Extendicare Inc.
2019 ANNUAL REPORT
Board of Directors
executives
Alan D. Torrie GN, HR
NON-EXECUTIVE CHAIRMAN, CHAIR OF THE GOVERNANCE AND
NOMINATING COMMITTEE
Norma Beauchamp INV, QR
Margery O. Cunningham A
Michael R. Guerriere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Sandra L. Hanington A, GN, QR
CHAIR OF THE QUALITY AND RISK COMMITTEE
Alan R. Hibben A, GN, INV
CHAIR OF AUDIT COMMITTEE
Donna E. Kingelin HR, QR
CHAIR OF THE HUMAN RESOURCES COMMITTEE
Samir Manji INV
Al Mawani A, HR, INV
CHAIR OF THE INVESTMENT COMMITTEE
COMMITTEES
A Audit
GN Governance and Nominating
HR Human Resources
INV Investment
QR Quality and Risk
Michael R. Guerriere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
David E. Bacon
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
John Toffoletto
SENIOR VICE PRESIDENT, CHIEF LEGAL OFFICER &
CORPORATE SECRETARY
Leslie Sarauer
SENIOR VICE PRESIDENT AND CHIEF HUMAN RESOURCES OFFICER
Elaine E. Everson
VICE PRESIDENT, CORPORATE DEVELOPMENT
Jillian E. Fountain
VICE PRESIDENT, INVESTOR RELATIONS
Michael A. Harris
VICE PRESIDENT, LONG-TERM CARE OPERATIONS
Gary Loder
VICE PRESIDENT, EXTENDICARE ASSIST AND SGP PURCHASING
PARTNER NETWORK
Mark Lugowski
VICE PRESIDENT, ESPRIT LIFESTYLE COMMUNITIES
Ali Mir
VICE PRESIDENT, PARAMED OPERATIONS
Tracey Mulcahy
VICE PRESIDENT, QUALITY, RISK AND INNOVATION
Prakash Patel
VICE PRESIDENT, FINANCE OPERATIONS
Mark Trenholm
VICE PRESIDENT, FINANCE
March 30, 2020
FELLOW EXTENDICARE SHAREHOLDERS,
We find ourselves in
an extraordinary time,
navigating the uncharted
perils of a global pandemic.
The world is changing quickly at a pace and scale
unimaginable only a few short weeks ago. Extendicare
is on the front lines of the battle with the virus, with
the protection and care of our residents, clients and
staff our paramount priority. We have well honed
procedures for infection control, practiced over many
years protecting seniors from annual waves of influenza
and other viral threats. These techniques are well suited
to preventing the spread of COVID-19, and are deployed
across our homes, communities and offices.
The pandemic is affecting our business in numerous
ways. Our business volumes may be impacted as
access to our homes and communities is restricted and
non-essential home health care services suspended
where prudent. At the same time, we are experiencing
increases in demand as hospitals look to our homes,
retirement communities and home health care services
as a safe place to manage hospital patients as they
endeavour to create greater capacity for COVID-19
admissions. We are incurring additional costs as we use
more masks, gloves and gowns, and incur greater staff
absenteeism as they self-isolate when circumstances
warrant. However, governments are making new
funding announcements in an effort to mitigate the
increased costs incurred in managing the virus and
launching new programs to encourage virtual home
health care, creating new opportunities to treat our
clients at a distance. Also, we are seeing major volatility
in the labour market, which may impact recruiting,
retention and engagement of staff both positively and
negatively.
At this point, it is impossible to project the net impact
of these changes on our business. That said, we have
the benefit of being an essential service where over 90%
of our business lines are government funded. Although
it is hard to see how long this crisis will last and how it
will end, our services will continue to be in high demand
once the crisis passes.
At Extendicare, we
continue to be committed
to helping people live better
by delivering high quality
care to Canada’s growing
seniors’ population.
We provide services directly to seniors across the
continuum of care, ranging from home health care to
retirement living and long-term care (LTC). We also use our
proven expertise and experience to assist other LTC and
retirement owners to operate their homes with particular
focus on quality improvement, efficient operations, use of
technology and cost-effective purchasing.
Extendicare’s business is underpinned by government
revenue and a strong balance sheet. To drive improved
performance and profitability, we constantly monitor
industry advancements and adapt our operations to take
advantage of new technology, adding new systems to
improve performance and drive organic growth.
In 2019, we continued to invest in our future and
positioned Extendicare for long-term success. Our long-
term care operations continued to deliver high quality
care for seniors. Occupancy in our LTC homes averaged
over 97% in 2019, generating more than half our total
revenue and delivering stable margins.
On the home health care front, we made significant
progress in transforming our ParaMed home health care
operations through a $12 million investment in cloud-
based software. While these costs put pressure on our
2019 home health care margins, they set us up for the
future by creating capacity for growth and put ParaMed
at the forefront of the home health care industry.
Our retirement living business performed strongly in
2019, with brisk lease up activity in our newly added and
expanded communities. Since November 2018 we have
added 281 new suites with the expansion of Douglas
Crossing, and the opening of two new communities,
Bolton Mills and The Barrieview.
Our B2B services are also an important part of our
growth strategy. In 2019, we continued to grow this high
margin segment of our business, most notably through
a 27% increase in the number of beds served by our
SGP Purchasing Partner Network.
Looking forward, as the COVID-19 challenge recedes,
we see growth opportunities across all segments of
our business. The number of seniors aged 75 or over in
Canada is expected to grow at 4% per year, putting even
more strain on our already stretched health care system.
Expansion of home health care and long-term care will
be essential to avoid overwhelming the acute health
care system with services that can be provided more
effectively in the community setting.
The Ontario government understands the importance
of adding new beds and redeveloping existing beds
to address the growing need for services. We are
working closely with the government to advance
the redevelopment program. Extendicare has 21
redevelopment projects that are well positioned to play
a meaningful part in addressing the shortage of senior
care beds in Ontario.
B2C: DIRECT SERVICES TO SENIORS
B2B: CONTRACT & CONSULTING SERVICES
LONG TERM
CARE
HOME
HEALTH CARE
RETIREMENT
LIVING
GROUP PURCHASING
SERVICES
CONTRACT SERVICES
& CONSULTING
58Long-term care
centres owned
>9M
Home Health Care
hours delivered (TTM)
11Retirement
communities owned
>71K
Third-party
residents served
53Homes under
contract
With our ParaMed transformation substantially
complete, we expect to fully participate in the growing
seniors market with increased volume of care hours and
improving margins. As the healthcare industry evolves,
we expect to see increased integration and collaboration
between home health care providers and doctors and
hospitals. As the only home health care provider with
scale and a cloud-based technology platform, our
ability to provide integrated care services is a strategic
advantage that positions us well to respond quickly to
market opportunities as they arise.
Continued lease up of our new retirement communities
and the planned expansion in Port Hope will contribute
strongly to our overall performance.
Our well-established processes and scale can provide
valuable assistance to smaller service providers through
our B2B offerings. We expect to continue to develop
opportunities to grow SGP and Extendicare Assist
through additional services and product offerings and
by expanding the geographic reach of our sales team.
We are building a strong
foundation to drive growth
and shareholder value.
Extendicare is well positioned to provide high quality
care to Canada’s growing seniors’ population.
In closing, WE want to
pay tribute to our 22,000
team members across the
country who are going
above and beyond during
this difficult time to care
for those who depend on us.
While we are completely focused on addressing
the COVID-19 challenge in the near term, we remain
confident in our future. Once we emerge from this crisis,
demographic tailwinds and the investments we have
made in our business will provide a variety of future
growth opportunities. As a leader in the industry, we
will play an important part in improving the accessibility
of seniors’ care services. Our focus on helping people
live better will drive sustainable value creation for
Extendicare’s shareholders for years to come.
Their dedication and commitment to the Extendicare
mission sets an example for all of us to do everything
in our power to protect our neighbours, our families
and our way of life. We are also grateful to our advisors,
business partners and Board of Directors for their
tireless efforts in support of Extendicare and its mission.
Dr. Michael Guerriere
PRESIDENT & CEO
Alan Torrie
CHAIRMAN
MANAGEMENT’S DISCUSSION AND ANALYSIS
Year ended December 31, 2019
Extendicare Inc.
Dated: February 27, 2020
Management’s Discussion and Analysis
Year ended December 31, 2019
Dated: February 27, 2020
TABLE OF CONTENTS
Basis of Presentation ........................................................... 1
Additional Information ........................................................ 2
Forward-looking Statements ............................................... 2
Non-GAAP Measures ......................................................... 3
Business Strategy ................................................................ 4
Significant 2019 Events and Developments ........................ 5
Changes Affecting Results ......................................... 32
Business Overview .............................................................. 6
Related Party Transactions .............................................. 35
Key Performance Indicators .............................................. 10
Select Annual Information ................................................ 13
Risks and Uncertainties ................................................... 35
Select Quarterly Financial Information ............................. 14 Accounting Policies and Estimates ................................. 44
2019 Fourth Quarter Financial Review ........................... 15
2019 Financial Review.................................................... 19
Adjusted Funds from Operations .................................... 24
Liquidity and Capital Resources ..................................... 26
Other Contractual Obligations and Contingencies .......... 30
Update of Regulatory and Funding
BASIS OF PRESENTATION
This Management’s Discussion and Analysis (MD&A) provides information on Extendicare Inc. and its subsidiaries, and
unless the context otherwise requires, references to “Extendicare”, the “Company”, “we”, “us” and “our” or similar terms
refer to Extendicare Inc., either alone or together with its subsidiaries. The Company’s common shares (the “Common
Shares”) are listed on the Toronto Stock Exchange (TSX) under the symbol “EXE”. The registered office of Extendicare is
located at 3000 Steeles Avenue East, Suite 700, Markham, Ontario, Canada, L3R 9W2.
The Company and its predecessors have been in operation since 1968, helping Canadians live better through a commitment
to quality care. The Company is the largest private-sector operator of long-term care homes in Canada and we believe is the
largest private-sector provider of publicly funded home health care services in Canada through its wholly owned subsidiary
ParaMed Inc. (ParaMed). In addition, the Company owns and operates retirement communities under the Esprit Lifestyle
Communities brand, provides contract services and consulting to third-party long-term care (LTC) homes and retirement
communities through its Extendicare Assist division and provides group purchasing services to third-party clients through
its SGP Purchasing Partner Network (SGP) division. The Company’s qualified and highly trained workforce of
approximately 22,000 individuals is passionate about providing high quality services to help people live better.
The Company has prepared this MD&A to provide information to current and prospective investors of the Company to
assist them to understand the Company’s financial results for the year ended December 31, 2019. This MD&A should be
read in conjunction with the Company’s audited consolidated financial statements for the year ended 2019 and 2018, and
the notes thereto, prepared in accordance with International Financial Reporting Standards (IFRS). The annual and interim
MD&A, financial statements and notes thereto are available on the Company’s website at www.extendicare.com. All
currencies are in Canadian dollars unless otherwise indicated. Except as otherwise specified, references to years indicate the
fiscal year ended December 31, 2019, or December 31 of the year referenced.
The discussion and analysis in this MD&A are based upon information available to management as of February 27, 2020.
This MD&A should not be considered all-inclusive, as it excludes changes that may occur in general economic, political
and environmental conditions. Additionally, other events may or may not occur, which could affect the Company in the
future.
Effective January 1, 2019, the Company adopted IFRS 16 “Leases”, as described under “Accounting, Policies and
Estimates – New Accounting Policies Adopted”. The Company has applied IFRS 16 using the modified retrospective
approach, under which the comparative information presented has not been restated and continues to be reported under
International Accounting Standard (IAS) 17 “Leases”. Certain practical expedients were selected on transition. The
transition did not result in any retrospective adjustment to opening retained earnings on January 1, 2019.
Lease costs for the prior year have been reclassified under administrative costs to conform with the current year
presentation. The impact of adopting this standard on net earnings and overall cash flow is neutral; however, the principal
payment of the lease liabilities is presented in financing activities (previously reflected as operating activities).
Extendicare Inc. – 2019 Management’s Discussion and Analysis
1
In connection with the adoption of IFRS 16, the Company has amended its definition of funds from operations (FFO) by
including a deduction for “depreciation for office leases”. As a result, the impact of the adoption of IFRS 16 on the
determination of FFO and adjusted funds from operations (AFFO) is not material.
ADDITIONAL INFORMATION
Additional information about the Company, including its latest Annual Information Form, may be found on SEDAR’s
website at www.sedar.com under the Company’s issuer profile and on the Company’s website at www.extendicare.com.
A copy of this and other public documents of the Company are available upon request to the Corporate Secretary of the
Company.
FORWARD-LOOKING STATEMENTS
Information provided by the Company from time to time, including in this Annual Report, contains or may contain
forward-looking statements concerning anticipated future events, results, circumstances, economic performance or
expectations with respect to the Company, including, without limitation: statements regarding its business operations,
business strategy, growth strategy, results of operations and financial condition; statements relating to the expected annual
revenue, net operating income yield (NOI Yield) to be derived from development projects and AFFO to be derived from
acquisitions and development projects; and statements relating to indemnification provisions in respect of disposed
operations. Forward-looking statements can be identified by the expressions “anticipate”, “believe”, “estimate”, “expect”,
“intend”, “objective”, “plan”, “project”, “will” or other similar expressions or the negative thereof. These forward-looking
statements reflect the Company’s current expectations regarding future results, performance or achievements and are based
upon information currently available to the Company and on assumptions that the Company believes are reasonable.
Although forward-looking statements are based upon estimates and assumptions that the Company believes are reasonable
based upon information currently available, these statements are not representations or guarantees of future results,
performance or achievements of the Company and are inherently subject to significant business, economic and competitive
uncertainties and contingencies. In addition to the assumptions and other factors referred to specifically in connection with
these forward-looking statements, the risks, uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed or implied by the forward-looking statements,
include, without limitation, the following: changes in the overall health of the economy and changes in government; the
ability of the Company to attract and retain qualified personnel; changes in the health care industry in general and the long-
term care industry in particular because of political, legal and economic influences; changes in applicable accounting
policies; changes in regulations governing the health care and long-term care industries and the compliance by the
Company with such regulations; changes in government funding levels for health care services; the ability of the Company
to renew its government licenses and customer contracts; changes in labour relations and costs; changes in tax laws;
resident care and class action litigation, including the Company’s exposure to punitive damage claims, increased insurance
costs and other claims; the ability of the Company to maintain and increase resident occupancy levels and business
volumes; changes in competition; changes in demographics and local environment economies; changes in foreign exchange
and interest rates; changes in the financial markets, which may affect the ability of the Company to refinance debt; and the
availability and terms of capital to the Company to fund capital expenditures and acquisitions; changes in the anticipated
outcome and benefits of dispositions, acquisitions and development projects, including risks relating to completion; and
those other risks, uncertainties and other factors identified in the Company’s other public filings with the Canadian
securities regulators available on SEDAR’s website at www.sedar.com under the Company’s issuer profile.
The forward-looking statements contained in this Annual Report are expressly qualified by this cautionary statement. Given
these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements of the
Company. The forward-looking statements speak only as of the date of this Annual Report. Except as required by
applicable securities laws, the Company assumes no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
2
NON-GAAP MEASURES
The Company assesses and measures operating results and financial position based on performance measures referred to as
“net operating income”, “net operating income margin”, “EBITDA”, “Adjusted EBITDA”, “Adjusted EBITDA margin”,
“earnings before depreciation, amortization, and other expense”, “earnings (loss) from continuing operations before
separately reported items, net of taxes”, “Funds from Operations” and “Adjusted Funds from Operations”. These measures
are commonly used by the Company and its investors as a means of assessing the performance of the core operations in
comparison to prior periods. They are presented by the Company on a consistent basis from period to period, thereby
allowing for consistent comparability of its operating performance. In addition, the Company assesses its return on
investment in development activities using the non-GAAP financial measure “NOI Yield”. These measures are not
recognized under GAAP and do not have standardized meanings prescribed by GAAP. These non-GAAP measures are
presented in this document because either: (i) management believes that they are a relevant measure for users of the
Company’s financial statements to assess the Company’s operating performance and ability to pay cash dividends; or
(ii) certain ongoing rights and obligations of the Company may be calculated using these measures. Such non-GAAP
measures may differ from similar computations as reported by other issuers, and accordingly, may not be comparable to
similarly titled measures as reported by such issuers. They are not intended to replace earnings (loss) from continuing
operations, net earnings (loss), cash flow, or other measures of financial performance and liquidity reported in accordance
with GAAP.
References to “net operating income”, or “NOI”, in this document are to revenue less operating expenses, and this value
represents the underlying performance of the operating business segments. References to “net operating income margin”
are to net operating income as a percentage of revenue.
References to “EBITDA” in this document are to earnings (loss) from continuing operations before net finance costs,
income taxes, depreciation and amortization. References to “Adjusted EBITDA” in this document are to EBITDA adjusted
to exclude the line item “other expense”, and as a result, is equivalent to the line item “earnings before depreciation,
amortization, and other expense” reported on the consolidated statements of earnings. References to “Adjusted EBITDA
Margin” are to Adjusted EBITDA as a percentage of revenue. Management believes that certain lenders, investors and
analysts use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin to measure a company’s ability to service debt
and meet other payment obligations, and as a common valuation measurement.
References to “earnings (loss) from continuing operations before separately reported items, net of tax” in this document
are to earnings (loss) from continuing operations, excluding the following separately reported line items: “foreign
exchange and fair value adjustments” and “other expense”. These line items are reported separately and excluded from
certain performance measures, because they are transitional in nature and would otherwise distort historical trends. They
relate to the change in the fair value of or gains and losses on termination of convertible debentures and interest rate
agreements, as well as gains or losses on the disposal or impairment of assets and investments, and foreign exchange gains
or losses on capital items. In addition, these line items may include acquisition related costs, restructuring charges, proxy
related costs and the write-off of unamortized deferred financing costs on early retirement of debt. The above separately
reported line items are reported on a pre-tax and on an after-tax basis as a means of deriving earnings (loss) from operations
and related earnings per share excluding such items.
“Funds from Operations”, or “FFO”, is defined as Adjusted EBITDA less depreciation for furniture, fixtures, equipment
and computers, or “depreciation for FFEC”, depreciation for office leases, accretion costs, net interest expense and current
income taxes. Depreciation for FFEC is considered representative of the amount of maintenance (non-growth) capital
expenditures, or “maintenance capex”, to be used in determining “Funds from Operations”, as the depreciation term is
generally in line with the life of these assets. FFO is a recognized earnings measure that is widely used by public real estate
entities, particularly by those entities that own and/operate income-producing properties. Management believes that certain
investors and analysts use FFO, and as such has included FFO to assist with their understanding of the Company’s
operating results.
“Adjusted Funds from Operations”, or “AFFO”, is defined as FFO plus: i) the reversal of non-cash deferred financing and
accretion costs; ii) the reversal of non-cash share-based compensation; iii) the principal portion of government capital
funding; iv) amounts received from income support arrangements; and v) the reversal of income or loss of the captive
insurance company that was included in the determination of FFO, as those operations are funded through investments held
for U.S. self-insured liabilities, which are not included in the Company’s reported cash and short-term investments. In
addition, AFFO is further adjusted to account for the difference in total maintenance capex incurred from the amount
deducted in the determination of FFO. Since the Company’s actual maintenance capex spending fluctuates on a quarterly
basis with the timing of projects and seasonality, the adjustment to AFFO for these expenditures from the amount of
depreciation for FFEC already deducted in determining FFO, may result in an increase to AFFO in the interim periods
Extendicare Inc. – 2019 Management’s Discussion and Analysis
3
reported. Management believes that AFFO is a relevant measure of the ability of the Company to earn cash and pay cash
dividends to shareholders.
Both FFO and AFFO are subject to other adjustments, as determined by management in its discretion, that are not
representative of the Company’s operating performance.
References to “payout ratio” in this document are to the ratio of dividends declared per share to AFFO per basic share.
References to “NOI Yield” in this document are to a financial measure used by the Company to assess its return on
investment in development activities. NOI Yield is defined by the Company as the estimated stabilized NOI of a
development property in the first year it achieves expected stabilized occupancy divided by the estimated Adjusted
Development Costs, as defined below. Management believes that this is a relevant measure of the Company’s total
economic return of a development project.
“Adjusted Development Costs” is defined as development costs on a GAAP basis (which includes the cost of land, hard
and soft development costs, furniture, fixtures and equipment) plus/minus cumulative net operating losses/earnings
generated by the development property prior to achieving expected stabilized occupancy, plus an estimated imputed cost
of capital during the development period through to the expected stabilized occupancy.
Reconciliations of “earnings (loss) from continuing operations before income taxes” to “Adjusted EBITDA” and “net
operating income” are provided under “Select Quarterly Financial Information”, “2019 Fourth Quarter Financial Review”
and “2019 Financial Review”.
Reconciliations of “earnings from continuing operations” to “FFO” and “AFFO” are provided under “Adjusted Funds from
Operations”.
Reconciliations of “net cash from operating activities” to “AFFO” are provided under “Adjusted Funds from Operations –
Reconciliation of Net Cash from Operating Activities to AFFO”.
BUSINESS STRATEGY
Our vision is to be the leading provider of care and services to seniors in Canada. We strive to provide quality, person-
centred care through compassionate caregivers across the continuum of care – offering the services seniors need wherever
they need it as they age and their care needs change – and to be an employer of choice in the communities in which we
operate.
Our LTC business provides high quality care in the homes we own and operate across the country. Capital investment is
focused on redeveloping our older LTC homes in the portfolio that will proceed when the economics are favourable. We
also provide contract services and consulting to a growing list of third-party LTC homes and retirement communities
through our Extendicare Assist division. Both our operations and our Extendicare Assist clients are supported by our SGP
Purchasing Partner Network division. We intend to continue to grow our third-party services offerings to gain market share
and capitalize on the organic growth in the Canadian seniors care market.
Our core long-term care services are complemented by a market leading home health care platform operating under the
ParaMed brand. Demand for home care is growing in tandem with the aging of the population, trending at an average
market growth of 4% per year, according to Statistics Canada. Strategic investments in systems and processes are designed
to enable volume growth in line with the market, while improving efficiency and resulting profitability.
Our private-pay retirement business operates under the Esprit Lifestyle Communities brand. We continue to grow Esprit
through new developments and expansions in secondary markets where supply and demand dynamics are favourable.
We are continually enhancing our operations to provide excellent care to the growing number of Canadian seniors. These
enhancements broaden the range of services available to seniors, while driving improved profitability and greater
diversification for the Company. We believe that the effective execution of this strategy will provide an appropriate and
consistent return to our shareholders who have demonstrated their belief in our mission by investing in the Company.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
4
SIGNIFICANT 2019 EVENTS AND DEVELOPMENTS
Completed Projects
In October 2019, the Company opened and welcomed its first residents to The Barrieview, its 124-suite retirement living
community in Barrie, Ontario, offering 78 independent living (IL) suites, 23 assisted living (AL) suites and 23 memory care
(MC) suites. Based on the strong pre-sale activity and initial occupancy experienced at The Barrieview, management is
projecting achieving stabilized occupancy of 95% by the end of 2020, earlier than originally anticipated. Management
estimates the Adjusted Development Costs for this project to be $35.4 million, with an estimated stabilized annual NOI of
$3.1 million and a corresponding NOI Yield of 8.7%.
Projects under Development
The Company is undertaking a 59-suite expansion of Empire Crossing Retirement Community (63 suites) in Port Hope,
Ontario that is anticipated to break ground in the second quarter of 2020. The project includes enhancements and upgrades
of the common amenities, which together with the efficiencies of operating a larger community, are anticipated to generate
incremental revenue and costs savings. Management estimates the Adjusted Development Costs for this project to be
$24.9 million, with an expected stabilized occupancy of the 122-suite retirement community of 95% and an estimated
incremental stabilized annual NOI of $2.0 million.
The Company continues to pursue the redevelopment of its 21 Class C LTC homes in Ontario in terms of pre-construction
activities. Management is working closely with the Ontario government and the Ontario Long Term Care Association (the
“OLTCA”) to improve the building program, including potential changes to the application and licensing process and the
capital funding subsidy required to advance our projects. Management believes that the Ontario government is well aware
of the critical state of long-term care and the pressing need for additional LTC beds, as discussed further under “Update of
Regulatory and Funding Changes Affecting Results – Ontario LTC Redevelopment and Expansion”.
Financing Activity
In April 2019, the Company secured a Canadian Mortgage and Housing Corporation (CMHC) insured mortgage in the
amount of $16.0 million, inclusive of fees, on Lynde Creek Manor Retirement Community that had been acquired in April
2018. The mortgage carries a fixed rate of 2.81% per annum, maturing in September 2029.
In June 2019, the Company renewed its corporate head office lease for a term of 10 years with renewal options, resulting in
the recognition of a right-of-use asset and lease liability of $10.3 million, in accordance with IFRS 16.
In October 2019, the Company refinanced its construction loan in the amount of $9.0 million on Cedar Crossing Retirement
Community that had opened in November 2016, with a CMHC-insured mortgage in the amount of $9.3 million, inclusive
of fees, that matures in September 2029 and carries a fixed rate of 2.49% per annum.
ParaMed – Bill 148 Funding Update
In June 2019, the Company received confirmation from the Local Health Integration Networks (LHINs) of the amount of
additional funding they would provide to offset increased costs associated with Bill 148, the Fair Workplaces, Better Jobs
Act, 2017 (Ontario) in 2018. The incremental funding was in excess of that estimated by the Company for the period ended
December 31, 2018, resulting in a $2.2 million increase in revenue recorded in the three months ended June 30, 2019. For
further information, refer to the discussion under “Update of Regulatory and Funding Changes Affecting Results – Ontario
Home Health Care Funding”.
ParaMed – Transformation
Our home health care business, ParaMed, accounted for 37.4% of our revenue in 2019, or 34.4% excluding the British
Columbia (B.C.) operations, which ceased in January 2020. Demand for home health care services in Canadian markets is
continuing to increase, but legacy information technology systems and processes are preventing us from fully capitalizing
on this opportunity.
Our legacy scheduling technology has impaired our ability to give our staff full time hours, adversely impacting staff
retention. This, coupled with competition for personal support workers (PSWs) and nurses, has prevented us from accepting
growing client referrals. To address these issues we are investing over $12 million to transform ParaMed’s business (the
“ParaMed Transformation”), including the implementation of a new cloud-based system to optimize scheduling and
automate work processes, which will improve scheduling for our valued staff, reduce turnover, increase capacity and allow
Extendicare Inc. – 2019 Management’s Discussion and Analysis
5
for more care referrals to be accepted. At year end, 89% of the targeted business volumes were supported by the new
platform, with the balance to be completed by the end of the first quarter of 2020.
The following table summarizes the costs incurred in respect of the ParaMed Transformation, including the ongoing costs
of the three legacy systems to be decommissioned once the new system is implemented in all ParaMed offices. In 2019,
Adjusted EBITDA was impacted by approximately $5.9 million ($2.3 million at the NOI level), as compared to
approximately $3.3 million ($2.3 million at the NOI level) in 2018. Management anticipates that the remaining costs
associated with the completion of the ParaMed Transformation project will total approximately $1.2 million ($0.5 million
at the NOI level).
ParaMed Transformation Costs
(millions of dollars)
Operating expenses (1)
Administrative costs
Adjusted EBITDA
Three months ended December 31
2018
0.5
0.4
0.9
2019
0.5
0.9
1.4
2019
2.3
3.6
5.9
Years ended December 31
2017
1.6
–
1.6
2018
2.3
1.0
3.3
(1) The operating expenses reflect the impact on net operating income.
The Company expects this investment will drive increased revenue growth and ultimately improve margins in the business.
Management is focused on completing the systems implementation stage of the project in early 2020. It is anticipated that
the new system, coupled with the ongoing training and optimization of the new platform, will drive volume increases in
2020, excluding the impact of the B.C. exit, with margin improvements coming later in the year.
ParaMed – B.C. Contract Expiration
As previously announced in March 2019, the Company received notice from Fraser Health and Vancouver Coastal Health,
both regional health authorities in B.C. (the “Health Authorities”), that the Health Authorities would be bringing their home
support services in-house, and as a result, would not be renewing contracts with private sector home support agencies,
including ParaMed. Consequently, ParaMed transferred and ceased providing services to the B.C. Health Authorities at the
end of January 2020. In connection with the expiration of the contracts, the Company recorded a charge of $1.4 million in
the three months ended March 31, 2019, primarily for facilities related costs.
For the three months ended December 31, 2019, ParaMed’s B.C. operations contributed revenue of $13.3 million and net
operating income of $0.1 million, as compared to revenue of $11.6 million and a net operating loss of $0.2 million for the
three months ended December 31, 2018. For the year ended December 31, 2019, ParaMed’s B.C. operations contributed
revenue of $50.7 million and a net operating loss of $0.3 million, as compared to revenue of $45.5 million and a net
operating loss of $0.1 million for the year ended December 31, 2018. In addition, the B.C. operations incurred lease costs of
approximately $0.4 million annually.
BUSINESS OVERVIEW
As at December 31, 2019, the Company owned and operated 58 LTC homes and 11 retirement living communities, through
its Extendicare and Esprit Lifestyle Communities divisions, respectively, and provided contract services to 53 LTC homes
and retirement communities for third parties through Extendicare Assist. In total, Extendicare operated or provided contract
services to a network of 122 LTC homes and retirement communities across four provinces in Canada, with capacity for
15,787 residents. The majority of these homes are in Ontario and Alberta, which accounted for approximately 77% and
11% of residents served, respectively.
In addition to providing group purchasing services to the Company’s own operations, SGP supports third-party clients
representing approximately 64,800 senior residents across Canada, as at December 31, 2019.
With respect to the Company’s home health care operations, ParaMed delivered approximately 10.6 million hours of home
health care services in 2019. Excluding the B.C. operations, ParaMed’s business volumes were approximately 9.3 million
in 2019, operating from 34 locations across five provinces (29 in Ontario, 2 in Alberta, 1 in Manitoba, 1 in Nova Scotia and
1 in Quebec).
Extendicare Inc. – 2019 Management’s Discussion and Analysis
6
The following table summarizes the LTC homes and retirement communities operated by the Company and those for which
it provided contract services to, as at December 31, 2019. Included are nine LTC homes in Ontario that the Company
operates under 25-year lease arrangements, with full ownership obtained at the end of the leases, which expire between
2026 and 2028. In addition to the homes listed in the following table, the Company owns land adjacent to its retirement
residence at Lynde Creek in Whitby, Ontario, on which there is an enclave of 113 townhomes, known as Lynde Creek
Village, that are leased by the Company to seniors under life leases.
By Province
Owned/Leased
Ontario
Alberta
Saskatchewan
Manitoba
Contract Services
Ontario
Alberta
Manitoba
Total
Long-term Care
No. of Resident
Homes Capacity
Retirement Living
No. of Resident
Homes Capacity
Chronic Care Unit
No. of Resident
Homes Capacity
Total
No. of Resident
Homes Capacity
34
14
5
5
58
42
1
2
45
103
5,207
1,519
649
762
8,137
5,442
102
168
5,712
13,849
7
–
4
–
11
6
1
–
7
18
708
–
341
–
1,049
660
109
–
769
1,818
–
–
–
–
–
1
–
–
1
1
–
–
–
–
–
120
–
–
120
120
41
14
9
5
69
49
2
2
53
122
5,915
1,519
990
762
9,186
6,222
211
168
6,601
15,787
(1) The homes are categorized based on the predominant level of care provided, the type of licensing and the type of funding provided. For example,
two LTC homes with retirement wings have been categorized as LTC homes. In addition, government-funded supportive living suites have
been categorized as LTC homes due to the nature of the regulatory oversight and government-determined fee structure.
The following reflects the change in operating capacity of the LTC homes and retirement communities during 2019 and
2018. During 2019, the Company opened Bolton Mills Retirement Community (112 suites) in Bolton, Ontario in January,
and The Barrieview Retirement Community (124 suites) in Barrie, Ontario in October.
Long-term Care and Retirement Living
As at beginning of year
Contract services added
Contract services ceased
Retirement living
Long-term care
As at end of year
Operating Segments
No. of
Homes
120
1
(1)
2
–
122
2019
Resident
Capacity
15,447
164
(60)
236
–
15,787
No. of
Homes
116
4
(1)
1
–
120
2018
Resident
Capacity
15,004
524
(243)
138
24
15,447
The Company reports the following segments within its Canadian operations: i) long-term care; ii) retirement living;
iii) home health care; iv) contract services, consulting and group purchasing as “other Canadian operations”; and v) the
Canadian corporate functions and any intersegment eliminations as “corporate Canada”. For financial reporting purposes,
the Company’s owned and operated homes are reported under the “long-term care” or the “retirement living” operating
segment based on the predominant level of care provided. The Company’s managed homes are reported under the “other
Canadian operations” segment, as the revenue from those operations is earned on a fee-for-service basis.
The Company continues to group its remaining U.S. operations as one segment, consisting of its wholly owned Bermuda-
based captive insurance company, Laurier Indemnity Company, Ltd. (the “Captive”) that insured the Company’s U.S.
general and professional liability risks up to the date of the sale of the Company’s U.S. business in 2015 (the “U.S. Sale
Transaction”). The Captive’s expense incurred or release of reserves for U.S. self-insured liabilities as well as the disposed
U.S. businesses are presented as discontinued operations, while the Captive’s costs to administer and manage the settlement
of the remaining claims are reported as continuing operations within the U.S. segment.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
7
The following summarizes the contribution of the business segments to the Company’s consolidated revenue and net
operating income for 2019 and 2018.
Operating
Segments
Long-term care
Retirement living
Home health care
Other Canadian
Remaining U.S.
Revenue
57.3%
3.9%
36.7%
2.1%
0.0%
Three months ended December 31
2018
NOI
57.2%
6.9%
24.1%
11.0%
0.8%
Revenue
57.0%
3.1%
37.8%
2.0%
0.1%
2019
NOI
62.4%
9.1%
18.0%
10.5%
0.0%
Revenue
56.9%
3.6%
37.4%
2.1%
0.0%
Years ended December 31
2018
NOI
54.5%
6.7%
28.4%
10.1%
0.3%
Revenue
56.5%
3.0%
38.5%
2.0%
0.0%
2019
NOI
58.0%
8.6%
23.5%
9.9%
0.0%
Excluding ParaMed’s B.C. operations, the long-term care operations represented 59.6% of consolidated revenue and 57.9%
of consolidated NOI for the 2019 year, while the home health care operations represented 34.4% and 23.7%, respectively.
The following describes the operating segments of the Company.
LONG-TERM CARE
The Company owns and operates for its own account 58 LTC homes with capacity for 8,137 residents, inclusive of a stand-
alone designated supportive living home (140 suites) and a designated supportive living wing (60 suites) in Alberta and two
retirement wings (76 suites) in Ontario.
In Canada, provincial legislation and regulations closely control all aspects of the operation and funding of LTC homes and
government-funded supportive living homes, including the fee structure, subsidies, the adequacy of physical homes,
standards of care and accommodation, equipment and personnel. A substantial portion of the fees paid to providers of these
services are funded by provincial programs, with a portion to be paid by the resident. Nobody is refused access to long-term
care due to an inability to pay. A government subsidy, generally based on an income test, is available for residents who are
unable to afford the resident co-payment. In Alberta, designated supportive living homes provide an alternative setting for
residents not yet requiring the needs of a more expensive LTC home. Such homes are licensed, regulated and funded by
Alberta Health Services (AHS) in a similar manner to LTC homes, including a government-determined fee structure.
In Ontario, long-term care operators have the opportunity to receive additional funding through higher accommodation
rates charged to residents for private and semi-private accommodation, at maximum preferred accommodation rates that are
fixed by the government. Long-term care operators are permitted to designate up to 60% of the resident capacity of a home
as preferred accommodation and charge higher accommodation rates that vary according to the structural classification of
the LTC home.
The following summarizes the composition of the owned/leased LTC homes operated by the Company in Ontario, as at
December 31, 2019, as well as the maximum preferred differential rates per diem for each classification of bed that took
effect July 1, 2019.
Ontario Owned/Leased
New
Class C (1)
No. of
Homes
13
21
34
Private
$26.64 premium
1,106
–
1,106
Private
$19.17 premium
–
476
476
Semi-private
$8.52 premium Basic/Other
741
–
1,412
1,396
2,153
1,396
Total
1,847
3,284
5,131
Composition of Beds
(1) Beds in operation of 3,284 exclude 3 beds held in abeyance.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
8
RETIREMENT LIVING
Under the Esprit Lifestyle Communities brand, the Company owned and operated 11 retirement communities with
1,049 suites as at December 31, 2019. Four of these communities (341 suites) are located in Saskatchewan and seven
communities (708 suites) are located in Ontario. Plans are under way for a 59-suite expansion of the Company’s 63-suite
Empire Crossing Retirement Community in Port Hope, Ontario (see “Significant 2019 Events and Development – Projects
under Development”).
The Company’s retirement communities provide accommodation and services to private-pay residents at rates set by the
Company based on the services provided and market conditions. The monthly fees vary depending on the type of
accommodation, level of care and services chosen by the resident and the location of the retirement community. Residents
are able to choose the living arrangements best suited to their personal preference and needs, as well as the level of care and
support they receive as their needs evolve over time.
HOME HEALTH CARE
The Company provides home health care services through ParaMed, whose professionals and staff members are skilled
in providing complex nursing care, occupational, physical and speech therapy and assistance with daily activities to
accommodate clients of all ages living at home.
Provincial governments fund a wide range of home health care services and contract these services to providers such as
ParaMed. ParaMed receives approximately 98% of its revenue from contracts tendered by locally administered provincial
agencies, with the remainder coming from private-pay clients. ParaMed delivered approximately 10.6 million hours of
service in 2019, of which approximately 81% were provided in Ontario, 12% in B.C., 4% in Alberta, and the balance were
provided in Manitoba, Nova Scotia and Quebec. As previously noted, ParaMed transferred its operations in B.C. and ceased
providing services to the B.C. Health Authorities at the end of January 2020 (refer to the discussion under “Significant
2019 Events and Developments – ParaMed – B.C. Contract Expiration”). Excluding the B.C. operations, ParaMed
delivered approximately 9.3 million hours of service in 2019, with Ontario and Alberta representing approximately 92%
and 5%, respectively.
OTHER CANADIAN OPERATIONS
The Company’s other Canadian operations are composed of its contract services and consulting provided by Extendicare
Assist and group purchasing services provided by SGP Purchasing Partner Network.
Contract Services and Consulting
Through its Extendicare Assist division, the Company leverages its expertise in operating LTC homes and retirement
communities in providing a wide range of contract services and consulting to third parties. Extendicare Assist partners with
not-for-profit and for-profit organizations, hospitals and municipalities seeking to improve their management practices,
quality of care practices and operating efficiencies. Extendicare Assist provides a broad range of services aimed at meeting
the needs of its partners, including: financial administration, record keeping, regulatory compliance and purchasing. In
addition, Extendicare Assist provides consulting services to third parties for the development and redevelopment of LTC
homes.
Extendicare Assist’s contract services portfolio consisted of 53 LTC homes and retirement communities with capacity for
6,601 residents as at December 31, 2019 (December 31, 2018 – 53 homes with capacity for 6,497 residents).
Group Purchasing Services
Through SGP, the Company offers cost-effective purchasing contracts to other senior care providers for food, capital
equipment, furnishings, cleaning and nursing supplies and office products. SGP negotiates long-term and high volume
contracts with suppliers that provide members with preferred pricing, thereby providing a cost-effective means to secure
quality national brand-name products, along with a range of innovative services. As at December 31, 2019, SGP provided
services to third parties representing approximately 64,800 senior residents across Canada (December 31, 2018 – 51,100
seniors).
Extendicare Inc. – 2019 Management’s Discussion and Analysis
9
U.S. REMAINING OPERATIONS – CAPTIVE INSURANCE COMPANY
Prior to the U.S. Sale Transaction, the Company self-insured certain risks related to general and professional liability of its
disposed U.S. operations through the Captive. The obligation to settle such claims relating to the period prior to the closing
of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with the Company, which continues
to be funded through the Captive. The majority of the risks that the Company self-insured relating to the U.S. operations are
long-term in nature, and accordingly, claim payments for any particular policy year can occur over a long period of time.
Any expense incurred or release of reserves for U.S. self-insured liabilities are presented as discontinued operations, while
the costs to administer and manage the settlement of the remaining claims are reported as continuing operations within the
U.S. segment.
As at December 31, 2019, the accrual for U.S. self-insured general and professional liabilities was $12.2 million
(US$9.4 million) as compared to $37.1 million (US$27.2 million) as at December 31, 2018, and the investments held for
U.S. self-insured liabilities totalled $27.6 million (US$21.2 million) as compared to $67.9 million (US$49.8 million) as at
December 31, 2018, with the decline in each primarily reflecting the “run off” of the self-insured liabilities and release of
reserves. In 2019, the Company released $12.2 million (US$9.2 million) of reserves for self-insured liabilities, and
transferred $26.7 million (US$20.0 million) of cash previously held for investment by the Captive to the Company for
general corporate use. Subsequent to December 31, 2019, the Company initiated the repatriation of US$7.0 million from
the Captive, which is expected to be received in the second quarter of 2020. For further information on the self-insured
liabilities, refer to the discussion under “Accrual for U.S. Self-insured Liabilities” found within the “Liquidity and Capital
Resources” section of this MD&A.
KEY PERFORMANCE INDICATORS
In addition to those measures identified under “Non-GAAP Measures”, management uses certain key performance
indicators in order to compare the financial performance of the Company’s continuing operations between periods. In
addition, we assess the operations on a same-store basis between the reported periods. Such performance indicators may not
be comparable to similar indicators presented by other companies. Set forth below is an analysis of the key performance
indicators and a discussion of significant trends when comparing the Company’s financial results from continuing
operations.
The following is a glossary of terms for some of the Company’s key performance indicators:
“Occupancy” is measured as the percentage of the number of earned resident days (or the number of occupied suites in the
case of a retirement community) relative to the total available resident days. Total available resident days is the number of
beds (or suites in the case of a retirement community) available for occupancy multiplied by the number of days in the
period;
“Stabilized” is the classification by the Company of an LTC home or retirement community that has achieved and
sustained its expected stabilized occupancy level for three consecutive months, which level varies from project to project;
“Lease-up” is any LTC home or retirement community not classified as stabilized;
“Non same-store” or “NSS”, generally refers to those homes, communities or businesses that were not continuously
operated by the Company since the beginning of the previous fiscal year or have been classified as held for sale; and
“Same-store” or “SS” generally refers to those homes, communities or businesses that were continuously operated by the
Company since the beginning of the previous fiscal year, and which are not classified as held for sale.
Long-term Care
The following table provides the average occupancy levels of the LTC operations for the past eight quarters.
Long-term Care Homes
Average Occupancy (%)
Total LTC
Ontario LTC
Total operations
Preferred Accommodation (1)
“New” homes – private
“C” homes – private
“C” homes – semi-private
2019
Year
Q3
96.9% 97.5% 97.9% 97.8% 97.5%
Q4
Q2
Q1
Q1
96.4%
Q2
97.2%
Q3
97.8%
Q4
97.6%
2018
Year
97.3%
97.5% 98.2% 98.5% 98.2% 98.1%
97.1%
97.7%
98.3%
98.2%
97.8%
95.1% 96.3% 95.9% 95.8% 95.8%
96.2% 93.8% 94.2% 93.1% 94.3%
65.3% 65.6% 66.5% 66.7% 66.0%
96.3%
97.4%
65.2%
96.7%
97.3%
65.7%
97.6%
97.8%
66.5%
96.6%
97.6%
66.1%
96.8%
97.5%
65.9%
(1) Average occupancy reported for the available private and semi-private rooms reflects the percentage of residents occupying those beds and paying
the respective premium rates.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
10
The average occupancy at the Company’s LTC homes was 97.8% for the three months ended December 31, 2019, as
compared to 97.6% for the three months ended December 31, 2018, and 97.9% for the three months ended September 30,
2019. For the year, average occupancy was slightly higher at 97.5% as compared to 97.3% in 2018. In terms of the
quarterly trends throughout the year, slightly lower occupancy levels are to be expected during the winter months as a result
of outbreaks, which can lead to a temporary freeze on admissions. In addition, occupancy levels for the three months ended
March 31, 2018, were impacted by the fill-up of a 24-bed addition to one of the LTC homes that opened in February 2018,
yet achieved stabilized occupancy levels in April 2018.
In Ontario, overall government funding is occupancy-based, but once the average occupancy level of 97% or higher for the
calendar year is achieved, operators receive government funding based on 100% occupancy. In 2019, the Company’s LTC
homes in Ontario achieved an overall average occupancy of 98.1%, with all but one home achieving the 97% occupancy
threshold.
In addition, the Company’s Ontario LTC homes receive premiums for preferred accommodation. The average occupancy of
private beds in the “New” homes was 95.8% for the three months ended December 31, 2019, as compared to 96.6% for the
three months ended December 31, 2018. For the year, the average occupancy of the “New” private beds was 95.8% as
compared to 96.8% in 2018. The average occupancy of the private beds at the Company’s Class C homes was 93.1% for
the three months ended December 31, 2019, as compared to 97.6% for the three months ended December 31, 2018. For the
year, the average occupancy of the Class C private beds was 94.3% as compared to 97.5% in 2018.
Retirement Living
The following table summarizes the composition of the Company’s eleven retirement communities in operation as at
December 31, 2019. During the three months ended December 31, 2019, Douglas Crossing and Yorkton Crossing achieved
stabilized occupancy and The Barrieview opened at the beginning of October. Consequently, three of the retirement
communities were in lease-up and three of the retirement communities were classified as non same-store.
Retirement Communities
Cedar Crossing
Douglas Crossing
Empire Crossing
Harvest Crossing
Riverbend Crossing
Stonebridge Crossing
Yorkton Crossing
Lynde Creek Manor
West Park Crossing
The Barrieview
Bolton Mills
Total suites
Total communities
AS AT OCCUPANCY
Location
Simcoe, ON
Uxbridge, ON
Port Hope, ON
Tillsonburg, ON
Regina, SK
Saskatoon, SK
Yorkton, SK
Whitby, ON
Moose Jaw, SK
Barrie, ON
Bolton, ON
Total
68
148
63
100
67
116
79
93
79
124
112
1,049
11
Stabilized Lease-up
Same-store Non Same-store
68
148
63
100
67
116
79
93
734
8
79
124
112
315
3
68
148
63
100
67
116
79
79
720
8
93
124
112
329
3
The following table provides the combined occupancy of the Company’s stabilized and lease-up retirement communities at
the end of each of the past eight quarters, based on their classification at December 31, 2019.
Retirement Communities
As at Occupancy (%) – total
Stabilized communities
Lease-up communities
Q1
80.9%
91.0%
41.9%
Q2
83.8%
92.5%
50.3%
Q3
86.6%
94.1%
57.6%
2019
Q4
85.6%
95.1%
63.5%
Q1
80.8%
83.2%
62.0%
Q2
86.0%
88.7%
62.0%
Q3
89.5%
91.6%
70.9%
2018
Q4
88.6%
89.8%
77.2%
Extendicare Inc. – 2019 Management’s Discussion and Analysis
11
The occupancy of the stabilized communities was 95.1% as at December 31, 2019, as compared to 94.1% as at September
30, 2019, and to 89.8% as at December 31, 2018. The improvement from the end of last year reflects the lease-up of
Douglas Crossing and Yorkton Crossing and the maintenance of stable occupancy levels at the six other retirement
communities in that category. The completion of the 45-suite addition at Douglas Crossing in November 2018 resulted in a
sequential decline in occupancy as at December 31, 2018 from September 30, 2018. The occupancy of the three lease-up
communities increased to 63.5% as at December 31, 2019, as compared to 57.6% as at September 30, 2019. The opening of
Bolton Mills (112 suites) in January 2019, resulted in a decline in occupancy of the lease-up communities from 77.2% at
December 31, 2018.
AVERAGE OCCUPANCY
The following table provides the average occupancy of the retirement communities in total and for each of the stabilized
and lease-up groupings for the past eight quarters. The average occupancy of the stabilized communities grew to 94.9% for
the three months ended December 31, 2019, as compared to 89.8% for the same prior year period. The sequential trend in
the average occupancy of the stabilized communities experienced in the three months ended December 31, 2018 from the
three months ended September 30, 2018, reflects the opening of the 45-suite addition at Douglas Crossing. The sequential
trend in the average occupancy of the lease-up communities from the end of 2018 reflects the impact of the opening of
Bolton Mills (112 suites) in January 2019 and The Barrieview (124 suites) in October 2019.
Retirement Communities
Average Occupancy (%) – total
Stabilized communities
Lease-up communities
Q1
79.3%
90.7%
35.7%
Q2
82.0%
91.4%
45.8%
Q3
85.5%
94.0%
52.7%
Q4
81.7%
94.9%
50.7%
2019
Year
82.1%
92.7%
46.9%
Q1
80.4%
82.6%
64.0%
Q2
84.4%
87.1%
61.5%
Q3
87.9%
90.1%
69.0%
Q4
88.4%
89.8%
76.1%
2018
Year
85.5%
87.6%
67.7%
Home Health Care
The following table provides the service volumes of the Company’s home health care operations in total and excluding the
B.C. operations, for the past eight quarters.
Home Health Care
Service Volumes
Total
Hours of service (000’s)
Hours per day
Excluding B.C.
Hours of service (000’s)
Hours per day
Q1
Q2
Q3
Q4
2019
Year
Q1
Q2
Q3
Q4
2018
Year
2,595.3
28,837
2,660.5
29,236
2,652.7
28,834
2,661.2 10,569.7
28,958
28,926
2,705.0
30,055
2,734.8
30,053
2,708.6
29,441
2,750.0 10,898.4
29,859
29,891
2,291.9
25,465
2,340.0
25,714
2,322.5
25,245
2,329.2
25,318
9,283.6
25,435
2,408.7
26,763
2,430.1
26,704
2,402.0
26,108
2,441.6
26,539
9,682.4
26,527
ParaMed’s average daily hours of service for the three months ended December 31, 2019, increased by 0.3% from the three
months ended September 30, 2019. In comparison to 2018, ParaMed’s average daily hours of service declined by 3.2% for
the three months ended December 31, 2019, and declined by 3.0% for the year. Excluding the B.C. operations, the average
daily volumes declined by 4.1% over 2018, due to the challenges experienced with ParaMed’s Ontario operations. We
continue efforts to build capacity to address these challenges and to take advantage of the significant organic growth
opportunity that exists across Canada (refer to the discussion under “Significant 2019 Events and Developments – ParaMed
– Transformation”).
Extendicare Inc. – 2019 Management’s Discussion and Analysis
12
SELECTED ANNUAL INFORMATION
The following is a summary of selected annual financial information for each of the past three years.
(thousands of dollars unless otherwise noted)
Financial Results
Revenue
Earnings before depreciation, amortization and
other expense (Adjusted EBITDA)
Earnings from continuing operations
per basic and diluted share ($)
Earnings (loss) from discontinued operations
Net earnings
per basic and diluted share ($)
AFFO
per basic share ($)
Cash dividends declared
per share ($)
Financial Position (at year end)
Total assets
Total non-current liabilities
Long-term debt
Long-term debt, including current portion
2019
2018
2017
1,131,950
1,120,007
1,097,331
91,111
17,051
0.19
11,579
28,630
0.32
52,600
0.590
42,672
0.480
888,800
497,515
422,535
556,306
94,238
8,084
0.09
23,654
31,738
0.36
57,751
0.653
42,351
0.480
896,324
543,359
454,344
528,970
97,597
31,712
0.36
(29,580)
2,132
0.02
58,495
0.659
42,583
0.480
934,281
588,804
476,404
536,068
Financial Results – The selected information provided for each of the years under the heading “Financial Results” reflects
the classification of disposed U.S. operations as discontinued. The financial results for 2018 reflected a decline in earnings
from continuing operations of $23.6 million, largely impacted by other expenses totalling $20.2 million that included an
impairment charge of $16.2 million pre-tax in respect of certain of the Company’s retirement communities and long-term
care homes, costs associated with the redemption of convertible debentures and the acquisition of a retirement community,
a net change in foreign exchange and fair value adjustments of $3.1 million pre-tax and a decline in Adjusted EBITDA. The
decrease in Adjusted EBITDA reflects an improvement from Canadian operations of $1.5 million, offset by a decline from
U.S. operations due to lower investment income from the Captive as it winds down.
Financial Position – Since the end of 2017, total assets and non-current liabilities have declined largely due to the “run
off” of the U.S. self-insured liabilities and related investments held by the Captive and an impairment charge recorded in
2018.
A comparison between the 2019 and 2018 financial results is provided in the discussion under the headings “2019 Financial
Review” and “Liquidity and Capital Resources”.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
13
SELECT QUARTERLY FINANCIAL INFORMATION
The following is a summary of select quarterly financial information for the past eight quarters.
(thousands of dollars unless otherwise noted)
Revenue
Q4
290,895
Q3
282,733
Q2
284,053
Net operating income
NOI margin
Adjusted EBITDA
Adjusted EBITDA margin
Earnings (loss) from continuing operations
per basic and diluted share ($)
Earnings from discontinued operations
Net earnings
per basic and diluted share ($)
AFFO
per basic share ($)
Maintenance Capex
Cash dividends declared
per share ($)
Weighted Average Number of Shares
Basic
Diluted
32,877
11.3%
22,998
7.9%
4,893
0.05
5,195
10,088
0.11
11,365
0.127
6,028
10,701
0.120
34,867
12.3%
23,588
8.3%
5,247
0.06
2,012
7,259
0.08
13,693
0.153
3,056
10,680
0.120
35,320
12.4%
24,973
8.8%
5,854
0.07
2,471
8,325
0.10
14,927
0.168
2,312
10,657
0.120
2019
Q1
274,269
30,386
11.1%
19,552
7.1%
1,057
0.01
1,901
2,958
0.03
12,615
0.142
916
10,634
0.120
2018
Q1
288,793 280,302 279,488 271,424
Q4
Q3
Q2
32,863
11.4%
35,492
12.7%
36,307
13.0%
29,322
10.8%
22,538
7.8%
24,393
8.7%
27,330
9.8%
19,977
7.4%
(9,055)
(0.10)
15,562
6,507
0.07
12,570
0.142
4,202
10,612
0.120
7,598
0.08
975
8,573
0.10
13,379
0.151
3,639
10,591
0.120
5,975
0.07
5,852
11,827
0.14
17,133
0.194
3,783
10,570
0.120
3,566
0.04
1,265
4,831
0.05
14,669
0.166
1,051
10,578
0.120
89,467
99,850
89,253
99,614
89,039
99,415
88,825
99,186
88,612
98,962
88,412
98,788
88,208
98,595
88,379
99,688
The following is a reconciliation of “earnings (loss) from continuing operations before income taxes” to Adjusted EBITDA
and “net operating income”.
(thousands of dollars)
Earnings (loss) from continuing
operations before income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Net operating income
Q4
Q3
Q2
2019
Q1
Q4
Q3
Q2
2018
Q1
6,878
7,488
8,057
1,813
(12,327)
10,135
9,131
5,380
10,597
5,523
–
22,998
9,861
6,239
–
23,588
9,705
6,236
975
24,973
9,427
6,883
1,429
19,552
10,184
8,039
16,642
22,538
9,014
5,244
–
24,393
8,235
6,591
3,373
27,330
7,837
6,580
180
19,977
9,879
32,877
11,279
34,867
10,347
35,320
10,834
30,386
10,325
32,863
11,099
35,492
8,977
36,307
9,345
29,322
There are a number of factors affecting the trend of the Company’s quarterly results from continuing operations. With
respect to the core operations, while year-over-year quarterly comparisons will generally remain comparable, sequential
quarters can vary materially for seasonal and other trends. The significant factors that impact the results from period to
period are as follows:
• Ontario long-term care funding tied to flow-through funding envelopes requires revenue be deferred until it is matched
with the related costs for resident care in the periods in which the costs are incurred, resulting in a fluctuation in
revenue and operating expenses by quarter, with both generally being at their lowest in the first quarter and at their
highest in the fourth quarter;
• Ontario long-term care providers generally receive annual flow-through funding increases and case mix index
adjustments effective April 1st and accommodation funding increases effective July 1st, and Alberta long-term care
providers generally receive annual inflationary rate increases and acuity-based funding adjustments on April 1st and
accommodation funding increases effective July 1st;
• maintenance capex spending, which impacts AFFO, fluctuates on a quarterly basis with the timing of projects and
seasonality and is generally at its lowest in the first quarter and its highest in the fourth quarter;
•
•
utility costs are generally at their highest in the first quarter and their lowest in the second and third quarters; and
certain line items that are reported separately due to their transitional nature that would otherwise distort the
comparability of the historical trends, being “other expense” and “foreign exchange and fair value adjustments”.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
14
2019 FOURTH QUARTER FINANCIAL REVIEW
The following provides a breakdown of the consolidated statement of earnings between the Canadian and remaining U.S.
operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
and income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Foreign exchange and fair value adjustments
Net finance costs (income)
Earnings (loss) from continuing
operations before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense (recovery)
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings
Earnings (loss) from continuing operations
Add (Deduct) (1):
Foreign exchange and fair value adjustments
Other expense
Earnings (loss) from continuing operations
before separately reported items,
net of taxes
Canada
290,895
258,018
32,877
9,350
23,527
10,597
–
12,930
7,623
(1,004)
303
(444)
6,478
U.S.
–
–
–
529
(529)
–
–
(529)
–
–
90
(1,045)
(955)
2019
Total
290,895
258,018
32,877
9,879
22,998
10,597
–
12,401
7,623
(1,004)
393
(1,489)
5,523
Three months ended December 31
Total
Change
2,102
2,088
14
(446)
460
413
(16,642)
2018
Total
288,793
255,930
32,863
10,325
22,538
10,184
16,642
U.S.
277
–
277
339
(62)
–
–
Canada
288,516
255,930
32,586
9,986
22,600
10,184
16,642
(4,226)
6,685
(926)
299
1,289
7,347
(62)
–
–
336
356
692
(4,288)
6,685
(926)
635
1,645
8,039
16,689
938
(78)
(242)
(3,134)
(2,516)
6,452
426
6,878
(11,573)
(754)
(12,327)
19,205
1,068
917
1,985
4,467
–
4,467
4,467
–
–
–
426
5,195
5,621
426
1,068
917
1,985
4,893
5,195
10,088
4,893
2,001
(5,273)
(3,272)
(8,301)
–
(8,301)
(8,301)
–
–
–
(754)
15,562
14,808
(754)
2,001
(5,273)
(3,272)
(9,055)
15,562
6,507
(9,055)
(933)
6,190
5,257
13,948
(10,367)
3,581
13,948
(255)
–
(1,045)
–
(1,300)
–
715
12,153
356
–
1,071
12,153
(2,371)
(12,153)
4,212
(619)
3,593
4,567
(398)
4,169
(576)
(1) The separately reported items being added to or deducted from earnings (loss) from continuing operations are net of income taxes, and are
non-GAAP measures. Refer to the discussion of non-GAAP measures.
The following provides a reconciliation of “earnings (loss) from continuing operations before income taxes” to “Adjusted
EBITDA” and “net operating income”.
(thousands of dollars)
Earnings (loss) from continuing
operations before income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs (income)
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Net operating income
Canada
U.S.
2019
Total
Canada
Three months ended December 31
Total
Change
2018
Total
U.S.
6,452
426
6,878
(11,573)
(754)
(12,327)
19,205
10,597
6,478
–
23,527
9,350
32,877
–
(955)
–
(529)
10,597
5,523
–
22,998
10,184
7,347
16,642
22,600
–
692
–
(62)
10,184
8,039
16,642
22,538
413
(2,516)
(16,642)
460
529
–
9,879
32,877
9,986
32,586
339
277
10,325
32,863
(446)
14
Extendicare Inc. – 2019 Management’s Discussion and Analysis
15
The following is an analysis of the consolidated results from operations for the three months ended December 31, 2019, as
compared to the three months ended December 31, 2018. Refer to the discussion that follows under “Summary of Results
of Operations by Segment” for an analysis of the revenue and net operating income by operating segment, including the
components of non same-store revenue and net operating income.
Revenue
Revenue grew by $2.1 million or 0.7% to $290.9 million for the three months ended December 31, 2019, driven primarily
by LTC funding enhancements, expansion of the retirement living operations and growth in other Canadian operations,
partially offset by a decline in home health care volumes.
Operating Expenses
Operating expenses increased by $2.1 million or 0.8% to $258.0 million for the three months ended December 31, 2019.
The increase in operating expenses was driven by increased costs of resident care, expansion of the retirement living
operations and higher labour and utility costs, partially offset by the impact of lower home health care volumes delivered
and favourable year-end labour accrual adjustments. Labour costs, including the favourable year-end adjustments declined
by $1.1 million over the same prior year period and represented 84.0% of operating expenses as compared to 85.1% for the
three months ended December 31, 2018, and labour costs as a percentage of revenue were 74.5% for the three months
ended December 31, 2019, and 75.4% for the same prior year period.
Net Operating Income
Net operating income was unchanged at $32.9 million for the three months ended December 31, 2019, and represented
11.3% of revenue as compared to 11.4% for the three months ended December 31, 2018, reflecting funding enhancements,
timing of spending under the Ontario flow through envelopes, growth of the retirement living and other Canadian
operations and year-end adjustments for labour accruals, offset by lower home health care volumes and increased back
office operating costs.
Administrative Costs
Administrative costs declined by $0.5 million or 4.3% to $9.9 million for the three months ended December 31, 2019. The
comparability of administrative costs between periods was impacted by higher ParaMed Transformation costs of
$0.5 million ($0.9 million for the three months ended December 31, 2019, as compared to $0.4 million for the same prior
year period), and the adoption of IFRS 16, which reduced administrative costs by $0.8 million. Excluding the $0.3 million
favourable net impact of these factors, administrative costs decreased by $0.2 million.
Adjusted EBITDA
Adjusted EBITDA increased by $0.5 million to $23.0 million for the three months ended December 31, 2019, as compared
to $22.5 million for the three months ended December 31, 2018, and represented 7.9% of revenue as compared to 7.8%,
respectively, reflecting flat net operating income and lower administrative costs of $0.5 million. The comparability of
Adjusted EBITDA between periods was impacted by higher ParaMed Transformation costs of $0.5 million, year-end
accrual adjustments of $0.9 million and the adoption of IFRS 16 of $0.8 million, for a net favourable impact of
$1.2 million. Excluding these factors, Adjusted EBITDA declined by $0.7 million to $22.7 million, or 7.8% of revenue for
the three months ended December 31, 2019, as compared to $23.4 million, or 8.1% of revenue for the same prior year
period, reflecting growth in net operating income of the LTC and retirement living operations and lower administrative
costs, offset by lower volumes and net operating income of the home health care operations.
Depreciation and Amortization
Depreciation and amortization costs increased by $0.4 million to $10.6 million for the three months ended December 31,
2019, and included higher costs of $0.6 million as a result of the adoption of IFRS 16.
Other Expense
Other expense of $16.6 million for the three months ended December 31, 2018, related primarily to an impairment charge
in respect of certain of the Company’s retirement communities and LTC homes.
Net Finance Costs
Net finance costs decreased by $2.5 million to $5.5 million for the three months ended December 31, 2019, primarily due to
a net favourable change in foreign exchange and fair value adjustments related to the Captive’s investments and interest
Extendicare Inc. – 2019 Management’s Discussion and Analysis
16
rate swaps aggregating to $3.1 million and lower accretion costs in connection with the decline in the accrual for U.S. self-
insured liabilities, partially offset by higher net interest costs of $0.8 million. Net interest costs were negatively impacted by
a reduction in the amount of capitalized interest of $0.4 million following the completion of two retirement communities,
the adoption of IFRS 16 of $0.2 million and an increase in debt levels.
Income Taxes
The income tax provision was $2.0 million for the three months ended December 31, 2019, representing an effective tax
rate of 28.9%, as compared to a provision of $3.3 million and an effective tax rate of 26.5% for the three months ended
December 31, 2018. The effective tax rate of the Canadian operations was 30.8% for the three months ended December 31,
2019, as compared to 28.3% for the three months ended December 31, 2018, and was impacted by, among other things,
foreign exchange and fair value adjustments and other items reported separately as “other expense”, as noted above. The
effective tax rate of the Canadian operations, excluding the impact of separately reported items, was 29.9% for the three
months ended December 31, 2019, as compared to 28.2% for the same prior year period.
Earnings from Continuing Operations
Earnings from continuing operations of $4.9 million ($0.05 per basic share) for the three months ended December 31, 2019,
was up by $13.9 million from a loss of $9.0 million (loss of $0.10 per basic share) for the three months ended December
31, 2018, largely impacted by the impairment charge incurred in 2018 and favourable change in foreign exchange and fair
value adjustments.
Discontinued Operations
Earnings from discontinued operations relate to the former U.S. operations and were $5.2 million for the three months
ended December 31, 2019, which included the release of $5.5 million of the Captive’s reserves, partially offset by the
impact of discount rate adjustments. The $15.5 million reported for the three months ended December 31, 2018, included
the release of $7.1 million of the Captive’s reserves, the favourable impact of discount rate adjustments of $1.1 million, a
$3.6 million reduction in indemnification provisions and other items and a net tax recovery of $5.9 million.
Summary of Results of Operations by Segment
The following summarizes the Company’s segmented “revenue”, “operating expenses” and “net operating income”,
followed by an analysis of the operating performance of each of the Company’s operating segments.
Three months ended December 31
(thousands of dollars)
Long-term Retirement
Living
Care
Home
Other
Health Canadian Corporate
Canada
Care Operations
Total
Canada
Total
U.S.
Total
2019
Revenue
Operating expenses
Net operating income
NOI margin %
2018
Revenue
Operating expenses
Net operating income
NOI margin %
Change
Revenue
Operating expenses
Net operating income
166,656
146,135
20,521
12.3%
164,656
145,849
18,807
11.4%
11,356
8,363
2,993
26.4%
106,699
100,778
5,921
5.5%
9,039
6,761
2,278
25.2%
109,012
101,097
7,915
7.3%
2,000
286
1,714
2,317
1,602
715
(2,313)
(319)
(1,994)
6,184
2,742
3,442
55.7%
5,808
2,223
3,585
61.7%
376
519
(143)
–
–
–
–
290,895
258,018
32,877
11.3%
–
–
–
–
290,895
258,018
32,877
11.3%
1
–
1
100.0%
288,516
255,930
32,586
11.3%
277
–
277
100.0%
288,793
255,930
32,863
11.4%
(1)
–
(1)
2,379
2,088
291
(277)
–
(277)
2,102
2,088
14
LONG-TERM CARE OPERATIONS
Net operating income from the long-term care operations was $20.5 million for the three months ended December 31, 2019,
as compared to $18.8 million for the three months ended December 31, 2018, an increase of $1.7 million or 9.1%, with an
NOI margin of 12.3% and 11.4%, respectively. Results included favourable labour accrual adjustments of approximately
$1.4 million recorded this quarter, excluding which the net operating income would have been $19.1 million, with an NOI
margin of 11.5%. Revenue grew by $2.0 million, or 1.2%, of which approximately $1.5 million related to the Ontario
Extendicare Inc. – 2019 Management’s Discussion and Analysis
17
flow-through funding envelopes, and was therefore directly offset by increased costs of resident care, and the balance was
from other funding enhancements. Operating expenses increased by $0.3 million, or 0.2%, due primarily to higher labour,
utilities and other costs of resident care, partially offset by the labour accrual adjustments. Excluding the accrual
adjustments, labour costs as a component of operating expenses increased by $0.3 million over the three months ended
December 31, 2018, and represented 80.5% of operating expenses for the three months ended December 31, 2019, as
compared to 81.2% for the same prior year period.
RETIREMENT LIVING OPERATIONS
The following table summarizes the breakdown of the same-store and non same-store operating results of the retirement
living operations.
Retirement Living
(thousands of dollars unless otherwise noted)
Same-store
Revenue
Operating expenses
Net operating income / margin %
Average occupancy / weighted average available suites
Non Same-store
Revenue
Operating expenses
Net operating income / margin %
Average occupancy / weighted average available suites
Total
Revenue
Operating expenses
Net operating income / margin %
Average occupancy / weighted average available suites
2019
Three months ended December 31
Change
2018
9,043
6,086
2,957
95.8%
2,313
2,277
36
50.6%
11,356
8,363
2,993
81.7%
32.7%
720
1.6%
328
26.4%
1,048
7,885
5,695
2,190
88.3%
1,154
1,066
88
89.5%
9,039
6,761
2,278
88.4%
27.8%
702
7.6%
93
25.2%
795
1,158
391
767
18
1,159
1,211
(52)
235
2,317
1,602
715
253
Net operating income from the retirement living operations was $3.0 million for the three months ended December 31,
2019, as compared to $2.3 million for the three months ended December 31, 2018, an increase of $0.7 million or 31.4%,
reflecting growth in occupancy of same-store operations to 95.8% from 88.3%. Net operating income from non same-store
operations reflect the impact of early lease-up and pre-opening losses from Bolton Mills and The Barrieview.
HOME HEALTH CARE OPERATIONS
Net operating income from the home health care operations was $5.9 million for the three months ended December 31,
2019, as compared to $7.9 million for the three months ended December 31, 2018, a decrease of $2.0 million or 25.2%,
with an NOI margin of 5.5% and 7.3%, respectively. Total labour costs as a component of total operating expenses
decreased by $1.3 million and represented 91.7% of operating expenses for the three months ended December 31, 2019, as
compared to 92.8% for the same prior year period. For the three months ended December 31, 2019, results reflect a 3.2%
decline in average daily volumes and increased back office operating costs compared to the same prior year period, and
approximately $0.5 million of out-of-period adjustments related to benefit cost accrual adjustments and private-pay
customer receivable provisions. Excluding the net impact of the out-of-period accrual adjustments and ParaMed
Transformation costs of $0.5 million, net operating income would have been $6.9 million this period as compared to
$8.4 million in the same prior year period, with an NOI margin of 6.5% as compared to 7.7%, respectively. After further
excluding the impact of the B.C. operations, net operating income would have been $6.8 million this period as compared to
$8.6 million in the same prior year period, with an NOI margin of 7.3% as compared to 8.9%, respectively. Refer to the
discussion under “Significant 2019 Events and Developments – ParaMed – B.C. Contract Expiration”.
OTHER CANADIAN OPERATIONS
Net operating income from the contract services, consulting and group purchasing operations declined by $0.1 million to
$3.4 million for the three months ended December 31, 2019, as compared to three months ended December 31, 2018, with
revenue growth of 6.5% due to an increase in clients served offset by increased costs to support operations.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
18
2019 FINANCIAL REVIEW
The following provides a breakdown of the consolidated statement of earnings between the Canadian and remaining U.S.
operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
and income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Foreign exchange and fair value adjustments
Net finance costs (income)
Earnings (loss) from continuing
operations before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings
Earnings (loss) from continuing operations
Add (Deduct) (1):
Foreign exchange and fair value adjustments
Other expense
Earnings (loss) from continuing operations
before separately reported items,
net of taxes
Canada
1,131,950
998,500
133,450
41,151
92,299
39,590
2,404
U.S.
2019
Total
– 1,131,950
998,500
–
133,450
–
42,339
1,188
91,111
(1,188)
39,590
–
2,404
–
Canada
1,119,602
986,023
133,579
38,570
95,009
35,270
20,195
Years ended December 31
Total
Change
11,943
12,477
(534)
2,593
(3,127)
4,320
(17,791)
2018
Total
1,120,007
986,023
133,984
39,746
94,238
35,270
20,195
U.S.
405
–
405
1,176
(771)
–
–
50,305
28,733
(3,688)
1,195
2,081
28,321
(1,188)
–
–
648
(4,088)
(3,440)
49,117
28,733
(3,688)
1,843
(2,007)
24,881
39,544
27,584
(3,761)
1,250
(149)
24,924
(771)
–
–
1,628
(98)
1,530
38,773
27,584
(3,761)
2,878
(247)
26,454
10,344
1,149
73
(1,035)
(1,760)
(1,573)
21,984
2,252
24,236
14,620
(2,301)
12,319
11,917
8,287
(1,102)
7,185
14,799
–
14,799
14,799
–
–
–
2,252
11,579
13,831
2,252
8,287
(1,102)
7,185
17,051
11,579
28,630
17,051
8,129
(3,894)
4,235
10,385
–
–
–
(2,301)
– 23,654
10,385 21,353
(2,301)
10,385
8,129
(3,894)
4,235
8,084
23,654
31,738
8,084
158
2,792
2,950
8,967
(12,075)
(3,108)
8,967
1,732
2,070
(4,088)
–
(2,356)
2,070
(523)
15,165
(98)
–
(621)
15,165
(1,735)
(13,095)
18,601
(1,836)
16,765
25,027
(2,399)
22,628
(5,863)
(1) The separately reported items being added to or deducted from earnings (loss) from continuing operations are net of income taxes, and are
non-GAAP measures. Refer to the discussion of non-GAAP measures.
The following provides a reconciliation of “earnings (loss) from continuing operations before income taxes” to “Adjusted
EBITDA” and “net operating income”.
(thousands of dollars)
Earnings (loss) from continuing
operations before income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs (income)
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Net operating income
Canada
U.S.
2019
Total
Canada
Years ended December 31
Total
Change
2018
Total
U.S.
21,984
2,252
24,236
14,620
(2,301)
12,319
11,917
39,590
28,321
2,404
92,299
–
(3,440)
–
(1,188)
39,590
24,881
2,404
91,111
35,270
24,924
20,195
95,009
–
1,530
–
(771)
35,270
26,454
20,195
94,238
4,320
(1,573)
(17,791)
(3,127)
41,151
133,450
1,188
–
42,339
133,450
38,570
133,579
1,176
405
39,746
133,984
2,593
(534)
Extendicare Inc. – 2019 Management’s Discussion and Analysis
19
The following is an analysis of the consolidated results from operations for 2019 as compared to 2018. Refer to the
discussion that follows under “Summary of Results of Operations by Segment” for an analysis of the revenue and net
operating income by operating segment, including the components of non same-store revenue and net operating income.
Summary of Factors Impacting Comparability
To assist in the analysis, the following is a summary of items impacting the comparability of results from operations
between periods:
• ParaMed Bill 148 funding: incremental revenue of $2.2 million recognized in the three months ended June 30, 2019,
related to 2018 for Bill 148.
• ParaMed Transformation costs:
o operating expenses included $2.3 million in each of 2019 and 2018; and
o
administrative costs were higher by $2.6 million ($3.6 million in 2019 as compared to $1.0 million in 2018);
• Severance costs: reduced administrative costs by $0.6 million ($1.1 million in 2019 as compared to $1.7 million in
2018).
• Adoption of IFRS 16 in 2019: reduced administrative costs by $2.9 million in 2019 (which was offset by higher
depreciation costs of $2.6 million and interest costs of $0.5 million).
• Year-end adjustments in 2019: reduced operating expenses by $0.6 million related to adjustments recorded in the
three months ended December 31, 2019, primarily related to favourable labour accrual adjustments.
The net impact of the above items was an increase of $2.8 million in net operating income (net favourable of $0.5 million in
2019 as compared to costs of $2.3 million in 2018) and an increase of $3.7 million in Adjusted EBITDA ($1.3 million in
2019 as compared to $5.0 million in 2018).
Revenue
Revenue grew by $12.0 million or 1.1% to $1,132.0 million in 2019. Excluding the factors impacting comparability
discussed above, revenue increased by $9.8 million, or 0.9%, driven primarily by LTC funding enhancements, expansion of
the retirement living operations and growth in other Canadian operations, partially offset by a decline in home health care
volumes.
Operating Expenses
Operating expenses increased by $12.5 million or 1.3% to $998.5 million in 2019. Total labour costs increased by
$6.8 million over 2018 and represented 85.5% and 86.0% of operating expenses for 2019 and 2018, respectively, and as a
percentage of revenue were 75.5% and 75.7%, respectively. Excluding the factors impacting comparability of $0.6 million
discussed above, the increase in operating expenses of $13.1 million was driven by higher costs of resident care, expansion
of the retirement living operations and higher labour costs, partially offset by the impact of lower home health care volumes
delivered.
Net Operating Income
Net operating income declined by $0.5 million or 0.4% to $133.5 million in 2019 and represented 11.8% of revenue as
compared to 12.0% in 2018. Excluding the factors impacting comparability of $2.8 million discussed above, net operating
income declined by $3.3 million to $133.0 million, or 11.8% of revenue in 2019, as compared to $136.3 million, or 12.2%
of revenue in 2018, reflecting funding enhancements and growth of the retirement living and other Canadian operations,
offset by lower home health care volumes and increased back office operating costs.
Administrative Costs
Administrative costs increased by $2.6 million or 6.5% to $42.3 million in 2019. Excluding the factors impacting
comparability of $0.9 million discussed above, administrative costs increased by $3.5 million, primarily due to higher
compensation costs and professional fees.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
20
Adjusted EBITDA
Adjusted EBITDA declined by $3.1 million to $91.1 million in 2019 and represented 8.0% of revenue as compared to 8.4%
in 2018, reflecting the $0.5 million decline in net operating income and $2.6 million increase in administrative costs.
Excluding the factors impacting comparability of $3.7 million discussed above, Adjusted EBITDA declined by $6.8 million
to $92.4 million, or 8.2% of revenue in 2019, as compared to $99.2 million, or 8.9% of revenue in 2018, reflecting growth
in net operating income of the LTC and retirement living operations, offset by lower volumes and net operating income of
the home health care operations and higher administrative costs.
Depreciation and Amortization
Depreciation and amortization costs increased by $4.3 million to $39.6 million in 2019, of which $2.6 million was a result
of the adoption of IFRS 16, and the balance was due to higher capital expenditures in prior periods.
Other Expense
Other expense of $2.4 million in 2019 related to costs associated with the ParaMed B.C. Contract Expiration of
$1.4 million recorded in the three months ended March 31, 2019, and costs of $1.0 million recognized in the three months
ended June 30, 2019, in connection with a representation and standstill agreement entered into with the Sandpiper group
pursuant to which two nominees of the Sandpiper group were appointed to the Company’s board of directors (the “Board of
Directors” or “Board”) and certain standstill covenants were provided in favour of the Company. Other expense of
$20.2 million in 2018 related to an impairment charge of $16.2 million in respect of certain of the Company’s retirement
communities and LTC homes, costs associated with the redemption of convertible debentures and costs related to the
acquisition of a retirement community.
Net Finance Costs
Net finance costs decreased by $1.6 million to $24.9 million in 2019, primarily due to a favourable net change in foreign
exchange and fair value adjustments related to the Captive’s investments and interest rate swaps aggregating to $1.8 million
and lower accretion costs in connection with the decline in the accrual for U.S. self-insured liabilities, partially offset by
higher interest expense due to a reduction in capitalized interest of $0.6 million, increased debt levels and the adoption of
IFRS 16 in the amount of $0.5 million.
Income Taxes
The income tax provision was $7.2 million in 2019, representing an effective tax rate of 29.6%, as compared to a provision
of $4.2 million and an effective tax rate of 34.4% in 2018. The effective tax rate of the Canadian operations was 32.7% in
2019, as compared to 29.0% in 2018, and was impacted by, among other things, foreign exchange and fair value
adjustments and other items reported separately as “other expense”, as noted above. The effective tax rate of the Canadian
operations, excluding the impact of separately reported items, was 29.7% in 2019 as compared to 27.8% in 2018.
Earnings from Continuing Operations
Earnings from continuing operations of $17.1 million ($0.19 per basic share) in 2019 was up by $9.0 million from
$8.1 million ($0.09 per basic share) in 2018, largely impacted by the above noted impairment charge incurred in 2018 and
the favourable change in foreign exchange and fair value adjustments, partially offset by an increase in depreciation costs,
and decline in earnings from the home health care operations due to higher back office operating costs and ParaMed
Transformation costs and lower business volumes.
Discontinued Operations
Earnings from discontinued operations relate to the former U.S. operations and were $11.6 million in 2019 as compared to
$23.6 million in 2018. The 2019 after-tax earnings include the release of $12.2 million of the Captive’s reserves, partially
offset by the impact of discount rate adjustments. The 2018 after-tax earnings of $23.6 million include the release of
$13.0 million of the Captive’s reserves, the favourable impact of discount rate adjustments of $1.1 million, a $3.6 million
decrease in indemnification provisions and other items and a net tax recovery of $5.9 million.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
21
Summary of Results of Operations by Segment
The following summarizes the Company’s segmented “revenue”, “operating expenses” and “net operating income”,
followed by an analysis of the operating performance of each of the Company’s operating segments.
Years ended December 31
(thousands of dollars)
Long-term Retirement
Living
Care
Home
Other
Health Canadian Corporate
Canada
Care Operations
Total
Canada
Total
U.S.
Total
2019
Revenue
Operating expenses
Net operating income
NOI margin %
2018
Revenue
Operating expenses
Net operating income
NOI margin %
Change
Revenue
Operating expenses
Net operating income
643,785
566,375
77,410
12.0%
632,533
559,489
73,044
11.5%
41,276
29,844
11,432
27.7%
422,995
391,646
31,349
7.4%
23,894
10,635
13,259
55.5%
– 1,131,950
998,500
–
133,450
–
11.8%
–
– 1,131,950
998,500
–
133,450
–
11.8%
–
33,412
24,430
8,982
26.9%
431,343
393,354
37,989
8.8%
22,291
8,750
13,541
60.7%
23 1,119,602
986,023
133,579
11.9%
–
23
100.0%
405 1,120,007
986,023
133,984
12.0%
–
405
100.0%
11,252
6,886
4,366
7,864
5,414
2,450
(8,348)
(1,708)
(6,640)
1,603
1,885
(282)
(23)
–
(23)
12,348
12,477
(129)
(405)
–
(405)
11,943
12,477
(534)
LONG-TERM CARE OPERATIONS
Net operating income from the long-term care operations was $77.4 million in 2019 as compared to $73.0 million in 2018,
an increase of $4.4 million or 6.0%, with an NOI margin of 12.0% and 11.5%, respectively. Results included favourable
labour accrual adjustments of approximately $1.1 million recorded in 2019, excluding which the net operating income
would have been $76.3 million, with an NOI margin of 11.9%. Revenue grew by $11.3 million, or 1.8%, of which
approximately $6.7 million related to the Ontario flow-through funding envelopes, and was therefore directly offset by
increased costs of resident care, and the balance was from other funding enhancements. Operating expenses increased by
$6.9 million, or 1.2%, due primarily to higher labour, utilities and other costs of resident care, partially offset by the labour
accrual adjustments. Excluding the accrual adjustments, labour costs as a component of operating expenses increased by
$5.3 million or 1.2% over 2018, and represented 82.3% of operating expenses in 2019 as compared to 82.5% in 2018.
RETIREMENT LIVING OPERATIONS
The following table summarizes the breakdown of the same-store and non same-store operating results of the retirement
living operations.
Retirement Living
(thousands of dollars unless otherwise noted)
Same-store
Revenue
Operating expenses
Net operating income / margin %
Average occupancy / weighted average available suites
Non Same-store
Revenue
Operating expenses
Net operating income (loss) / margin %
Average occupancy / weighted average available suites
Total
Revenue
Operating expenses
Net operating income / margin %
Average occupancy / weighted average available suites
2019
32.9%
720
–
236
27.7%
956
34,725
23,290
11,435
93.0%
6,551
6,554
(3)
48.9%
41,276
29,844
11,432
82.1%
Extendicare Inc. – 2019 Management’s Discussion and Analysis
Years ended December 31
Change
2018
29,615
21,320
8,295
84.7%
3,797
3,110
687
93.0%
33,412
24,430
8,982
85.5%
28.0%
683
18.1%
68
26.9%
750
5,110
1,970
3,140
37
2,754
3,444
(690)
168
7,864
5,414
2,450
206
22
Net operating income from the retirement living operations was $11.4 million in 2019 as compared to $9.0 million in 2018,
representing an increase of $2.4 million or 27.3%. This improvement was driven primarily by growth in average occupancy
from same-store operations to 93.0% in 2019 as compared to 84.7% for the same prior year period, partially offset by a
decline in contribution from non same-store operations of $0.7 million, due to early lease-up and pre-opening losses from
Bolton Mills and The Barrieview.
HOME HEALTH CARE OPERATIONS
Net operating income from the home health care operations declined by $6.6 million or 19.2% to $31.3 million in 2019
over 2018, with an NOI margin of 7.4% and 8.8%, respectively. Total labour costs as a component of total operating
expenses decreased by $3.5 million and represented 92.3% of operating expenses compared to 92.8% in 2018. Excluding
the factors impacting comparability of $1.7 million discussed under “– Summary of Factors Impacting Comparability”, net
operating income declined by $8.3 million to $32.0 million, or 7.6% of revenue, in 2019, as compared to $40.3 million, or
9.3% of revenue, in 2018. The decline in net operating income related primarily to a 3.0% decline in average daily volumes
and higher back office operating costs. After further excluding the impact of the B.C. operations, net operating income for
2019 would have been $32.3 million as compared to $40.3 million in 2018, with an NOI margin of 8.7% compared to
10.5%, respectively. Refer to the discussion under “Significant 2019 Events and Developments – ParaMed – B.C. Contract
Expiration”.
OTHER CANADIAN OPERATIONS
Net operating income from the contract services, consulting and group purchasing operations declined by $0.3 million or
2.1% to $13.3 million in 2019 over 2018, with revenue growth of 7.2% due to an increase in clients served, offset by
increased costs to support operations.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
23
ADJUSTED FUNDS FROM OPERATIONS
The following provides a reconciliation of “net earnings” to FFO and AFFO. A reconciliation of “net cash from operating
activities” to AFFO is also provided under “Reconciliation of Net Cash from Operating Activities to AFFO”.
(thousands of dollars unless otherwise noted)
Net earnings
Add (Deduct):
Depreciation and amortization
Depreciation for FFEC (maintenance capex) (1)
Depreciation for office leases (2)
Other expense (continuing operations)
Other income (discontinued operations)
Foreign exchange and fair value adjustments
Current income tax expense (recovery) on other expense,
foreign exchange and fair value adjustments (3)
Deferred income tax expense
FFO
Amortization of deferred financing costs
Accretion costs
Non-cash share-based compensation
Principal portion of government capital funding
Amounts offset through investments held for
self-insured liabilities (4)
Additional maintenance capex (1)
AFFO
Per Basic Share ($)
FFO
AFFO
Per Diluted Share ($)
FFO
AFFO
Dividends ($)
Declared
Declared per share ($)
Weighted Average Number of Shares (thousands)
Basic
Diluted
Current income tax expense included in FFO
Total maintenance capex (1)
Three months ended
December 31
Change
3,581
2018
6,507
10,184
(1,882)
–
16,642
(9,663)
1,645
413
27
(621)
(16,642)
4,468
(3,134)
(12,076)
830
12,187
391
635
214
1,300
10,777
1,379
248
45
(242)
162
69
163
(2,320)
12,570
366
(1,853)
(1,205)
0.137
0.142
0.002
(0.015)
0.137
0.138
0.002
(0.014)
2019
10,088
10,597
(1,855)
(621)
–
(5,195)
(1,489)
(1,299)
2,209
12,435
436
393
376
1,369
529
(4,173)
11,365
0.139
0.127
0.139
0.124
Years ended
December 31
2018 Change
(3,108)
31,738
35,270
(7,422)
–
20,195
(17,755)
(247)
(11,805)
1,936
51,910
1,736
2,878
430
5,200
4,320
524
(2,588)
(17,791)
6,176
(1,760)
10,226
(1,724)
(5,725)
(22)
(1,035)
1,168
286
850
(5,253)
57,751
338
(161)
(5,151)
0.587
0.653
(0.069)
(0.063)
0.587
0.634
(0.069)
(0.062)
2019
28,630
39,590
(6,898)
(2,588)
2,404
(11,579)
(2,007)
(1,579)
212
46,185
1,714
1,843
1,598
5,486
1,188
(5,414)
52,600
0.518
0.590
0.518
0.572
10,701
0.120
10,612
0.120
89
–
42,672
0.480
42,351
0.480
321
–
89,467
99,850
1,075
6,028
88,612
98,962
2,075
4,202
(1,000)
1,826
89,148
99,539
8,552
12,312
88,403
98,753
8,205
12,675
347
(363)
(1) The aggregate of the items “depreciation for FFEC” and “additional maintenance capex” represents total actual maintenance capex incurred
in the period. An amount equivalent to depreciation for FFEC, or furniture, fixtures, equipment and computers, is deducted in determining
FFO, and the difference from the actual total maintenance capex incurred is adjusted for in determining AFFO.
(2) Represents depreciation recognized on adoption of IFRS 16 related to office leases.
(3) Represents current income tax with respect to items that are excluded from the computation of FFO and AFFO, such as foreign exchange and
fair value adjustments, and other expense.
(4) Represents AFFO of the Captive that decreases/(increases) the Captive’s investments held for self-insured liabilities not impacting the Company’s
reported cash and short-term investments.
AFFO 2019 Financial Review
For the three months ended December 31, 2019, AFFO declined by $1.2 million, or 9.6%, to $11.4 million ($0.127 per
basic share) from $12.6 million ($0.142 per basic share) for the three months ended December 31, 2018, impacted by an
increase in maintenance capex of $1.8 million and net interest costs of $0.8 million, partially offset by lower current taxes
of $1.0 million. Current income taxes this quarter were impacted by favourable year-end accrual adjustments and deferred
tax timing differences.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
24
For 2019, AFFO declined by $5.2 million, or 8.9%, to $52.6 million ($0.590 per basic share) from $57.8 million
($0.653 per basic share) in 2018, impacted by the decline in Adjusted EBITDA, partly driven by reduced volumes and
lower net operating income in the home health care operations and higher administrative costs, and increased net interest
costs.
Excluding the impact of the previously noted factors, AFFO declined by $1.8 million, or 13.9%, to $11.4 million for the
three months ended December 31, 2019 and by $7.0 million, or 11.2%, to $55.3 million from $62.3 million for the year
ended December 31, 2019.
A discussion of the factors impacting net earnings and Adjusted EBITDA can be found under “2019 Fourth Quarter
Financial Review” and “2019 Financial Review”.
The effective tax rate on FFO was 15.6% in 2019 as compared to 13.6% in 2018. The Company’s current income taxes for
2018 benefitted from favourable timing differences and the utilization of tax loss carryforwards. In 2020, the Company
expects the effective tax rate on FFO will be in the range of 14% to 16%. The determination of FFO includes a deduction
for current income tax expense and does not include deferred income tax expense. As a result, the effective tax rates on
FFO can be impacted by: adjustments to estimates of annual deferred timing differences, particularly when dealing with
cash-based tax items versus accounting accruals; changes in the proportion of earnings between taxable and non-taxable
entities; book-to-file adjustments for prior year filings; and the ability to utilize loss carryforwards.
Maintenance capex was $6.0 million for the three months ended December 31, 2019, as compared to $4.2 million for the
three months ended December 31, 2018, and as compared to $3.0 million for the three months ended September 30, 2019,
representing 2.1%, 1.5% and 1.1% of revenue, respectively. Maintenance capex was $12.3 million in 2019 as compared to
$12.7 million in 2018, representing 1.1% of revenue in each year. These costs fluctuate on a quarterly and annual basis with
the timing of projects and seasonality. Management monitors and prioritizes the capital expenditure requirements of its
properties throughout the year, taking into account the urgency and necessity of the expenditure. In 2020, the Company
expects to spend in the range of $11 million to $13 million in maintenance capex, as compared to $12.3 million in 2019.
Reconciliation of Net Cash from Operating Activities to AFFO
The following provides a reconciliation of “net cash from operating activities” to AFFO.
(thousands of dollars)
Net cash from operating activities
Add (Deduct):
Net change in operating assets and liabilities, including interest,
taxes and payments for U.S. self-insured liabilities
Current income tax on items excluded from AFFO (1)
Depreciation for office leases (2)
Depreciation for FFEC (maintenance capex) (3)
Additional maintenance capex (3)
Principal portion of government capital funding
Amounts offset through investments held for self-insured liabilities (4)
AFFO
Three months ended
December 31
2018
1,189
2019
4,996
Years ended
December 31
2018
39,473
2019
45,190
12,419
(1,299)
(621)
(1,855)
(4,173)
1,369
529
11,365
26,196
(12,076)
–
(1,882)
(2,320)
1,300
163
12,570
17,215
(1,579)
(2,588)
(6,898)
(5,414)
5,486
1,188
52,600
36,708
(11,805)
–
(7,422)
(5,253)
5,200
850
57,751
(1) Represents current income tax with respect to items that are excluded from the computation of AFFO, such as foreign exchange and fair value
adjustments, and other expense.
(2) Represents depreciation recognized on adoption of IFRS 16 related to office leases.
(3) The aggregate of the items “depreciation for FFEC” and “additional maintenance capex” represents total actual maintenance capex incurred in
the period. An amount equivalent to depreciation for FFEC, or furniture, fixtures, equipment and computers, is deducted in determining FFO,
and the difference from the actual total maintenance capex incurred is adjusted for in determining AFFO.
(4) Represents AFFO of the Captive that decreases/(increases) its investments held for self-insured liabilities not impacting the Company’s reported
cash and short-term investments.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
25
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
The following summarizes the sources and uses of cash between continuing and discontinued operations for 2019 and 2018.
(thousands of dollars unless otherwise noted)
Cash provided by operating activities,
before working capital changes
and interest and income taxes
Net change in operating assets and liabilities
Accounts receivable
Other assets
Accounts payable and accrued liabilities
Interest, taxes and claims payments
Interest paid
Interest received
Income taxes paid
Payments for U.S. self-insured liabilities
Net cash from (used in) operating activities
Net cash from (used in) investing activities
Net cash used in financing activities
Foreign exchange gain (loss) on U.S. cash held
Increase (decrease) in cash and
short-term investments
Cash and short-term investments at
beginning of year
Cash and short-term investments at
end of year
Continuing Discontinued
2019
Total
Continuing Discontinued
2018
Total
92,708
200
1,133
(6,165)
(4,832)
(27,933)
3,677
(5,661)
–
(29,917)
57,959
–
(28,668)
(727)
28,564
65,893
94,457
–
–
–
–
–
–
–
–
(12,769)
(12,769)
(12,769)
12,769
–
–
–
–
–
92,708
94,668
–
94,668
200
1,133
(6,165)
(4,832)
(27,933)
3,677
(5,661)
(12,769)
(42,686)
45,190
12,769
(28,668)
(727)
(8,172)
(536)
2,210
(6,498)
(28,383)
3,785
(8,862)
–
(33,460)
54,710
(70,289)
(48,763)
2,079
–
–
–
–
–
–
–
(15,237)
(15,237)
(15,237)
15,237
–
–
(8,172)
(536)
2,210
(6,498)
(28,383)
3,785
(8,862)
(15,237)
(48,697)
39,473
(55,052)
(48,763)
2,079
28,564
(62,263)
–
(62,263)
65,893
128,156
–
128,156
94,457
65,893
–
65,893
As at December 31, 2019, the Company had cash and short-term investments on hand of $94.5 million, reflecting an
increase in cash of $28.6 million from the beginning of the year. Cash flow generated from the operating activities of the
continuing operations of $57.9 million was in excess of cash dividends paid of $37.2 million.
Net cash from operating activities of the continuing operations was a source of cash of $57.9 million in 2019, up
$3.2 million or 5.9% as compared to a source of cash of $54.7 million in 2018. The increase in cash between periods was
primarily due to a reduction in net income taxes paid and favourable net change in operating assets and liabilities, partially
offset by lower earnings between periods.
Net cash from investing activities of the continuing operations was break even in 2019, as compared to a use of cash of
$70.3 million in 2018. The 2019 activity included the repatriation of cash of $26.7 million (US$20.0 million) from the
Captive and collection of other assets, offset by purchases of property, equipment and other intangible assets of
$33.2 million. The 2018 activity included cash from the Captive of $9.7 million (US$7.5 million) and collection of other
assets, offset by the acquisition of a retirement community for $33.8 million and purchases of property, equipment and
other intangible assets of $50.6 million. The table that follows summarizes the capital expenditures. Growth capex,
excluding acquisitions, relates to the construction of new beds, building improvements or other capital projects, all of which
are aimed at earnings growth. Maintenance capex relates to the actual capital expenditures incurred to sustain and upgrade
existing property and equipment. Management monitors and prioritizes the capital expenditure requirements of its
properties throughout the year, taking into account the urgency and necessity of the expenditure. In 2020, the Company is
projecting to spend in the range of $11 million to $13 million in maintenance capex and in the range of $25 million to
$28 million in growth capex related primarily to the planned expansion of Empire Crossing Retirement Community, LTC
redevelopment and other growth initiatives.
(thousands of dollars)
Growth capex
Deduct: capitalized interest
Growth capex, excluding capitalized interest
Maintenance capex
Extendicare Inc. – 2019 Management’s Discussion and Analysis
2019
21,595
(725)
20,870
12,312
33,182
2018
39,291
(1,318)
37,973
12,675
50,648
26
Net cash from financing activities of the continuing operations was a use of cash of $28.7 million in 2019, down
$20.1 million, as compared to a use of cash of $48.8 million in 2018. The 2019 activity included debt repayments of
$35.7 million and cash dividends paid of $37.2 million, partially offset by the issuance of mortgages on two retirement
communities in the aggregate of $25.3 million and draws on construction financing of $20.7 million. The 2018 activity
included debt repayments of $33.2 million, cash dividends paid of $37.4 million, Common Shares acquired for cancellation
under a normal course issuer bid at a cost of $6.3 million and financing costs primarily in connection with the issuance
and redemption of convertible debentures, partially offset by draws on construction financing of $23.0 million and the
issuance of a $10.5 million mortgage on a retirement community. For information on the change in long-term debt, refer to
“– Long-term Debt”.
Discontinued operations reflect the payment of claims for U.S. self-insured liabilities as a component of net cash from
operating activities, which payments are funded by the Captive’s investments held for self-insured liabilities. Changes in
the Captive’s investments are reported as a component of net cash from investing activities, as those invested funds are not
included in cash and short-term investments.
Capital Structure
SHAREHOLDERS’ EQUITY
The following summarizes shareholders’ equity for 2019 and 2018.
(thousands of dollars unless otherwise noted)
Shareholders’ Equity
Common Shares
Equity portion of convertible debentures
Contributed surplus
Accumulated deficit at beginning of year
Adoption of new standard on financial instruments
Net earnings
Dividends declared
Equity portion of redeemed convertible debentures
Purchase of Common Shares in excess of book value and other
Accumulated deficit at end of year
Accumulated other comprehensive loss
Shareholders’ equity
Au
Share Information (thousands)
Common Shares (TSX symbol: EXE) (1)
2019
2018
498,116
7,085
3,675
508,876
(368,147)
–
28,630
(42,672)
–
–
(382,189)
(11,273)
115,414
492,064
7,085
2,706
501,855
(365,084)
4,334
31,738
(42,351)
5,573
(2,357)
(368,147)
(7,717)
125,991
February 26 ,
2020
89,383.9
December 31,
2019
89,232.5
December 31,
2018
88,490.0
(1) Closing market value per the TSX on February 26, 2020, was $8.25.
As at February 26, 2020, the Company had $126.5 million in aggregate principal amount of convertible subordinate
debentures outstanding that mature in April 2025 (the “2025 Debentures”), which in the aggregate are convertible into
10,326,531 Common Shares.
DIVIDENDS
The declaration and payment of dividends by the Company is at the discretion of the Board as to the amount and timing of
dividends to be declared and paid, after consideration of a number of factors, including results of operations, requirements
for capital expenditures and working capital, future financial prospects of the Company, debt covenants and obligations and
any other factors deemed relevant by the Board. If the Board determines that it would be in the Company’s best interests, it
may modify the amount and frequency of dividends to be distributed to holders of Common Shares (Shareholders).
The Company declared cash dividends of $0.48 per share in 2019, consistent with that declared in 2018, representing
$42.7 million and $42.3 million in dividends declared for each period respectively. In 2019, dividends paid in cash totalled
$37.2 million and $5.4 million were by way of 693,466 Common Shares issued under the Company’s dividend
reinvestment plan (the “DRIP”), as compared to $37.4 million in cash and $4.9 million by way of 650,361 Common Shares
issued under the DRIP in 2018.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
27
Compared to AFFO of $52.6 million in 2019, dividends declared of $42.7 million represented a payout ratio of 81%, as
compared to a payout ratio of 73% in 2018. The increase in the payout ratio was primarily due to the decline in earnings in
2019. For further information on AFFO, refer to the discussion under “Adjusted Funds from Operations”.
NORMAL COURSE ISSUER BID (NCIB)
During 2019, the Company purchased no Common Shares under its NCIB that expired on January 14, 2020, for which it
sought and received approval from the TSX to purchase up to 8,830,000 Common Shares.
During 2018, under its NCIB that expired on January 14, 2019, for which the Company sought and received approval from
the TSX to purchase up to 8,770,000 Common Shares, the Company purchased an aggregate of 703,585 Common Shares at
a weighted average price of $8.89 per share, for a total cost of $6.3 million.
In January 2020, the Company received approval from the TSX to renew its NCIB to purchase for cancellation up to
8,000,000 Common Shares (representing approximately 10% of its public float) through the facilities of the TSX, and
through alternative Canadian trading systems, in accordance with TSX rules. The NCIB commenced on January 15, 2020,
and provides the Company with flexibility to purchase Common Shares for cancellation until January 14, 2021, or on such
earlier date as the NCIB is complete. The actual number of Common Shares purchased under the NCIB and the timing of
any such purchases will be at the Company’s discretion. Subject to the TSX’s block purchase exception, on any trading
day, purchases under the NCIB will not exceed 42,703 Common Shares. As at February 27, 2020, the Company has not
acquired any Common Shares under its NCIB.
Long-term Debt
CONTINUITY OF LONG-TERM DEBT
Long-term debt totalled $556.3 million as at December 31, 2019, as compared with $529.0 million as at December 31,
2018, representing an increase of $27.3 million, consisting of an increase in lease liabilities of $16.8 million primarily due
to the renewal of the corporate head office lease ($10.3 million) and the adoption of IFRS 16 ($5.8 million), mortgage
financings on two retirement communities in the aggregate of $25.3 million and draws on construction loans, partially
offset by debt repayments. The long-term debt activity for 2018 included a $10.5 million mortgage on a retirement
community and the refinancing of $126.5 million of convertible debentures for seven years to 2025, draws on construction
loans, partially offset by debt repayments. The Company and its subsidiaries are in compliance with all of their respective
financial covenants as at December 31, 2019. Details of the components, terms and conditions of long-term debt are
provided in Note 12 of the audited consolidated financial statements.
The following summarizes the changes in the carrying amounts of long-term debt for 2019 and 2018.
(millions of dollars)
Long-term debt at beginning of year, prior to deferred financing costs
Issue of long-term debt
Construction loans
Mortgages
2025 Debentures at face value
Lease liabilities on adoption of IFRS 16
Lease liabilities
Redemption of convertible debentures at face value
Repayment of long-term debt
Change in equity component of convertible debentures and other
Deferred financing costs at end of year
Long-term debt at end of year
Less: current portion
2019
537.4
20.7
25.3
–
5.8
11.0
–
(35.7)
0.2
564.7
(8.4)
556.3
(133.8)
422.5
2018
541.8
23.0
10.5
126.5
–
–
(126.5)
(33.2)
(4.7)
537.4
(8.4)
529.0
(74.7)
454.3
Extendicare Inc. – 2019 Management’s Discussion and Analysis
28
CREDIT FACILITIES
The Company’s wholly owned subsidiary, ParaMed Inc., has a demand credit facility in the amount of $65.0 million
(the “ParaMed Credit Facility”) that is secured by the assets of its home health care business and is available for general
corporate purposes by the Company. The ParaMed Credit Facility has no financial covenants, but does contain normal and
customary terms. The entire $65.0 million was available and unutilized as at December 31, 2019.
Extendicare Inc. has a demand credit facility in the amount of $47.3 million (the “Extendicare Credit Facility”) that is
secured by 13 Class C LTC homes in Ontario and is guaranteed by certain Canadian subsidiaries of Extendicare. As at
December 31, 2019, the Company had letters of credit totalling $43.6 million issued under the Extendicare Credit Facility,
of which $38.1 million secure the defined benefit pension plan obligations and the balance were issued in connection with
obligations relating to recently acquired homes and those homes under development. The letter of credit to secure the
pension plan obligations renews annually in May based on an actuarial valuation. The Extendicare Credit Facility has no
financial covenants, but does contain normal and customary terms including annual re-appraisals of the homes that could
limit the maximum amount available.
LONG-TERM DEBT MATURITIES AND WEIGHTED AVERAGE INTEREST RATES
The following table presents the principal, or notional, amounts and related weighted average interest rates by year of
maturity, of the Company’s long-term debt obligations as at December 31, 2019. The Company had an aggregate of
$64.6 million drawn on construction loans at the end of 2019, which are repayable on demand and, in any event, are to be
fully repaid by the earlier of achieving stabilized occupancy as defined by the agreements and specified dates.
Consequently, these loans are reflected as current and due in 2020 in the following table. Permanent financing for each of
the communities may be sought upon maturity of the construction financing.
(millions of dollars unless otherwise noted)
Convertible Debentures (at face value)
Fixed rate
Average interest rate
Long-term Debt
Fixed rate (including fixed through swap)
Average interest rate
Variable rate (construction loans)
Average interest rate
Lease Liabilities
Fixed rate
Average interest rate
2020
2021
2022
2023
2024
After
2024
Total
–
–
–
–
–
–
–
–
–
–
126.5
5.00%
126.5
5.00%
60.8
3.75%
64.6
4.41%
15.9
4.06%
–
–
59.4
3.75%
–
–
46.4
4.03%
–
–
6.0
4.89%
–
–
104.7
4.50%
–
–
293.2
4.18%
64.6
4.41%
Fair
Value
132.6
290.1
64.6
9.9
6.39%
11.0
6.16%
10.0
6.73%
10.1
6.83%
10.5
6.88%
34.7
6.53%
86.2
6.83%
95.7
Management has limited the amount of debt that may be subject to changes in interest rates, with all of the debt currently at
fixed rates, other than the construction loans of $64.6 million. The Company’s variable-rate mortgages and term loan,
aggregating $82.0 million at the end of 2019, have effectively been converted to fixed rate financings with interest rate
swaps over the full term. As at December 31, 2019, the net carrying value of the interest rate swaps was a net asset of
$0.8 million (including a liability of $0.7 million).
Extendicare Inc. – 2019 Management’s Discussion and Analysis
29
The following summarizes key metrics of consolidated long-term debt as at December 31, 2019 and 2018.
(thousands of dollars unless otherwise noted)
Weighted average interest rate of long-term debt outstanding
Weighted average term to maturity of long-term debt outstanding
Trailing twelve months consolidated net interest coverage ratio(1)
Trailing twelve months consolidated interest coverage ratio(2)
Debt to Gross Book Value (GBV)
Total assets (carrying value)
Accumulated depreciation on property and equipment
Accumulated amortization on other intangible assets
GBV
Debt (3)
Debt to GBV
(1) Net interest coverage ratio is defined as Adjusted EBITDA divided by net interest (interest expense before reduction of capitalized interest,
net of interest revenue). The adoption of IFRS 16 has not had a material impact on the interest coverage ratios.
December 31, 2019
4.7%
6.7 yrs
3.5 X
3.1 X
888,800
251,403
23,951
1,164,154
570,536
49.0%
December 31, 2018
4.9%
7.4 yrs
3.7 X
3.2 X
896,324
226,417
18,509
1,141,250
544,111
47.7%
(2) Interest coverage ratio is defined as Adjusted EBITDA divided by interest expense before reduction of capitalized interest. The adoption of
IFRS 16 has not had a material impact on the interest coverage ratios.
(3) Debt includes convertible debentures at face value of $126.5 million, and excludes deferred financing costs.
Future Liquidity and Capital Resources
The Company’s consolidated cash and short-term investments on hand was $94.5 million as at December 31, 2019, as
compared with $65.9 million as at December 31, 2018, representing an increase of $28.6 million. In addition, the Company
had $65.0 million available to draw under its ParaMed Credit Facility. Cash and short-term investments exclude restricted
cash of $2.4 million and $27.6 million (US$21.2 million) of investments held by the Captive to support the accrual for U.S.
self-insured liabilities of $12.2 million (US$9.4 million). Subsequent to December 31, 2019, the Company initiated the
repatriation of US$7.0 million from the Captive, which is expected to be received in the second quarter of 2020.
As at December 31, 2019, the Company had construction financings in the aggregate of up to $77.7 million that are secured
on three retirement communities (Douglas Crossing, Bolton and The Barrieview), of which $64.6 million was drawn. As at
December 31, 2019, the Company had incurred approximately $98.4 million of the estimated $99.1 million of Adjusted
Development Costs for these three retirement communities.
Management believes that cash from operating activities and future debt financings will be sufficiently available to support
the Company’s ongoing business operations, maintenance capex and debt repayment obligations. Growth through
redevelopment of the LTC homes over the next few years, strategic acquisitions and developments will necessitate the
raising of funds through debt and equity financings. Decisions will be made on a specific transaction basis and will depend
on market and economic conditions at the time.
OTHER CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
Property and Equipment Commitments
The Company had outstanding commitments of $0.6 million at December 31, 2019, in connection with retirement
communities under development in Ontario.
Defined Benefit Pension Plan Obligations
The Company has a registered defined benefit plan and a supplementary plan covering certain executives, both of which
have been closed to new entrants since 2000. The accrued benefit liability on the statement of financial position as at
December 31, 2019, was $36.5 million (2018 – $36.1 million). The registered defined benefit plan was in an actuarial
deficit of $2.8 million, with plan assets of $5.3 million and accrued benefit obligations of $8.1 million as at December 31,
2019 (2018 – an actuarial deficit of $2.6 million with plan assets of $5.1 million and accrued benefit obligations of
$7.7 million). The accrued benefit obligations of the supplementary plan were $33.7 million as at December 31, 2019 (2018
– $33.5 million). The Company does not set aside assets in connection with the supplementary plan and the benefit
payments will be paid from cash from operations. The benefit obligations under the supplementary plan are secured by a
letter of credit totalling $38.1 million as at December 31, 2019 (2018 – $38.0 million). This letter of credit renews annually
in May based on an actuarial valuation of the pension obligations. The annual benefit payments under the supplementary
pension plan to be funded from cash from operations over the next five years are expected to be in the range of $2.0 million
to $3.4 million, and the annual contributions to the registered pension plan are less than $0.1 million. Since the majority of
Extendicare Inc. – 2019 Management’s Discussion and Analysis
30
the accrued benefit obligations represent obligations under the non-registered supplementary plan, which is not required to
be funded, changes in future market conditions are not expected to have a material adverse effect on the Company’s cash
flow requirements with respect to its pension obligations, or on its pension expense.
Accrual for U.S. Self-insured Liabilities
The obligation to settle U.S. self-insured general and professional liability claims relating to the period prior to the closing
of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with the Company, which continues
to be funded through the Captive. Consequently, the balance of the accrual for self-insured liabilities and the related
investments held for self-insured liabilities remain on the consolidated statement of financial position. However, any
expense incurred or release of reserves for U.S. self-insured liabilities are presented as discontinued operations, while the
Captive’s costs to administer and manage the settlement of the remaining claims are reported as continuing operations
within the U.S. segment.
Management regularly evaluates and semi-annually engages an independent third-party actuary to determine the
appropriateness of the carrying value of this liability. The most recent independent actuarial review was conducted at the
end of 2019, which confirmed the adequacy of the Company’s reserves.
As at December 31, 2019, the accrual for U.S. self-insured general and professional liabilities was $12.2 million
(US$9.4 million) as compared to $37.1 million (US$27.2 million) at the beginning of the year. The decline of
US$17.8 million reflected claim payments of US$9.6 million and a release of reserves of US$9.2 million, partially offset
by accretion of the discounted liability and change in discount factor applied.
During 2018, payments for self-insured liabilities were $15.2 million (US$11.8 million) and $13.0 million (US$9.9 million)
in reserves were released and reflected in discontinued operations.
Most of the risks that the Company self-insures are long-term in nature, and accordingly, claim payments for any particular
policy year occur over a long period of time. However, management estimates and allocates a current portion of the accrual
for self-insured liabilities on the statement of financial position. As at December 31, 2019, management estimated that
approximately $3.6 million of the accrual for U.S. self-insured general and professional liabilities will be paid within the
next twelve months. As the timing of payments is not directly within management’s control, estimates could change in the
future.
The Captive holds investments sufficient to support the accrual for self-insured liabilities and to meet required statutory
solvency and liquidity ratios. These invested funds are reported in other assets and totalled $27.6 million (US$21.2 million)
as at December 31, 2019, as compared to $67.9 million (US$49.8 million) at the beginning of the year. During 2019, the
Captive transferred US$20.0 million of cash previously held for investment to the Company for general corporate use and
initiated repatriation of a further US$7.0 million, which is expected to be received in the second quarter of 2020.
Management believes there are sufficient invested funds held to meet estimated current claims payment obligations.
Legal Proceedings, Claims and Regulatory Actions
The Company and its consolidated subsidiaries are defendants in various actions and proceedings that are brought against
them from time to time in connection with their operations.
As previously disclosed, in April 2018, the Company was served with a statement of claim alleging negligence by the
Company in the operation of its long-term care homes and its provision of care to residents and seeking $150.0 million in
damages. The claim sought an order certifying the claim as a class action pursuant to the Class Proceedings Act (Ontario).
By order of the Ontario Superior Court of Justice the class proceeding was discontinued on October 25, 2018. Following
the discontinuance, the plaintiff who commenced the class proceeding still has the option to pursue a claim on her own
behalf while others may also do so separately on their own behalf. Since July 2019, certain individual plaintiffs have served
the Company with statements of claim alleging negligence by the Company in the operation of certain of its long-term care
homes and its provision of care to certain residents. The Company intends to defend itself against any and all such
individual claims and does not believe the outcome on any or all such claims would have a material adverse impact on its
business, results of operations or financial condition and in any event believes that any potential liability would be resolved
within the limits of its insurance coverage.
On September 19, 2018, the Company was served with a statement of claim seeking an order certifying the claim as a class
action pursuant to the Class Proceedings Act (Ontario). The claim alleges that the Company failed to properly apply certain
required medical equipment sterilization protocols at one or more of its home health care clinics and seeks $20.0 million in
damages. The Company does not believe that the lawsuit or the damages sought have merit. The Company intends to
Extendicare Inc. – 2019 Management’s Discussion and Analysis
31
vigorously defend itself against the claim and does not believe the outcome will have a material adverse impact on its
business, results of operations or financial condition and in any event believes that any potential liability would be resolved
within the limits of its insurance coverage.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company
to prevent deficiencies in the quality of patient care through quality assurance strategies and to remedy any such
deficiencies cited by government inspections within the applicable prescribed period of time. The Company accrues for
costs that may result from investigations, or any possible related litigation, to the extent that an outflow of funds is probable
and a reliable estimate of the amount of the associated costs can be made.
UPDATE OF REGULATORY AND FUNDING CHANGES AFFECTING RESULTS
In Canada, provincial legislation and regulations closely control all aspects of operation and funding of long-term care
homes and publicly funded home health care services, including the fee structure, subsidies, the adequacy of physical
homes, standards of care and accommodation, equipment and personnel. A substantial portion of the fees paid to providers
of these services are funded by provincial programs, with a portion to be paid by residents or clients. Each province has a
different system for managing the services provided. In some provinces, the government has delegated responsibility for the
funding and administration of health care programs, such as long-term care and home health care, to regional health
authorities. As a result, there can be significant variability in the regulations governing the provision of and reimbursement
for care from location to location. The Company is unable to predict whether governments will adopt changes in their
funding or regulatory programs, and if adopted and implemented, the impact, if any, such changes will have on the
Company’s business, results of operations and financial condition.
In most provinces, a license must be obtained from the applicable provincial ministry in order to operate LTC homes and
retirement communities. In Ontario, license terms for LTC homes are issued for a fixed term of not more than 30 years,
after which the license may or may not be renewed. License terms for Class B and C homes in Ontario are set to expire in
June 2025, unless the license terms are extended or the homes are redeveloped to the government’s new design standards
wherein a new license will be issued upon successful application, as discussed further below under “– Ontario LTC
Redevelopment and Expansion”. In general, the issuance of new licenses for LTC beds is infrequent because of the funding
implications for the provincial governments, while the issuance of licenses for retirement communities is less restrictive as
the funding for these services is generally private-pay. In addition to, or in some provinces in place of, the license
procedure, LTC operators in Alberta, Manitoba, Ontario and Saskatchewan are required to sign service contracts that
incorporate service expectations with the applicable provincial health authority. A failure of the Company’s operating
licences or contracts to be renewed or conditionally renewed may have a material adverse impact on the business, results of
operations and financial condition of the Company.
The People’s Health Care Act, 2019 (Bill 74)
In April 2019, Bill 74, The People’s Health Care Act, 2019 (Ontario), received Royal Assent, resulting in the creation of
the Ontario Health agency to act as a central point of accountability and oversight for the province’s public health care
system. Organizations to be integrated into Ontario Health include Cancer Care Ontario, Health Quality Ontario, eHealth
Ontario, Health Shared Services Ontario and the LHINs. LHIN functions that involve the oversight of home and
community care, including long-term care, are anticipated to move to Ontario Health.
Bill 74 also introduces the creation of Ontario Health Teams (OHTs), which are groups of health care providers, such as
primary care and hospitals, home care and long-term care and mental health and addictions supports, who will be ultimately
clinically and fiscally responsible for delivering the full continuum of care to patients. In April 2019, the government
provided a guidance document for interested applicants, Ontario Health Teams: Guidance for Health Care Providers and
Organizations, that provides an overview of the intended structure of the OHTs, recognizing that the framework will be
further developed as the new health care model becomes operational.
The Ministry of Health’s application process for groups of providers interested in becoming an OHT is ongoing. The
Company continues to participate in the various stages and be involved in a variety of such groups across the province as it
continues to explore growth opportunities.
All of ParaMed’s government funded business in Ontario is currently governed by contracts with the LHINs. These
contracts may be impacted by the integration of the LHINs into the new agency and may need to be assigned or reissued.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
32
Although the treatment of these contracts is not yet known, and while any change in home care contracting and associated
government operating models would represent a significant change, the underlying market demand is such that it is likely
that there would be minimal disruption to ParaMed’s business service provision; however, the Company is unable to predict
the nature and extent such changes will have on the Company’s business, results of operations and financial condition.
Ontario LTC Redevelopment and Expansion
In Ontario, the Company’s largest LTC market, management seeks to advance the redevelopment of its 21 Class C LTC
homes (3,287 beds) under the Ministry of Long-Term Care’s (MOLTC) redevelopment program. The license terms for
these 21 Class C LTC homes are set to expire in June 2025, unless they are redeveloped to the government’s new design
standards. Given the significant backlog in demand for long-term care, the lack of alternative care environments and license
extension precedents to-date, management is of the view that it is likely that licenses will be extended until redevelopment
can be completed; however, there can be no assurance that this will be the case.
As part of the 2019 Ontario Budget, released in April 2019, the government announced $1.75 billion in additional funding
over five years to add 15,000 new LTC beds and to redevelop 15,000 existing LTC beds. We are encouraged by the
importance the Ontario Government has put on LTC, and we will continue to apply for allocations of new beds to leverage
the redevelopment of our older homes and to initiate new campus of care opportunities.
In May 2019, the Ontario government announced updates to the Construction Funding Subsidy Policy for Long-Term Care
Homes, 2019, which among other things, increased the base per diem funding from $16.65 to $18.03 for LTC homes with
161 or more beds. LTC homes with between 40% and 60% of beds designated as basic accommodation are eligible to
receive an additional per diem subsidy of up to $3.50. Where variances from design requirements are permitted, reductions
in the per diem subsidy may apply. Further updates to the policy may be made in 2020 to reflect changes in market
conditions and construction cost inflation.
Each of the Company’s 21 redevelopment projects is unique, with the overall redevelopment program involving a
combination of new construction and retrofits. Each project is being carefully appraised to ensure strong economic
fundamentals prior to proceeding with construction. Factors such as construction costs, adequacy of the government capital
funding subsidies, availability of financing and the timing of project approvals will affect the sequencing and the duration
of the redevelopment program. Management is working closely with the Ontario government with the goal of accelerating
the Company’s redevelopment projects. Projects are in various stages of planning and approvals, but none are under
construction at present.
Once completed, redeveloped homes are expected to realize the benefit of improved performance and extended license
terms. The extent to which such redevelopment plans are not implemented or proceed on significantly different timing,
terms or government funding than currently anticipated, could have an adverse effect on the business, results of operations
and financial condition of the Company.
Ontario LTC Funding
Ontario is the Company’s largest market for its senior care services. Funding for LTC homes in Ontario is based on
reimbursement for the level of care assessed to be required by the residents, in accordance with scheduled rates. The
MOLTC allocates funds through “funding envelopes”, specifically: nursing and personal care (NPC); programs and
support services (PSS); and accommodation (which includes a sub-envelope for raw food). The funding for the NPC and
PSS envelopes is generally adjusted annually based on the acuity of residents as determined by a classification assessment
of resident care needs. The NPC, PSS and food envelopes are “flow-through” envelopes, whereby any deviation in actual
costs from scheduled rates is either absorbed by the provider (if actual costs exceed funding allocations) or is returned to
the MOLTC (if actual costs are below funding allocations). With respect to the accommodation envelope, providers retain
any excess funding received over costs incurred. The province sets the rates for standard accommodation, as well as the
maximum premiums that providers can charge and retain for semi-private and private accommodation (preferred
accommodation) and these premiums vary according to the structural classification of the LTC home. Long-term care
providers are permitted to designate up to 60% of the resident capacity of a home as preferred accommodation. The
accommodation rates are substantially paid for by the resident; however, the province guarantees funding for beds
designated as standard accommodation through resident subsidies. Overall government funding is occupancy-based, but
once the average occupancy level of 97% or higher for the calendar year is achieved, operators receive government funding
based on 100% occupancy.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
33
In May 2019, the MOLTC announced an overall funding increase for long-term care providers of 1% for the flow-through
and accommodation envelopes, retroactive to April 1, 2019, which represents additional accommodation envelope (non-
flow through) revenue for the Company of approximately $1.1 million. In addition, the MOLTC had indicated plans to
eliminate the structural compliance premium (SCP) funding of $5.00, $2.50 and $1.00 per diem for eligible Class A, B and
C beds, respectively, effective October 1, 2019. However, the MOLTC has since deferred that change until April 1, 2020.
The Company currently receives annual SCP funding of $1.3 million.
In addition, effective July 1, 2019, the MOLTC implemented a 2.3% increase in the maximum preferred accommodation
premiums that may be charged by long-term care providers. For older LTC beds that are not classified as “New” or “A”
beds, the maximum daily preferred accommodation premiums increased to $8.52 and $19.17 for semi-private and private
rooms, respectively. For newer LTC beds that are classified as “New” or “A” beds, the maximum daily preferred
accommodation premiums increased to $12.78 and $26.64 for semi-private and private rooms, respectively. Refer to the
table under “Business Overview – Operating Segments – Long-term Care” for a summary of the classification of the
Company’s LTC beds in Ontario.
As announced in December 2019 and implemented on January 1, 2020, the Ministry of Health implemented changes to the
reimbursement model for pharmacies providing professional services to residents of LTC homes in Ontario. The
reimbursement model shifts from a fee-for-service model to a fixed fee-per-bed capitation model. The new model
reimburses pharmacies for all medication dispensing and professional service activities including, medication reviews,
medication assessments, and education seminars on a capitated basis.
Similar capitation-based reimbursement models are in place in other provinces in Western Canada where the Company
operates. To adjust to the new reimbursement model in Ontario, pharmacy operators are evaluating existing workflows and
looking for opportunities to streamline operations and deliver the same service level using technology and virtual meetings.
While the Company continues to work with pharmacy operators to assess the impact of the workflow changes, it is not
anticipated that these changes will have a material adverse impact on the business, results of operations or financial
condition of the Company.
Alberta LTC Funding
Alberta is the Company’s second largest market for its senior care services. Since April 2010, AHS has been using an
activity-based funding system for continuing care homes that includes the measurement of a resident’s acuity through the
use of a resident assessment instrument – minimum data set, or RAI-MDS, to determine the resident’s level of care and
resources required. The Alberta Continuing Care Association is actively engaged in discussions with the Alberta
government and AHS to further enhance care funding to accommodate higher expenses within continuing care, and to
revise the existing funding model used within continuing care.
The Alberta government’s 2019-20 budget released in October 2019 imposed a four-year funding freeze for AHS. In
February 2020, an independent comprehensive review of AHS (the “AHS Performance Review”) was released, which
includes a number of recommendations for AHS to potentially reduce costs and improve system performance. AHS has
until May 2020 to develop a long-term implementation plan in response to the AHS Performance Review. As well, in
February 2020, the Alberta Health Minister launched a formal review of the continuing care system, which currently has
separate legislation for home health care, supportive living and long-term care. The Company is unable to predict whether
the Alberta government or AHS will adopt changes in their funding or regulatory programs, and if adopted and
implemented, the impact, if any, such changes will have on the Company’s business, results of operations and financial
condition.
On July 1, 2019, the annual accommodation charge (the portion paid directly by residents of long-term care and designated
supportive living homes) increased by 1.6%, based on inflation as reflected by Alberta’s CPI, representing additional
annual revenue for the Company of approximately $0.5 million.
In November 2019, AHS announced adjustments to government funding for providers of long-term care and designated
supportive living homes retroactive to October 1, 2019, rather than to April 1, 2019, the start of the government’s fiscal
year. The funding changes represent additional annual revenue to the Company of approximately $0.4 million.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
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Ontario Home Health Care Funding
Ontario is ParaMed’s largest market, representing approximately 92% of its annual service volumes (following the exit
from B.C.), of which approximately 98% are received from government-funded contracts at specified rates, making
ParaMed the largest private-sector provider of publicly funded home health care in the province. ParaMed’s government-
funded business in Ontario is currently obtained through evergreen contracts with the LHINs. In 2019, the Ontario
government announced plans to integrate the LHINs into a newly created Ontario Health agency to act as a central point of
accountability and oversight for the province’s public health system. For further information, refer to the discussion above
under “– The People’s Health Care Act, 2019 (Bill 74)”.
The enactment of Bill 148, the Fair Workplaces, Better Jobs Act, 2017 (Ontario) in November 2017, resulted in a number
of amendments to the Employment Standards Act (ESA) that included: an increase in the minimum wage and revisions to
vacation, public holiday pay and personal leave entitlements that took effect January 1, 2018. Bill 148 necessitated changes
in the manner in which the Company managed its workforce and had a significant financial impact on the Company’s home
health care operations, although such impact was subsequently reduced with the enactment of Bill 47, Making Ontario
Open for Business Act, 2018 (Ontario) in November 2018.
In response to increased costs associated with Bill 148, the Ontario government provided enhanced funding to contracted
service providers, including ParaMed. During 2018, the Company received $2.0 million of additional funding for the three
months ended March 31, 2018, and continued to estimate an accrual for incremental funding beyond that date. During
2019, the Company received additional funding from the LHINs related to 2018 that was in excess of that estimated by the
Company for the period ended December 31, 2018, resulting in a $2.2 million increase in revenue recorded in the three
months ended June 30, 2019.
In shaping the delivery of health care to Canadians, both the federal and provincial governments have stated that home
health care is an area that merits further investment to ensure that more health care services are available in the home. As
part of its initiative to improve and make the health care system more efficient, the Ontario government has noted that
insufficient capacity in the health care system, like home care, is contributing to the problem of hallway health care in the
province. In the 2019 Ontario Budget, released in April 2019, the government announced an additional $267 million for
home and community care, focused on increasing front-line care delivery, such as personal support services, nursing,
therapy and other professional services at home and in the community, in an effort to reduce waitlists for long-term care. As
governments continue to recognize the benefits of this segment of the Canadian health care system, management believes
that ParaMed is well-positioned to take advantage of the significant organic growth opportunity that exists today and that
steps we are taking to position ParaMed as the employer of choice for caregivers will further enhance the Company’s
position. In addition, ParaMed continues to assess private-pay home health care opportunities that may enable it to further
leverage its platform.
RELATED PARTY TRANSACTIONS
As previously disclosed, the Company’s former President and Chief Executive Officer stepped down from his position on
October 22, 2018. In connection therewith, the Company recorded a charge of $1.7 million in the three months ended
September 30, 2018, representing a cash payment of $2.9 million, partially offset by the reversal of $1.2 million in respect
of forfeited performance share units.
RISKS AND UNCERTAINTIES
The risks and uncertainties described below could adversely affect the business, results of operations and financial
condition of the Company, cause the trading price of the Company’s securities to decline and cause the actual outcome of
matters to differ materially from the expectations of the Company regarding future results, performance or achievements
reflected in information in this MD&A and other information provided by the Company from time to time. The risks and
uncertainties described below, which is not an exhaustive description of the risks and uncertainties faced by the Company,
should be carefully considered by investors.
General Business Risks
The Company is subject to general business risks inherent in the senior care industry, including: changes in government
regulation and oversight; changing consumer preferences; fluctuations in occupancy levels and business volumes; the
ability of the Company to renew its government licenses and customer contracts; changes in government funding and
reimbursement programs, including the ability to achieve adequate government funding increases; changes in labour
relations and costs; increases in other operating costs; competition from other senior care providers; changes in
neighbourhood or location conditions and general economic conditions; health related risks, including disease outbreaks
Extendicare Inc. – 2019 Management’s Discussion and Analysis
35
(for example COVID-19 if it progresses) and control risks; changes in accounting principles and policies; the imposition of
increased taxes or new taxes; capital expenditure requirements; and changes in the availability and cost of both short- and
long-term financing, which may render refinancing of long-term debt difficult or unattractive. Any one of, or a combination
of, these factors may adversely affect the business, results of operations and financial condition of the Company.
In addition, there are inherent legal, reputational and other risks involved in providing accommodation and health care
services to seniors. The vulnerability and limited mobility of some seniors enhances such risks. Such risks include fires or
other catastrophic events at a Company location which may result in injury or death, negligent or inappropriate acts by
employees or others who come into contact with the residents and clients, and unforeseen events at locations at which the
Company operates that result in damage to the Company’s brand or reputation or to the industry as a whole.
Risks Related to Growth and Redevelopment Activities
The Company expects that it will continue to have opportunities to acquire businesses and properties, develop properties,
redevelop or expand existing LTC homes, and grow its home health care, private-pay retirement, contract services,
consulting and group purchasing businesses, but there can be no assurance that this will be the case.
The number of licensed LTC beds are restricted by the provinces and any new licenses are awarded through a request for
proposal process. The provinces also regulate the manner in which LTC homes are developed and redeveloped. If
regulatory approvals are required in order to expand operations (via development or otherwise) or redevelop operations of
the Company, the inability of the Company to obtain the necessary approvals, changes in standards applicable to such
approvals and possible delays and expenses associated with obtaining such approvals could adversely affect the ability of
the Company to expand or redevelop and, accordingly, to maintain or increase its revenue and earnings.
Approximately 40% of the Company’s owned LTC beds are in older Ontario homes that are subject to redevelopment. In
Ontario, licenses for LTC homes are issued for a fixed term of not more than 30 years, after which the license may or may
not be renewed. LTC operators are to be notified of license renewals at least three years prior to the maturity date. License
terms for Class B and C LTC homes in Ontario are set to expire in June 2025, unless the license terms are extended or the
homes are redeveloped to the government’s new design standards wherein a new license will be issued upon successful
application. Given the significant backlog in demand for long-term care, the lack of alternative care environments and
license extension precedents to-date, management is of the view that it is likely that licenses will be extended until
redevelopment can be completed; however, there can be no assurance that this will be the case. The Company has 21 Class
C LTC homes with 3,287 beds that it is seeking to redevelop under the government’s redevelopment program (see “Ontario
LTC Redevelopment and Expansion” under the heading “Update of Regulatory and Funding Changes Affecting Results”).
The extent to which such redevelopment plans are not implemented or proceed on significantly different timing, terms or
government funding than currently anticipated, could have an adverse effect on the business, results of operations and
financial condition of the Company.
The success of the business acquisition and development activities of the Company, including the expansion of its private-
pay retirement operations, will be determined by numerous factors, including the ability of the Company to identify suitable
acquisition targets, competition for acquisition and development opportunities, purchase price, ability to obtain external
sources of funding or adequate financing on reasonable terms, the financial performance of the businesses or homes after
acquisition or development, and the ability of the Company to effectively integrate and operate the acquired businesses or
homes. Acquired businesses or homes, and development projects, may not meet financial or operational expectations due to
the possibility that the Company has insufficient management expertise to engage in such activities profitably or without
incurring inappropriate amounts of risk, unexpected costs or delays associated with their acquisition or development, as
well as the general investment risks inherent in any real estate investment or business acquisition. Moreover, new
acquisitions may require significant management attention, place additional demands on the Company’s resources, systems,
procedures and controls, and capital expenditures that would otherwise be allocated by the Company in a different manner
to existing businesses. Any failure by the Company to identify suitable candidates for acquisition, successfully complete
development projects, secure financing, or operate the new businesses effectively may have an adverse effect on the
business, results of operations and financial condition of the Company.
The success of the Company’s ability to grow its contract services, consulting, group purchasing and home health care
businesses, including the private-pay home health care segment, will be determined by numerous factors, including the
ability of the Company to retain, renew and secure new contracts, identify suitable markets, develop competitive services
and marketing and pricing strategies, attract and retain residents and clients, and hire, retain and motivate key personnel.
Changes in government funding policies and regulatory changes, the risks related to which are described below under
“Risks Related to Government Funding and Regulatory Changes”, in addition to the financial performance of these
businesses, also impact the Company’s growth potential. Any failure by the Company to grow or operate its businesses
effectively may have an adverse effect on the business, results of operations and financial condition of the Company.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
36
Risks Related to Occupancy and Business Volumes
Senior care providers compete primarily on a local and regional basis with many other health care, long-term care and
retirement living providers, including large publicly held companies, privately held companies, not-for-profit organizations,
hospital-based LTC units, rehabilitation hospitals, home health care agencies, and rehabilitative therapy providers. The
Company’s ability to compete successfully varies from location to location and depends on a number of factors, including
the number of competitors in the local market, the types of services available, the Company’s local reputation for quality
care, the commitment and expertise of its staff, the Company’s local service offerings, the cost of care in each locality, and
the physical appearance, location, age and condition of its residences. Increased competition could limit the Company’s
ability to attract and retain residents and clients and thus maintain or increase occupancy levels and business volumes. An
inability to continue to attract residents and clients could have an adverse effect on the business, results of operations and
financial condition of the Company.
Risks Related to Government Funding and Regulatory Changes
The Company’s earnings are highly reliant on government funding and reimbursement programs, and the effective
management of staffing and other costs of operations, which are strictly monitored by government regulatory authorities.
See “Update of Regulatory and Funding Changes Affecting Results”. Given that the Company operates in a labour-
intensive industry, where labour costs account for a significant portion of the Company’s operating costs (approximately
86% in 2019), government funding constraints, or funding enhancements that are not commensurate with increased costs,
could have a significant adverse effect on the Company’s results from operations and cash flows. The Company is unable to
predict whether governments will adopt changes in their funding and regulatory programs, and if adopted and implemented,
the impact, if any, such changes will have on the Company’s business, results of operations and financial condition.
Health care providers are subject to surveys, inspections, audits and investigations by government authorities to ensure
compliance with applicable laws and licensure requirements of the various government funding programs. Long-term care
operators and publicly funded home health care providers must comply with applicable regulations that, depending on the
jurisdiction in which they operate, may relate to such matters as staffing levels, client care related operating standards,
occupational health and safety, client confidentiality, billing and reimbursement, along with environmental and other
standards. Retirement communities are also subject to extensive government regulation and oversight, licensure
requirements and the potential for regulatory change. The government review process is intended to determine compliance
with survey and certification requirements, and other applicable laws. Remedies for survey deficiencies can be levied based
upon the scope and severity of the cited deficiencies and range from notices of deficiencies to revocation of licenses or
termination of contracts. The revocation of a license by authorities or the cancellation of a service contract due to
inadequate performance by the operator has been historically infrequent and is usually preceded by a series of warnings,
notices and other sanctions.
Non-compliance with applicable laws and licensure requirements could result in adverse consequences, including severe
penalties, which may include criminal sanctions and fines, civil monetary penalties and fines, administrative and other
sanctions, including reimbursement of government funding or exclusion from participation in government funded
programs, or one or more third-party payor networks, and reputational damage to the Company. These penalties could have
a material adverse effect on the business, results of operations and financial condition of the Company.
The Company accrues for costs that may result from investigations, or any possible related litigation, to the extent that an
outflow of funds is probable and a reliable estimate of the amount of associated costs can be made; however, there can be
no assurance that such accruals are accurate or sufficient.
With respect to home health care services, 98% of ParaMed’s revenue is from contracts tendered by locally administered
provincial agencies, at specified billing rates and, among other things, quality operating and performance standards. Home
health care service providers must ensure their key performance indicators are meeting or exceeding provincial targets in
order to continue to receive their allocated funding volumes and/or retain their contracts. Contracts with qualified service
providers are generally awarded through a competitive bidding model. Any failure by ParaMed to retain its government
contracts, including in connection with any regulatory or other funding changes, may have an adverse effect on the
business, results of operations and financial condition of the Company.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
37
The majority of ParaMed’s business volumes are generated in Ontario and Alberta, representing 92% and 5%, respectively,
based on volumes delivered in 2019 excluding the recently exited B.C. operations. In Alberta, government contracts have
specified termination dates and or/renewal periods, following which they are put out to tender. In Ontario, the government
implemented new open-ended contracts in 2012 that are evergreen contracts provided that the service provider remains in
good standing. New contracts in Ontario are awarded under a bidding process to prequalified service providers. Under this
regime, all of ParaMed’s government contracts in Ontario have remained in effect. In 2019, the Ontario government created
the Ontario Health agency to act as central point of accountability and oversight for the provinces’ public health care
system. All of ParaMed’s government funded business in Ontario is currently governed by contracts with the LHINs. These
contracts may be impacted by the integration of the LHINs into the new agency and may need to be assigned or reissued.
Although the treatment of these contracts is not yet known, and while any change in home care contracting and associated
government operating models would represent a significant change, the underlying market demand is such that it is likely
that there would be minimal disruption to ParaMed’s business service provision; however, the Company is unable to predict
the nature and extent such changes will have on the Company’s business, results of operations and financial condition. For
further information, refer to the discussion under “Update of Regulatory and Funding Changes Affecting Results – The
People’s Health Care Act, 2019 (Bill 74)”.
Risks Related to Dependence on Key Personnel
The success of the Company depends, to a significant extent, on the efforts and abilities of its executive officers and other
members of management, as well as its ability to attract and retain qualified personnel to manage existing operations and
future growth. Although the Company has entered into employment agreements with certain of its key employees, it cannot
be certain that any of these individuals will not voluntarily terminate his or her employment with the Company. The loss of
an executive officer or other key employee could negatively affect the Company’s ability to develop and pursue its business
strategy, which could have a material adverse effect on the business, results of operations and financial condition of the
Company.
CONFLICTS OF INTEREST
The Company’s Board of Directors may, from time to time, in their individual capacities deal with parties with whom the
Company may be dealing, or may be seeking investments similar to those desired by the Company. The relevant constating
documents of the Company contain conflict of interest provisions requiring the Company’s directors to disclose material
interests in material contracts and transactions and to refrain from voting thereon.
Risks Related to Labour Intensive Business
AVAILABILITY AND COST OF PERSONNEL
The senior care industry is labour intensive, with approximately 86% of the Company’s operating costs represented by
labour costs. The Company competes with other health care providers in attracting and retaining qualified and skilled
personnel to manage and operate its businesses. The health care industry continues to face shortages of qualified personnel,
such as nurses, certified nurse’s assistants, nurse’s aides and therapists, particularly in non-urban settings. This shortage
along with general inflationary pressures may require the Company to enhance its pay and benefits package to compete
effectively for qualified personnel. The Company may not be able to recover such added costs through increased
government funding and reimbursement programs, or through increased rates charged to residents and clients. In addition,
the Company has contracted out select dietary and housekeeping services provided in some of its homes. Should the
Company become dissatisfied with the quality or cost of such contracted services, it may need to terminate the related
contracts and recruit replacement staff at an incremental cost and potential business disruption. The inability to retain
and/or attract qualified personnel and meet minimum staffing levels may result in: a reduction in occupancy levels and
volume of services provided; the use of staffing agencies at added costs; an increased risk in the inability to provide
continuity of care between the Company’s staff and its residents and clients; and an increased risk of the Company being
subject to fines and penalties. An increase in personnel costs or a failure to attract, train and retain qualified and skilled
personnel could adversely affect the business, results of operations and financial condition of the Company.
WORKPLACE HEALTH AND SAFETY
The Company recognizes that ensuring a healthy and safe workplace minimizes injuries and other risks its employees may
face in carrying out their duties, improves productivity and helps to minimize any liability or penalties which could be
incurred in connection with workplace injuries. The Company has health and workplace safety programs in place and has
established policies and procedures aimed at ensuring compliance with applicable legislative requirements. Failure to
comply with appropriate and established workplace health and safety policies and procedures or applicable legislative
requirements could result in increased workplace injury-related liability and penalties and reputational damage to the
Extendicare Inc. – 2019 Management’s Discussion and Analysis
38
Company and thus have a material adverse effect on the business, results of operations and financial condition of the
Company.
LABOUR RELATIONS
The Company employs approximately 22,000 individuals, of whom approximately 69% are represented by labour unions.
Labour relations with the unions are governed by numerous collective bargaining agreements with different unions. Upon
expiration of the collective bargaining agreements, the Company may not be able to negotiate collective agreements on
satisfactory terms. There can be no assurance that the Company will not at any time, whether in connection with the
renegotiation of a collective bargaining agreement or otherwise, experience strikes, other labour disruptions or any other
type of conflict with unions or employees which could have a material adverse effect on the Company’s business, operating
results and financial condition. The homes that the Company operates are generally subject to legislation that prohibits both
strikes and lock-outs, and requires compulsory arbitration to settle labour disputes. In jurisdictions where strikes and
lockouts are permitted, certain essential services regulations apply which provide for the continuation of resident care and
most services.
There can be no assurance that employees who are not currently unionized will not, in the future, become unionized, the
result of which could increase the Company’s labour costs, which could have a material adverse effect on the business,
results of operations and financial condition of the Company.
Risks Related to Liability and Insurance
Operating in the senior care industry exposes the Company to an inherent risk of claims of wrongful death, personal injury,
professional malpractice and other potential claims being brought by the Company’s residents, clients, and employees.
From time to time, the Company is subject to lawsuits alleging, among other claims, that the Company did not properly
treat or care for a client or resident, that the Company failed to follow internal or external procedures that resulted in harm
to a client or resident, or that the Company’s employees mistreated the Company’s residents or clients resulting in harm. In
addition, attempts to advance class action lawsuits have become prevalent in the Canadian marketplace, including senior
care. There can be no assurance that the Company will not face risks of this nature. Refer to the discussion under “Other
Contractual Obligations and Contingencies – Legal Proceedings, Claims and Regulatory Actions”.
The Company maintains business and property insurance policies in amounts and with such coverage and deductibles as
deemed appropriate, based on the nature and risks of the business, historical experience and industry standards. There can
be no assurance, however, that claims in excess of the insurance coverage, or in excess of the Company’s reserves, or
claims not covered by the insurance coverage will not arise or that the liability coverage will continue to be available on
acceptable terms. Furthermore, there are certain types of risks, generally of a catastrophic nature, such as war, non-certified
acts of terrorism, or environmental contamination, which are either uninsurable or are not insurable on an economically
viable basis. A successful claim against the Company not covered by, or in excess of, such insurance, or in excess of the
Company’s reserves for self-insured retention levels, could have a material adverse effect on the business, results of
operations and financial condition of the Company. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect on the ability of the Company to attract residents and clients, or maintain
favourable standings with regulatory authorities.
Prior to the U.S. Sale Transaction, the Company self-insured certain risks related to general and professional liability of its
disposed U.S. business through the Captive, its Bermuda-based captive insurance company. The obligation to settle any
such claims relating to the period prior to the closing of the U.S. Sale Transaction, including claims incurred but yet to be
reported, remains with the Company, which continues to be funded through the Captive.
Risks Related to Privacy of Client Information and Cyber Security
As a custodian of a large amount of personal information, including health information, relating to its residents, clients and
employees, the Company is exposed to the potential loss, misuse or theft of any such information. If the Company were
found to be in violation of federal and provincial laws protecting the confidentiality of patient health information, it could
be subject to sanctions and civil or criminal penalties, which could increase its liabilities, harm its reputation and have a
material adverse effect on the business, results of operations and financial condition of the Company. In addition, cyber
attacks against large organizations are increasing in sophistication and are often focused on financial fraud, compromising
sensitive data for inappropriate use or disrupting business operations. The Company mitigates this risk by deploying
appropriate information technology systems, including controls around logical access, physical access and data
management, and training its employees relating to safeguarding of sensitive information.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
39
The Company has deployed operational technology solutions enabling process automation, electronic health record data
collection and automated business intelligence. Technology deployments also present security and privacy risks that must
be managed proactively and effectively to prevent breaches that can have an adverse impact on the Company’s reputation
and results of operations. To counter internet-based and internal security threats, the Company invests in cyber defense
technologies to identify risks to its network, software and hardware systems. Extendicare partners with leading technology
security firms to mitigate identified risks and develop contingency plans. As security threats to the Company’s financial,
client and employee data increase and evolve, the Company adjusts and adopts new counter-measures in an effort to ensure
it maintains high privacy and security standards. The Company’s risk and exposure to these matters cannot be fully
mitigated because of, among other things, the evolving nature of these threats. As cyber threats continue to evolve, the
Company may be required to expend additional resources to continue to modify or enhance protective measures or to
investigate and remediate any security vulnerabilities.
Although to date the Company has not experienced any material losses relating to cyber attacks or other information
security breaches, there can be no assurance that the Company will not incur such losses in the future and any such losses
may have a material adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to Tax Rules and Regulations
The Company is subject to audits from federal, state and provincial tax jurisdictions and is therefore subject to risk in the
interpretation of tax legislation and regulations. Tax rules and regulations are complex and require careful review by the
Company’s tax management and its external tax consultants. Differences in interpretation of tax rules and regulations could
result in tax assessments and penalties for the untimely payment of the determined tax liability, which could have a material
adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to Financing
DEBT FINANCING
Due to the level of real property ownership by the Company, a significant portion of the consolidated cash flow of the
Company is devoted to servicing debt, and there can be no assurance that the Company will continue to generate sufficient
cash flow from operations to meet required interest and principal payments. If the Company were unable to meet its
required interest or principal payments, it could be required to seek renegotiation of such payments or obtain additional
equity, debt or other financing.
The Extendicare Credit Facility is a demand facility in the amount of $47.3 million that is secured by 13 Class C LTC
homes in Ontario and is guaranteed by certain Canadian subsidiaries of Extendicare. As at December 31, 2019, Extendicare
had letters of credit totalling $43.6 million issued under the Extendicare Credit Facility, of which $38.1 million secured the
defined benefit pension plan obligations. The Extendicare Credit Facility has no financial covenants, but does contain
normal and customary terms, including annual re-appraisals of the homes that could limit the maximum level of the line of
credit and other restrictions on Extendicare’s subsidiaries making certain payments, investments, loans and guarantees. A
demand for repayment of amounts drawn on the line of credit could inhibit the flow of cash dividends by the Company on a
temporary basis until alternative financing is obtained.
The Company cannot predict whether future financing will be available, what the terms of such future financing will be
(including, whether it will result in a higher cost of borrowing – see “Interest Rates” below) or whether its existing debt
agreements will allow for the timely arrangement and implementation of such future financing. If the Company were
unable to obtain additional financing or refinancing when needed or on satisfactory terms, it could have a material adverse
effect on the business, results of operations and financial condition of the Company.
DEBT COVENANTS
The Company and its subsidiaries are in compliance with all of their respective financial covenants as at December 31,
2019. However, there can be no assurance that future covenant requirements will be met. The Company’s bank lines and
other debt may be affected by its ability to remain in compliance. If the Company does not remain in compliance with its
financial covenants, its ability to amend the covenants or refinance its debt may be affected.
INTEREST RATES
The Company has limited the amount of debt that may be subject to changes in interest rates. All of the Company’s long-
term debt is at fixed rates, other than its construction loans that had an aggregate balance of $64.6 million drawn as at
December 31, 2019. The Company primarily finances its properties through fixed-rate mortgages and considers securing
interest rate swap agreements for any variable-rate debt to mitigate exposure to interest rate changes. The Company’s
Extendicare Inc. – 2019 Management’s Discussion and Analysis
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variable-rate mortgages and term loan, aggregating $82.0 million as at December 31, 2019, have effectively been converted
to fixed rate financings with interest rate swaps over the full term. The Company maintains risk management control
systems to monitor interest rate risk attributable to its outstanding or forecasted debt obligations as well as any offsetting
hedge positions. The Company does not enter into financial instruments for trading or speculative purposes.
Risks Related to Real Property Ownership
REAL PROPERTY OWNERSHIP
All real property investments are subject to a degree of risk. They are affected by various factors, including geographic
concentration, changes in general economic conditions (such as the availability of mortgage financing) and in local
conditions (such as an oversupply of space or a reduction in demand for real estate in the area), the attractiveness of the
properties to residents, competition from other available space and various other factors. In addition, fluctuations in interest
rates could have a material adverse effect on the business, results of operations and financial condition of the Company.
The Company owns, or operates under 25-year lease arrangements whereby ownership transfers at the end of the lease
term, 100% of its LTC homes and retirement communities, excluding those to which it provides contract services. LTC
homes and retirement communities are limited in terms of alternative uses; therefore, their values are directly driven by the
cash flow from operations. All but 11 of the Company’s 69 homes owned by it at December 31, 2019, are government-
funded senior care homes. The value of the real property depends, in part, on government funding, license terms, and
reimbursement programs. In addition, overbuilding in any of the market areas in which the Company operates could cause
its homes to experience decreased occupancy or depressed margins, which could have a material adverse effect on the
business, results of operations and financial condition of the Company. Moreover, certain significant expenditures relating
to real property ownership, such as real estate taxes, maintenance costs and mortgage payments, represent liabilities that
must be met regardless of whether the property is producing any income.
Real property investments are relatively illiquid, thereby limiting the ability of the Company to vary its portfolio in a timely
manner in response to changed economic or investment conditions. By specializing in LTC homes and retirement
communities, the Company is exposed to adverse effects on these segments of the real estate market. There is a risk that the
Company would not be able to sell its real property investments or that it may realize sale proceeds below their current
carrying value.
CAPITAL INTENSIVE INDUSTRY
The Company must commit a substantial portion of its funds to maintain and enhance its property and equipment to meet
regulatory standards, operate efficiently and remain competitive in its markets. During 2019, the company incurred
$12.3 million in maintenance capex, and expects to spend in the range of $11 million to $13 million in 2020 to sustain and
upgrade its existing property and equipment. In addition to recurring maintenance capex, the Company invests in
enhancements of existing properties aimed at earnings growth and improved profitability, including redevelopment of LTC
homes under provincial programs. See “– Risks Related to Growth and Redevelopment Activities”. These, as well as other
future capital requirements, could adversely impact the amount of cash available to the Company and have a material
adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to Environmental, Health and Safety Laws
The Company is subject to various environmental, health and safety laws and regulations, both as an owner of real property
and as a provider of health care services, governing the storage, handling, use, and disposal of equipment, materials and
waste products. The Company may become liable for the costs of removal or remediation of certain hazardous, toxic, or
regulated substances present at, released on or disposed of from its properties or other service locations, regardless of
whether or not the Company knew of, or was responsible for, their presence, release or disposal. The failure to remove,
remediate, or otherwise address such substances, if any, may adversely affect operations or the ability to sell such properties
or to borrow using such properties as collateral, and could potentially result in claims by public or private parties, including
by way of civil action, and have a material adverse effect on the business, results of operations and financial condition of
the Company.
With respect to the Company’s pre-1980 properties, management has determined that future costs could be incurred for
possible asbestos remediation at these sites. Appropriate remediation procedures may be required to remove potential
asbestos-containing materials, consisting primarily of floor and ceiling tiles, in connection with any major renovation or
demolition. Based upon current assumptions, the estimated fair value of the decommissioning provision related to the
asbestos remediation was approximately $10.7 million undiscounted, or $9.5 million discounted, as at December 31, 2019,
refer to Note 11 of the audited consolidated financial statements.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
41
Environmental, health and safety laws may change and the Company may become subject to more stringent laws in the
future. Compliance with more stringent environmental, health and safety laws, which may be more rigorously enforced,
could have a material adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to the Common Shares and Debentures
UNPREDICTABILITY AND VOLATILITY OF THE COMMON SHARE PRICE
A publicly traded company does not necessarily trade at values determined by reference to the underlying value of its
business. The prices at which the Common Shares will trade cannot be predicted. The market price of the Common Shares
could be subject to significant fluctuations in response to variations in quarterly operating results, dividends and other
factors beyond the control of the Company. The annual yield on the Common Shares, represented as the ratio of annual
dividend to the market price per Common Share, as compared to the annual yield on other financial instruments, may also
influence the price of the Common Shares in the public trading markets. In addition, the securities markets have
experienced significant price and volume fluctuations from time to time in recent years that often have been unrelated or
disproportionate to the operating performance of particular issuers. These broad fluctuations may adversely affect the
market price of the Common Shares.
CASH DIVIDENDS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH THE PERFORMANCE OF THE
COMPANY
The declaration and payment of dividends by the Company is at the discretion of the Board as to the amount and timing of
dividends to be declared and paid, after consideration of a number of factors, including results of operations, requirements
for capital expenditures and working capital, future financial prospects of the Company, debt covenants and obligations and
any other factors deemed relevant by the Board. All of these factors are susceptible to a number of risks and other factors
beyond the control of the Company. The amount of funds available for distribution will fluctuate with the performance of
the Company. If the Board determines that it would be in the Company’s best interests, it may reduce the amount and
frequency of dividends to be distributed to Shareholders and such reductions may significantly effect the market value of
the Common Shares.
A high dividend yield results in a higher cost of capital incurred by the Company in raising capital through the issue of
Common Shares to fund future growth and equally can inhibit the ability of the Company to grow through acquisition or
new developments. Therefore, the Board also has to balance the dividend yield relative to its growth plans and need to raise
capital.
Funds available for dividends are driven by cash generated from operations and may be dependent upon the Company’s
plan for growth-based capital expenditures. The timing and amount of capital expenditures will directly affect the amount
of cash available for dividends to Shareholders. Dividend payments to Shareholders may be reduced, or even eliminated, at
times when the Company cannot access the capital markets for raising cash and/or when Directors deem it necessary to
make significant capital or other expenditures. The Company may be required to reduce dividends or access the capital
markets in order to accommodate these items. There can be no assurance that sufficient capital will be available on
acceptable terms to the Company for necessary or desirable capital expenditures.
COMPANY STRUCTURE
The Company does not carry on business directly, but does so indirectly through its subsidiaries. The Company has no
major assets of its own, other than the LTC homes that it leases to Extendicare (Canada) Inc. (ECI) and the direct and
indirect interests it has in its subsidiaries (including ECI, ParaMed and the subsidiaries that own and operate the Company’s
retirement communities), all of which are separate legal entities. The Company is therefore financially dependent on lease
payments that it receives from ECI and dividends and other distributions it receives from all of its subsidiaries.
FUTURE ISSUES OF COMMON SHARES AND PREFERRED SHARES AND DILUTION
The Company’s articles permit the issuance of an unlimited number of Common Shares and a number of preferred shares of
the Company (the “Preferred Shares”), issuable in series, equal to 50% of the number of Common Shares that are issued
and outstanding, for the consideration and on the terms and conditions that the Board may determine without Shareholder
approval. Shareholders have no pre-emptive rights in connection with such future issues. Future issues of Common Shares
and/or Preferred Shares could be dilutive to the interests of Shareholders and could adversely affect the prevailing market
price of the Common Shares.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
42
LEVERAGE AND RESTRICTIVE COVENANTS IN CURRENT AND FUTURE INDEBTEDNESS
The ability of the Company to pay dividends is subject to applicable laws and contractual restrictions contained in the
instruments governing any indebtedness of the Company (including its subsidiaries). The degree to which the Company is
leveraged could have important consequences to Shareholders, including: (i) that the Company’s ability to obtain additional
financing in the future for working capital, capital expenditures or acquisitions may be limited; (ii) that a significant portion
of the Company’s cash flow from operations may be dedicated to the payment of the principal of, and interest on, its
indebtedness; (iii) that certain of the Company’s borrowings could be financed at variable rates of interest, which exposes
the Company to the risk of increased interest rates; and (iv) that the Company may be more vulnerable to economic
downturns and be limited in its ability to withstand competitive pressures. These factors may reduce funds available for the
Company to pay dividends.
CHANGES IN THE COMPANY’S CREDITWORTHINESS MAY AFFECT THE VALUE OF THE COMMON
SHARES
The perceived creditworthiness of the Company may affect the market price or value and the liquidity of the Common
Shares.
MATTERS AFFECTING TRADING PRICES FOR THE DEBENTURES
The 2025 Debentures are listed on the TSX. No assurance can be given that an active or liquid trading market for the 2025
Debentures will develop or be sustained. If an active or a liquid market for the 2025 Debentures fails to develop or be
sustained, the prices at which the 2025 Debentures trade may be adversely affected. Whether or not the 2025 Debentures
will trade at lower prices depends on many factors, including liquidity of the 2025 Debentures, prevailing interest rates and
the markets for similar securities, the market price of the Common Shares, general economic conditions, and the
Company’s financial condition, historic financial performance and future prospects.
The Company may determine to redeem outstanding 2025 Debentures for Common Shares or to repay outstanding
principal amounts thereunder at maturity of the 2025 Debentures by issuing additional Common Shares. Accordingly,
Shareholders may suffer dilution.
DEBENTURES – CREDIT RISK AND PRIOR RANKING INDEBTEDNESS; ABSENCE OF COVENANT
PROTECTION
The likelihood that purchasers of the 2025 Debentures will receive payments owing to them under the terms of the 2025
Debentures will depend on the Company’s financial condition and creditworthiness. In addition, the 2025 Debentures are
unsecured obligations of the Company and are subordinate in right of payment to all of the Company’s existing and future
senior indebtedness. Therefore, if the Company becomes bankrupt, liquidates its assets, reorganizes or enters into certain
other transactions, the Company’s assets will be available to pay its obligations with respect to the 2025 Debentures only
after it has paid all of its senior indebtedness in full. There may be insufficient assets remaining following such payments to
pay amounts due on any or all of the 2025 Debentures then outstanding. The 2025 Debentures are also effectively
subordinate to claims of creditors of the Company’s subsidiaries except to the extent the Company is a creditor of such
subsidiaries ranking at least pari passu with such other creditors. The trust indenture, pursuant to which the Company
issued the 2025 Debentures (the “Indenture”) does not prohibit or limit the ability of the Company or its subsidiaries to
incur additional debt or liabilities (including senior indebtedness) or to make distributions except in respect of distributions
where an event of default caused by the failure to pay interest when due has occurred and such default has not been cured or
waived. The Indenture does not contain any provision specifically intended to protect holders of 2025 Debentures in the
event of a future leveraged transaction involving the Company or any of its subsidiaries.
CONVERSION OF THE DEBENTURES FOLLOWING CERTAIN TRANSACTIONS
In the case of certain transactions, the 2025 Debentures will become convertible into the securities, cash or property
receivable by a Shareholder under the transaction. The change could substantially lessen or eliminate the value of the
conversion privilege associated with the 2025 Debentures in the future. For example, if the Company were acquired in a
cash merger, the 2025 Debenture would become convertible solely into cash and would no longer be convertible into
securities whose value would vary depending on the Company’s future prospects and other factors.
REDEMPTION OF THE DEBENTURES PRIOR TO MATURITY
The 2025 Debentures may be redeemed, at the option of the Company, at any time and from time to time, at a price equal to
the principal amount thereof plus accrued and unpaid interest.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
43
INABILITY OF THE COMPANY TO PURCHASE THE DEBENTURES IN CASH ON A CHANGE OF CONTROL
If a change of control of the Company occurs, debentureholders will have the right to require the Company to redeem the
2025 Debentures in an amount equal to 101% of the principal amount of the 2025 Debentures plus accrued and unpaid
interest until the date of redemption. If holders of 2025 Debentures holding 90% or more of all the 2025 Debentures
exercise their right to require the Company to redeem such 2025 Debentures, the Company may acquire the remaining 2025
Debentures on the same terms. In such event, the conversion privilege associated with the 2025 Debentures would be
eliminated. Although the Company may be required to purchase all outstanding 2025 Debentures upon the occurrence of a
change of control, it is possible that following a change of control, the Company will not have sufficient funds at that time
to make any required purchase of outstanding 2025 Debentures or that restrictions contained in other indebtedness will
restrict those purchases.
ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
A full discussion of the Company’s critical accounting policies and estimates is provided in Note 3 of the audited
consolidated financial statements for the year ended December 31, 2019, and under the heading “Future Changes in
Accounting Policies” that follows this section.
Management considers an understanding of the Company’s accounting policies to be essential to an understanding of its
financial statements because their application requires significant judgement and reliance on estimations of matters that are
inherently uncertain, which affect the application of the accounting policies and reported amounts. Estimates and
underlying assumptions are reviewed on an ongoing basis giving consideration to past experience and other factors that
management believes are reasonable under the circumstances. Accordingly, actual results could differ from those estimated.
The estimates and assumptions, which have a significant risk of causing a material adjustment to the carrying amount of
assets and liabilities, are discussed below.
VALUATION OF PURCHASE PRICE ALLOCATION FOR ACQUISITIONS
Fair value is the price that would be received when selling an asset, or paid when transferring a liability in an orderly
transaction (that is other than in a forced or liquidation sale) between market participants at the measurement date under
current market conditions. The fair value measurement is based on the presumption that the transaction takes place either:
in the principal market for the asset or liability; or in the absence of a principal market, in the most advantageous market for
the asset or liability. The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing
the asset or liability assuming that market participants act in their economic best interests. The Company uses valuation
techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value,
maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The techniques used to
estimate future cash flows will vary from one situation to another depending on the circumstances surrounding the asset or
liability in question. Management assesses fair value based on estimated discounted cash flow projections and available
market information (including the historical operating results and anticipated trends, local markets and economic
conditions).
As discussed below under the heading “Valuation of Cash Generating Units and Impairment”, an impairment loss is
recognized when the carrying amount of an asset is not recoverable. The impairment loss is determined as the excess of the
carrying value over its estimated recoverable amount.
Intangible assets with indefinite lives are also required to be assessed at a minimum annually, comparing the estimated
recoverable amount to the carrying value to determine if an impairment loss is required to be recognized.
VALUATION OF CASH GENERATING UNITS AND IMPAIRMENT
Non-financial assets consist of property and equipment, intangible assets with finite lives, intangible assets with indefinite
lives and goodwill. Property and equipment represents approximately 60% of the Company’s total assets as at December
31, 2019, and goodwill and other intangibles represent approximately 10%. A CGU is defined to be the smallest group of
assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets. The
Company has identified the home health care segment and each individual LTC home and retirement community as a CGU.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
44
Goodwill and indefinite-life intangibles are tested annually, except in the year of acquisition, and other assets are assessed
for impairment when indicators of impairment exist. If any such indication exists, then the asset’s recoverable amount is
reassessed. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the
recoverable amount is estimated annually at the same time or more frequently if warranted. An impairment loss is
recognized in net earnings if the carrying amount of an asset or its related CGU, or group of assets on the same basis as
evaluated by management, exceeds its estimated recoverable amount. The recoverable amount of an asset or a CGU is the
greater of its value in use and its fair value less costs to sell.
The determination of recoverable amounts can be significantly impacted by estimates related to current market valuations,
current and future economic conditions in the geographical markets of each CGU, and management’s strategic plans within
each of its markets. Estimates and assumptions used in the determination of any impairment loss are based upon
information that is known at the time, along with future outlook. When impairment tests are performed, the estimated
useful lives of the assets are reassessed, with any change accounted for prospectively. Actual results can differ from these
estimates and can have either a positive or negative impact on the estimate, and impact whether an impairment situation
exists.
In 2018, the Company performed the impairment assessment of its operations and recognized a pre-tax impairment charge
of property and equipment in the amount of $16.2 million in respect of certain of its Saskatchewan retirement communities
($15.9 million) and of its LTC homes ($0.3 million).
VALUATION OF INDEMNIFICATION PROVISIONS
As a result of the U.S. Sale Transaction, the Company has indemnified certain obligations of its former U.S. operations
related to tax, a corporate integrity agreement, and other items. As at December 31, 2019, the Company had remaining
provisions totalling $7.4 million or US$5.7 million (2018 – $13.7 million or US$10.1 million) and an indemnification
receivable of $1.3 million (2018 – $2.0 million). The estimates of these items are assessed every reporting period based on
management’s best estimate of the ultimate costs or recovery of such items, and any changes to the estimates are reflected
as part of other expense in the results of discontinued operations. There were no valuation changes to the indemnifications
during 2019 (2018 – favourable changes of $3.8 million), refer to Note 21 of the audited consolidated financial statements.
Actual results can differ materially from the estimates made due to a number of factors, including the assumptions used by
management and other market forces.
SELF-INSURED LIABILITIES OF DISCONTINUED OPERATIONS
The obligation to settle any U.S. self-insured general and professional liability claims relating to the period prior to the July
2015 closing of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with the Company,
which continues to be funded through the Captive. The accrual for U.S. self-insured liabilities of the Company’s former
U.S. operations is based on management’s best estimate of the ultimate cost to resolve general and professional liability
claims, using historical information and industry data, supported by actuarial projections, advice from legal counsel,
consultants and external risk management. Actual results can differ materially from the estimates made due to a number of
factors, including the assumptions used by management and other market forces.
Management regularly evaluates and periodically engages an independent third-party actuary to determine the
appropriateness of the carrying value of this liability. Assumptions underlying the determination of the liability are limited
by the uncertainty of predicting future events and assessments regarding expectations of several factors. Such factors
include, but are not limited to: the frequency and severity of claims, which can differ materially by jurisdiction; trends in
claims along with unique and identifiable settlements; the effectiveness of the claims management process; and the
outcome of litigation. Therefore, management’s estimate of the accrual for general and professional liability claims is
significantly influenced by assumptions that are subject to judgement by management and the actuary, which may cause the
expense to fluctuate significantly from one reporting period to another. Differences between the ultimate claims costs and
our historical expense for loss and actuarial assumptions and estimates could have a material adverse effect on our business,
results of operations and financial condition.
As at December 31, 2019, the accrual for self-insured general and professional liabilities was $12.2 million or
US$9.4 million (2018 – $37.1 million or US$27.2 million) supported by investments held by the Captive of $27.6 million
or US$21.2 million (2018 – $67.9 million or US$49.8 million). Changes in the level of retained risk and other significant
assumptions that underlie management’s estimates could have a material effect on the future carrying value of the self-
insured liabilities. For example, a 1% variance in the accrual for U.S. self-insured liabilities at December 31, 2019, would
have impacted the Company’s net earnings from discontinued operations by approximately $0.1 million. For further
information refer to the discussion under the heading “Other Contractual Obligations and Contingencies – Accrual for U.S.
Self-Insured Liabilities”.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
45
TAX UNCERTAINTIES
Tax uncertainties are evaluated on the basis of whether it is more likely than not that a tax position will ultimately be
sustained upon examination by the relevant taxing authorities. Tax uncertainties are measured using a probability adjusted
or expected value model whereby amounts are recorded if there is any uncertainty about a filing position, determined by
multiplying the amount of the exposure by the probability that the entity’s filing position will not be sustained. The
assessment of tax uncertainties relies on estimates and assumptions and may involve a series of judgements about future
events. New information may become available that causes the Company to change its judgement regarding the adequacy
of existing tax liabilities. Such changes to tax liabilities will impact tax expense in the period that such a determination is
made.
DEFERRED TAX ASSETS AND LIABILITIES
The Company uses the asset and liability method of accounting for deferred income taxes, which takes into account the
differences between financial statement treatment and tax treatment of certain transactions, assets and liabilities. Deferred
tax assets and liabilities are recognized to reflect the expected future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax values as well as available tax
loss carryforwards. Deferred tax assets and liabilities are measured using the substantively enacted tax rates anticipated to
apply in the periods that the temporary differences are expected to be recovered or settled. The ultimate realization of
deferred tax assets is dependent upon if the generation of future taxable income is probable during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. As at December 31, 2019, the
Company had recognized deferred tax assets totalling $12.7 million (2018 – $9.7 million). Management believes that it is
more likely than not that the Company will realize the benefits of these deductible differences. In addition, as at December
31, 2019, there were capital losses available for Canadian income tax purposes of $41.7 million (2018 – $42.1 million) that
have not been tax benefited and are available indefinitely to apply against future capital gains.
New Accounting Policies Adopted
The following new standards were adopted effective January 1, 2019, and have been applied in preparing the financial
results for the year ended December 31, 2019. These accounting standards are summarized below, and are more fully
described in Note 4 of the audited consolidated financial statements.
LEASES
Effective January 1, 2019, the Company adopted IFRS 16 “Leases”, which supersedes IAS 17 “Leases” and related
interpretations. This new standard requires a lessee to recognize assets and liabilities for all leases with a term of more than
12 months, unless the underlying asset is of low value, using a single accounting model, thereby eliminating the distinction
between operating and finance leases. The nature and timing of the related expense has changed as IFRS 16 replaces the
straight-line lease costs with a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Lease costs for the prior year have been reclassified under administrative costs to conform with the current year
presentation. The impact of adopting this standard on net earnings and overall cash flow is neutral; however, the principal
payment of the lease liabilities is presented in financing activities (previously reflected as operating activities).
The Company has applied IFRS 16 using the modified retrospective approach, under which the comparative information
presented has not been restated. Certain practical expedients were selected on transition. The transition did not result in any
retrospective adjustment to opening retained earnings on January 1, 2019.
Transition
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of
the remaining lease payments, discounted at the Company’s incremental weighted average borrowing rate as at January 1,
2019, of 4.86%. Right-of-use assets were measured at an amount equal to the lease liability. For leases that were classified
as finance leases under IAS 17, the carrying amount of the right-of-use assets and the lease liability as at January 1, 2019,
was the carrying amount of the lease assets and lease liability immediately before the date of initial application. These are
accounted for using IFRS 16 from that date.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
46
The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating
leases under IAS 17:
•
applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of lease
term;
applied the exemption not to recognize right-of-use assets and liabilities for leases that are of low value;
excluded initial direct costs from measuring the right-of-use asset as at January 1, 2019; and
used hindsight as at January 1, 2019, when determining the lease term if the contract contains options to extend or
terminate the lease.
•
•
•
INCOME TAXES
On June 7, 2017, the IASB issued IFRIC Interpretation 23 “Uncertainty over Income Tax Treatments”. The interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is
uncertainty over income tax treatments. Effective January 1, 2019, the Company adopted the IFRIC Interpretation 23, with
no material impact on the consolidated financial statements.
Future Changes in Accounting Policies
On October 22, 2018, the IASB issued amendments to IFRS 3 “Business Combinations”, that seek to clarify whether a
transaction results in an asset or a business acquisition. The amendments apply to businesses acquired in annual reporting
periods beginning on or after January 1, 2020. Earlier application is permitted. The Company intends to adopt the
amendments for the annual period beginning on January 1, 2020.
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures (DC&P) to
provide reasonable assurance that all material information relating to the Company is gathered and reported to senior
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that
appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the DC&P was conducted as at December 31, 2019, by management under the
supervision of the Company’s CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the
Company’s disclosure controls and procedures, as defined by National Instrument 52-109, Certification of Disclosures in
Issuers’ Annual and Interim Filings, were effective as at December 31, 2019.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting (ICFR)
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for
external purposes in accordance with IFRS.
Management, under the supervision of the Company’s CEO and CFO, has evaluated the effectiveness of our ICFR using
the 2013 Integrated Control framework as published by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management has concluded that our ICFR were effective and that there were no
material weaknesses in the Company’s ICFR as at December 31, 2019.
In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not
prevent or detect misstatements. Additionally, management is required to use judgement in evaluating controls and
procedures.
Extendicare Inc. – 2019 Management’s Discussion and Analysis
47
... helping people live better
CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES
Year ended December 31, 2019
Extendicare Inc.
Dated: February 27, 2020
Management’s Responsibility for Consolidated Financial Statements
The accompanying consolidated financial statements of Extendicare Inc. (“Extendicare” or the “Company”) and other
financial information contained in this Annual Report are the responsibility of management. The consolidated financial
statements have been prepared in conformity with International Financial Reporting Standards, using management’s best
estimates and judgements, where appropriate. In the opinion of management, these consolidated financial statements reflect
fairly the financial position, results of operations and cash flows of Extendicare within reasonable limits of materiality. The
financial information contained elsewhere in this Annual Report has been reviewed to ensure consistency with that in the
consolidated financial statements.
A system of internal accounting and administrative controls is maintained by management to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition and that financial records are properly
maintained to provide accurate and reliable consolidated financial statements.
The board of directors of Extendicare (the “Board of Directors”) is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal controls. The Board of Directors carries out this responsibility principally
through its independent Audit Committee comprised of unrelated and outside directors. The Audit Committee meets regularly
during the year to review significant accounting and auditing matters with management and the independent auditors and to
review and approve the interim and annual consolidated financial statements of Extendicare.
The consolidated financial statements have been audited by KPMG LLP, which has full and unrestricted access to the Audit
Committee. KPMG’s report on the consolidated financial statements follows.
MICHAEL GUERRIERE
President and Chief Executive Officer
February 27, 2020
DAVID BACON
Senior Vice President and
Chief Financial Officer
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
1
KPMG LLP
100 New Park Place, Suite 1400
Vaughan, ON L4K 0J3
Tel 905-265 5900
Fax 905-265 6390
www.kpmg.ca
Independent Auditors’ Report
To the Shareholders of Extendicare Inc.
Opinion
We have audited the consolidated financial statements of Extendicare Inc. (the Entity), which
comprise:
the consolidated statements of financial position as at December 31, 2019 and
December 31, 2018
the consolidated statements of earnings and comprehensive income (loss) for the years
then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated financial position of the Entity as at December 31, 2019 and December 31,
2018, and its consolidated financial performance and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
“Auditors’ Responsibilities for the Audit of the Financial Statements” section of our
auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
2
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with
the relevant Canadian Securities Commissions as at the date of this auditors’ report. If,
based on the work we have performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to report that fact in the
auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “Annual Report” is expected to be made available
to us after the date of this auditors’ report. If, based on the work we will perform on this other
information, we conclude that there is a material misstatement of this other information, we
are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s
ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
3
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Entity's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity's ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Entity to cease to continue
as a going concern.
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
Communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
4
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the group Entity to express an opinion on the
financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Paola Cipolla
Vaughan, Canada
February 27, 2020
Extendicare Inc. – 2019 Annual Consolidated Financial Statements 5
Extendicare Inc.
Consolidated Statements of Financial Position
As at December 31
(in thousands of Canadian dollars)
notes
2019
2018
Assets
Current assets
Cash and short-term investments
Restricted cash
Accounts receivable
Income taxes recoverable
Other assets
Total current assets
Non-current assets
Property and equipment
Goodwill and other intangible assets
Other assets
Deferred tax assets
Total non-current assets
Total assets
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Long-term debt
Provisions
Total current liabilities
Non-current liabilities
Long-term debt
Provisions
Other long-term liabilities
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Share capital
Equity portion of convertible debentures
Contributed surplus
Accumulated deficit
Accumulated other comprehensive loss
Shareholders’ equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
Commitments and contingencies (Note 23).
Approved by the Board
7
10
8
9
10
22
12
11
12
11
13
22
15
12
14
94,457
2,441
50,382
15,958
20,661
183,899
530,527
89,874
71,752
12,748
704,901
888,800
136,922
1,606
133,771
3,572
275,871
422,535
25,541
35,187
14,252
497,515
773,386
498,116
7,085
3,675
(382,189)
(11,273)
115,414
888,800
65,893
2,290
50,570
17,316
21,465
157,534
514,849
95,200
118,996
9,745
738,790
896,324
133,654
1,073
74,626
17,621
226,974
454,344
42,595
35,077
11,343
543,359
770,333
492,064
7,085
2,706
(368,147)
(7,717)
125,991
896,324
Alan D. Torrie
Chairman
Michael Guerriere
President and Chief Executive Officer
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
6
Extendicare Inc.
Consolidated Statements of Earnings
Years ended December 31
(in thousands of Canadian dollars except for per share amounts)
CONTINUING OPERATIONS
Revenue
Operating expenses
Administrative costs
Total expenses
Earnings before depreciation, amortization, and other expense
Depreciation and amortization
Other expense
Earnings before net finance costs and income taxes
Interest expense
Interest revenue
Accretion
Foreign exchange and fair value adjustments
Net finance costs
Earnings before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings from continuing operations
DISCONTINUED OPERATIONS
Earnings from discontinued operations, net of income taxes
Net earnings
Basic and Diluted Earnings per Share
Earnings from continuing operations
Net earnings
See accompanying notes to consolidated financial statements.
notes
2019
2018
998,500
42,339
16, 28 1,131,950 1,120,007
986,023
39,746
17 1,040,839 1,025,769
94,238
35,270
20,195
38,773
27,584
91,111
39,590
2,404
49,117
28,733
18
(3,688)
1,843
(2,007)
24,881
24,236
8,287
(1,102)
7,185
17,051
(3,761)
2,878
(247)
26,454
12,319
8,129
(3,894)
4,235
8,084
11,579
28,630
23,654
31,738
0.19
0.32
0.09
0.36
19
22
21
20
20
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
7
Extendicare Inc.
Consolidated Statements of Comprehensive Income
Years ended December 31
(in thousands of Canadian dollars)
Net earnings
Other comprehensive loss, net of income taxes
Items that will not be reclassified to profit or loss:
Defined benefit plan actuarial losses, net of taxes
Items that are or may be reclassified subsequently to profit or loss:
Net change in foreign currency translation adjustment
Total items that are or may be reclassified subsequently to profit or loss
Other comprehensive income (loss), net of tax
Total comprehensive income
See accompanying notes to consolidated financial statements.
notes
2019
28,630
2018
31,738
22, 24
(1,043)
(373)
22
(2,513)
(2,513)
(3,556)
25,074
1,841
1,841
1,468
33,206
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
8
Extendicare Inc.
Consolidated Statements of Changes in Equity
Years ended December 31
(in thousands of Canadian dollars)
Balance at January 1, 2019
DRIP
Share-based compensation
Net earnings
Dividends declared
Other comprehensive loss
Balance at December 31, 2019
notes
15
14
Number of
Shares
88,489,984
693,466
49,062
–
–
–
89,232,512
Share
Capital
492,064
5,423
629
–
–
–
498,116
Equity Portion
of Convertible
Debentures
7,085
–
–
–
–
–
7,085
Contributed
Surplus
2,706
–
969
–
–
–
3,675
Accumulated
Other
Comprehensive
Income (Loss)
(7,717)
–
–
–
–
(3,556)
(11,273)
Accumulated
Deficit
(368,147)
–
–
28,630
(42,672)
–
(382,189)
Shareholders'
Equity
125,991
5,423
1,598
28,630
(42,672)
(3,556)
115,414
Number of
Shares
88,523,290
–
88,523,290
650,361
(703,585)
19,918
(in thousands of Canadian dollars)
Balance at January 1, 2018, previously
notes
d
14
15
15
Adoption of new standard (1)
Balance at January 1, 2018
DRIP
Purchase of shares for cancellation
Share-based compensation
Redemption of convertible
debentures
Issuance of convertible debentures
Net earnings
Dividends declared
Other comprehensive income
Balance at December 31, 2018
See accompanying notes to consolidated financial statements.
(1) Adoption of new standard on financial instruments – IFRS 9.
–
–
–
–
–
88,489,984
12
12
Equity portion
of convertible
debentures
5,573
–
5,573
–
–
–
(5,573)
7,085
–
–
–
7,085
Contributed
surplus
2,437
–
2,437
–
–
269
–
–
–
–
–
2,706
Accumulated
deficit
(365,084)
4,334
(360,750)
–
(2,357)
–
5,573
–
31,738
(42,351)
–
(368,147)
Accumulated
other
comprehensive
income (loss)
(4,851)
(4,334)
(9,185)
–
–
–
Shareholders'
equity
128,956
–
128,956
4,928
(6,260)
427
–
–
–
–
1,468
(7,717)
–
7,085
31,738
(42,351)
1,468
125,991
Share
capital
490,881
–
490,881
4,928
(3,903)
158
–
–
–
–
–
492,064
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
9
Extendicare Inc.
Consolidated Statements of Cash Flows
Years ended December 31
(in thousands of Canadian dollars)
Operating Activities
Net earnings
Adjustments for:
Depreciation and amortization
Share-based compensation
Deferred taxes
Current taxes
Net finance costs
Other expense
Foreign exchange and fair value adjustments
Net change in operating assets and liabilities
Accounts receivable
Other assets
Accounts payable and accrued liabilities
Payments for self-insured liabilities
Interest paid
Interest received
Income taxes paid
Net cash from operating activities
Investing Activities
Purchase of property, equipment and other intangible assets
Acquisitions
Decrease in investments held for self-insured liabilities
Decrease in other assets
Net cash from (used in) investing activities
Financing Activities
Issuance of long-term debt
Repayment of long-term debt
Decrease (increase) in restricted cash
Purchase of securities for cancellation
Dividends paid
Financing costs
Other
Net cash used in financing activities
Increase (decrease) in cash and short-term investments
Cash and short-term investments at beginning of year
Foreign exchange gain (loss) on cash held in foreign currency
Cash and short-term investments at end of year
See accompanying notes to consolidated financial statements.
notes
2019
2018
28,630
31,738
8, 9
14
22
22
12
19
8, 9
6
39,590
1,598
212
6,973
26,888
(9,175)
(2,007)
92,709
200
1,133
(6,166)
87,876
(12,769)
(27,933)
3,677
(5,661)
45,190
(33,182)
–
40,464
5,487
12,769
45,987
(35,658)
(151)
–
(37,218)
(1,628)
–
(28,668)
29,291
65,893
(727)
94,457
35,270
430
1,936
(3,600)
26,701
2,440
(247)
94,668
(8,172)
(536)
2,210
88,170
(15,237)
(28,383)
3,785
(8,862)
39,473
(50,648)
(33,767)
24,163
5,200
(55,052)
159,998
(159,674)
10
(6,258)
(37,424)
(5,886)
471
(48,763)
(64,342)
128,156
2,079
65,893
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
10
Notes to Consolidated Financial Statements
YEAR ENDED DECEMBER 31, 2019
General Information and Nature of the Business………………………………………………………….….
12
Basis of Preparation……………………………………………………………………………………………..
12
Significant Accounting Policies…………………………………………………………………………………
13
New Accounting Policies Adopted………………………………………………………………………..…….
Future Changes in Accounting Policies………………………………………………………………………..
Acquisition……………………………………………………………………………………………………….
Accounts Receivable…………………………………………………………………………………………….
20
21
21
22
Property and Equipment……………………………………………………………………………………….
22
Goodwill and Other Intangible Assets………………………………………………………………………….
23
Other Assets……………………………………………………………………………………………………..
23
Provisions…………………………………………………………………………………………………………
24
Long-term Debt………………………………………………………………………………………………….
25
Other Long-term Liabilities…………………………………………………………………………………….
28
Share-based Compensation……………………………………………………………………………………..
28
Share Capital…………………………………………………………………………………………………….
29
Revenue…………………………………………………………………………………………………………..
Expenses by Nature……………………………………………………………………………………………..
Other Expense…………………………………………………………………………………………………...
Foreign Exchange and Fair Value Adjustments…………………………………………………….…...……
Earnings per Share……………………………………………………………………………………………...
Discontinued Operations………………………………………………………………………………………..
30
30
30
31
32
32
Income Taxes…………………………………………………………………………………………………….
33
Commitments and Contingencies………………………………………………………………………………
35
Employee Benefits………………………………………………………………………………………………
25 Management of Risks and Financial Instruments…………………………………………………………….
Capital Management……………………………………………………………………………………………
Related Party Transactions…………………………………………………………………………………….
Segmented Information…………………………………………………………………………………………
44
Significant Subsidiaries…………………………………………………………………………………………
45
36
38
43
43
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
26
27
28
29
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
11
Notes to Consolidated Financial Statements
1. GENERAL INFORMATION AND NATURE OF THE BUSINESS
The common shares (the “Common Shares”) of Extendicare Inc. (“Extendicare” or the “Company”) are listed on the
Toronto Stock Exchange (TSX) under the symbol “EXE”. The Company and its predecessors have been operating since
1968, providing care and services to seniors throughout Canada. The Company has repositioned itself as a leading provider
of care and services across Canada, committed to delivering quality care throughout the health continuum to meet the needs
of a growing seniors’ population. The registered office of the Company is located at 3000 Steeles Avenue East, Suite 700,
Markham, Ontario, Canada, L3R 9W2.
2. BASIS OF PREPARATION
a) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS). These consolidated financial statements were approved by the board of directors (the “Board”) on February 27,
2020.
b) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost basis except for financial assets and
liabilities classified at fair value through profit or loss.
The Company’s consolidated financial statements are presented in Canadian dollars, which is the Company’s functional
currency. All financial information presented in dollars has been rounded to the nearest thousand, unless otherwise noted.
c) Use of Estimates and Judgement
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting period. Estimates and underlying assumptions are reviewed
on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods
affected.
The more subjective of such estimates are:
•
•
•
•
•
•
•
•
•
determination of the lease term for leases that include renewal options and the appropriate discount rate used to
recognize lease liability;
valuation of purchase price allocation for acquisition;
valuation of indemnification provisions;
valuation of self-insured liabilities;
valuation of equity portion of convertible debentures;
valuation of financial assets and liabilities;
valuation of share-based compensation;
determination of the recoverable amount of cash generating units (CGUs) subject to an impairment test;
and
accounting for tax uncertainties and the tax rates used for valuation of deferred taxes
In addition, the assessment of contingencies and provisions are subject to judgement. The recorded amounts for such items
are based on management’s best available information and are subject to assumptions and judgement, which may change as
time progresses; accordingly, actual results could differ from estimates.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
12
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements, except for those detailed in Note 4.
a) Basis of Consolidation
The consolidated financial statements include the accounts of Extendicare and its wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated. The financial statements of Extendicare’s subsidiaries are
included within the Company’s consolidated financial statements from the date that control commences until the date that
control ceases, and are prepared for the same reporting period as the Company, using consistent accounting policies.
The acquisition method of accounting is used to account for the acquisition of businesses. Consideration transferred on the
acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed on
the date of the acquisition and transaction costs are expensed as incurred. Identified assets acquired and liabilities assumed
are measured at their fair value on the acquisition date. The excess of fair value of consideration given over the fair value of
the identifiable net assets acquired is recorded as goodwill, with any gain on a bargain purchase being recognized in net
earnings on the acquisition date.
b) Foreign Currency
The assets and liabilities of foreign operations are translated at exchange rates at the reporting date. The income and
expenses of foreign operations are translated at average rates of exchange for the period. The resulting translation
adjustments are included in accumulated other comprehensive income (AOCI) in shareholders’ equity.
Transactions in foreign currencies are translated at exchange rates at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange
rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are
retranslated at the exchange rate at the date that the fair value was determined.
c) Cash and Short-term Investments
Cash and short-term investments include unrestricted cash and short-term investments less bank overdraft and outstanding
cheques. Short-term investments, comprised of money market instruments, have a maturity of 90 days or less from their
date of purchase.
d) Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition or development of the asset. Homes that are
constructed or under construction include all incurred expenditures for the development and other direct costs related to the
acquisition of land, development and construction of the homes, including borrowing costs of assets meeting certain criteria
that are capitalized until the home is completed for its intended use.
Property and equipment are classified into components when parts of an item have different useful lives. The cost of
replacing a component of an item is recognized in the carrying amount of the item if there is a future economic benefit and
its cost can be measured reliably. Any undepreciated carrying value of the assets being replaced will be derecognized and
charged to net earnings upon replacement. The costs of the day-to-day maintenance of property and equipment are
recognized in net earnings as incurred.
Depreciation and amortization are computed on a straight-line basis based on the useful lives of each component of
property and equipment. Depreciation of long-term care (LTC) homes or retirement communities under construction
commences in the month after the home is available for its intended use based upon the useful life of the asset, as outlined
in the following table. Land and Construction in Progress are not depreciated. The depreciation methods, useful lives and
residual values are reviewed at least annually, and adjusted if appropriate.
The Company acquires in-place leases in connection with the acquisitions of operating retirement communities. These
assets are stated at the amounts determined upon acquisition and are amortized on a straight-line basis, based upon a review
of the residents’ average length of stay. In-place leases are a component of building and are generally depreciated over a
three-year period.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
13
Notes to Consolidated Financial Statements
Land improvements
Buildings:
Building components:
Structure and sprinklers systems
Roof, windows and elevators
HVAC and building systems
Flooring and interior upgrades
In-place leases
Building improvements and extensions
10 to 25 years
50 years
25 years
15 to 25 years
5 to 15 years
1 to 3 years
5 to 30 years
Furniture and equipment:
Furniture and equipment
Computer equipment
Leasehold improvements
e) Government Grants
5 to 15 years
3 to 5 years
Term of the lease and renewal that is reasonably certain to be exercised
Government grants are recognized depending on the purpose and form of the payment from the government.
Forgivable loans issued by the government are accounted for as government grants if there is reasonable assurance the
Company will meet the terms for forgiveness of the loan. Forgivable loans granted by a provincial or health authority body
for the construction of a senior care centre, where the grants are received throughout the duration of the construction
project, are netted with the cost of property and equipment to which they relate when such payments are received.
Capital funding payments for the development of a senior care centre that are received from a provincial body subsequent
to construction over extended periods of time are present valued and are recorded as notes, mortgages and amounts
receivable included in other assets, with an offset to the cost of property and equipment upon inception; as these grants are
received over time, the accretion of the receivable is recognized in interest revenue as part of net finance costs within net
earnings.
f) Leases
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is
initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses and adjusted
for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate
cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental
borrowing rate as the discount rate.
The lease liability is subsequently increased by the interest cost through accretion and decreased by lease payments made. It
is remeasured when there is a change in future lease payments arising from a change in an index or rate, or as appropriate,
changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination
option is reasonably certain not to be exercised.
The Company has applied judgement to determine the lease term for leases that include renewal options. The assessment of
whether there is reasonable certainty to exercise such options impacts the lease term, which significantly affects the amount
of right-of-use assets and lease liabilities recognized.
g) Goodwill and Other Intangible Assets
GOODWILL
Goodwill represents the excess amount of consideration given over the fair value of the underlying net assets acquired in a
business combination and is measured at cost less accumulated impairment losses. Goodwill is not amortized but is tested
for impairment on an annual basis or more frequently if there are indicators that goodwill may be impaired.
OTHER INTANGIBLE ASSETS
Other intangible assets that are acquired are recorded at fair value determined upon acquisition, and if the assets have finite
useful lives are measured at cost less accumulated amortization and accumulated impairment losses.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
14
Notes to Consolidated Financial Statements
Intangible assets with finite lives are amortized based on cost. Subsequent expenditures are capitalized only if a future
benefit exists. All other expenditures, including expenditures on internally generated goodwill, are recognized in net
earnings as incurred.
Intangible assets with indefinite useful lives are measured at cost without amortization.
Customer relationships acquired in connection with the purchase of a Canadian home health care business represent the
intangible asset underlying the various contracts in the business. These assets are being amortized over the estimated useful
lives over 15 years.
Non-compete agreements acquired through acquisitions are amortized on a straight-line basis over the period until the
agreement expires.
Computer software is amortized over five to seven years and internally developed software over its useful life.
Amortization methods and useful lives are reviewed at least annually and are adjusted when appropriate.
h) Impairment
Impairment of financial and non-financial assets is assessed on a regular basis. All impairment losses are charged to other
expense as part of earnings before net finance costs and income taxes.
NON-FINANCIAL ASSETS
Non-financial assets consist of property and equipment, intangible assets with finite lives, intangible assets with indefinite
lives and goodwill.
The carrying amounts of non-financial assets are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated to determine the
extent of the impairment, if any. For goodwill, and intangible assets that have indefinite useful lives or those that are not yet
available for use, the recoverable amount is estimated annually at the same time or more frequently if warranted. An
impairment loss is recognized in net earnings if the carrying amount of an asset or its related CGU, or group of assets on the
same basis as evaluated by management, exceeds its estimated recoverable amount. A CGU is defined to be the smallest
group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other
assets. The Company has identified the home health care segment and each individual LTC home and retirement
community as a CGU.
The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. Goodwill
and indefinite life intangible assets are allocated to their respective CGUs for the purpose of impairment testing. Indefinite
life intangible assets and corporate assets that do not generate separate cash flows and are utilized by more than one CGU,
are allocated to each CGU for the purpose of impairment testing and are not tested for impairment separately.
Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated to the CGU and then to reduce the carrying amounts of the assets in the CGU on a pro rata basis. Impairment
losses on goodwill cannot be reversed. In respect of other non-financial assets, impairment losses recognized in prior
periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortization, if no impairment loss had been recognized (Note 3(m)).
FINANCIAL ASSETS
Financial assets are reviewed at each reporting date using the expected credit loss (ECL) impairment model which applies
to all financial assets except for investments in equity securities.
The Company has elected to use the simplified approach and calculates impairment loss on account receivable when there
has been a significant increase in credit risk of lifetime ECL. The other ECL models applied to other financial assets also
require judgement, assumptions and estimations on changes in credit risks, forecasts of future economic conditions and
historical information on the credit quality of the financial asset.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
15
Notes to Consolidated Financial Statements
Impairment losses are recorded in operating expenses in the consolidated statement of earnings with the carrying amount of
the financial asset reduced through the use of impairment allowance accounts.
i) Employee Benefits
DEFINED BENEFIT PLANS
Defined benefit plans are post-employment plans with a defined obligation to employees in return for the services rendered
during the term of their employment with the Company. The net obligation of these plans is calculated separately for each
plan by estimating the present value of future benefit that employees have earned in return for their service in the current
and prior periods. Past service costs are recognized during the period in which they are incurred, and the fair value of any
plan assets are deducted. The discount rate used in deriving the present value is the yield at the reporting date on AA credit-
rated corporate bonds that have maturity dates approximating the Company’s obligations and are denominated in the same
currency in which the benefits are expected to be paid.
The calculation of the future benefit of the plan is performed annually by a qualified actuary using the projected unit credit
method. When the calculation results in a benefit to the plan, the recognized asset is limited to the present value of
economic benefits available in the form of reductions in future contributions to the plan.
All actuarial gains and losses arising from defined benefit plans are recognized in OCI during the period in which they are
incurred.
DEFINED CONTRIBUTION PLANS
The Company has corporate specific and multi-employer defined benefit pension plans, as well as deferred compensation
plans. Multi-employer defined benefit pension plans are accounted for as defined contribution plans as the liability per
employer is not available. Deferred compensation plans are also accounted for as defined contribution plans. Defined
contribution plans are post-employment plans where the costs are fixed and there are no legal or constructive obligations to
pay further amounts. Obligations for such contributions are recognized as employee benefit expense in net earnings during
the periods in which services are rendered by employees.
SHORT-TERM EMPLOYEE BENEFITS
The Company has vacation, paid sick leave and short-term disability plans along with other health, drug and welfare plans
for its employees. These employee benefit obligations are measured on an undiscounted basis and are expensed as the
related services are rendered.
j) Share-Based Compensation
EQUITY-SETTLED LONG-TERM INCENTIVE PLANS
Awards for deferred share units (DSUs) and performance share units (PSUs) are a share-based component of director and
executive compensation, which are accounted for based on the intended form of settlement. Under a long-term incentive
plan (LTIP), the Board has the discretion to settle the DSU and PSU awards in cash, market-purchased Common Shares, or
Common Shares issued from treasury. Based on the Board’s intention to settle the awards in Common Shares issued from
treasury, the PSU and DSU awards are accounted for as equity-settled awards. Settlement of the DSUs and PSUs are net of
any applicable taxes and other source deductions required to be withheld by the Company, which amounts are anticipated to
approximate 50% of the fair value of the award on the redemption date. The compensation expense for these equity-settled
awards is prorated over the vesting or performance period, with a corresponding increase to contributed surplus. The fair
value of each award is measured at the grant date. Forfeitures are estimated at the grant date and are revised to reflect
changes in expected or actual forfeitures. In addition, PSU and DSU participants are credited with dividend equivalents in
the form of additional units when dividends are paid on Common Shares in the ordinary course of business.
k) Provisions
A provision is recognized when there is a present legal or constructive obligation as a result of a past event, it is probable
that an outflow of economic benefits will be required to settle the obligation, and that obligation can be measured reliably.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the
current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision
due to passage of time is recognized as accretion and recognized as part of net finance costs. Provisions are reviewed on a
regular basis and adjusted to reflect management’s best current estimates. Due to the judgemental nature of these items,
future settlements may differ from amounts recognized. Provisions comprise estimated self-insured liabilities,
decommissioning provisions and other legal claims and obligations.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
16
Notes to Consolidated Financial Statements
SELF-INSURED LIABILITIES
As a result of the U.S. Sale Transaction, the Company no longer self-insures, but retained the associated obligation relating
to the self-insured liabilities. The accrual for self-insured liabilities includes the estimated costs of both reported claims and
claims incurred but not yet reported. The provision for self-insured liabilities is based on estimates of loss based upon
assumptions made by management supported by actuarial projections and the advice of external risk management and legal
counsel. The accrual for self-insured liabilities is discounted based on the projected timing of future payment obligations.
DECOMMISSIONING PROVISIONS
Management has determined that future costs could be incurred for possible asbestos remediation of the Company’s pre-
1980 constructed homes. Although asbestos is currently not a health hazard in any of these homes, appropriate remediation
procedures may be required to remove potential asbestos-containing materials, consisting primarily of floor and ceiling
tiles, in connection with any major renovation or demolition.
The fair value of the decommissioning provision related to asbestos remediation is estimated by computing the present
value of the estimated future costs of remediation based on estimated expected dates of remediation. The computation is
based on a number of assumptions, which may vary in the future depending upon the availability of new information,
changes in technology and in costs of remediation, and other factors.
INDEMNIFICATION PROVISIONS
Indemnification provisions include management’s best estimate of amounts required to indemnify for obligations related to
tax, a corporate integrity agreement (CIA), and other items, resulting from the U.S. Sale Transaction.
l) Fair Value Measurement
The Company measures certain financial instruments at fair value at each balance sheet date. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date under current market conditions. The fair value measurement is based on the presumption that the
transaction to sell the asset or transfer the liability takes place either: in the principal market for the asset or liability; or in
the absence of a principal market, in the most advantageous market for the asset or liability.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available
to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are
categorized within the following fair value hierarchy:
Level 1 – quoted (unadjusted) market prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either
directly (as prices) or indirectly (derived from prices); or
Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable market data.
Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its
entirety, categorization of which is re-assessed at the end of each reporting period. For the purpose of fair value disclosures,
the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset
or liability and the level of the fair value hierarchy as explained above.
m) Financial Instruments
FINANCIAL ASSETS AND LIABILITIES
Financial assets are classified as measured at fair value through profit and loss (FVTPL), fair value through other
comprehensive income (FVOCI), or amortized cost. The classification depends on the Company’s business model for
managing its financial instruments and the characteristics of the contractual cash flows associated with the instruments.
Financial assets and liabilities classified as measured at amortized cost are initially recognized at fair value (net of any
transaction costs) and are subsequently measured at amortized cost using the effective interest method less allowance for
credit losses for financial assets.
Financial assets classified as measured at FVOCI are initially recognized at fair value and transaction costs are recognized
in net earnings. Subsequently, unrealized gains and losses are recognized in other comprehensive income. Upon
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
17
Notes to Consolidated Financial Statements
derecognition, realized gains and losses are reclassified from other comprehensive income and are recognized in net
earnings for debt instruments and remain in other comprehensive income for equity investments. Interest income, foreign
exchange gains/losses and impairments from debt instruments as well as dividends from equity investments are recognized
in net earnings.
Financial assets and liabilities classified as measured at FVTPL are initially recognized at fair value and transaction costs
are recognized in net earnings, along with gains and losses arising from changes in fair value.
A debt instrument is classified as FVOCI if is not designated as at FVTPL, is held within a business model with the purpose
of holding assets to collect contractual cash flows and selling prior to maturity; and its contractual terms give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial liabilities are measured as FVTPL if they are classified as held for trading or are designated as such. Other non-
derivative financial liabilities are classified as amortized cost. Derivative financial liabilities are classified as FVTPL.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used to manage risks from fluctuations in exchange rates and interest rates. All
derivative instruments, including embedded derivatives that must be separately accounted for, are valued at their respective
fair values in the consolidated financial statements.
The Company currently does not have any fair-value, cash-flow or net investment hedges.
n) Revenue
The Company recognizes revenue for the transfer of goods or services to customers at an amount that reflects the
consideration expected to be received for those goods or services. The Company generates revenue primarily from the
provision of services to residents, rental income, home health care services, contract services, consulting and group
purchasing services.
i. Long-term Care
Services provided to residents include the provision of accommodation and meals, assistance with activities of daily living
and continuing care. Programs and services are offered to all residents and specialty programs are offered for those with
behavioural needs. Revenue from our LTC segment is regulated by provincial authorities and provincial programs fund a
substantial portion of these fees with a co-payment for accommodation being paid by the residents. Accommodation and
services are delivered as a bundle and revenue is recognized over time, typically on a monthly basis, which reflects when
the services are provided. The frequency that funding is received depends on the jurisdiction in which the LTC home
operates and it varies between a monthly or more frequent basis; and payments from residents are typically due at the
beginning of each month.
In some cases, the Company’s funding is based on occupancy levels achieved or certain policy conditions being met such
as spending or staffing hour requirements. In these cases, the Company estimates the amount of funding that it expects to be
entitled to for the services provided.
ii. Home Health Care
Home health care services provided include complex nursing care, occupational, physical and speech therapy and assistance
with daily activities to accommodate clients living at home. Revenue from the home health care segment is also regulated
by provincial authorities. Revenue is derived from both government and private-pay clients. Performance obligations are
satisfied as services are delivered and revenue is therefore recognized over time, typically as the services provided to the
customer. Private-pay services provided are invoiced at the end of each month based on the services provided, and the
billing frequency of government-funded services varies between monthly and bi-weekly depending on the jurisdiction in
which the Company operates.
iii. Retirement Living
Retirement living revenue is primarily derived from private-pay residents. Residents are charged monthly fixed fees based
on the type of accommodation, level of care and services chosen by the resident and the location of the retirement
community. These fixed fees are allocated to the lease and the service components. Payments are due at the beginning of
each month.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
18
Notes to Consolidated Financial Statements
Accommodation revenue is recognized on a straight-line basis over the lease term, beginning when a resident has the right
to use the retirement community. Revenue allocated to the services is recognized over time, typically on a monthly basis, as
this corresponds to the period in which services are provided. The Company may also provide additional services to
residents on an as-requested basis, at rates established by the Company based upon market conditions. Revenue for such
services is recognized as the services are provided to the residents.
iv. Other Services
The Company also offers contract services, consulting and group purchasing services to third parties. Rates are set by the
contracts, and these contracts are typically accounted for as a single performance obligation because goods or services are
delivered concurrently. Revenue is recognized over time, typically on a monthly basis, which reflects when the services are
provided.
o) Finance Costs and Finance Income
Finance costs include: interest expense on long-term debt; accretion of the discount on provisions, decommissioning
provisions and convertible debentures; losses on the change in fair value of financial assets and liabilities designated as
FVTPL; and losses in foreign exchange on non-Canadian based financial assets.
Finance income includes interest income on funds invested, gains on the change in fair value of financial assets and
liabilities designated as FVTPL, accretion on deferred consideration and gains in foreign exchange on non-Canadian based
financial assets.
p) Income Taxes
The Company and its subsidiaries are subject to income taxes as imposed by the jurisdictions in which they operate, in
accordance with the relevant tax laws of such jurisdictions. The provision for income taxes for the period comprises current
and deferred tax.
Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting
period in the jurisdictions in which the Company operates. Deferred income tax is calculated using tax rates anticipated to
apply in the periods that the temporary differences are expected to reverse.
The income tax rates used to measure deferred tax assets and liabilities are those rates enacted or substantially enacted at
the reporting date and are recognized to the extent that it is probable that future taxable profit will be available against
which the temporary differences can be utilized.
Current and deferred income tax assets and liabilities are offset when there is a legally enforceable right of offset; and the
income taxes are levied by the same taxation authority on either the same taxable entity or different taxable entities, which
intend either to settle current tax liabilities and assets on a net basis or to realize the assets and settle the liabilities
simultaneously, for each future period in which significant amounts of deferred tax liabilities or assets are expected to be
settled or recovered.
The ultimate realization of deferred tax assets is dependent upon if the generation of future taxable income is probable
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
International Financial Reporting Interpretations Committee (IFRIC) Interpretation 23, Uncertainty over Income Tax
Treatments, was effective for reporting periods beginning on or after January 1, 2019. IFRIC 23 clarifies the recognition
and measurement requirements under IAS 12, Income Taxes, when there is uncertainty over income tax treatments. As at
January 1, 2019, the Company applied IFRIC 23, and there was no material impact on the Company’s consolidated
financial statements as there are no known material uncertain tax positions.
q) Discontinued Operations
A discontinued operation is a component of the Company’s business that represents a separate major line of business or
geographical area of operations that has been disposed of or is held for sale. Classification as a discontinued operation
occurs upon disposal or earlier, if the operation meets the criteria to be classified as held for sale. When an operation is
classified as a discontinued operation, the comparative statements of earnings and cash flow information is re-presented as
if the operation had been discontinued from the start of the comparative period.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
19
Notes to Consolidated Financial Statements
4. NEW ACCOUNTING POLICIES ADOPTED
Leases
Effective January 1, 2019, the Company adopted IFRS 16 “Leases”, which supersedes IAS 17 “Leases” and related
interpretations. This new standard requires a lessee to recognize assets and liabilities for all leases with a term of more than
12 months, unless the underlying asset is of low value, using a single accounting model, thereby eliminating the distinction
between operating and finance leases. The nature and timing of the related expense has changed as IFRS 16 replaces the
straight-line lease costs with a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Lease costs for the prior year have been reclassified under administrative costs to conform with the current year
presentation. The impact of adopting this standard on net earnings and overall cash flow is neutral; however, the principal
payment of the lease liabilities is presented in financing activities (previously reflected as operating activities).
The Company has applied IFRS 16 using the modified retrospective approach, under which the comparative information
presented has not been restated. Certain practical expedients were selected on transition. The transition did not result in any
retrospective adjustment to opening retained earnings on January 1, 2019.
DEFINITION OF A LEASE
Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a
period of time in exchange for consideration. On transition to IFRS 16, the Company elected to apply the practical
expedient to grandfather the assessment of which transactions are leases, whereby IFRS 16 applies only to contracts that
were previously identified as leases. Contracts that were not identified as leases under IAS 17 and related interpretations
were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts that were entered
into or changed on or after January 1, 2019.
RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company has lease agreements for office space and office equipment. As a lessee, lease arrangements were previously
classified as operating or finance leases based on the assessment of whether the lease transferred substantially all the risks
and rewards of ownership. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for all material
and long-term leases on the consolidated statement of financial position.
TRANSITION
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of
the remaining lease payments, discounted at the Company’s incremental weighted average borrowing rate as at January 1,
2019, of 4.86%. Right-of-use assets were measured at an amount equal to the lease liability. For leases that were classified
as finance leases under IAS 17, the carrying amount of the right-of-use assets and the lease liability as at January 1, 2019,
was the carrying amount of the lease assets and lease liability immediately before the date of initial application. These are
accounted for using IFRS 16 from that date.
The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating
leases under IAS 17:
•
•
•
•
applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of
lease term;
applied the exemption not to recognize right-of-use assets and liabilities for leases that are of low value;
excluded initial direct costs from measuring the right-of-use asset as at January 1, 2019; and
used hindsight as at January 1, 2019, when determining the lease term if the contract contains options to extend or
terminate the lease.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
20
Notes to Consolidated Financial Statements
IMPACTS ON FINANCIAL STATEMENTS
i.
Impacts on transition
On transition to IFRS 16, the Company recognized additional right-of-use assets and lease liabilities of $5.8 million.
Right-of-use assets presented in property and equipment
Lease liabilities – current portion presented in current portion of long-term debt
Lease liabilities – long-term portion presented in long-term debt
January 1,
2019
5,780
2,305
3,475
The weighted average discount rate applied to the total lease liabilities recognized on transition was 4.86%, representing the
Company’s incremental borrowing rate at January 1, 2019.
Operating lease commitments balance, December 31, 2018
Operating lease commitments discounted using the incremental borrowing rate
Finance lease liabilities balance, December 31, 2018
Recognition exemption for:
Leases relating to termination of home healthcare operations in B.C.
Short-term and low value leases
Lease liabilities balance, January 1, 2019
Income Taxes
7,874
7,138
80,992
(1,045)
(313)
86,772
On June 7, 2017, the IASB issued IFRIC Interpretation 23 “Uncertainty over Income Tax Treatments”. The interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is
uncertainty over income tax treatments. Effective January 1, 2019, the Company adopted the IFRIC Interpretation 23, with
no material impact on the interim condensed consolidated financial statements.
5. FUTURE CHANGES IN ACCOUNTING POLICIES
Definition of a Business (Amendments to IFRS 3)
On October 22, 2018, the IASB issued amendments to IFRS 3 Business Combinations, that seek to clarify whether a
transaction results in an asset or a business acquisition. The amendments apply to businesses acquired in annual reporting
periods beginning on or after January 1, 2020. Earlier application is permitted. The Company intends to adopt the
amendments for the annual period beginning on January 1, 2020.
6. ACQUISITION
On April 11, 2018, the Company completed the acquisition of Lynde Creek Retirement Community for $33.8 million,
which included $31.2 million property and equipment, $2.9 million intangible assets, net of ($0.3 million) working capital.
The acquired community, located in Whitby, Ontario, consists of Lynde Creek Manor, a retirement residence offering 93
independent and assisted living suites; Lynde Creek Village, a life lease seniors’ community of 113 townhomes; and
3.7 acres of adjacent land for expansion. This acquisition was funded by cash on hand and is accounted for as a business
combination.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
21
Notes to Consolidated Financial Statements
7. ACCOUNTS RECEIVABLE
Trade receivables
Other receivables
Accounts receivable - net of allowance (Note 25(a))
8. PROPERTY AND EQUIPMENT
2019
38,633
11,749
50,382
2018
39,894
10,676
50,570
Land & Land
Improvements
51,128
58
4,401
(70)
(1,123)
3,886
58,280
58,280
–
58,280
247
(197)
3,080
61,410
Land & Land
Improvements
4,096
554
(70)
4,580
4,580
Buildings
544,510
7,579
26,309
(7,828)
(14,566)
31,157
587,161
587,161
5,780
592,941
14,030
(980)
33,746
639,737
Buildings
177,928
21,680
(7,828)
191,780
191,780
Furniture &
Leasehold
Equipment Improvements
Construction
in Progress
(CIP)
65,088
5,628
490
(8,966)
(469)
1,276
63,047
63,047
–
63,047
6,147
(5,213)
2,543
66,524
2,337
32
–
(442)
–
–
1,927
1,927
–
1,927
139
(955)
–
1,111
31,794
35,376
–
–
–
(36,319)
30,851
30,851
–
30,851
21,666
–
(39,369)
13,148
Furniture &
Leasehold
Equipment Improvements
Construction
in Progress
(CIP)
31,013
6,204
(8,966)
28,251
28,251
1,852
396
(442)
1,806
1,806
–
–
–
–
–
Total
694,857
48,673
31,200
(17,306)
(16,158)
–
741,266
741,266
5,780
747,046
42,229
(7,345)
–
781,930
Total
214,889
28,834
(17,306)
226,417
226,417
Cost or Deemed Cost
January 1, 2018
Additions
Acquisitions (Note 6)
Write-off of fully depreciated assets
Impairment loss (Note 18)
Transfer from CIP
December 31, 2018
January 1, 2019
Recognition of right-of-use assets on
initial application of IFRS 16
Adjusted January 1, 2019
Additions
Write-off of fully depreciated assets
Transfer from CIP
December 31, 2019
Accumulated Depreciation
January 1, 2018
Additions
Write-off of fully depreciated assets
December 31, 2018
January 1, 2019
Recognition of right-of-use assets on
initial application of IFRS 16
–
4,580
647
(197)
5,030
–
191,780
24,775
(980)
215,575
Adjusted January 1, 2019
Additions
Write-off of fully depreciated assets
December 31, 2019
Carrying amounts
At December 31, 2018
At December 31, 2019
The right-of-use assets included in buildings were $97.8 million (2018 – $81.0 million) with accumulated depreciation of
$39.6 million (2018 – $32.2 million).
395,381
424,162
34,796
37,012
30,851
13,148
53,700
56,380
121
(175)
514,849
530,527
–
28,251
6,474
(5,213)
29,512
–
226,417
32,331
(7,345)
251,403
–
1,806
435
(955)
1,286
–
–
–
–
–
During 2019, new and renewed leases have been recognized as right-of-use asset within Buildings is $11.0 million with
accumulated depreciation of $2.6 million. The additions include $10.3 million recognized in connection with the renewed
lease for its corporate office for 10 years with renewal options.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
22
Notes to Consolidated Financial Statements
During 2019, the Company capitalized $0.7 million of borrowing costs related to development projects under construction
at an average capitalization rate of 4.5% (2018 – $1.5 million at 4.9%).
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Balance at beginning of year
Balance at end of year
Other Intangible Assets
Gross carrying value at beginning of year
Additions
Acquisitions (Note 6)
Disposal
Write-off of fully amortized assets
Gross carrying value at end of year
Accumulated amortization at beginning of year
Amortization
Write-off of fully amortized assets
Accumulated amortization at end of year
Net carrying value at end of year
Goodwill and other intangible assets
10. OTHER ASSETS
Investments held for self-insured liabilities
Amounts receivable and other assets
Interest rate swaps
less: current portion
2019
2018
51,675
51,675
51,675
51,675
62,034
1,933
–
–
(1,817)
62,150
18,509
7,259
(1,817)
23,951
38,199
89,874
56,455
3,292
2,925
(484)
(154)
62,034
12,229
6,434
(154)
18,509
43,525
95,200
2019
27,562
63,371
1,480
92,413
(20,661)
71,752
2018
67,938
69,967
2,556
140,461
(21,465)
118,996
Investments Held for Self-insured Liabilities
After the sale of our U.S. business in 2015 (the “U.S. Sale Transaction”), as part of its continuing operations, the Company
retained its wholly owned Bermuda-based captive insurance company, Laurier Indemnity Company, Ltd. (the “Captive”),
which, along with third-party insurers, insured the Company’s U.S. general and professional liability risks up to the date of
the U.S. Sale Transaction.
The Company holds U.S. dollar-denominated investments within the Captive for settlements of the self-insured liabilities
that are subject to insurance regulatory requirements.
As at December 31, 2019, the investment portfolio comprises cash of $6.3 million (December 31, 2018 – $5.8 million),
money market funds of $21.2 million (December 31, 2018 – $53.8 million), and investment-grade corporate securities $nil
(December 31, 2018 – $8.3 million). Certain of these investments in the amount of $2.7 million (December 31, 2018 –
$35.1 million), have been pledged as collateral for letters of credit issued by the banker of the Captive in favour of ceding
companies. As at December 31, 2019, all investments were carried at fair value, with changes in fair value reflected in
earnings.
Amounts Receivable and Other Assets
Amounts receivable and other assets include discounted amounts receivable due from the government of Ontario with
respect to construction funding subsidies for long-term care homes, totalling $47.9 million (December 31, 2018 –
$53.3 million) of which $5.8 million (December 31, 2018 – $5.5 million) is current. These subsidies represent funding for a
portion of long-term care home construction costs over a 20-year or 25-year period. The weighted average remaining term
of this funding is 14 years.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
23
Notes to Consolidated Financial Statements
Also included in amounts receivable and other assets is a $1.3 million receivable as at December 31, 2019 (2018 –
$2.0 million), resulting from the U.S. Sale Transaction. The remaining balance of $14.2 million primarily relates to prepaid
expenses and deposits (2018 – $14.7 million).
Interest Rate Swaps
The interest rate swaps include swap contracts relating to mortgages, with notional amount totalling $82.1 million, to lock
in the rates between 3.11% and 5.04% for the full term of the loans being five to ten years (Note 12).
All interest rate swap contracts are measured at fair value through profit or loss, and hedge accounting has not been applied.
Changes in fair value are recorded in the statements of earnings (Note 19). As at December 31, 2019, the interest rate swaps
were valued at a net asset of $0.8 million (2018 – $2.0 million), including a liability of $0.7 million (2018 – $0.5 million)
(Notes 12 and 13).
11. PROVISIONS
January 1, 2018
Provisions released
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2018
Less: current portion
January 1, 2019
Provisions released
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2019
Less: current portion
Accrual for Self-
Indemnification Decommissioning
insured Liabilities
61,135
(14,132)
(15,237)
1,631
3,741
37,138
(12,286)
24,852
37,138
(11,579)
(12,769)
648
(1,277)
12,161
(3,572)
8,589
Provisions
22,679
(3,832)
(6,587)
–
1,453
13,713
(5,335)
8,378
13,713
–
(5,757)
–
(530)
7,426
–
7,426
Provisions
9,185
–
(15)
195
–
9,365
–
9,365
9,365
–
(34)
195
–
9,526
–
9,526
Total
92,999
(17,964)
(21,839)
1,826
5,194
60,216
(17,621)
42,595
60,216
(11,579)
(18,560)
843
(1,807)
29,113
(3,572)
25,541
Accrual for Self-Insured Liabilities
The obligation to settle U.S. self-insured general and professional liability claims relating to the period prior to the closing
of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with the Company, which it intends
to fund through the Captive. Consequently, the balance of the accrual for self-insured liabilities and the related investments
held for self-insured liabilities (Note 10) remain on the consolidated statement of financial position. However, any expense
incurred or release of reserves for U.S. self-insured liabilities are presented as discontinued operations; while the Captive’s
costs to administer and manage the settlement of the remaining claims are reported as continuing operations within the U.S.
segment.
The accrual for self-insured liabilities is based on management’s best estimate of the ultimate cost to resolve general and
professional liability claims. Actual results can differ materially from the estimates made due to a number of factors
including the assumptions used by management and other market forces.
As at December 31, 2019, the accrual for self-insured general and professional liabilities was $12.2 million
(US$9.4 million) compared to $37.1 million (US$27.2 million) as at December 31, 2018. The decline represented mainly
claim payments and the release of reserves (Note 21).
Indemnification Provisions
As a result of the U.S. Sale Transaction, the Company agreed to indemnify certain obligations of the U.S. operations related
to tax, a corporate integrity agreement (the “CIA”), and other items. Any revisions to these estimates are reflected as part of
other expense in discontinued operations (Note 21). As at December 31, 2019, the remaining provisions totalled
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
24
Notes to Consolidated Financial Statements
$7.4 million (US$5.7 million) (2018 – $13.7 million or US$10.1 million). Actual results can differ materially from the
estimates made due to a number of factors including the assumptions used by management and other market forces.
Decommissioning Provisions
The decommissioning provisions relate to possible asbestos remediation of the Company’s pre-1980 constructed homes. An
estimated undiscounted cash flow amount of approximately $10.7 million (December 31, 2018 – $10.5 million) was
discounted using a rate of 1.64% (December 31, 2018 – 1.98%) over an estimated time to settle of 6 years. This represents
management’s best estimate and actual amounts may differ.
12. LONG-TERM DEBT
Convertible unsecured subordinated debentures
CMHC mortgages
Non-CMHC mortgages
Construction loans
Lease liabilities
Deferred financing costs
Total debt, net of deferred financing costs
Less: current portion
Long-term debt, net of deferred financing costs
Interest Rate Year of Maturity
2025
2020 - 2037
2020 - 2038
on demand
2020 - 2034
5.0%
2.49% - 7.70%
3.11% - 5.64%
variable
2.28% - 7.19%
2019
120,675
128,878
164,349
64,601
86,208
564,711
(8,405)
556,306
(133,771)
422,535
2018
119,775
114,083
169,670
52,866
80,992
537,386
(8,416)
528,970
(74,626)
454,344
Convertible Unsecured Subordinated Debentures
In April 2018, the Company issued $126.5 million aggregate principal amount of 5.00% convertible unsecured
subordinated debentures due April 30, 2025 (the “2025 Debentures”), with a conversion price of $12.25 per Common Share
(the “Offering”). The initial offering for $110.0 million of the 2025 Debentures closed on April 17, 2018, and the exercise
of the over-allotment option for $16.5 million debentures closed on April 25, 2018. The debt and equity components of the
2025 Debentures were bifurcated as the financial instrument is considered a compound instrument with $119.2 million
classified as a liability and the residual $7.3 million classified as equity attributable to the conversion option. The liability
portion of the 2025 Debentures is recorded at amortized cost. The fees and transaction costs allocated to the debt
component are amortized over the term of the 2025 Debentures using the effective interest rate method and are recognized
as part of net finance costs.
Interest on the 2025 Debentures is payable semi-annually in April and October. The 2025 Debentures may not be redeemed
by the Company prior to April 30, 2021, except in the event of the satisfaction of certain conditions after a change of
control has occurred. On or after May 1, 2021 but prior to April 30, 2023, these debentures may be redeemed by the
Company in whole at any time or in part from time to time, at a price equal to the principal amount thereof plus accrued and
unpaid interest, on a notice of not more than 60 days and not less than 30 days prior, provided that the volume-weighted
average trading price of the Common Shares on the TSX for the 20 consecutive trading days ending on the fifth trading day
immediately preceding the date on which notice of redemption is given is not less than 125% of the conversion price. On
and after May 1, 2023, these debentures may be redeemed by the Company in whole at any time or in part from time to
time, at a price equal to the principal amount thereof plus accrued and unpaid interest, on a notice of not more than 60 days
and not less than 30 days prior.
Upon the occurrence of a change of control, whereby more than 66.67% of the Common Shares are acquired by any person,
or group of persons acting jointly, each holder of the 2025 Debentures may require the Company to purchase their
debentures at 101% of the principal plus accrued and unpaid interest. If 90% or more of the debentureholders do so, the
Company has the right, but not the obligation, to redeem all the remaining outstanding 2025 Debentures.
The net proceeds from the Offering of $120.9 million, together with cash on hand, was used by the Company to finance the
redemption of its 2019 Debentures on April 30, 2018. The redemption price of the 2019 Debentures was equal to the sum
of the outstanding aggregate principal amount of $126.5 million and all accrued and unpaid interest thereon for a total of
$127.1 million. As a result of the early redemption of the 2019 Debentures, the unaccreted liability of $1.4 million was
expensed (Note 18), and the related equity portion of $5.6 million was classified as part of accumulated deficit.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
25
Notes to Consolidated Financial Statements
CMHC Mortgages
The Company has various mortgages insured through the Canada Mortgage and Housing Corporation (CMHC) program.
The CMHC mortgages are secured by several Canadian financial institutions at rates ranging from 2.49% to 7.70% with
maturity dates through to 2037.
In April 2019, the Company secured a CMHC-insured mortgage of $16.0 million, inclusive of fees, on the Lynde Creek
Manor Retirement Community, that matures in September 2029, with a fixed rate of 2.81% per annum.
In October 2019, the Company secured a CMHC-insured mortgage of $9.3 million, inclusive of fees, on the Cedar Crossing
Retirement Community, that matures in September 2029, with a fixed rate of 2.49% per annum.
In August 2018, the Company renewed maturing mortgages of $8.3 million. These renewed mortgages mature in August
2022, with a fixed rate of 2.96%.
Non-CMHC Mortgages
The Company has a number of conventional mortgages on certain long-term care homes, at rates ranging from 3.11% to
5.64%. Some of these mortgages have a requirement to maintain a minimum debt service coverage ratio. In September
2018, the Company secured financing of $10.5 million on a retirement community in Ontario. This financing has a 10-year
term. In conjunction with securing this financing, the Company entered into an interest rate swap contract to lock in the
interest rate at 5.04% for the full term of this financing. Also, during the 2018 third quarter, the Company reduced the
balances on mortgages of three communities by a total of $8.6 million.
Construction Loans
Construction loans of $77.7 million are available for three retirement home developments at Bolton, Uxbridge, and Barrie
and provide for additional letter of credit facilities of $0.8 million, $0.8 million, and $1.0 million respectively, at rates
ranging from 2.25% to 2.50% if utilized. Construction loans are interest-only based on 30-day banker’s acceptance (BA)
plus 2.25% to 2.50%, with no standby fee.
The construction loans are payable on demand and, in any event, are to be fully repaid by the earlier of achieving stabilized
occupancy as defined by the agreements and specified dates between late 2019 and 2021 for Bolton and Uxbridge; and by
the earlier of September 2023 and three months following stabilized occupancy as defined by the agreement for Barrie.
During 2019, the Company repaid the construction loan balance relating to Cedar Crossing and refinanced it with a CMHC
mortgage mentioned above.
All construction loans have been reflected as current.
As at December 31, 2019, an aggregate of $64.6 million was drawn on the construction loans, leaving $13.1 million
available; in addition, letters of credit totalling $1.3 million were issued under credit facilities, leaving $1.3 million
available.
Lease Liabilities
Lease liabilities as at December 31, 2019 include leases on long-term care homes and the liability related to office leases in
connection with IFRS 16 (Note 4). The Company operates nine Ontario long-term care homes, which were built between
2001 and 2003, under 25-year lease arrangements. The liability associated with the office leases will be amortized over the
remaining lease terms ranging up to 15 years.
Balance, December 31, 2018
Initial recognition of lease liabilities upon transition to IFRS 16
Reclassification of finance lease to lease liabilities upon adoption of IFRS 16
Net additions
Principal payments of lease liabilities
Balance, December 31, 2019
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
Amount
-
5,780
80,992
10,316
(10,880)
86,208
26
Notes to Consolidated Financial Statements
Credit Facilities
The Company has two demand credit facilities totalling $112.3 million, secured by either 13 Class C long-term care homes
in Ontario or the assets of the home health care business. Neither of these facilities has financial covenants but do contain
normal and customary terms. As at December 31, 2019, $38.1 million of the facilities secure the Company’s defined benefit
pension plan obligations, $5.5 million was issued in connection with obligations relating to long-term care homes and
retirement living communities, leaving $68.7 million unutilized.
Deferred Financing Costs
Deferred financing costs are deducted against long-term debt and are amortized using the effective interest rate method over
the term of the debt.
Below is a summary of the deferred financing costs:
Convertible unsecured subordinated debentures
CMHC mortgages
Non-CMHC mortgages
Lease liabilities
Total deferred financing costs
Less: current portion
Principal Repayments – Debentures, Mortgages and Loans
2019
4,002
3,122
1,107
174
8,405
(1,557)
6,848
Year
2020
2021
2022
2023
2024
2025 and beyond
Principal Repayments – Lease Liabilities
Year
2020
2021
2022
2023
2024
2025 and beyond
Total undiscounted lease liabilities as at December 31, 2019
Interest on lease liabilities
Total present value of minimum lease payment
2018
4,774
2,017
1,419
206
8,416
(1,404)
7,012
Amount
125,392
15,857
59,411
46,444
5,978
231,246
484,328
Amount
15,236
15,652
14,010
13,440
13,175
40,008
111,521
(25,313)
86,208
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
27
Notes to Consolidated Financial Statements
Long-term Debt Continuity
Balance, beginning of the year
Initial recognition of lease liabilities upon transition to IFRS 16
Issuance of long-term debt
New lease liabilities
Accretion and other
Repayments
Early redemption of the convertible debentures
Addition - deferred financing costs
Amortization of deferred financing costs and other
Balance, end of the year
Interest Rates
2019
528,970
5,780
45,987
10,316
900
(35,658)
-
(1,628)
1,639
556,306
2018
536,068
-
159,998
-
912
(159,674)
(5,596)
(5,886)
3,148
528,970
The weighted average interest rate of all long-term debt as at December 31, 2019, was approximately 4.7% (December 31,
2018 – 4.9%). As at December 31, 2019, 88.6% of the long-term debt, including interest rate swaps, was at fixed rates
(December 31, 2018 – 90.2%).
Financial Covenants
The Company is subject to external requirements for certain of its loans on debt service coverage. The Company was in
compliance with all these covenants as at December 31, 2019.
13. OTHER LONG-TERM LIABILITIES
Accrued pension plan obligation (Note 24)
Interest rate swaps (Note 10)
Other
14. SHARE-BASED COMPENSATION
2019
32,609
702
1,876
35,187
2018
33,486
523
1,068
35,077
The Company’s share-based compensation, which includes deferred share units (DSUs) and performance share units
(PSUs), and prior to 2019, share appreciation rights (SARs) was an expense of $1.7 million for 2019 (2018 –$0.2 million).
The carrying amounts of the Company’s share-based compensation arrangements are recorded in the consolidated
statements of financial position as follows:
Contributed surplus – DSUs
Contributed surplus – PSUs
2019
2,594
1,081
3,675
2018
1,914
792
2,706
Equity-settled Long-term Incentive Plan
The Company’s long-term incentive plan (the “LTIP”) provides for a share-based component of executive and director
compensation designed to encourage a greater alignment of the interests of the Company’s executives and directors with its
shareholders, in the form of PSUs for employees and DSUs for non-employee directors.
PSUs and DSUs granted under the LTIP do not carry any voting rights. DSUs vest immediately upon grant and PSUs vest
three years from the date of grant. During 2019, the Company settled PSUs totalling 61,285, of which 12,223 were settled
in cash to cover withholding taxes payable ($0.1 million) and 49,062 were settled with Common Shares issued from
treasury.
An aggregate of 4,338,912 Common Shares are reserved and available for issuance pursuant to the LTIP.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
28
Notes to Consolidated Financial Statements
Subsequent to December 31, 2019, the Company settled DSUs totalling 48,234, of which 14,471 were settled in cash to
cover withholding taxes payable and 33,763 were settled with Common Shares issued from treasury.
DSU and PSU activity is as follows:
Units outstanding, beginning of period
Granted
Reinvested dividend equivalents
Forfeited
Settled
Units outstanding, end of period
Weighted average fair value of units granted during
the period at grant date
Deferred Share Units
2018
2019
134,369
239,725
109,744
82,384
10,498
14,920
–
–
(14,886)
–
239,725
337,029
Performance Share Units
2018
342,944
192,116
26,007
(367,126)
(5,032)
188,909
2019
188,909
292,581
17,889
(38,573)
(61,285)
399,521
$8.26
$7.36
$9.62
$9.33
DSUs are fair valued at the date of grant using the previous day’s closing trading price of the Common Shares. The grant
date values of PSUs awarded were based on the fair values of one award comprised of two equal components being the
adjusted funds from operations (AFFO) and total shareholder return (TSR). The fair values of the AFFO component were
measured using the previous day’s closing trading price of the Common Shares. The fair values of the TSR component
were measured using the Monte Carlo simulation method.
PSUs granted and the assumptions used to determine the grant date values are as follows:
Grant date
Vesting date
PSUs granted
Fair value of AFFO component
Fair value of TSR component
Grant date fair value
Expected volatility of the Company’s Common Shares
Expected volatility of the Index
Risk-free rate
Dividend yield
15. SHARE CAPITAL
Balance at beginning of year
Transactions with shareholders
DRIP
Purchase of shares for cancellation
Share-based compensation
Balance at end of year
Common Shares
2019
May 31, 2019
May 31, 2022
292,581
$4.04
5.58
$9.62
20.49%
9.42%
1.40%
nil
2018
March 15, 2018
March 15, 2021
192,116
$4.36
4.97
$9.33
23.66%
12.20%
1.84%
nil
2018
Amount
490,881
4,928
(3,903)
158
492,064
Shares
88,489,984
2019
Amount
492,064
Shares
88,523,290
693,466
–
49,062
89,232,512
5,423
–
629
498,116
650,361
(703,585)
19,918
88,489,984
Each Common Share is transferable and represents an equal and undivided beneficial interest in the assets of the Company.
Each Common Share entitles the holder to one vote at all meetings of shareholders of the Company. Shareholders are
entitled to receive dividends from the Company if, as and when declared by the Board. During 2019 and 2018, the
Company declared cash dividends of $0.48 per share.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
29
Notes to Consolidated Financial Statements
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (DRIP) pursuant to which shareholders who are Canadian residents may
elect to reinvest their cash distributions in additional Common Shares. During 2019, the Company issued 693,466 Common
Shares at a value of $5.4 million in connection with the DRIP (2018 – 650,361 Common Shares at a value of $4.9 million).
Normal Course Issuer Bid (NCIB)
During 2019, under the NCIB that commenced on January 15, 2019 and ended on January 14, 2020, the Company did not
purchase any Common Shares. During 2018, under the NCIB that commenced on January 15, 2018 and ended on
January 14, 2019, the Company acquired and cancelled 703,585 Common Shares at an average price of $8.89 per share, for
a total cost of $6.3 million.
In January 2020, the Company received approval from the TSX to renew its NCIB to purchase for cancellation up to
8,000,000 Common Shares (representing approximately 10% of its public float) through the facilities of the TSX, and
through alternative Canadian trading systems, in accordance with TSX rules. The NCIB commenced on January 15, 2020,
and provides the Company with flexibility to purchase Common Shares for cancellation until January 14, 2021, or on such
earlier date as the NCIB is complete. The actual number of Common Shares purchased under the NCIB and the timing of
any such purchases will be at the Company’s discretion. Subject to the TSX’s block purchase exception, on any trading
day, purchases under the NCIB will not exceed 42,703 Common Shares.
16. REVENUE
Long-term care
Retirement living
Home health care
Other Canadian operations
Total revenue
2019
643,785
41,276
422,995
23,894
1,131,950
2018
632,533
33,412
431,343
22,719
1,120,007
Funding for the Company’s LTC homes and home health care services is regulated by provincial authorities. Revenue from
provincial programs represented approximately 69% of the Company’s long-term care revenue (2018 – 70%), and
approximately 98% of the home health care revenue for both 2019 and 2018.
Retirement living includes accommodation revenue of approximately $16.6 million (2018 – $13.5 million) and services
revenue of approximately $24.7 million (2018 – $19.9 million). Service revenue represents a combination of monthly
service fees paid by the residents, including proceeds retained by the Company upon the sale of homes in the life lease
community.
17. EXPENSES BY NATURE
Employee wages and benefits
Food, drugs, supplies and other variable costs
Property based and leases
Other
Total operating expenses and administrative costs
18. OTHER EXPENSE
Termination of B.C. market home health care contracts
Other costs
Impairment
Loss on early redemption of convertible debt
Acquisition costs
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
2019
876,651
53,872
48,942
61,374
1,040,839
2018
868,089
52,181
49,974
55,525
1,025,769
2019
1,429
975
–
–
–
2,404
2018
–
484
16,158
2,511
1,042
20,195
30
Notes to Consolidated Financial Statements
Termination of B.C. market home health care contracts
In the first quarter of 2019, the Company received notice from Fraser Health and Vancouver Coastal Health, both regional
health authorities in British Columbia (the “Health Authorities”), that the Health Authorities will be bringing their home
support services in-house, and as a result will not be renewing contracts with private sector home support agencies,
including ParaMed Inc. (ParaMed), the Company’s home health care operations. Consequently, ParaMed’s contracts with
the B.C. Health Authorities will expire in March 2020. The Company recognized a $1.4 million provision in the first
quarter of 2019 for costs to be incurred in connection with the contract expiration.
Other costs
In the second quarter of 2019, the Company incurred other costs of $1.0 million in connection with a representation and
standstill agreement it entered into dated April 22, 2019 (the “Sandpiper Agreement”), with Sandpiper Real Estate Fund 2
Limited Partnership, Sandpiper Real Estate Fund 3 Limited Partnership, Sandpiper GP 2 Inc., and Sandpiper GP 3 Inc.,
(collectively, the “Sandpiper Group”).
Impairment
In the 2018 fourth quarter, the Company recorded a pre-tax impairment charge of $16.2 million ($11.8 million after tax), in
respect of certain of its retirement communities ($15.9 million), and LTC homes ($0.3 million).
The impairment charge for the retirement living operations relates to the write down of the carrying value of the property
and equipment of three Saskatchewan retirement communities that were acquired in late 2015 and early 2016; two of which
were newly opened at that time and are still in lease up. These communities have not performed as expected, primarily due
to competitive market conditions, impacting rates, occupancy and labour and benefit costs.
The determination of recoverable amounts can be significantly impacted by estimates related to current market valuations,
current and future economic conditions in the geographical markets of each CGU, and management’s strategic plans within
each of its markets. Estimates and assumptions used in the determination of the impairment loss for both the retirement
communities and LTC homes were based upon information that was known at the time, along with the future outlook. The
Company completes the assessment of the impairment amount of each of these properties (each being a CGU), by
comparing the recoverable amount (in this case the value in use) of each CGU, determined using the direct capitalization
method, to their carrying values. The direct capitalization method divides the estimated stabilized net operating income,
after adjusting for management fee and capital maintenance, by appropriate market capitalization rates, ranging from 5.56%
and 8.75%, derived from a combination of third-party information and industry trends. The fair value is a Level 3 valuation
(Note 25(b)).
Loss on early redemption of convertible debt
In 2018, upon the early redemption of the 2019 Debentures, the unaccreted liability of $1.4 million and the associated
unamortized finance costs of $1.1 million were expensed.
Acquisition costs
In 2018, the Company acquired the Lynde Creek Retirement Community, and incurred transaction costs of $1.0 million.
19. FOREIGN EXCHANGE AND FAIR VALUE ADJUSTMENTS
Gain on Foreign Exchange and Investments
Gains on foreign exchange and investments was $3.3 million for 2019 (2018 – $1.2 million). These include: FX gain (loss)
related to deferred consideration and other balances in connection with the U.S. Sale Transaction that are denominated in
U.S. dollars (Note 21); gain (loss) on fair value adjustments on investments held for self-insured liabilities; and a foreign
exchange gain recognized upon repatriation of funds from the Captive.
Fair Value Adjustments
Fair value adjustments relate to interest rate swap contracts on certain mortgages are a loss of $1.3 million in 2019
(2018 – loss of $1.0 million) (Note 10).
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
31
Notes to Consolidated Financial Statements
20. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing the net earnings for the period by the weighted average number of
shares outstanding during the period, including vested DSUs awarded that have not settled. Diluted EPS is calculated by
adjusting the net earnings and the weighted average number of shares outstanding for the effects of all dilutive instruments.
The Company’s potentially dilutive instruments include the convertible debentures and equity-settled compensation
arrangements. The number of shares included with respect to the PSUs is computed using the treasury stock method. The
convertible debentures and equity-settled compensation arrangements would be antidilutive and as such, these are not
included in the calculation of diluted EPS.
The following table reconciles the numerator and denominator of the basic and diluted earnings per share computation.
Numerator for Basic and Diluted Earnings per Share
Earnings from continuing operations
Net earnings for basic earnings per share
Less: earnings from discontinued operations, net of tax
Earnings from continuing operations for basic earnings per share
Add: after-tax interest on convertible debt
Earnings from continuing operations for diluted earnings per share
Net earnings
Net earnings for basic earnings per share
Add: after-tax interest on convertible debt
Net earnings for diluted earnings per share
Denominator for Basic and Diluted Earnings per Share
Actual weighted average number of shares
DSUs
Weighted average number of shares for basic earnings per share
Shares issued if all convertible debt was converted
PSUs
Total for diluted earnings per share
Basic and Diluted Earnings per Share (in dollars)
Earnings from continuing operations
Earnings from discontinued operations
Net earnings
21. DISCONTINUED OPERATIONS
Earnings from Discontinued Operations
Earnings before income taxes
Income tax recovery
Earnings from discontinued operations
Cash Flows from Discontinued Operations
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Effect on cash flows
2019
2018
28,630
(11,579)
17,051
6,117
23,168
31,738
(23,654)
8,084
6,681
14,765
28,630
6,117
34,747
31,738
6,681
38,419
88,868,741
279,173
89,147,914
10,326,531
64,886
99,539,331
88,233,092
170,363
88,403,455
10,326,531
22,844
98,752,830
0.19
0.13
0.32
0.09
0.27
0.36
2019
2018
11,579
–
11,579
17,755
5,899
23,654
2019
2018
(12,769)
12,769
–
–
(15,237)
15,237
–
–
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
32
Notes to Consolidated Financial Statements
Earnings from discontinued operations includes the release of a portion of the accrual for self-insured liabilities and the
valuation change to the indemnification provisions of $11.6 million and $nil respectively in 2019 (2018 – $14.1 million and
$3.8 million). The balance of the earnings related to the impact of discount rate adjustments on the Captive’s reserves.
In December 2018, the Company sold one of the remaining U.S. legal entities and realized a capital loss for U.S. tax
purposes of approximately US$20 million available to carryback against a 2015 capital gain, resulting in a tax recovery of
$9.7 million (US$7.1 million).
22. INCOME TAXES
Tax Recognized in Net Earnings
Current Tax Expense (Recovery)
Current year
Items related to discontinued operations (Note 21)
Utilization of losses
Other adjustments
Deferred Tax Expense (Recovery)
Origination and reversal of temporary difference
Items related to discontinued operations (Note 21)
Utilization of losses
Other adjustments
Total tax expense (recovery)
Tax expense from continuing operations
Tax recovery from discontinued operations
2019
2018
8,422
(1,314)
(233)
98
6,973
(1,520)
1,314
101
317
212
7,185
7,185
–
7,185
8,921
(11,729)
(924)
132
(3,600)
(4,406)
5,830
629
(117)
1,936
(1,664)
4,235
(5,899)
(1,664)
Tax Recognized in Other Comprehensive Income
Before Tax
Tax
Recovery
Net of Tax
Before Tax
2019
2018
Tax
Recovery
Net of Tax
(2,513)
(1,419)
(3,932)
–
376
376
(2,513)
(1,043)
(3,556)
1,841
(507)
1,334
–
134
134
1,841
(373)
1,468
Foreign currency translation
difference for foreign operations
Defined benefit plan actuarial gains
Effective Tax Rate
The major factors that caused variations from the expected combined Canadian federal and provincial statutory income tax
rates were as follows:
Earnings from continuing operations before income taxes
Income taxes at statutory rates of 26.5%
Income tax effect relating to the following items:
Tax rate variance of foreign subsidiaries
Non-deductible items
Non-taxable income (loss)
Prior year adjustment
Other items
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
2019
24,236
6,423
2018
12,319
3,265
(595)
886
56
413
2
7,185
610
517
(107)
42
(92)
4,235
33
Notes to Consolidated Financial Statements
Summary of Operating and Capital Loss Carryforwards
The company’s Canadian corporate subsidiaries have $12.9 million net operating loss carryforwards available as at
December 31, 2019 (2018 – $5.7 million), which expire in the years 2036 through 2039, and capital loss carryforwards of
$41.7 million (2018 – $42.1 million) which have not been tax benefited and are available indefinitely to apply against future
capital gains.
Deferred tax assets recognized as at December 31, 2019, were $12.7 million (2018 – $9.7 million). Net deferred tax
liabilities decreased in 2019 to $1.5 million from $1.6 million at December 31, 2018.
Recognized Deferred Tax Assets and Liabilities
Net deferred tax liabilities comprise the following:
Property and equipment
Intangible assets
Other assets
Deferred financing costs
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Decommissioning provision
Other
Set-off of tax
Deferred tax liabilities, net
Assets
5,928
74
–
63
212
250
681
9,672
3,445
3,287
2,525
1,119
(14,508)
12,748
Liabilities
21,700
5,237
394
914
422
–
–
–
–
27
–
66
(14,508)
14,252
2019
Net
15,772
5,163
394
851
210
(250)
(681)
(9,672)
(3,445)
(3,260)
(2,525)
(1,053)
–
1,504
Assets
6,410
73
–
67
–
254
2,357
9,599
1,519
3,348
2,482
1,335
(17,699)
9,745
Liabilities
20,339
5,933
683
1,379
545
–
–
–
–
48
–
115
(17,699)
11,343
2018
Net
13,929
5,860
683
1,312
545
(254)
(2,357)
(9,599)
(1,519)
(3,300)
(2,482)
(1,220)
–
1,598
Deferred income taxes are provided for temporary differences between the carrying values of assets and liabilities and their
respective tax values as well as available tax loss carryforwards. Management believes it is more likely than not that the
Company’s corporate subsidiaries will realize the benefits of these deductible differences.
The significant components of deferred income tax assets and liabilities and the movement in these balances during the year
were as follows:
Recognized in
Property and equipment
Other assets
Deferred financing costs
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Intangible assets
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Decommissioning provision
Other
Deferred tax liabilities, net
Balance
Other Recognized in
January 1, Recognized in Comprehensive Discontinued
Operations
–
–
–
–
–
1,314
–
–
–
–
–
–
1,314
2019 Net Earnings
1,843
(285)
(461)
(335)
4
288
(697)
303
(1,926)
40
(43)
167
(1,102)
Income/Other
–
–
–
–
–
–
–
(376)
–
–
–
–
(376)
13,929
683
1,312
545
(254)
(2,357)
5,860
(9,599)
(1,519)
(3,300)
(2,482)
(1,220)
1,598
Change in
Balance
Foreign December 31,
2019
15,772
394
851
210
(250)
(681)
5,163
(9,672)
(3,445)
(3,260)
(2,525)
(1,053)
1,504
Exchange
–
(4)
–
–
–
74
–
–
–
–
–
–
70
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
34
Notes to Consolidated Financial Statements
Recognized in
Property and equipment
Other assets
Deferred financing costs
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Intangible assets
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Decommissioning provision
Other
Deferred tax liabilities, net
Balance
Other Recognized in
January 1, Recognized in Comprehensive Discontinued
Operations
–
–
–
–
–
5,830
–
–
–
–
–
–
5,830
2018 Net Earnings
(6,121)
(217)
1,678
(363)
22
232
428
548
403
1,038
(234)
(1,308)
(3,894)
Income/Other
–
–
(86)
–
–
–
–
(134)
–
–
–
–
(220)
20,050
963
(280)
908
(276)
(7,939)
5,432
(10,013)
(1,922)
(4,338)
(2,248)
88
425
Change in
Balance
Foreign December 31,
2018
13,929
683
1,312
545
(254)
(2,357)
5,860
(9,599)
(1,519)
(3,300)
(2,482)
(1,220)
1,598
Exchange
–
(63)
–
–
–
(480)
–
–
–
–
–
–
(543)
23. COMMITMENTS AND CONTINGENCIES
Property and Equipment Commitments
The Company has outstanding commitments of $0.6 million at December 31, 2019, in connection with retirement
communities under development in Ontario.
Legal Proceedings and Regulatory Actions
The Company and its consolidated subsidiaries are defendants in various actions and proceedings that are brought against
them from time to time in connection with their operations.
As previously disclosed, in April 2018, the Company was served with a statement of claim alleging negligence by the
Company in the operation of its long-term care homes and its provision of care to residents and seeking $150.0 million in
damages. The claim sought an order certifying the claim as a class action pursuant to the Class Proceedings Act (Ontario).
By order of the Ontario Superior Court of Justice the class proceeding was discontinued on October 25, 2018. Following
the discontinuance, the plaintiff who commenced the class proceeding still has the option to pursue a claim on her own
behalf while others may also do so separately on their own behalf. Since July 2019, certain individual plaintiffs have served
the Company with statements of claim alleging negligence by the Company in the operation of certain of its long-term care
homes and its provision of care to certain residents. The Company intends to defend itself against any and all such
individual claims and does not believe the outcome on any or all such claims would have a material adverse impact on its
business, results of operations or financial condition and in any event believes that any potential liability would be resolved
within the limits of its insurance coverage.
On September 19, 2018, the Company was served with a statement of claim seeking an order certifying the claim as a class
action pursuant to the Class Proceedings Act (Ontario). The claim alleges that the Company failed to properly apply certain
required medical equipment sterilization protocols at one or more of its home health care clinics and seeks $20.0 million in
damages. The Company does not believe that the lawsuit or the damages sought have merit. The Company intends to
vigorously defend itself against the claim and does not believe the outcome will have a material adverse impact on its
business, results of operations or financial condition and in any event believes that any potential liability would be resolved
within the limits of its insurance coverage.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company
to prevent deficiencies in the quality of patient care through quality assurance strategies and to remedy any such
deficiencies cited by government inspections within the applicable prescribed period of time. The Company accrues for
costs that may result from investigations, or any possible related litigation, to the extent that an outflow of funds is probable
and a reliable estimate of the amount of the associated costs can be made.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
35
Notes to Consolidated Financial Statements
24. EMPLOYEE BENEFITS
Retirement compensation arrangements are maintained for certain employee groups as described below.
Defined Benefit Plans
The Company has pension arrangements for certain of its executives, which include a registered defined benefit pension
plan, as well as a supplementary plan that provide pension benefits in excess of statutory limits. Both of these plans have
been closed to new entrants for several years. The plans are exposed to various risks, including longevity risk, currency
risk, interest rate risk and market risks.
The different types of defined benefit plans of the Company are listed below.
Funded
Defined Benefit Plan
2018
5,066
7,666
(2,600)
2019
5,325
8,137
(2,812)
Unfunded Supplementary
Defined Benefit Plan
2018
–
33,523
(33,523)
2019
–
33,678
(33,678)
2019
5,325
41,815
(36,490)
Total
2018
5,066
41,189
(36,123)
Fair value of plan assets
Present value of obligations
Deficit
FUNDING
As required by law, the registered defined benefit pension plan benefits are funded through a trust, and the Company is
responsible for meeting the statutory obligations for funding this plan. The funding requirement for past service is
determined based on separate actuarial valuations for funding purposes, which are completed every three years. The last
actuarial review was performed effective October 1, 2018 and completed in early 2019.
The supplementary plan is unfunded and pension benefits are secured through a letter of credit that is renewed annually.
The Company does not set aside assets for this plan and the benefit payments are funded from our cash from operations.
DEFINED BENEFIT OBLIGATIONS
Present Value of Defined Benefit Obligations
Accrued benefit obligations
Balance at beginning of year
Current service cost
Benefits paid
Interest costs
Actuarial losses
Balance at end of year
Plan assets
Fair value at beginning of year
Employer contributions
Actual return on plan assets
Interest income on plan assets
Benefits paid
Fair value at end of year
Defined benefit obligations
2019
2018
41,189
98
(2,614)
1,399
1,743
41,815
5,066
159
321
172
(393)
5,325
36,490
42,081
104
(2,680)
1,330
354
41,189
5,443
88
(241)
172
(396)
5,066
36,123
The expected contribution to the supplementary plan for the coming year is approximately $3.4 million.
Current accrued liabilities
Other long-term liabilities (Note 13)
Accrued benefit liability at end of year
2019
3,881
32,609
36,490
2018
2,637
33,486
36,123
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
36
Notes to Consolidated Financial Statements
EFFECT OF CHANGES TO DEFINED BENEFIT OBLIGATIONS
Expense Recognized in Net Earnings
Annual benefit plan expense
Current service cost
Interest costs
Plan benefit expense recognized in the year - included in operating expenses and
administrative costs
Actuarial Losses Recognized in Other Comprehensive Income
Amount accumulated in accumulated deficit at January 1
Actuarial loss arising from changes in liability experience and assumption changes
Return on assets
Income tax recovery on actuarial losses
Amount recognized in accumulated deficit at December 31
PLAN ASSETS
Equities
Fixed income securities
Real estate / commercial mortgage
ACTUARIAL ASSUMPTIONS
Discount rate for year-end accrued obligation
Discount rate for period expense
Rate of compensation increase
Income Tax Act limit increase
Average remaining service years of active employees
2019
2018
98
1,227
104
1,158
1,325
1,262
(10,236)
(1,740)
321
376
(11,279)
(9,863)
(266)
(241)
134
(10,236)
2019
47%
33%
20%
100%
2019
3.00%
3.50%
–
3.00%
2
2018
42%
38%
20%
100%
2018
3.50%
3.25%
2.00%
3.00%
2
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using
a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate.
Any changes in these assumptions will impact the carrying amount of pension obligations.
The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used
to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In
determining the appropriate discount rate, the Company considers the interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and those that have terms to maturity approximating the
terms of the related pension liability.
Changes to the following actuarial assumptions, while holding the other assumptions constant, would have affected the
defined benefit obligation and related expense for 2019 by the amounts shown below.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
37
Notes to Consolidated Financial Statements
Discount rate
1% increase
1% decrease
Rate of compensation increase*
1% increase
1% decrease
Mortality rate
10% increase
10% decrease
Increase (Decrease) in
Benefit Obligation
Increase (Decrease) in
Net Earnings
(3,602)
4,255
–
–
(811)
917
(204)
263
–
–
24
(28)
* No impact as actual salary rates are used in valuation for 2019
Defined Contribution Plans
The Company maintains registered savings and defined contribution plans and matches up to 120% of the employees’
contributions according to seniority, subject to a maximum based on the salary of the plan participants. Contributions
expensed by Canada in 2019 and 2018 were $17.1 million and $16.7 million, respectively.
25. MANAGEMENT OF RISKS AND FINANCIAL INSTRUMENTS
(a) Management of Risks
LIQUIDITY RISK
Liquidity risk is the risk that the Company will encounter difficulty in meeting its contractual obligations. The Company
manages our liquidity risk through the use of budgets and forecasts. Cash requirements are monitored regularly based on
actual financial results and actual cash flows to ensure that there are sufficient resources to meet operational requirements.
In addition, since there is a risk that current borrowings and long-term debt may not be refinanced or may not be refinanced
on as favourable terms or with interest rates as favourable as those of the existing debt, the Company attempts to
appropriately structure the timing of contractual long-term debt renewal obligations and exposures.
The following are the contractual maturities of financial liabilities, including estimated interest payments:
As at December 31, 2019
Convertible debentures
CMHC mortgages
Non-CMHC mortgages
Construction loans
Lease liabilities
Accounts payable and accrued
Income taxes payable
Carrying
Amount
120,675
128,878
164,349
64,601
86,208
136,922
1,606
703,239
Contractual
Cash Flows
161,288
152,981
212,800
66,026
111,521
136,922
1,606
843,144
Less than
1 Year
6,325
38,652
33,128
66,026
15,236
136,922
1,606
297,895
1-2 Years
6,325
14,472
10,820
–
15,652
–
–
47,269
2-5 Years
18,975
45,167
86,533
–
40,625
–
–
191,300
More than
5 Years
129,663
54,690
82,319
–
40,008
–
–
306,680
The gross outflows presented above represent the contractual undiscounted cash flows.
In addition to cash generated from its operations and cash on hand, the Company has available undrawn credit facilities
totalling $70.0 million (2018 – $69.1 million).
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
38
Notes to Consolidated Financial Statements
CREDIT RISK
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the Company by failing to
discharge its obligation. The nature and maximum exposure to credit risk as at December 31 was:
Cash and short-term investments
Restricted cash
Accounts receivables, net of allowance
Investments held for self-insured liabilities
Government note receivables
Cash and Short-term Investments
Carrying Amount
2018
2019
65,893
94,457
2,290
2,441
50,570
50,382
67,938
27,562
53,341
47,854
240,032
222,696
The majority of our cash and short-term investments are held with highly rated financial institutions in Canada.
Restricted Cash
The restricted cash is cash held mainly on account of lender capital reserves with no credit risk.
Accounts Receivables, Net of Allowance
The Company periodically evaluates the adequacy of its provision for receivable impairment by conducting a specific
account review of amounts in excess of predefined target amounts and aging thresholds. Allowances for uncollectibility are
considered based upon the evaluation of the circumstances for each of these specific accounts. In addition, the Company
has established percentages for provision for receivable impairment that are based upon historical collection trends for each
payor type and age of the receivables. Accounts receivable that are specifically estimated to be uncollectible, based upon
the above process, are fully reserved for in the provision for receivable impairment until they are written off or collected.
Receivables from government agencies represent the only concentrated group of accounts receivable for the Company
which is primarily from provincial government agencies. Management does not believe there is any credit risk associated
with these government agencies other than possible funding delays. Accounts receivable other than from government
agencies consist of private individuals that are subject to different economic conditions, none of which represents any
concentrated credit risk to the Company.
The maximum exposure to credit risk for accounts receivable at the reporting date is the carrying value of each class of
receivable.
Trade receivables
Other receivables
2019
38,633
11,749
50,382
2018
39,894
10,676
50,570
As at December 31, 2019, receivables from government agencies represented approximately 80% of the total receivables
(2018 – 85%). Management continuously monitors reports from trade associations or notes from provincial or federal
agencies that announce possible delays that are rare to occur and usually associated with changes of fiscal intermediaries or
changes in information technology or forms.
Receivables, other than those from government agencies, consist of receivables from various payors and do not represent
any concentrated credit risks to the Company. There is no significant exposure to any single party.
As at December 31, 2019, the Company had trade receivables of $38.6 million (2018 – $39.9 million). All the receivables
were fully performing and collectible in the amounts outlined above.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
39
Notes to Consolidated Financial Statements
The aging analysis of these trade receivables is as follows:
Current
Between 30 and 90 days
Over 90 days
Less: provision for receivable impairment
Movements on the Company’s provision for receivable impairment are as follows:
At January 1
Increase in provision for receivable impairment
Receivables written off as uncollectible
At December 31
2019
24,538
12,704
3,553
(2,162)
38,633
2018
28,889
10,122
2,479
(1,596)
39,894
2019
1,596
1,941
(1,375)
2,162
2018
1,597
2,910
(2,911)
1,596
Any change in provision for receivables impairment has been included in operating expenses in net earnings. In general,
amounts charged to the provision for impairment of trade receivables are written off when there is no expectation of
recovering additional cash.
Investments Held for Self-insured Liabilities
The Company’s investments held for self-insured liabilities include investments in corporate or government fixed-rate
bonds with ratings above a rating of AAA- along with U.S. treasuries. The majority of these investments are investment
grade. Cash held for self-insured liabilities are with high-quality financial institutions. The Company limits the amount of
exposure to any one institution.
Notes, Mortgages and Amounts Receivable
Included in notes, mortgages and amounts receivable were $47.9 million (2018 – $53.3 million) of discounted amounts
receivable due from government agencies. These represent amounts funded by the Ontario government for a portion of
LTC home construction costs over a 20-year or 25-year period (Note 10). The Company does not believe there is any credit
exposure for these amounts due from government agencies.
CURRENCY RISK
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in foreign exchange rates. Cross-border transactions are subject to exchange rate fluctuations that may result in realized
gains or losses as and when payments are made.
As a result of the U.S. Sale Transaction, our exposure to foreign currency risk has been significantly reduced. The
following table outlines the net asset exposure to both the U.S. continuing operations and other items retained from the U.S.
Sale Transaction as at December 31, 2019.
Assets
Current assets
Investments held for self-insured liabilities
Liabilities
Current liabilities
Indemnification provisions
Non-current liabilities
Net asset exposure
US$
16,962
21,218
3,955
5,717
6,663
21,845
2019
C$
22,032
27,562
5,137
7,426
8,655
28,376
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
40
Notes to Consolidated Financial Statements
Net Earnings Sensitivity Analysis
Prior to the U.S. Sale Transaction, the majority of the Company’s operations were conducted in the United States. As at
December 31, 2019, U.S. operations have no revenue from continuing operations (2018 – less than 1%).
Every one cent strengthening of the Canadian dollar against the U.S. dollar in 2019 would favourably impact net earnings
by $0.1 million and OCI by $0.1 million. This analysis assumes that all other variables, in particular the interest rates,
remain constant.
INTEREST RATE RISK
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
To mitigate interest rate risk, the Company’s long-term care debt portfolio includes fixed-rate debt and variable-rate debt
with interest rate swaps in place. At December 31, 2019, construction loans of $64.6 million are variable-rate debt, which
do not have interest rate swaps in place. The Company’s credit facility, and future borrowings, may be at variable rates
which would expose the Company to the risk of interest rate volatility (Note 12).
Although the majority of the Company’s long-term debt is effectively at fixed rates, there can be no assurance that as debt
matures, renewal rates will not significantly impact future income and cash flow. The Company does not account for any
fixed-rate liabilities at FVTPL; consequently, changes in interest rates have no impact on our fixed-rate debt and therefore,
would not impact net earnings.
Below is the interest rate profile of our interest-bearing financial instruments, which reflects the impact of the interest rate
swaps:
Fixed-rate instruments:
Long-term debt (1)
Total liability in fixed-rate instruments
Variable-rate instruments:
Long-term debt (1)
(1) Includes current portion and excludes netting of deferred financing costs.
Fair Value Sensitivity Analysis for Variable-rate Instruments
Carrying Amount
2018
2019
500,110
500,110
64,601
64,601
484,520
484,520
52,866
52,866
All long-term debt with variable rates are classified as other financial liabilities, which are measured at amortized cost using
the effective interest method of amortization; therefore, changes in interest rates would not affect OCI or net earnings with
respect to variable-rate debt. As at December 31, 2019, long-term debt with variable rates represented 11.4% of total debt
(2018 – 9.8%). The value of the interest rate swaps is subject to fluctuations in interest rates, changes in fair value of these
swaps are recognized in net earnings.
Cash Flow Sensitivity Analysis for Variable-rate Instruments
An increase of 100 basis points in interest rates would have decreased net earnings by $0.5 million and a decrease of
100 basis points in interest rates would have increased net earnings by $0.5 million. This analysis assumes that all other
variables, in particular foreign currency rates, remains constant, and excludes variable interest rate debt that is locked in
through interest rate swaps.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
41
Notes to Consolidated Financial Statements
(b) Fair values of Financial Instruments
As at December 31, 2019
Financial assets:
Cash and short-term investments
Restricted cash
Invested assets (1)
Accounts receivable
Interest rate swaps
Amounts receivable and other assets (2) (3)
Investments held for self-insured liabilities
Financial liabilities:
Accounts payable
Interest rate swaps
Long-term debt excluding convertible debentures (3) (4)
Convertible debentures
As at December 31, 2018
Financial assets:
Cash and short-term investments
Restricted cash
Invested assets (1)
Accounts receivable
Interest rate swaps
Amounts receivable and other assets (2) (3)
Investments held for self-insured liabilities
Financial liabilities:
Accounts payable
Interest rate swaps
Long-term debt excluding convertible debentures (3) (4)
Convertible debentures
(1) Included in other assets.
(2) Includes primarily amounts receivable from government.
(3) Includes current portion.
(4) Excludes netting of deferred financing costs.
BASIS FOR DETERMINING FAIR VALUES
Amortized
Cost
Fair Value
through Profit
and Loss
Total
Carrying
Amount
94,457
2,441
354
50,382
–
47,854
6,316
201,804
18,021
–
444,036
120,675
582,732
–
–
–
–
1,480
–
21,246
22,726
–
702
–
–
702
Amortized
Cost
Fair Value
through Profit
and Loss
65,893
2,290
442
50,570
–
53,341
2,242
174,778
6,239
–
417,611
119,775
543,625
–
–
–
–
2,556
–
65,696
68,252
–
523
–
–
523
94,457
2,441
354
50,382
1,480
47,854
27,562
224,530
18,021
702
444,036
120,675
583,434
Total
Carrying
Amount
65,893
2,290
442
50,570
2,556
53,341
67,938
243,030
6,239
523
417,611
119,775
544,148
Fair
Value
Hierarchy
Level 2
Level 2
Level 2
Level 1
Level 2
Level 1
Fair
Value
Hierarchy
Level 2
Level 2
Level 2
Level 1
Level 2
Level 1
Fair
Value
94,471
2,441
354
50,382
1,480
51,950
27,562
228,640
18,021
702
450,382
132,585
601,690
Fair
Value
65,907
2,290
442
50,570
2,556
55,142
67,938
244,845
6,239
523
444,092
125,551
576,405
The following summarizes the significant methods and assumptions used in estimating the fair values of financial
instruments reflected in the previous table.
Fair values for investments designated as FVTPL are based on quoted market prices. Accounts receivable are recorded at
amortized cost. The carrying values of accounts receivable approximate fair values due to their short-term maturities, with
the exception of the amounts receivable due from the government of Ontario, which are valued at discounted future cash
flows using current applicable rates for similar instruments of comparable maturity and credit quality (Note 10). The fair
values of convertible debentures are based on the closing price of the publicly traded convertible debentures on each
reporting date, and the fair values of mortgages and other debt are estimated based on discounted future cash flows using
discount rates that reflect current market conditions for instruments with similar terms and risks.
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
42
Notes to Consolidated Financial Statements
FAIR VALUE HIERARCHY
The Company uses a fair value hierarchy to categorize the type of valuation techniques from which fair values are derived:
Level 1 – use of quoted market prices; Level 2 – internal models using observable market information as inputs; and Level
3 – internal models without observable market information as inputs.
The fair value hierarchy for the fair values of financial instruments where carrying value is not a reasonable approximation
of fair value, are indicated above.
26. CAPITAL MANAGEMENT
The Company accesses the capital markets periodically to fund acquisitions, growth capital expenditures and certain other
expenditures. The Company monitors the capital markets to assess the conditions for changes in capital and the cost of such
capital relative to the return on any acquisitions or growth capital projects. Funds raised in the capital markets that are not
deployed in acquisitions or growth projects are held in high-quality investments with surplus cash held in secure
institutions. The Company manages the cash position and prepare monthly cash flow projections over the remaining and
future fiscal periods, and the Company continuously monitors the level, nature and maturity dates of debt and level of
leverage and interest coverage ratios to ensure our compliance with debt covenants. The Company provides information to
the Board on a regular basis in order to carefully evaluate any significant cash flow decisions.
Capital Structure
The Company defines its capital structure to include long-term debt, net of cash and short-term investments, and share
capital.
Current portion of long-term debt (1)
Long-term debt (1)
Total debt
Less: cash and short-term investments
Net debt
Share capital
(1) Net of financing costs.
2019
2018
133,771
74,626
422,535
556,306
(94,457)
461,849
498,116
959,965
454,344
528,970
(65,893)
463,077
492,064
955,141
27. RELATED PARTY TRANSACTIONS
Transactions with Key Management Personnel
As previously disclosed, the Company’s former President and Chief Executive Officer stepped down from his position on
October 22, 2018. In connection therewith, the Company recorded a charge of $1.7 million in the three months ended
September 30, 2018, representing a cash payment of $2.9 million reflected below as part of post-employment benefits,
partially offset by the reversal of $1.2 million in respect of forfeited PSUs.
Compensation of Key Management Personnel
The remuneration of directors and other key management personnel of the Company was as follows:
Salaries and short-term benefits
Post-employment benefits
Share-based compensation
2019
2,636
–
1,231
3,867
2018
3,318
2,917
(106)
6,129
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
43
Notes to Consolidated Financial Statements
28. SEGMENTED INFORMATION
The Company reports the following segments: i) long-term care; ii) retirement living; iii) home health care; iv) contract
services, consulting and group purchasing as “other Canadian operations”; and v) the Canadian corporate functions and any
intersegment eliminations as “corporate Canada”. The continuing U.S. operations consist of the Captive.
The long-term care segment represents the 58 long-term care homes that the Company owns and operates in Canada. The
retirement living segment includes seven acquired retirement communities and four constructed retirement communities.
The retirement communities provide accommodation and services to private-pay residents at rates set by the Company
based on the services provided and market conditions. Through our wholly owned subsidiary ParaMed, ParaMed’s home
health care operations provide complex nursing care, occupational, physical and speech therapy, and assistance with daily
activities to accommodate those living at home.
The Company’s other Canadian operations are composed of its contract services, consulting and group purchasing
divisions. Through our Extendicare Assist division, the Company provides contract services and consulting to third parties;
and through our SGP Purchasing Partner Network division, the Company offers cost-effective purchasing contracts to other
senior care providers for food, capital equipment, furnishings, cleaning and nursing supplies, and office products.
The Company continues to group its former and remaining U.S. operations as one segment. The Captive’s expense
incurred for self-insured liabilities related to the Company’s U.S. general and professional liability risks up to the date of
the U.S. Sale Transaction as well as the disposed U.S. businesses are presented as discontinued operations; while the
Captive’s costs to administer and manage the settlement of the remaining claims are reported as continuing operations
within the U.S. segment.
(in thousands of Canadian dollars)
CONTINUING OPERATIONS
Revenue
Operating expenses
Net operating income
Administrative costs
Earnings (loss) before depreciation,
amortization, and other expense
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
Net interest costs
Foreign exchange and fair value
adjustments
Net finance costs (income)
Earnings before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings from continuing operations
DISCONTINUED OPERATIONS
Earnings from discontinued operations, net
of income taxes
Net earnings
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
2019
Total
643,785
566,375
77,410
41,276
29,844
11,432
422,995
391,646
31,349
23,894
10,635
13,259
–
–
–
41,151
1,131,950
998,500
133,450
41,151
–
–
–
1,188
1,131,950
998,500
133,450
42,339
39,590
2,404
26,240
2,081
28,321
8,287
(1,102)
7,185
92,299
39,590
2,404
50,305
26,240
2,081
28,321
21,984
8,287
(1,102)
7,185
14,799
(1,188)
–
–
(1,188)
648
(4,088)
(3,440)
2,252
–
–
–
2,252
91,111
39,590
2,404
49,117
26,888
(2,007)
24,881
24,236
8,287
(1,102)
7,185
17,051
–
–
11,579
11,579
14,799
13,831
28,630
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
44
Notes to Consolidated Financial Statements
(in thousands of Canadian dollars)
CONTINUING OPERATIONS
Revenue
Operating expenses
Net operating income
Administrative costs
Earnings (loss) before depreciation,
amortization, and other expense
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
i
Net interest costs
Foreign exchange and fair value
adjustments
Net finance costs
Earnings (loss) before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings (loss) from continuing
operations
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
income taxes
Net earnings
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
632,533
559,489
73,044
–
33,412
24,430
8,982
–
431,343
393,354
37,989
–
22,291
8,750
13,541
–
23
–
23
38,570
1,119,602
986,023
133,579
38,570
35,270
20,195
25,073
(149)
24,924
8,129
(3,894)
4,235
95,009
35,270
20,195
39,544
25,073
(149)
24,924
14,620
8,129
(3,894)
4,235
405
–
405
1,176
(771)
–
–
(771)
1,628
(98)
1,530
(2,301)
–
–
–
2018
Total
1,120,007
986,023
133,984
39,746
94,238
35,270
20,195
38,773
26,701
(247)
26,454
12,319
8,129
(3,894)
4,235
10,385
(2,301)
8,084
–
–
23,654
10,385
21,353
23,654
31,738
29. SIGNIFICANT SUBSIDIARIES
The following is a list of the significant subsidiaries as at December 31, 2019, all of which are 100% directly or indirectly
owned by the Company.
Extendicare (Canada) Inc.
ParaMed Inc.
Harvest Retirement Community Inc.
Stonebridge Crossing Retirement Community Inc.
Empire Crossing Retirement Community Inc.
Yorkton Crossing Retirement Community Inc.
West Park Crossing Retirement Community Inc.
Bolton Mills Retirement Community Inc.
Douglas Crossing Retirement Community Inc.
Lynde Creek Manor Retirement Community Inc.
9994165 Canada Inc.
Riverbend Crossing Retirement Community Inc.
Cedar Crossing Retirement Community Inc.
Laurier Indemnity Company, Ltd.
Jurisdiction of Incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Bermuda
Extendicare Inc. – 2019 Annual Consolidated Financial Statements
45
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Symbols:
Common Shares – EXE
2025 Convertible Debt (5.0%) – EXE.DB.C
TRANSFER AGENT
Computershare Trust Company of Canada
Tel: (800) 564-6253 Fax: (866) 249-7775
email: service@computershare.com
www.computershare.com
PUBLISHED INFORMATION
Additional information about Extendicare, including this
report, is available for viewing or printing on its website,
in addition to news releases, quarterly reports and
other filings with the securities commissions.
Printed copies are available upon request.
VISIT EXTENDICARE’S WEBSITE AT WWW.EXTENDICARE.COM
3000 Steeles Avenue East, Suite 103, Markham, Ontario, Canada L3R 4T9
T 905.470.4000 F 905.470.5588 www.extendicare.com