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Edited Transcript of EXE.TO earnings conference call or presentation 1-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Extendicare Inc Earnings Call

MARKHAM Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Extendicare Inc earnings conference call or presentation Wednesday, March 1, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jillian Fountain

Extendicare Inc. - Corporate Secretary

* Tim Lukenda

Extendicare Inc. - President & CEO

* Elaine Everson

Extendicare Inc. - CFO & VP

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Conference Call Participants

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* Doug Loe

Echelon Wealth Partners - Analyst

* Michael Smith

RBC Capital Markets - Analyst

* Jonathan Kelcher

TD Securities - Analyst

* Yash Sankpal

CIBC World Markets - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, welcome to the Extendicare fourth quarter conference call. Please be advised that this call is being recorded. I would now turn the meeting over to Mr. Jillian Fountain, please go ahead Ms. Fountain.

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Jillian Fountain, Extendicare Inc. - Corporate Secretary [2]

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Thanks, Marie. Good morning everyone and welcome to Extendicare's 2016 fourth quarter and year end results conference call. With me today are Tim Lukenda, Extendicare's President and CEO, Elaine Everson your Vice President and CFO.

The year end results were disseminated yesterday and are available on our website along the supplemental information package. The audio webcast of today's call is also available on our website along with an accompanying slide presentation which viewers may advance themselves. A replay of the call will be available from noon today until midnight on March 17. Replay numbers and pass code have been provided on our website and on our press release. An archived recording of this call also be available on our website.

Before we get started please be reminded that today's call may include forward-looking statements regarding our future operations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We've identified such factors in our public filings with the Securities Commissions and suggest that you refer to those filings. As we discuss our performance is bear in mind that all figures are in Canadian dollars unless otherwise noted. With that I'll turn the call over to Tim Lukenda.

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Tim Lukenda, Extendicare Inc. - President & CEO [3]

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Thanks Jillian, and good morning everyone. Extendicare is pleased to report strong financial results for the 2016 year end and a platform for continued growth. Our mission is to help people live better and we will do this by growing our care and services across the spectrum of care to meet the needs of a growing Canadian senior population.

The largest provider of long-term care in the country, the largest home healthcare provider and with a growing private pay retirement platform in addition to our management and group consulting services we are uniquely positioned to meet the needs of Canadian seniors where and when they need us. This is both an opportunity and a responsibility we take very seriously.

2016 was a year of strong performance that demonstrated progress towards our goal to position Extendicare for growth across all of our business units. During 2016 we outperformed on all key measures. Revenue was up 13%, NOI up 9%, adjusted EBITDA up 11% and AFFO from continuing operations up 53%.

Importantly with me continued progress in key strategic initiatives that will further improve efficiencies, lower costs and improve performance. And we are executing on our plans to grow in all of our operating divisions. We believe the key building blocks are in place to develop sustainable shareholder value over the long term.

Turning first to our core long-term care operations which represent 58% of Extendicare's Canadian revenue. Our consistent performance was due to receiving inflationary increases -- inflationary rate increases in Ontario and Alberta. Strong preferred an overall occupancy levels and retro funding received by our LTC homes in the western provinces in support of increases in staffing and other operating costs. Overall NOI margins were 12.4% up from 11.7% over the prior year.

Turning to slide 6, as previously announced Extendicare is taken a leadership role in advancing the redevelopment efforts of our class C long-term care centers in Ontario. We have a lot of work ahead of us to complete our plan to redevelop through both renovation and new construction our 3287 beds from 21 centers into state-of-the-art A class centers at an estimated investment of over CAD500 million over the next decade.

We currently have seven applications submitted to the Minister of Health and we are working closely with all stakeholders to receive the necessary support and approvals. We're confident that 2017 will be a year of significant progress on the redevelopment front for the sake of our residents and their families who deserve greater privacy and the enhanced amenities that a new center will provide. With the recent addition of an experienced construction manager hired from EllisDon to lead our in-house team, we've expanded our capabilities to manage redevelopment projects for Extendicare and for third-party owner operators as they navigate the complex redevelopment program requirements.

Our private pay retirement platform under the Esprit Lifestyle Communities banner now consists of seven communities with 574 suites. In 2016 two communities acquired in the previous year achieve 95% occupancy up from 72% at the beginning of the year. And our new communities in lease-up are experiencing steady growth due to the efforts of our local teams and the establishment of a sales and marketing strategy for all of our communities involving new collateral materials, a comprehensive media presence in each market, both print and radio ads, and website development. The seven communities are expected to generate CAD11 million of NOI once stabilized.

In addition we have a further three communities with 354 suites under development creating an organic pipeline for continued growth that complements our acquisition strategy to grow our private pay sources of revenue. These projects under development are in Uxbridge, Ontario with 106 suites, Bolton, Ontario, 124 suites, and in Barrie, Ontario, also 124 suites. All of which will be open by the end of 2018 and are expected to generate an additional CAD7.4 million of NOI once stabilized.

In the fall 2017 we look forward to the opening of Douglas Crossing in Uxbridge, Ontario. We are experiencing a strong level of pre-opening interest in this 106 suite independent and enhanced living center in a growing suburban community on the northern edge of the GTA. And we are optimistic in achieving a fill-up with a number of deposits in hand and a high number of leads.

Turning to our home healthcare business on slide 10. ParaMed, our home healthcare business unit, represents 39% of our Canadian revenue. We are pleased to experience volume increases overall with particular growth in British Columbia and Ontario resulting from enhanced levels of provincial support for home care as a cost-effective and essential component of an effective healthcare system. Key initiatives to improve efficiencies, reduce costs and optimize delivery of care throughout our ParaMed network of 41 branches are underway and progressing well. Our home healthcare platform will enable the growth in the delivery of private pay home care services under our new ParaMed Select brand.

Our other Canadian operations, consisting of our Extendicare Assist management consulting services division and SGP purchasing partner network are strategic business units that deliver growth and profitability. SGP provides group purchasing services to over 430 third-party member sites in addition to Extendicare centers. In 2016 SGP experienced extraordinary growth in the number of member beds service to 40,900 up 38% year-over-year, demonstrating the value proposition we can deliver to third-party operators looking to reduce costs.

Extendicare Assist experienced a decline in the number of beds under management for third parties during the fourth quarter and the start of 2017 due primarily to the sale a significant number of beds by one of our larger partners to another operator who manages their operations in-house. We're confident that this normal course turnover will be offset in 2017 with an increase of 606 beds already committed and further growth expected throughout the year.

With that I'll turn things over to Elaine for a deeper dive on our quarterly and annual financial results. Elaine?

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Elaine Everson, Extendicare Inc. - CFO & VP [4]

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Thanks Tim, and good morning everyone. Now turning to slide 13. I'm going to begin with a review of our year-to-date results and on the next slide we will discuss our quarter-over-quarter results.

We had strong results. Revenue grew by CAD117.5 million or 12.5% with our acquisitions contributing CAD89.7 million of that increase and growth from same-store operations of CAD27.8 million or 3.4% being driven by funding enhancements, higher preferred accommodation revenue and increased business volume in our home health, management services and group purchasing operations.

Consolidated NOI of CAD130.1 million was up CAD10.3 million or 8.6%, reflecting NOI margin of 12.3% with Canadian operations up CAD11.9 million year-over-year and investment income from the captive down CAD1.6 million. Excluding the decline from the captive the same-store NOI improved by CAD7.3 million or 7.3% from the Canadian operations, resulting from favorable revenue and an operating expense adjustment of approximately CAD2.2 million as well as the factors driving growth in revenue just discussed. These were partially offset by unfunded cost increases in our home health operations.

Now turning to slide 14, I'll provide a quarter-over-quarter review. Consolidated revenue from continuing operations grew by CAD14.2 million or 5.4% to CAD276.8 million in the fourth quarter. Revenue increases from Canadian operations of CAD16.1 million reflected growth in same-store operations of CAD7.2 million or 3.5% and included favorable prior-period settlements of approximately CAD2.2 million. Our home healthcare and retirement acquisitions contributed CAD8.9 million to the increase in revenue.

NOI from continuing operations improved by CAD900,000 to CAD33.7 million this quarter. Same-store Canadian NOI improved by CAD4.5 million this quarter, while non same-store operations saw a decline in NOI primarily from accrual adjustments and lease-up losses of our new retirement communities.

Now I'll touch on the divisional results. Turning to slide 15. Our long-term care operations saw improvement in revenue of CAD14.4 million, or 2.4%, and NOI of CAD6.1 million, or 8.8%, to CAD75.6 million for 2016, and resulted in an NOI margin of 12.4%. Operations benefited from funding enhancements and increased preferred accommodation revenue as well as favorable revenue and labor adjustments. Our average occupancy was 98% in 2016 compared to 97.9% in 2015 and we've seen three years of consistent growth in our preferred occupancy.

Slide 16 provides the results of our home healthcare operations. We've achieved growth in revenue of CAD87.4 million, or 26.7%, and increased NOI of CAD3.7 million, or 10.1%, reflecting the full-year impact of home health acquisition which was completed on April 30, 2015.

The total NOI margins were impacted by the timing of the acquisition as 2016 includes operations for the first four months of the calendar year, which typically have lower margins due to staff holiday costs, whereas in 2015 results are included from May through to December. On a same-store basis, revenue growth was CAD12 million, or 6.1%, reflecting growth in hours of service. And the NOI saw a small decline being impacted by unfunded cost increases and funding enhancements being limited to a level compensating operators to cover mandatory PSW wage increases.

As Tim mentioned, a number of initiatives are underway which will improve efficiency and reduce cost in our home health operations. We expect margins to improve over the course of 2017.

Turning to our Esprit Lifestyle division, these operations continue to grow with revenue for 2016 reported at CAD15.5 million compared to CAD1.2 million in 2015. The NOI from the retirement segment was reported at CAD600,000 compared to CAD300,000 in 2015. This retirement platform now includes seven communities in operation which were all in lease-up during 2016, and three further communities are under development.

Two of the communities that were acquired in 2015 achieved occupancy of 95% at the end of 2016 and have been reflected as mature communities. All four of our communities acquired in 2015 are expected to see continued movement towards stabilized monthly NOI late in 2017. The purchase of four of the six acquired communities included aggregate income support of CAD6.8 million to be released to us during lease-up periods based on an agreed-upon formula.

The realization of income support is not included in NOI or net earnings but is included in determination of AFFO. By the end of 2016 we had realized a cumulative total of CAD6.7 million of the income support through our AFFO. Other communities are in fill up and range in occupancy from a low of 13% to a high of 89% at December 31 with an average as-at occupancy of 50%. Our average monthly revenue per occupied suite for the year was CAD4,480 with potential for organic growth as we established market rates on fleet turnover and enhancement of other services provided. And we would anticipate rental rate growth in the range of 3% to 3.5% during 2017.

Slide 18 reflects our management and group purchasing operations. For 2016 these segments contributed revenue of CAD18.5 million and NOI of CAD9.9 million compared with revenue of CAD15.5 million and NOI of CAD8.2 million in 2015. The improvement in revenue and NOI was driven by growth in the number of clients served.

Turning to slide 19, we're pleased to report an increase of CAD23.1 million to CAD66.7 million of AFFO from continuing operations representing CAD0.755 per basic share for 2016 compared to CAD0.497 per share in 2015. AFFO from continuing operations this year included CAD58.6 million of AFFO from our Canadian operations and CAD8.1 million from our remaining US operations.

The Canadian operations contributed CAD14.6 million of the improvement and included an increase in adjusted EBITDA of CAD5.8 million, income support on the retirement acquisitions of CAD5.8 million, as well as lower net finance cost, an increase in government capital funding and a reduction in maintenance CapEx, all partially offset by higher income taxes. The AFFO from the US continuing operations of CAD8.1 million this year included a favorable book to file adjustment of CAD1 million and the full-year impact being CAD7.5 million of interest received related to the deferred consideration in connection with the US sale transaction.

Subsequent to December 31 due to a challenging US skilled nursing environment impacting cash flow of most industry providers, we agreed to the restructuring of the deferred consideration due following the US still transaction to effectively delay receipt of substantially all of the amounts to be expected to be received in 2017 and approximately half of the 2018 scheduled [announce]. This deferral will have an impact on reported AFFO during that period. Payments are to be restored in 2019.

We also had a couple significant favorable developments related to our former US operations. The sale of our US IT hosting business was completed, resulting in net cash proceeds of $7.1 million and we released a further $8.4 million of reserve for self-insured liabilities of our former US senior care operations this quarter, bringing the total release this year to $11.5 million on top of the $3.8 million in the 2015 fourth quarter.

The release of reserves is reflected through discontinued operations in our statement of earnings and is not included in AFFO. However, any repatriation of cash from our captive increases our cash available for operations. Since the sale of the US operations we repatriated $5 million from the captive in August of last year. With this further release of reserves more is available to repatriate this coming year.

At December 31, 2016 the remaining accrual for US self-insured liabilities was CAD95 million or $71 million compared to CAD148 million or $107 million at the beginning of the year. The captive investments held for self-insured liabilities which are not included in our cash on hand were CAD136 million or $101 million this year.

Our maintenance CapEx spend was CAD12 million this year and we expect to spend in the range of CAD9 million to CAD11 million in 2017. The FFO effective current tax rate was about 15.1% this year compared to 19.1% last year. The effective tax rate each period is impacted by a number of items including deferred tax timing differences and book to file adjustments. We anticipate an average rate for 2017 of between 20% and 25%.

Our payout ratio for 2016 was 65% of total AFFO compared to 83% in 2015. And our payout ratio on AFFO from just our Canadian operations was 72% for 2016 compared to 96% in 2015.

Now turning to our financial position on slide 20. Our total long-term debt at December 31 was CAD513 million and cash on hand was CAD102 million. The increase in debt of CAD48 million in 2015 reflects new mortgages of CAD56 million secured on three of our acquired retirement communities. Construction financing related to our retirement communities under development and normal pay downs of existing debt. The net impact providing funds available for additional growth opportunities.

Cash remains relatively unchanged from 2015 and was primarily impacted by the acquisition of two additional communities early in 2016, the commencement of construction of the retirement communities, and a new financing on prior acquisitions as well as the sale proceeds from the IT hosting business. The rates on the new mortgages have been fixed at 3.11% through interest rate swap contracts for the full seven-year term.

At December 31, 2016 our weighted average interest rate was 5.2% and the weighted average term to maturity on the debt is eight years. Our debt to gross book value was 43% and EBITDA to interest coverage was at 5.4 times. With that I'll turn it back to Tim for his concluding remarks

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Tim Lukenda, Extendicare Inc. - President & CEO [5]

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Thanks, Elaine. Extendicare has a national platform for growth in senior care and services. We intend to expand our presence in both existing and new markets to meet the needs of a growing Canadian seniors population and their families searching for solutions to the challenges that every family faces.

We are confident in our strategy and we're committed to disciplined execution of the plan. We will grow across the spectrum of senior care and services represented by our various business segments. We're committed to quality customer-centered care and services. In doing this we will live of our mission of helping people live better while delivering sustainable value to our shareholders who have invested in this mission.

Now before we open the lines for questions I'd like to address an announcement made in our quarterly release. I've decided to take a personal leave from Extendicare from May 29 to September 17 of this year. After a nine-year assignment in the US, the last two of which I have commuted on a weekly basis back and forth to spend weekends with my family, I've decided that I needed the time to organize my personal affairs, recharge my batteries, spend time with family and prepare for relocating to Toronto.

For those of you may be concerned, I do not have a serious health condition of any kind, there is no crises and there is no conflict. I will be here working hard until after the AGM and I will be returning as CEO in September without fail. I will return to give my full commitment to Extendicare and continue to drive our strategy forward.

In the meantime, during my absence the company will not skip a beat. We have a strong cohesive management team that knows their role in achieving our 2017 goals. They are experienced professionals in which I have full confidence. And we are fortunate to have an experienced, capable and willing Board member in Donna Kingelin to oversee and provide support to the leadership team during this time. With that, we would be happy to entertain your questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

We have a question from Doug Loe from Echelon Wealth. Please go ahead, your line is now open.

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Doug Loe, Echelon Wealth Partners - Analyst [2]

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Yes, thanks very much, and good morning all.

Elaine, I was just reviewing the breakout of NOI for your home healthcare on slide 16. I'm inferring from the way that you break out total and same-store that residual NOI for Rivera's home care business was still substantially lower than PeraMed. At least that's what I assume you are referring to by same-store. You made that acquisition several quarters ago. So I was wondering what specific initiatives are still ongoing to lift NOI margins up to more ParaMed-like levels within Rivera? And I have a follow-up from that, thanks.

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Tim Lukenda, Extendicare Inc. - President & CEO [3]

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Good morning, Doug, this is Tim. I'll start and address that question.

Yes, you're right in interpreting same-store versus non-same-store as essentially pre-existing ParaMed and versus the acquisition from Rivera. Those operations continue to be integrated. After this year will be reported as one segment. We do have to this point lower performance still in the pre-existing operations -- or, sorry, in the acquired operations versus the pre-existing. We have a number of initiatives, as we suggested, underway that involve, firstly, an exercise to develop a model branch operation to improve the efficiency and the function right from intake through to discharge and billing and et cetera. That process is well underway, where we are developing and improving the effectiveness of a branch and then replicating that across our network of 41 branches. We're also in the process still of consolidating some branches, so the ultimate number of branches will be less. We've done that, a couple already; and we have more to go in some other locations where we have co-located branches.

We are in the process of adopting a common IT platform from what was three different IT systems that were used throughout the organization. That's going to give us an end-to-end solution that's going to, again, support that efficiency and effectiveness of our internal process. The third main initiative is that we are moving to a new categorization of our employees as full-time, part-time and casual; and moving away from what was called an elect-to-work type workforce. The advantage of that will be to be able to recruit and hire individuals that want to make a career in home healthcare, and to increase the continuity of care and reduce the turnover of staff that is sometimes experienced in all home healthcare operations.

We think a combination of those different initiatives that have some overlap and interaction between the three of them, are going to enable us to restore and improve the margins in the combined operation to levels that we saw a few years ago, but on a much larger base with a combined operation. That's what we're working towards, and we hope to see progress along those lines as this year unfolds.

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Doug Loe, Echelon Wealth Partners - Analyst [4]

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Okay, that's great feedback; thanks.

Then my follow-up is going to be, I was interested that you talked about ParaMed Select and the potential for private-pay home-care revenue to be a modest growth driver in future quarters. Just wondering, maybe just provide more color on how about evolved your thinking is on the private-pay component of that business? Not sure if you are getting started on that initiative, or if you're starting to see some early traction on building out that part of the business. What sort of initiatives you might have in play, working with private insurers in order to grow that part of home care? And I'll leave it there; thanks

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Tim Lukenda, Extendicare Inc. - President & CEO [5]

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Thanks, Doug.

We see a lot of promise for ParaMed Select, but it is in early days. We're doing some market research to try to get a handle on the existing market for private-pay in the markets that we operate and other significant markets in Canada, throughout Canada. Intuitively we feel it is a growing business that has a lot of potential. And there's several forms that this ParaMed Select service can take. The first one is providing additional services to current government-contracted recipients that are not receiving sufficient care to meet their needs. They might want more than the hours than they are being allocated by the CCAC presently, because of the constraints on that system. So that's one form.

Another form would be truly private home care to individuals in their home that don't otherwise receive government-funded care. Another form would be providing wellness and other home care services into the retirement sector, where there is a growing demand for those types of services. We see there being a number of areas where, again, both intuitively and through our research to this point which is being provided, we're doing further research towards trying to quantify the scope of potential for various markets. We feel that this is an area that has significant growth opportunity, but we are just scratching the surface still

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Doug Loe, Echelon Wealth Partners - Analyst [6]

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That's great feedback; thank you

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Tim Lukenda, Extendicare Inc. - President & CEO [7]

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Thank you, Doug

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Operator [8]

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Thank you. We have a question from Michael Smith from RBC Capital. Please go ahead, your line is now open.

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Michael Smith, RBC Capital Markets - Analyst [9]

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Thank you and good morning.

I just wanted to -- I have a question on acquisitions. If I look at Empire Crossing, Harvest, Westpark, Yorkton, the price was about CAD89.1 million with a cap rate expected, combined cap rate of 7.2%. Including income support of CAD6.8 million; I believe there is about CAD100,000 left. My question is what is the current yield of those properties? And when you expect to achieve 7.2%?

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Elaine Everson, Extendicare Inc. - CFO & VP [10]

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Good morning, Michael; I'll start.

In the second part of your question, on when do we expect, those four acquisitions were all in 2015, and, as we indicated, two of them have reached mature occupancy. The grouping of all four of those 2015, we expect to be reaching stabilized NOI towards the end of 2017. We're seeing great progress and the first two of them reaching that mature occupancy. I don't have current yields for all of them in front of me, but as you can appreciate, as during that fill-up period the marketing and other costs will throw a wrench into having any number that you can jump from. We expect them to achieve what we've stated as stabilized towards the end of 2017

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Michael Smith, RBC Capital Markets - Analyst [11]

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So the CAD6.8 million of income support, was that designed to bridge it until you meet 7.2%? So in other words, are they behind schedule? Or are they on schedule?

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Tim Lukenda, Extendicare Inc. - President & CEO [12]

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I would say that they are progressing on schedule. Income support, as you know, Michael, is a negotiated item on any purchase, and it was the amount that we were able to achieve in that transaction, that we thought would give us a boost towards getting to stabilize. The process isn't scientific enough to be able to map out exactly how much will be needed for how long. It's a matter of getting the support that you can for as long as you can, and then jumping off that and trying to get to stabilized as quickly as you can. Would I say that we are behind? No; I mean there is a couple markets where it's been a little bit slower perhaps than, in particular in Saskatchewan, that we would like. Overall, though, I think the progress is being demonstrated and we're moving towards stabilized, hopefully by the end of this year

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Michael Smith, RBC Capital Markets - Analyst [13]

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Okay and just -- thank you. Just switching gears to development: so Simcoe was transferred to ITP. What's the occupancy rate of that property now?

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Elaine Everson, Extendicare Inc. - CFO & VP [14]

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It's only been open for a month and I believe it's around 13%, 14% at this point in time, Michael.

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Michael Smith, RBC Capital Markets - Analyst [15]

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Okay. And so, I know this is not a quite an apples-to-apples comparison, but last quarter, Q3, the development yields expecting from the four properties, one of which is now been transferred to ITP, it's a smaller one, showed a development yield expectation of 7.4%. In this quarter there remained three; you're showing a development yield of 7%. It looks like, by our math, that costs have gone up about CAD9 million or CAD21,000 a suite for the four projects together. Does that make sense to you?

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Elaine Everson, Extendicare Inc. - CFO & VP [16]

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It does. The complement of the homes that remain in that development pool are -- Simcoe is out and Barrie is a new addition to that pool. So cost of construction and those factors will have an impact on that yield, depending on the complement of the home

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Michael Smith, RBC Capital Markets - Analyst [17]

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Just so I understand, so last quarter there was four; this quarter one is gone from the four, and the development yield is down 40 basis points. That's just cost?

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Elaine Everson, Extendicare Inc. - CFO & VP [18]

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There was a home in the pool last time in Bradford, Ontario. There is now home in the pool in Barrie, Ontario So it's in your continuity of numbers, maybe.

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Michael Smith, RBC Capital Markets - Analyst [19]

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Okay, good. Can you give us some color on the release of the prior period tax provision?

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Elaine Everson, Extendicare Inc. - CFO & VP [20]

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Are you talking the CAD3.6 million one?

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Michael Smith, RBC Capital Markets - Analyst [21]

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Yes.

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Elaine Everson, Extendicare Inc. - CFO & VP [22]

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We have previously disclosed and in 2015 taken a charge for some notices of assessment from CRA related to some interest deductibility. We objected to that, and we have received a favorable decision from CRA this quarter, and therefore been able to recoup the CAD3.6 million. That is not sitting in our AFFO, but it is sitting in as a credit in our current tax provision

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Michael Smith, RBC Capital Markets - Analyst [23]

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Okay. And any more prior period revisions do you expect?

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Elaine Everson, Extendicare Inc. - CFO & VP [24]

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No.

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Michael Smith, RBC Capital Markets - Analyst [25]

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No; okay.

Tim, you talked about taking a leadership role in redeveloping the feedback. Two questions: I think you referenced CAD500 million in cost over the next probably 10 years. What do you think about financing, I know it's a long-term project and it's early on, and if I understand correctly, are you planning on redeveloping C beds for third parties?

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Tim Lukenda, Extendicare Inc. - President & CEO [26]

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Financing: we believe that there going to be ample sources of financing. We're looking at traditional mortgage financing; we're looking at other forms of [lightful] financing or other longer-term things that match the duration of the asset. We are currently developing that strategy, and have communication of discussions with a number of different industry players. And we are encouraged by the number of interested parties at this point in time. We haven't exactly figured out which one we're going to go with, or whether it will be decisions that are different in each situation. We're going to try to figure out that global strategy here as we move forward. But we believe that there will be ample sources of that capital.

The second question, related to doing for others, yes. Our hope is, as a significant provider on the management and consulting services in the industry, we manage on behalf of a lot of third parties, who have C beds, and they will naturally turn to us as their partner and look for some guidance and support in that redevelopment process. Our first priority, naturally, has been our own beds and redeveloping or getting ready to redevelop those beds. We are intending to expand on in-house capabilities to have more leverage, if you will, to provide additional services to third parties. Right now we do it on an ad hoc basis as capacity allows. It's our intention to build capacity to be able to assist others with redevelopment because we believe we've developed a fair amount of expertise in that area.

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Michael Smith, RBC Capital Markets - Analyst [27]

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Okay, thank you.

Just switching to home healthcare, Elaine, you mentioned unfunded cost increases in home healthcare division. Is that something that was mandated by the province? Or is it something that you expect to recoup? Or is it just a cost increase?

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Elaine Everson, Extendicare Inc. - CFO & VP [28]

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It really is sort of the history over the last two or three years, where the only funding increases that have come out on the home care side from a rate perspective have been focused on holding operators whole for mandated increases on PSW wages. Other cost pressures, inflationary pressures in our cost increases, have not been covered. We basically had a number of years of 0% rate increases. That's what was meant by that comment, Michael.

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Michael Smith, RBC Capital Markets - Analyst [29]

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Okay. I will turn it back.

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Tim Lukenda, Extendicare Inc. - President & CEO [30]

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Thanks, Michael

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Operator [31]

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Thank you. We have a question from Jonathan Kelcher from TD Securities. Please go ahead, your line is now open.

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Jonathan Kelcher, TD Securities - Analyst [32]

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Thanks and good morning.

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Tim Lukenda, Extendicare Inc. - President & CEO [33]

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Good morning, Jonathan

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Jonathan Kelcher, TD Securities - Analyst [34]

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First, could you provide a little bit more color. You talked a little bit about losing some beds in the other Canadian ops, in the management in Q4 and Q1. A couple questions on that: first, how much of a revenue impact do you think that will be? And secondly, probably more importantly, did you guys look at buying these properties?

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Tim Lukenda, Extendicare Inc. - President & CEO [35]

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Good questions. While we're digging out that revenue number, the nature of that managed business is such that, from time to time you have sales of the beds that are under management with us. When an owner decides, instead of owning and having us manage, they decide to exit by selling to a third party, we try to pick up the management services with the new owner. But in some cases the new owner has a size and sophistication that it will just roll the operations into their existing operations and take that part in-house. It's kind of normal course in that business, where from time to time you have some beds turn over. In this particular case, we did look at those beds and decided that it was not a good fit for us strategically to purchase those beds. We do see a lot of demand, however, for continued growth on the management side. And as I said, we think we will be able to replace the beds lost over the course of this year.

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Elaine Everson, Extendicare Inc. - CFO & VP [36]

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To the first part of your question, Jonathan, the impact of the beds being lost at the end of the year probably was generating about CAD1.6 million of revenue for us. The replacement of the beds that we already know are coming on stream will probably cover at least half of that. And we have lots of other things in the pipeline and hope to mitigate the rest of it.

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Jonathan Kelcher, TD Securities - Analyst [37]

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That's annual?

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Elaine Everson, Extendicare Inc. - CFO & VP [38]

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Yes, that's annual.

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Jonathan Kelcher, TD Securities - Analyst [39]

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Okay; and then the beds, were they class A Ontario beds? Or where were they located?

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Tim Lukenda, Extendicare Inc. - President & CEO [40]

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We had, the biggest chunk was a partner out in Western Canada, and then we had a couple of separate buildings in Ontario that were class C beds.

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Jonathan Kelcher, TD Securities - Analyst [41]

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Okay. Would you guys be looking at adding any class A long-term care beds?

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Tim Lukenda, Extendicare Inc. - President & CEO [42]

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We're not actively looking at acquiring long-term care beds, either C or A, but we are -- there are situations where, in our redevelopment exercise, we may need to pick up some beds in order to optimize the size of any particular redevelopment project, so that's multiples of 32, as you know. There are situations where we may try to pick up the odd bed here or there. But we're not actively looking to acquire on the long-term care side otherwise

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Jonathan Kelcher, TD Securities - Analyst [43]

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Okay; and then just switching gears on the deferred consideration, I guess the holiday that you're giving them for 2017 and half of 2018, how much is that going to impact AFFO in 2017? Where does that flow through the income statement?

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Elaine Everson, Extendicare Inc. - CFO & VP [44]

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So multiple parts to your question. First of all, if you look at the AFFO, the FFO slide we provided, the AFFO coming from the US continuing operations is where that is sitting. It's sitting in interest income, in the segmented notes related to the continuing US operations. On the AFFO slide you can see for 2016, our US continuing AFFO per share contribution was about $0.09

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Jonathan Kelcher, TD Securities - Analyst [45]

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Okay.

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Elaine Everson, Extendicare Inc. - CFO & VP [46]

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On a go-forward basis, you should focus on the AFFO from continuing Canadian operations.

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Jonathan Kelcher, TD Securities - Analyst [47]

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Okay so that $0.09 is -- it won't be there, and it will be CAD0.045 if we look at it. Would that be fair for 2018?

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Elaine Everson, Extendicare Inc. - CFO & VP [48]

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I think that would be fair, give or take a little bit, that would be fair for 2018 and then things fully restored in 2019.

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Jonathan Kelcher, TD Securities - Analyst [49]

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Okay, and then just last year, how much do you think you can repatriate from the captive in 2017?

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Tim Lukenda, Extendicare Inc. - President & CEO [50]

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We're still looking at that. We think we can comfortably repatriate CAD8 million to CAD10 million, but we are analyzing it to make a decision on the exact amount. But it's in that order of magnitude. By the US.

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Elaine Everson, Extendicare Inc. - CFO & VP [51]

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Yes.

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Jonathan Kelcher, TD Securities - Analyst [52]

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Okay, I think that's it for me; thanks.

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Tim Lukenda, Extendicare Inc. - President & CEO [53]

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Thanks, Jonathan.

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Operator [54]

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Thank you.

(Operator Instructions)

We have a question from Yash Sankpal from CIBC. PLease go ahead, your line is open.

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Yash Sankpal, CIBC World Markets - Analyst [55]

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Good morning.

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Tim Lukenda, Extendicare Inc. - President & CEO [56]

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Good morning.

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Yash Sankpal, CIBC World Markets - Analyst [57]

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Is there any update on the Ontario (inaudible) review of home care funding rates?

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Tim Lukenda, Extendicare Inc. - President & CEO [58]

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There's an intention to move toward [harmonized] rates; they set a date of April 1. We are planning and preparing for that to occur. There's a lot of discussions that are going on between government and the Association, other things about implementation and process. Our best information at this point in time is that they will proceed with that harmonized rate

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Yash Sankpal, CIBC World Markets - Analyst [59]

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And what kind of increase do you expect?

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Tim Lukenda, Extendicare Inc. - President & CEO [60]

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Well, for us, we have some winners and losers, if you will, in terms of the various contracts that we have. And moving to that harmonized rate, on an overall basis, it actually has minimal impact on us on the rate side.

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Yash Sankpal, CIBC World Markets - Analyst [61]

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Your rates have not gone up since 2013, right?

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Tim Lukenda, Extendicare Inc. - President & CEO [62]

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Correct.

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Yash Sankpal, CIBC World Markets - Analyst [63]

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So you don't expect any increase even after that?

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Tim Lukenda, Extendicare Inc. - President & CEO [64]

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No. We believe there will be net benefit as we move towards the common employment wage rate for our workers, that will enhance our margin overall. But on the top line side, the blend of some higher contract rates and some lower contract rates, weighted at the various volumes, the top line will not be significantly different than it is today

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Elaine Everson, Extendicare Inc. - CFO & VP [65]

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I just want to add to that, and I agree from a rate perspective. But we are seeing consistent annual and quarterly increases in volume.

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Tim Lukenda, Extendicare Inc. - President & CEO [66]

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That's right

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Elaine Everson, Extendicare Inc. - CFO & VP [67]

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Volume increases will grow that top line. It's just that immediate rate increases for 2017, I wouldn't expect.

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Tim Lukenda, Extendicare Inc. - President & CEO [68]

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Right.

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Yash Sankpal, CIBC World Markets - Analyst [69]

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Okay, and now with your income support gone, should we model a decline for NOI in 2017?

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Elaine Everson, Extendicare Inc. - CFO & VP [70]

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As we stated, the improvement and the growth to stabilize NOI from that portfolio will get us back to expectation towards the end of 2017. It depends on our pace. So there may be a little bit over the early part of 2017, but we will be back to a normalized level by the end of the year.

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Yash Sankpal, CIBC World Markets - Analyst [71]

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Tim, you talked about your leave of absence and changes to your management contract. Just maybe, if you could add some more color around how the Board approached the subject and what was the discussion?

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Tim Lukenda, Extendicare Inc. - President & CEO [72]

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Sure, Yash; I'll try to provide color there.

This is a discussion that's been ongoing with the Board for a while, resulting from what was a pending expiration of a walkaway option, if you will, or a single trigger option that I had in my employment contract, under which I would be compensated on exit from the Company or separation from the Company. I wanted to stay with the Company and the Board had a desire in retaining me as CEO, and we worked out a resolution and a renewal of my employment agreement that resolved that issue and addressed the leave of absence that I outlined, and established the basis for my return to the Company at that point in time. All of these things were brought together in resolution of that outstanding item that's been in existence for some time

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Yash Sankpal, CIBC World Markets - Analyst [73]

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Okay, thank you. And just one more question if I may.

Do you think you're Rivera home care business will achieve your legacy home care, margins of your legacy home care business in 2017?

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Tim Lukenda, Extendicare Inc. - President & CEO [74]

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Yes, we do. We are integrating the operations such that there will be hardly any way to distinguish old from new by, hopefully over the course of the balance of this year, as we integrate operations and create a common operating and IT platform so the distinctions will be going away. We have considerable efforts underway to improve the operating process and efficiencies and to lower the cost, such that we see our margins returning over the course of this year. Our hope is that by the end of this year we will be at combined margins of the pre-existing levels. We think we can get back to those levels and we're hoping that would be by the end of this year, but it's an ongoing process

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Yash Sankpal, CIBC World Markets - Analyst [75]

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That's it for me. Thank you.

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Tim Lukenda, Extendicare Inc. - President & CEO [76]

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Thanks Yash.

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Operator [77]

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Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Ms. Fountain.

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Jillian Fountain, Extendicare Inc. - Corporate Secretary [78]

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Thank you, Marie. This presentation is available on our website as are the call-in numbers for an archived recording. Thank you, everyone, for joining us today

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Operator [79]

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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.