply and maybe your expectations for the supply side heading into maybe 2020 or 2021?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [3]

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Certainly. We, as you know, are active in many markets across the country on development and we monitor all the markets that we're in. We do see a slowdown in expected starts or expected openings, more accurately, really by the back half of 2020. Construction costs and land costs keep rising, making it more difficult to do development in some markets and we ourselves have begun to look at some of our projects and sold some of the stuff down. And we see this happening kind of on a somewhat broader basis across the market. So our view is that supply will begin to moderate by the back half of 2020 as demand continues to grow.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [4]

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Right. Okay. And -- but I know the -- you disclosed in your MD&A, there's about $13 million of NOI opportunity on the stabilization of, I guess, 5 recently completed development. Just wondering if you could you remind us again on perhaps maybe a time line or expectations to achieve, call it, stabilized occupancy?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [5]

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Sure. It's actually a bit more than $13 million. These 5 properties contributed negative $2 million of NOI year-to-date in 2019, and our expectation that upon achievement of stabilized occupancy of 95%, these 5 properties will generate about $13.4 million of NOI at our share. So the net impact is probably a bit higher than $13.4 million.

These properties should stabilize over the next 2 years and different time frames for different properties, but over the next 2 years, all of these should be stabilized.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [6]

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Okay. And maybe just last question for me. I know Ottawa has kind of been a softer market for all industry operators there. Can you just remind us your exposure in that market specifically?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [7]

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Yes, we have 13 properties in the Ottawa market and certainly been impacted by the oversupply in that particular market.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [8]

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And so how much of NOI or percentage of suites was that?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [9]

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So 13 properties is about just under 10% of our overall retirement portfolio.

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Operator [10]

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The next question comes from Jonathan Kelcher from TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [11]

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Just sticking with the supply or the impact of supply, it sounds like you expect it to sort of even out near the back half of next year. How should we think about Ontario occupancy over the next couple of quarters?

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Karen Sullivan, Chartwell Retirement Residences - COO [12]

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Well, new supply has had more of an impact than we expected in Q3. But that said, we are seeing a real turnaround in our leading indicators, which is a good sign. So we saw an uptick in initial contacts and personal visits, and our sales calls are definitely up. Our online traffic is up. So we really do feel that the sales strategies that I've been talking to you about the last few quarters are starting to have an impact.

So everything from those cluster sales strategies that we're using in the competitive markets, the advertising campaign that we just launched this fall, we had a really successful open house. Our C2C, our contact center that we now have agents in Montreal as well as here in Mississauga, we're going to have agents in Vancouver very soon and those business B2B strategies where we're interacting with realtors and financial people as well as the more traditional kind of health care influencers are all kind of coming to bear, are all starting to come together, and that's why our leading indicators are up. So we're certainly feeling better about our future occupancy.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [13]

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So hopefully, Q3 '19 is a bottom for it?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [14]

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Yes.

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Karen Sullivan, Chartwell Retirement Residences - COO [15]

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Yes.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [16]

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Okay. And then on the -- just switching gears a little bit. On those -- the 5 new properties, and I guess this is more of a general question, and hopefully, you can answer it. But what occupancy is a home generally FFO breakeven?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [17]

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Well, it really depends on the size of the home. Rule of thumb used to be 55%, it's now a bit lower than that because the homes are bigger, but let's say, 50%.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [18]

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Okay. So then what -- and how have the -- I guess you gave occupancies for 4 of the developments that opened this year, how have they trended since the end of the quarter?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [19]

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The -- I mean, they are leasing up. So there's always increases in the occupancy. I cannot tell you exactly how many units they're up, but they're up as a group, for sure.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [20]

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Okay. And then just lastly on the Batimo acquisitions that looks like you're going to do in Q1 next year, would that be 80 -- the typical 85% that you would look to buy?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [21]

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Welltower has a right to participate in 1 of those acquisitions. So if they do participate, then they will take half of our 85% of that 1 home. The other home, we will be buying 85% in.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [22]

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Okay. And would it be fair to say that the cap rate would be somewhere in the low 6% range?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [23]

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Yes.

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Operator [24]

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The next question is from Chris Couprie from CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [25]

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Just following up on the Batimo questions. Does Welltower have the opportunity to participate in any of the other future Batimo projects?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [26]

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Yes. There are 2 other projects where they have an opportunity to participate.

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Chris Couprie, CIBC World Markets Corp. - Analyst [27]

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Okay. And the value that you thought was the value for those 2 that you'll be likely purchasing next quarter, it increased sequentially. Is that like kind of a final number now?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [28]

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We are still in negotiations with respect to the purchase price. As soon as we are done these, and we have a firm deal, we'll announce that number.

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Chris Couprie, CIBC World Markets Corp. - Analyst [29]

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Okay, got it. And then just I have a question on your leasing. In terms of the different types of lead sources, open house, online and so on, can you maybe give us an idea of the type of conversion rates for the various sources of leads?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [30]

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We -- obviously, somebody who walks in, that's the highest conversion ratio. After that, referrals, calls and refer -- people -- depends on how you were categorizing it, but direct calls would be next. But people who come with a referral that is, by far, the highest, and that's our biggest number of move-ins are people with referrals of some sort. So walk-ins, calls, calls include C2C, direct calls to the homes. What's after that?

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Chris Couprie, CIBC World Markets Corp. - Analyst [31]

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So open houses and...

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Karen Sullivan, Chartwell Retirement Residences - COO [32]

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Online.

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [33]

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Online is next, by far. Open houses are a smaller number, they're valuable, but they're a smaller number.

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Karen Sullivan, Chartwell Retirement Residences - COO [34]

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And I was going to add, it's why we're so focused on the customer experiences because the referrals are such a high conversion.

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [35]

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And just on average, just so you understand, half of the people who come visit us, half of the people who contact us, usually come visit us. And of those people, 1/4 usually move in. That's the rule of thumb, but different sources have different closing ratios.

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Chris Couprie, CIBC World Markets Corp. - Analyst [36]

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Overall, have closing ratios been falling?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [37]

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No. They've been actually introducing...

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [38]

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Fractionally, up.

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Chris Couprie, CIBC World Markets Corp. - Analyst [39]

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Okay. And then just kind of maybe getting back to the whole narrative around supply. In your preconstruction pipeline, a few of your projects, you've pushed out the expected completion date. Is that a function of you're trying to -- you're aware of your impact that those properties could have on the market? Or is there something else?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [40]

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No. The projects in construction, if the date is pushed out, it's because of the site-specific issues that caused the delay in construction completion. The projects that are in preconstruction, that will be the right observation, when we are reevaluating time of the entry and financial metrics of these projects. So it really depends on where the project is in the development cycle.

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Operator [41]

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(Operator Instructions) The next question comes from Himanshu Gupta from Scotiabank.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [42]

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Just going back to the occupancy question, so Ontario occupancy at around 84%. From your historical experience, at what level does the occupancy bottom out? I mean, this is not the first time you have seen supply, I mean, wave of new supply in the market.

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [43]

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No, I would get based on our experience and on where our leading indicators now sit in the marketplace and the traffic flow as it's moved back up. We believe that this is probably at the bottom of the trough and that it should start back up now.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [44]

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Sure. So on the mid-80s or like low-80s, is that really where we can see it's troughing out and we're seeing some kind of recovery?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [45]

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Yes.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [46]

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Okay. And then you mentioned in the MD&A and your remarks as well that you were kind of surprised by the impact of new supply. So I mean, my question is, were you surprised by the service levels and the product quality of the new product? Or is it just the sheer number of units being delivered is much more than what you thought of?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [47]

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We are not surprised by the number of units that were delivered. What was more than what expected is the impact that it had on the properties that we operate. And it's a combination of the service offering that the new properties offer and the quality of the new construction and how much impact it had on the existing property operations, not just ours, but everybody else who's in the markets.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [48]

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Sure. And will you consider giving like more incentives than before? I mean, given the competition there?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [49]

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No, we do not actually and that's because we're, by far, the largest player in the retirement marketplace in the country. And any time you -- our experience tells us at any time you engage in giving away part of your rate other people have to match, and it just becomes a race to the bottom. So we find it rare when we'll do that now. It might be on a very localized, one-off occasion in a site, 1 site, but it is not something we do on any broad-based basis at all.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [50]

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Got it. And just on the Toronto property, the Sumach, I mean, it's leasing up, is it as per your expectations? And in general, how is the product being received by the market?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [51]

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The lease-up is a little slower than what we originally expected. We're close to 50% occupied right now. It is a new product in the marketplace. So there's some education that needs to happen. We see quite a bit of traffic and interest in this product, and we're confident that we're going to meet our underwriting expectations and catch up to our lease-up projections.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [52]

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Got it. And maybe just switching gears on the forward purchase regarding the Edmonton property. And I think the stabilized cap rate is around 6.5%. What's your stabilized occupancy? And will you have underwritten in how many years? And probably a cap rate of around 6.5%, has the market moved since you got into this contract? I mean, the bond yields have come down, but the new supply has gone up. So any color on the cap rate there?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [53]

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Okay. So let's start with stabilized occupancy that we expect to achieve in this home is 95%, 96%. The cap rates, the purchase price has been negotiated at the time that we enter in this forward purchase agreements. So the changes in cap rates don't have any impact on the price that we're paying. Overall, cap rates have compressed across the country in the last 6 months or so according to CBRE reports, particularly in the markets like Toronto, Vancouver and Montréal, to a lesser degree.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [54]

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Sure. And maybe just last one for me, on the operating expenses. I mean, they were up, I think, around 2.7%, partly or mainly due to higher staffing costs. So how should we see that next year in terms of property expenses expectations?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [55]

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As always, our targets, and we think we can achieve it is to deliver 3% to 4% same-property NOI growth on a portfolio basis with respect to expenses. The expectation is that they'll probably continue to be in the same kind of range of 2% to 3% a year. We do see some higher staffing costs in some of the markets where there's a tight labor market and attracting people is hard. So we incur some over time and in some cases, agency costs, particularly in places like Québec City. But generally, for the portfolio overall, being as diverse as it is at Chartwell, our expectation is to have about 2% to 3% expense growth in the year.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [56]

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Yes. And 3% to 4% same property NOI growth, right? Did you mention that? 3% to 4%?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [57]

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Our expectation, yes.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [58]

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For next year. Okay.

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Operator [59]

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The next question is from Troy MacLean from BMO Capital Markets.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [60]

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Just given the cost inflation over the last couple of years, and you mentioned that having an impact on new supply in the next couple of years. Would you say there's a gap between where market rents are at right now and the costs needed to bring on newer projects to start, like, basically put a shovel in the ground today?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [61]

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Yes, given the acceleration in construction costs and the fact that people always have been building to the top of the market, nobody is really building to the bottom end of the market in terms of the pricing. I think there is gap in some markets with respect to how much it cost to build and how much people can achieve on rents.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [62]

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How wide would it be, would it be like equal to a couple of years’ worth of rent growth? Or is it like has it opened upwards but much wider than it has been in the past?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [63]

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Well, I mean, if you look at the acceleration of construction costs over the last couple of years, they're probably in 30% range. So rents have not grown at 30% -- by 30% in most of the markets. So it's probably wider than just 1 or 2 years of normal rent increases.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [64]

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That's good color. And then just on the -- with the supply overhang, I know you mentioned that you guys are not getting more aggressive on rents because it's kind of a zero-sum game. But are you finding competitors with a lot of product to lease-up, getting more rents, getting more aggressive on either rents or marketing versus prior quarters?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [65]

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For the most part, no. People -- most of the develop -- what is actually beneficial is most of the development being done now is by experienced operators as opposed to what we saw 6, 7 years ago when it was a lot of it was done by developers. This is experienced operator, all of whom understand the severely negative impact on long-term value caused by underleasing, underpricing your property just to lease it up, it creates a significant gap in value. And so because most of this development is being done by experienced operators, we are seeing very little of it.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [66]

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So most of the people doing building would be -- it's not merchant builders looking to sell. They're more building for their own accounts. Is that a fair comment?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [67]

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Absolutely, right. At this time, in this cycle, that's the case.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [68]

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And then, Brent, you mentioned the quality of new supply having an impact. And I was just kind of curious, is that just a newer product? Or is it like -- are there anything -- are there any differences between what's getting delivered today versus kind of more of the existing product, either like layout or services, that is having an impact?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [69]

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No, it's mostly the shiniest, newest building is the one that attracts most.

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [70]

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Initial interest.

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [71]

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The initial interest from the daughter of the resident who is doing the searching. That's just the way it is. So the newer is always better in the eyes of the people that are first looking at it. So it's why we view referrals as so critical, great service actually is the differentiator in the quality of life of a resident. So it's a matter of continuing down the path we're on. But that is -- it's no question, it's the new look that attracts the attention initially.

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Operator [72]

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(Operator Instructions) The next question comes from Brendon Abrams from Canaccord Genuity.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [73]

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Just a follow-up question. Just curious whether you guys track a percentage of new residents that own or previously owned their home versus rent, rented? I'm just curious, as we've seen a tight kind of rental market here in Canada.

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [74]

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We do not have that information. We can't tell you the precise number of residents that come from rental versus owning. We do know that -- our anecdotal evidence is the vast majority come from owning, but we don't track that.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [75]

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Okay. The second would be, wondering if are you guys able to quantify kind of the brand value of Chartwell? You're the largest operator in the country and one of the few probably with brand recognition. I'm wondering whether you are able to quantify in terms of benchmarking, like if you had a property next to an independent operator, is there -- for the same asset and service levels, is there a premium you are able to charge? Or is the competitive advantage really in probably just increasing the occupancy a little (inaudible)

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [76]

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That is very hard to quantify. Sorry. We do track brand awareness across the country, we would be significantly higher than our competitors. So that means people know our name before other names. We do know that in their most research, people will only visit 3 properties, having your brand out there is pretty important. We know if you show up at our door, 12% of people are going to move in. So we know it is some advantage, but we cannot quantify that.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [77]

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Okay. And that's helpful. And then just last question for me, I know we speak a lot about supply in some of the oversupplied market, what would be maybe 2 or 3 of your kind of strongest markets that you're seeing right now?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [78]

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All of B.C.

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Karen Sullivan, Chartwell Retirement Residences - COO [79]

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Southwestern Ontario has had a strong year for sure. So Windsor...

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [80]

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Southwestern Ontario for sure, pretty much everywhere in British Columbia. Would be some of the strongest markets.

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Operator [81]

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The next question comes from Pammi Bir from RBC Capital Markets.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [82]

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Just maybe coming back to the same-property NOI discussion for 2020, it sounds like BC should be quite strong. But can you provide some color just in terms of the 3 overall regions, how that might look for next year?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [83]

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Our expectation that all 3 regions will show some growth. And that's the beauty of having a diversified portfolio like we do, where if somebody underperforming, there's always an opportunity for somebody else to outperform. So at this point, we are not prepared to give you the geographical breakdown but our expectation is that we should deliver 3% to 4% same-property NOI growth on a portfolio-wide basis.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [84]

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Got it. And then maybe just lastly, on the 2 properties where you took the write-down in Ottawa, how do they compare to the rest of the Ottawa portfolio? And what maybe made those unique in terms of taking the charge there?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [85]

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These properties we felt were overpriced in this particular market. So in order to lease them up, we decided that these need to be repriced. So they are somewhat different than the rest of the properties in that market.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [86]

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And so the occupancy, I take it was considerably lower than the rest?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [87]

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Yes, the occupancy is considerably lower than the rest of our portfolio in Ottawa. Our expectation is that we will be leasing up these properties with the new rates. But because of the competitive nature of the Ottawa market, it will take a little time to get there.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [88]

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And are these newer or older properties in the portfolio?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [89]

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They are kind of middle age properties.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [90]

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Middle age. Okay. So putting additional CapEx or maybe some upgrades wasn't going to be enough to, I guess, get them to -- I guess, stabilized level a bit sooner?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [91]

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No. They're well maintained, they don't need additional capital. They were just overpriced in the market.

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Operator [92]

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The next question comes from Tal Woolley from National Bank Financial.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [93]

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Just wanted to ask, how have you refined your response to new products, say, over the last 5 years? Like there was an earlier discussion sort of about incentives and sort of refusing to kind of participate in that game in the past, like does that sound like one thing you learned. Is there anything else that you sort of learned in terms of negotiating a response to new products?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [94]

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Sure. We try and get out in front of -- on the CapEx side, a little earlier, when we see new competition coming. Suite turn, suite upgrades, we have a much more refined suite upgrade plan. And we -- for all our properties than we ever had before, where we focus our dollars, accretive upgrades to properties all of these, we do a pretty significant review of every single property every single year and where we're going to allocate our accretive dollars into the properties, and we try and put a little more focus on properties that have new costs coming in close by.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [95]

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And then is there anything on the marketing side, too, that you say you've learned as well?

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [96]

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That's more local in terms of marketing dollars. It depends really in certain markets, we'll do cluster advertising. We started that. If we've got 4 or 5 homes in an area and the new one is coming in, we'll pool the dollars, put actually a few extra dollars in from our broader marketing program, and spend a little bit more money in those markets to compete with the new build.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [97]

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Okay. And of your total marketing budget, like how much are you spending right now on the sort of corporate branding projects? And then how much is sort of spent locally?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [98]

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Most of the marketing budget is controlled centrally. Now with -- there's a new age. So a lot of stuff is being done online. So the advertising benefiting individual properties, but we control it centrally. So that's where most of the allocations are going. So we're doing online, we're doing advertising, as you could see on TV and newspapers. Some of it is done with regionally for specific properties in particular regions, but most of the marketing spend is controlled corporately.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [99]

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Okay. And just for an accounting purpose, that's mostly captured in your -- in the corporate G&A line?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [100]

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No, no. It will be allocated to the property as part of direct operating expenses.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [101]

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Okay, got it. And finally, just G&A, I think you talked earlier this year about expecting it to kind of ramp down in the back half of the year. Does that still feel consistent for Q4? And what sort of envelope should we be thinking about going forward?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [102]

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What we said in the beginning of the year that our expectation is that G&A will grow in line with inflation this year. We continue to believe that will be the case. Maybe a little bit lower because we adjusted the incentive-based compensation for our corporate people. And so that should be the expectation going forward, inflationary increases.

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Operator [103]

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(Operator Instructions) The next question comes from Chris Couprie from CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [104]

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Just a follow-up from me. Most of your properties are predominantly IL, ISL. I'm just wondering if you've noticed any occupancy trends in the properties that have a greater mix of AL memory care? And on the kind of new supply, is there anything that we -- you can tell us about what the suite mix is for the new supply?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [105]

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No, we haven't noticed any particular trends. Trends are consistent from our perspective across all property types and the new supply there is market by market. So it's kind of hard to make general statements like this.

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Chris Couprie, CIBC World Markets Corp. - Analyst [106]

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Okay. And then in your -- the managed communities, I noticed it's kind of been -- it's -- you've been adding kind of property here, property there for the last couple of quarters. Is there anything just kind of happening in terms of the property management side?

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Vlad Volodarski, Chartwell Retirement Residences - CFO & CIO [107]

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No. The only managed properties that we would be adding are vacuum of properties that are opening. We do not add properties to our managed portfolio. We'd like to own and operate our own or we manage properties which we have options to acquire interest.

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Operator [108]

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There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Brent Binions.

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W. Brent Binions, Chartwell Retirement Residences - President, CEO & Trustee [109]

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All right. That wraps up today's conference call. Thanks again to everybody for joining us. As always, if you have any further questions, please do not hesitate to give us a call. Thank you, and goodbye.

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Operator [110]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.