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Edited Transcript of SIA.TO earnings conference call or presentation 14-Nov-19 1:30pm GMT

Q3 2019 Sienna Senior Living Inc Earnings Call

MARKHAM Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Sienna Senior Living Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lois Cormack

Sienna Senior Living Inc. - President, CEO & Director

* Nitin Jain

Sienna Senior Living Inc. - CFO & CIO

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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

* Frederic Blondeau

Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research

* Himanshu Gupta

Scotiabank Global Banking and Markets, Research Division - Analyst

* Johann Rodrigues

Raymond James Ltd., Research Division - Equity Research Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Pammi Bir

RBC Capital Markets, Research Division - Analyst

* Sairam Srinivas

BMO Capital Markets Equity Research - Associate

* Tal Woolley

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

* Yashwant Sankpal

Laurentian Bank Securities, Inc., Research Division - Real Estate Investment Trust Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Sienna Senior Living Inc.'s Q3 2019 Conference Call. Today's call is hosted by Lois Cormack, President and Chief Executive Officer; and Nitin Jain, Chief Financial Officer and Chief Investment Officer of Sienna Senior Living Inc.

Please be aware that certain statements or information discussed today are forward looking and actual results could differ materially. The company does not undertake to update any forward-looking statement or information. Please refer to the forward-looking information and Risk Factors section in the company's public filings, including its most recent MD&A, for more information. You will also find a more fulsome discussion on the company's results in this MD&A and financial statements for the period, which are posted on SEDAR and can be found on the company's website, siennaliving.ca.

Today's call is being recorded, and a replay will be available. Instructions for accessing the call are posted on the company's website, and the details are provided in the company's news release. The company has posted slides, which accompany the host's remarks, on the company's website under Events and Presentations. With that, I will now turn the call over to Ms. Cormack. Please go ahead, Ms. Cormack.

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [2]

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Thank you, Joelle. Thank you and good morning, everyone. Thank you for joining us on our Q3 call this morning. During the third quarter of 2019, we made great strides in strengthening our balance sheet and optimizing our capital structure. Subsequent to the end of Q3, Sienna received an investment grade BBB credit rating with a stable trend from DBRS which supported our $150 million inaugural unsecured financing in early November. This rating and subsequent debt financing reflects the strength of Sienna's balanced portfolio and sophisticated operating platform. With respect to our operation, we are realigning and augmenting our sales and operations teams and have made further enhancement to our operations and sales programs.

Slide 5. Moving to our Q3 financial metrics on a per share basis, Q3 OFFO and AFFO remained near prior year levels of $0.364 and $0.368 respectively. As a result of lower occupancy in the retirement segment, our Q3 same property NOI decreased by 0.8%. During the quarter, we continued to strengthen the balance sheet and ended Q3 2019 with the debt-to-gross book value of 46.5%, a reduction of 180 basis points year-over-year.

Slide 6. The long-term care portfolio remained virtually at full occupancy at 98.2%, with waiting lists for each of our residences. Q3 Long Term Care same property net operating income increased by 1.5% year-over-year. Average same property occupancy in the retirement portfolio was 86.9% in Q3 2019. There are a number of factors that are contributing to this softness in occupancy, which I addressed on our Q2 call as well, including high resident attrition rate to long-term care in the portfolio that we acquired in 2018, the disruption associated with property upgrades and renovations at a number of our properties, and the oversupply in the Ottawa market.

We have been focused on a number of initiatives to improve occupancy in the retirement portfolio, which includes enhancing our assisted living services offered to residents in order to reduce the attrition rates to long-term care; realigning and augmenting our sales and operations teams; intensifying marketing and communication campaigns, and increasing community outreach in every local community; enhance sales programs including promotions and incentives, making further suite and amenity upgrades; and investing in our teams to enhancement to recruitment, onboarding and leadership development. In addition, our residences are now gearing up for an active flu vaccination and prevention campaign in an effort to minimize the severity and duration of the upcoming flu season.

Slide 8. While fundamentals in the sector remain strong with an aging population and growing demand for senior living accommodations, we are expecting competitive pressure in some markets in the short- to mid-term. However, we believe that the majority of Sienna's retirement residences are located in markets where future demand is expected to exceed supply. In addition, we believe that high barriers to entry, including rising construction costs and licensing requirements, will help to limit the future oversupply. Our recent expansion of Island Park in Campbellford is leasing up well, and we estimate to reach stabilized occupancy at the end of 2021.

I will now turn the call over to Nitin for further details on Sienna's financial results.

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [3]

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Thank you, Lois, and good morning, everyone. I will start on Slide 10. Same property net operating income for the quarter decreased by 0.8% or $305,000 compared to the same period last year for a total of $40.2 million. This decrease was largely as a result of softer occupancy in our retirement res segment, offset by an annual rental rate increases in line with market conditions.

The LTC division generated same property NOI of $23.3 million, an increase of 1.5% over the prior year. The retirement division generated same property NOI of $16.9 million, a decrease of 3.7% over the prior year as a result of softer occupancy, partially offset by annual rent increases and a focus on adjusting cost. OFFO increased by 1% year-over-year in Q3 2019 to $24.2 million. This increase was largely the result of lower interest expense on long-term debt, and lower current income taxes, partially offset by a decrease in same property NOI in the retirement portfolio. Q3 2019 diluted OFFO per share was in line with the prior year at $0.364. AFFO increased by 0.3% year-over-year in Q3 2019 to $24.5 million. Diluted AFFO per share was $0.368 in Q3 2019, down marginally from $0.372 in Q3 2018.

Moving to Slide 12. We continue to strengthen our balance sheet. At the end of Q3 2019, Sienna's debt-to-gross book value was 46.5%., a reduction of 180 basis points from Q3 2018. Sienna's debt-to-EBITDA declined to 6.6x in the quarter compared to 6.9x in Q3 2018.

Our interest coverage ratio remained high at 4x and our weighted average cost of debt was lower by 20 basis points year-over-year to 3.7%, highlighting our refinancing initiatives over the past 4 quarters. We ended the quarter with approximately $128 million in undrawn credit lines and cash.

As Lois mentioned, we're pleased with Sienna's BBB issuer rating from DBRS. This investment grade credit rating reflects our focus on strong balance sheet and highlights our balanced portfolio and sophisticated operating platform. Our subsequent $150 million inaugural unsecured debt financing at an interest rate of 3.109% for a 5-year term is a strong vote of confidence on the execution of our strategy. We intend to use the proceeds from this offering to pay down part of our debt and create a pool of unencumbered assets. After the unsecured financing closing, we currently have $307 million of unencumbered assets. With that, I will turn the call back to Lois.

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [4]

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Thank you Nitin. Our Long Term Care portfolio is expected to deliver stable and consistent NOI growth in 2019 and 2020, in line with the growth achieved in 2018. We expect Q4 2019 same property NOI growth in the retirement portfolio to be consistent with Q3 2019, which will result in flat same property NOI growth year-over-year for 2019. For 2020, we anticipate occupancy improvements which should translate to low single-digit NOI growth in the retirement portfolio.

We believe that fundamentals in senior living will remain strong and are optimistic about the potential of development opportunities, including exploring the development of freestanding retirement residences with joint-venture partners, intensification opportunities at existing retirement residences as well as the development of senior living campuses. We expect to begin a 60-suite expansion at Kingsmere Retirement Residence in Alliston by mid-2020. The estimated unleveraged returns for this approximately $20 million investment is approximately 10%. With an exceptional team, a strong operating platform and our strategy in place, I'm confident about our future and the immense opportunities we have as one of Canada's leading high-quality providers. Thank you for your participation on the call today, and Nitin and I will be pleased to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Fred Blondeau with Echelon Wealth Partners.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [2]

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Looks like you very well defined the causes for decrease in the retirement occupancy and just gave us more granularity on your actions. What's your scenario in terms of occupancy for 2020? And what's your timeline before Sienna getting to a more optimal level, I guess?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [3]

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Yes. So I think as we mentioned in our outlook and our call, so for the total 2019, we expect our retirement same property NOI to be flat to where it was in 2018, so no growth. Our average occupancy at the end of Q3 2019 for the same property was around 86.3% and we are in a similar range today. So we expect that year might be similar by the time we -- ended, and it will take us 2 to 3 quarters to start building it up. And we hope to be 300 basis points or so by the end of 2020. But it would take us some time to get there.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [4]

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Okay. Okay. Understood. And Nitin, could you remind us what's your target leverage ratio at this stage?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [5]

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So we always -- and again, as debt-to-book value, not fair market value, and we think 48% to 50% is a good place to be at, considering its book value. And we are right now below it. So again if you have a reason to go up, if it's development of the right strategic opportunity to grow, we will do that. Otherwise we like the ratio where it is today.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [6]

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And Lois, I think I missed it at the end you mentioned an expected return or an IRR on your -- Park project. Could you remind us what's your IRR on the Island Park? And what's your -- I guess, what's your expected IRR on Kingsmere?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [7]

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Yes. So on Island Park, the IRR, it was 10%, and Lois mentioned, Kingsmere, it's also 10%, roughly.

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Operator [8]

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Our next question comes from Chris Couprie with CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [9]

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Just turning back to Fred's question on the outlook. What is it that gives you confidence that the occupancy rate is going to improve into next year? Is it certain markets? Or where exactly do you think you are going to get those occupancy gains?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [10]

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I think, it's a good question. We don't expect really any change in the Ottawa market because there continues to be new supply there. Where we think we will see changes is in our assisted living program. We're making some enhancements there. We do have a number of designated assisted living units and by kind of changing our service packages and some better marketing and communications about the program, we do expect to get some gains, particularly over the winter months. That's primarily the area. And then as well we have, as we have mentioned, a number of upgrades that we are doing in a number of properties. And we expect them to be pretty much complete into early Q2 of next year.

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Chris Couprie, CIBC World Markets Corp. - Analyst [11]

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I don't have the numbers in front of me, but if you look at your IL versus AL suites, are there material occupancy differences between the two?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [12]

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I wouldn't say material. We just know that we do have some vacancy right now in our designated AL units, and we're really focused on that opportunity, particularly over the winter months where we feel that we can really get some traction there. Because as you know in the winter months, it's a difficult time for seniors to move in. So traffic is usually down for IL, and we believe that ALs are opportunity.

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Chris Couprie, CIBC World Markets Corp. - Analyst [13]

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Okay. Maybe just a different question. Have you looked at dispositions at all?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [14]

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Well, we always look at the best -- our capital allocation. And we've been on a journey, as you know, to upgrade the quality of the portfolio. And we've done -- we are doing a good job on that note. But we are always looking at what makes sense for Sienna and to get the most value for shareholders.

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Chris Couprie, CIBC World Markets Corp. - Analyst [15]

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So I guess it sounds like there is nothing really contemplated right now or whether it be in the LTC or most likely not retirement home given that's mostly recently acquired?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [16]

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I think, as Lois mentioned, Chris, we always are looking for what's the right mix for us. So again, nothing eminent at this point.

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Operator [17]

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Our next question comes from Jonathan Kelcher with TD Securities.

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

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Just sticking with the occupancy question. So it sounds like -- it looks -- you are going to look to sort of hold occupancy over the winter months by lowering attrition, is that fair to say?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [19]

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Yes. And we also -- we have a number of promotions. We're really hoping that we can get some traction before the end of the year. But yes, we think between assisted living, our promotional packages, all the work that we're doing with our sales teams and so on, that we hope to get some further traction. We know that Q1 is always kind of -- with the flu season, there's a lot of attrition at that time. But we're hoping through our assisted-living programs to try and close that or reduce it.

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

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Okay. So then the 300 basis points you're hoping to get by the end of 2020, that would sort of start to come in Q2 or Q3 of next year?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [21]

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Yes. Yes. That's right.

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

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Okay. How many properties are undergoing upgrades?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [23]

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Well, in total, there was -- there's 10 properties. So at any given time we've completed, I think, there's 3 or 4 complete, and the others are in various stages. And there's a couple that will start in Q1.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [24]

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Okay. And are you getting better -- on those 3 or 4 those are complete, are you getting better traction? Are you seeing a difference?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [25]

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Yes. In a couple of them, yes. A couple that have just been completed. Well, the residents living there are very happy with them, and there's good feedback from prospects that are coming in.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [26]

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Okay. And how do you look at your return on investment in those? Is it more just of defensive, almost maintenance CapEx, or do you target a return on the upgrades?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [27]

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Those are different, Jonathan. So when we acquired the Maple portfolio last year, we set aside $5 million as part of purchase price, or I would say on top of purchase price to spend on it because some of those properties needed a bit of work. So it was more contemplated using whatever and why we want to get from those properties and knowing that we had to spend the additional $5 million. So what the price we paid at that point. In our mind, we paid that plus $5 million. So that's how we looked at it.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [28]

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Okay. Fair enough. And then just lastly on the unsecured debentures. I think at Q3, you had $49 million on your line, so I'd assume you'd paid that down. How should we think about the other sort of $100 million of that unsecured?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [29]

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Yes. So most of $150 million we've already used to pay down debt. So the revolver would be part of it. We have some other debt maturities, which are coming due in Q4 so which we have paid down as well. And we have little bit left over for some of the other upcoming maturities. So what we would say most of the $150 million would be to pay down current debt. And we are on track to do that.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [30]

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Okay. So you're not going to see a material uptick in interest cost?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [31]

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Correct. You -- we would not.

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Operator [32]

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Our next question comes from Himanshu Gupta with Scotiabank.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [33]

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Just on the occupancy discussion, I think, Lois you mentioned running a number of promotions. So are you offering more price concessions or incentives to drive occupancy? And how is retirement home occupancy trending since September so far?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [34]

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Yes. So I -- not sure if I have completely caught your question, but we don't -- we do promotions and one-time incentives rather than rate reductions. Was that your question?

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [35]

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That's right. Yes. My question was are you offering more of what you were offering previously just to drive occupancy there? And the second part of the question was how is the occupancy trending since September?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [36]

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So I did answer that one before, Himanshu. So we ended quarter at 86.3% in same property, and we are in a similar range today. So we are on -- we are where we ended the quarter with.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [37]

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Sure. And maybe just switching gears on the acquisition side. Is the integration of the portfolios which were acquired in 2018, in '17, now fully complete? And do you plan to be active on the acquisition front?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [38]

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The integration of the acquisition is fully complete. As I mentioned in our -- earlier, we are doing a number of things like enhancing our assisted living program, really looking at the services, services packages that we offer to meet the needs of seniors in all of the assisted living programs, our designated unit. So we're doing that, and making some other enhancements to our sales programs and operations. That's kind of just ongoing improvements that we're always making. So but the portfolio has been completely integrated. And with respect to acquisitions, we're always looking at the right opportunity for Sienna, and our goal is to grow across the country.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [39]

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Sure. And maybe just a last question on the development side. Do you have any timelines for the Phase I development of, I think, it's like 1000 LTC beds and 500 new retirement homes. And how do you plan to finance this development cost?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [40]

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Well, at the present time, there's a -- we're working with government and our associations and the other providers in this sector to get a feasible program for these developments to work. So that's the current focus. And as you know government's doing a lot of reorganizing. So that work is underway. So we can't really commit to a timeframe. And they would all be financed on our balance sheet. We have a high liquidity.

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Operator [41]

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Our next question comes from Brendon Abrams with Canaccord Genuity.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [42]

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Lois and Nitin, I mean, you speak about the Ottawa market and the impact there, and it seems like the challenges are fairly well understood for that market. I guess my question is, we've talked in the past about the retirement business being very localized. I'm just wondering in your view -- your portfolio includes pretty significant exposure in, let's say, the Kingston market, right, which is still a 2-hour drive away. How broad is the Ottawa market -- is the impact from the Ottawa market spreading through other parts of the region? Or is it really just a localized impact?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [43]

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Yes. No, Ottawa is definitely specific to Ottawa and the kind Ottawa Valley area, it would not spread to Kingston. Kingston would have its own local supply issues from time to time. And there is -- there was a new property that just opened in Kingston just a few months ago. So that's having a little bit of impact in the Kingston market. But the 2 markets would be completely distinct.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [44]

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Okay. So you're not seeing that spread to markets that far away?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [45]

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No. No. No.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [46]

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Okay. And I guess the industry headwind so far has been focused on the supply side. I guess, from your view, how much of the imbalance is attributable to the demand side? And when I speak about this, I'm thinking about some of the commentary around seniors living in their home longer, seniors are healthier, not moving in as early. Maybe you can just talk about this kind of the demand side that you are seeing and the profile coming into your building, or not coming in?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [47]

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Yes. I mean if you look at demand, capture rates haven't substantially changed. It's typically -- and there are some variation within region, again, there is some variation in the capture rates within local markets. But overall, the capture rate in Ontario right now is about 6%. And that hasn't changed, I mean, in our experience, it doesn't change. And I would say for us, home care doesn't really compete with retirement living. Seniors, when they choose the retirement residence, it's for the lifestyle. They want socialization and food and so on. And seniors that choose to live at home, that's not the experience that they're going to get because often it results in social isolation. In fact, most seniors that move into our retirement residences often will say that they wish they'd done it sooner.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [48]

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Right. Okay. So you're still of the view that is the challenges are supply-driven and not more structural on the demand side?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [49]

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I would say -- and it's, again, very local. These markets that we are in where there's not excess supply where there's -- they are very stable markets.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [50]

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Okay. Maybe just switching gears -- I think in your MD&A here, you talked about receiving, I guess, the first level of approval on 3 projects for LTC Greenfield projects. I'm just wondering if you could provide any color with respect to these in terms of timing, cost, location, return, expectation, any color around that?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [51]

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Yes. The timing, it will be subject to getting the feasibility which we're working with the government to get a program that will work for more of these projects. So other than that, they are ready to go. Like we've done everything we can from our real estate point of view. So we're really waiting for the right ministry program on this. And in terms of...

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [52]

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-- Okay. Yes, and I think, it's just -- financial feasibility is the step. So once there's a financially feasible program, which we are hopeful that there would be one with the ministry, we will proceed accordingly.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [53]

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I guess that was my next question. Have they outlined or changed any of the incentives or payment structures that would have changed the feasibility?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [54]

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No. No.

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Operator [55]

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Our next question comes from Johan Rodrigues with Raymond James.

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Johann Rodrigues, Raymond James Ltd., Research Division - Equity Research Analyst [56]

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Maybe just kind of adding on to Brandon's question. In the slide deck, you mentioned that most of your markets, retirement residence markets, you see future demand exceeding supply. I guess I was just wondering which markets you didn't see that happening? I guess Ottawa would be the obvious one but anywhere else, in maybe BC or Ontario that down the road you kind of see current supply causing that problem?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [57]

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Yes. If you -- I mean other than the Ottawa area, we think central Ontario, the GTA, the lower mainland BC, and every other area that we operate, we see by 2023, there will be probably more demand than supply if there is no additional projects to go in the ground than what's known to date. And we have that, there's a bit of a chart in our MD&A that puts some color on that.

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Johann Rodrigues, Raymond James Ltd., Research Division - Equity Research Analyst [58]

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Okay. And then just kind of -- in the back half of next year and maybe in the first little bit of 2021 when you get a bounce back in occupancy in the retirement business to kind of that 90% level, you've a little bit of spike in same property coming off of the low comps in the second half of this year. But on a stabilized basis beyond that, what would you expect kind of over the long period of time, retirement residents, same property NOI to grow at?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [59]

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I think you're looking into like '20 or '21 and beyond? Is that what you're asking?

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Johann Rodrigues, Raymond James Ltd., Research Division - Equity Research Analyst [60]

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Yes. Or just if you get the portfolio back to 90% after that initial bounce that you get because you're coming off 86% occupancy. Once it hits 90%, then what would you kind of envision that portfolio growing at?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [61]

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Yes. I mean we've always talked about when things get stabilized low to mid-single digits for retirement and stable, consistent performance for long-term care. So our view hasn't really changed. And in the chart on our MD&A talks about the data in 2023, because a lot of those projects have to wait. It's not to say that today all the markets are oversupplied. All we are saying is today there are a couple of markets that are oversupplied today and by 2023, even with the existing supply coming or new supply coming in, there still would be more demand.

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Operator [62]

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Our next question comes from Sairam Srinivas with BMO Capital Markets.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [63]

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Lois, you mentioned in your comments this morning that about marketing and promotional campaigns as well as repositioning some services on the assisted living properties. Can you give us some color on that?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [64]

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Yes. We do -- like as I mentioned, we do onetime incentives. So we provide our -- all of our residences with a toolkit, if you will, of things that seniors might be looking for when they're moving in to help them transition from their home into retirement living. So it's a range of options that the site can use to support the seniors with that transition. So it's kind of just think about it as a one-time thing to help residents move in. The other is just we do a lot of things like community relations to invite seniors into the community to join their friends for lunch and dinner. There is always campaigns and promotions going on. This fall, we had one campaign to try and encourage seniors to move in before the end of the year.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [65]

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Right. And that's really helpful, Lois. And in terms of repositioning of services which you briefly mentioned for the assisted living properties for recapturing the occupancy, what would be your thoughts on that in terms of are you changing the structural service or the payment mechanism? Just wondering on that?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [66]

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It's all of that. It's really looking at the whole program. So what's included in kind of the base rent and then one of the service packages. So this is kind of responding to residents' needs as they age in place. So typically as the residents stays longer, after a few years, they may need just a few services, and then as the age or their health changes, they may need more. So we're really targeting those service packages to meet the needs as the seniors' needs change over time.

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Operator [67]

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Our next question comes from Tal Woolley with National Bank.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [68]

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My first question just is on the financing environment. Not necessarily for you, for Sienna specifically, but what is it like trying to get that capital and other types of capital right now for long-term care centers?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [69]

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Yes. As we highlighted, from a debt capital, again, our recent unsecured financing would reflect on it because it is underpinned by a few of our long-term care assets as well. You know the market seems very strong. There are lot of life cos who are very active in this business as are most of the banks are very active. Now Ontario does not have, unfortunately, the CMHC program, but the CMHC program for BC Long Term Care is very robust, and we have couple of properties which have CMHC financing and BC LTC. So again, that market continues to be very strong, like CMHC financing 10-year rates are around 2.7%, 2.8%, excluding the upfront fee. So I think all around between them and life cos, there is lot of demand for this kind of product for financing.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [70]

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And so is it your intention then to finance more on the LT side -- LTC side of the business if with sort of unsecured and maximize the CMHC financing on the retirement side?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [71]

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We always look at whether it's CMHC financing, conventional revolver, secured, unsecured as different things to look at in our debt structure. So it's never -- there is never a very specific answer, okay, all retirement CMHC and all long-term care, unsecured or secured. So I think, it is really the property-dependent and the needs for the business at that time.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [72]

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And so this is really just about opening up another capital source?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [73]

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Correct. And yes, we do not expect, again, the idea was not to do one time. So we expect to do it when the market is right, when it makes sense. But I would say, you should expect or the market should expect that we would be doing range of these things from everything we have been doing so far and unsecured would just be an additional item to it.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [74]

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Okay. And then in your earlier commentary you mentioned perhaps working with some partners on some ground up department opportunities in retirement. Is that also bit of a commentary on what the market for stabilized acquisitions looks like right now?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [75]

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Not necessarily. I think what we have talked about always is, we mentioned in our second quarter conversation as well, we're looking at standalone retirement residences with joint-venture partners, either developers or builders who are -- who have quite a bit of these expertise. That would be on top of what we're doing in acquisitions. So we have good access to capital. We have a strong balance sheet. So we don't think that these 2 things are mutually exclusive. So it's -- by doing one doesn't mean we will not be doing the other.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [76]

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Okay. So -- and then, maybe I can just ask for what your commentary is on the market for stabilized property right now then?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [77]

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I think there's always opportunities that come up from time to time. We look at everything, and we always do where we believe we can add value to a portfolio or an asset.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [78]

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So you're just -- because I mean it's been quite some time since your last portfolio acquisition. So is there anything that is sort of rate limiting you? Or do you -- or is it just that you haven't like the assets you have seen recently?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [79]

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No. There's nothing imminent that we've -- that we -- that's come out that we can add value to that's kind of the right that meets all of our investment criteria.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [80]

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Okay. And then sorry, just to pivot back to the assisted living issue, is the solution to that issue, is it a capital question or is it an operating expense question?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [81]

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It's operating. It's service packages getting the right staffing and the education and the promotional materials to explain it to seniors and to residents who are IL and need to convert to AL.

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Operator [82]

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Our next question comes from Yashwant Sankpal with Laurentian Bank.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Real Estate Investment Trust Analyst [83]

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First question is on the retirement home NOI margin. It has been holding up quite well. So I'm just wondering, do you think that you will be able to maintain this 44% level through Q1, Q2 2020?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [84]

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Yes. I think our margin has been pretty consistent, Q3 year-to-date is around 44%, total 2018 was around 44.9%. Obviously, there's -- when occupancy declines materially, we would have an impact in margin. So at this point, we think that number where we ended the Q3 is a good way of thinking about for what it might be in 2019 and going forward.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Real Estate Investment Trust Analyst [85]

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Okay. And just on your taxes. I was wondering if you could give us some ideas to how you should model your taxes in 2020.

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [86]

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Yes. So this year, we were around a $7.5 million of taxes, and I think next year, we're in the range of around $9 million.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Real Estate Investment Trust Analyst [87]

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Okay. And 1 question for Lois. So, Lois, these programs that you are considering, the assisted living promotions, so does that mean you're actually trying to convert your IL residents to the AL residents?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [88]

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No. We don't convert like a resident -- When a senior needs care and services, what -- we want them to stay in place rather than have to move out to a Long Term Care. So what we try to do is design service packages that we can handle, that we have the staffing for and the physical environment for to avoid sort of a premature move-out to Long Term Care. So this is the area that we are focused on. We can't convert an IL -- So, yes. That's right. And an IL only converts to an AL when the senior needs the services, a certain level of service.

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Operator [89]

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(Operator Instructions) Our next question comes from Pammi Bir with RBC Capital Markets.

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

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Just maybe coming back to the development commentary on the retirement home space. Do you just maybe expand on what markets you're looking at, at this stage? And how much capital you're comfortable allocating to retirement home and development?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [91]

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So we can't really comment on specific markets. There are a couple of specific opportunities we are initial due diligence of. If there's a potential site, and we are understanding if that's a right site for us, depending on market conditions and if the pro forma works. From a development standpoint, so far our program has been quite small. We are committing close to $20 million for our Kingsmere site, which will happen over the next 1.5 years or so. I would say Pammi, if things work out, maybe in the period of 3 years or so, we might build a program which is $100 million or so at any given time, not more than that based on our current methodology. That could change over time if we find that, that's more lucrative than what we think it is today. But I think $100 million and -- if we get there in the 3 years, we think that would be a good place.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [92]

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And so would that $100 million include the Long Term Care redevelopments, or is that strictly just retirement homes?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [93]

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No. It's everything. Any development we do that would be sort of added any given time.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [94]

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Right. And just we have heard commentary in terms of rising cost for retirement home developments. So I'm just curious what sort of returns would you expect. Even on this may be the one site that you mentioned, that you're looking at, not Kingsmere. But the one you're talking about earlier. What sort of unlevered returns would you be thinking about today for retirement homes?

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Nitin Jain, Sienna Senior Living Inc. - CFO & CIO [95]

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You know the market has changed quite a bit in terms of expectation because of rising cost. And there are acquisition opportunities time to time, but building something which would work with your platform. So our return expectations would be if the acquisition cap rate is x, it would be, call it, 50 to 150 basis points on top of x. That would be our expectation for retirement development.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [96]

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And for lease up, let's say, to stabilize levels, is that changing as well or is that -- is it 3 years, is it 2 years, or is it getting a bit longer?

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [97]

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Well, it depends on the market. I think, generally, it's 3 years depending on where it is. And that's to Nitin's -- what Nitin said earlier about the locations and the site. We are in due diligence, and that's a big factor that there's adequate income qualified demand.

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Operator [98]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Lois Cormack for any further remarks.

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Lois Cormack, Sienna Senior Living Inc. - President, CEO & Director [99]

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Okay. Well thank you, everyone, for joining our call this morning. We appreciate your support and have a great day.

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Operator [100]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.