Our view: Our outlook on Chartwell (CSH) continues to improve post a better-than-expected start to the year relative to our call. A combination of its significant operating enhancements and a favourable backdrop in fundamentals has set the stage for a robust earnings recovery through 2025. In conjunction with the portfolio optimization process underway, we see a path to materially lower leverage. Bottom line, still good money on the table in our view. Outperform, PT raised to $15 (+$1).
Key points:
Better tactics, better results, as momentum continues to build. SP NOI was +25% YoY, as higher occupancy and higher rents/services rates (~5%) drove impressive growth across all regions. Q1 average occupancy rose to 86.2% (+150 bps QoQ, +610 bps YoY), with management forecasting June at 87.3% (+120 bps from March). SP NOI margins improved to 35% (+350 bps YoY) as CSH works toward its 38% 2024 target. Importantly, advances in CSH’s operating strategies, including a more localized approach are driving increased tour activity, higher quality leads, and higher closing ratios. Reduced agency use and stronger retention have also pushed staffing costs down ~60% YoY. Combined with pent-up demand and limited new supply, we expect occupancy and margin gains to carry-on, with our forecasts reflecting double-digit SP NOI growth through the balance of the year.
Portfolio optimization at work. CSH continues to high-grade its assets, with Q2 acquisitions of 85% interests in two stabilized developments (96% occupied) in QC from Batimo for $166MM (low-to-mid 6% cap rate). Two additional Batimo projects valued at ~$150MM (at 100%) have reached stabilized occupancy, although timing of any further deals is uncertain at this point. We expect dispositions to provide a source of funding, including the Welltower JV wind-up slated for Q3/24 (net $78MM proceeds) and the eventual sale of Ballycliffe LTC on project completion (value should exceed initial $65MM given recent funding improvements in ON LTC).
Estimates raised. Our 2024E-25E FFOPU increased to $0.69 (+$0.02) and $0.76 (+$0.01) on higher NOI, partly offset by higher interest costs. Our 2023A-25E CAGR is a robust 18%, well ahead of its seniors housing peers (3%) and the sector (2%). Importantly, our forecast debt/EBITDA falls to sub-9x in 2024E, with further improvements through 2025E (with no forecast equity issuance). Our current and one-year forward NAVPU estimates rose to $12.50 (+$0.50)/$13.50 (+$0.50) on higher NOI.
Outperform, price target raised to $15 (+$1) on the increase in our forward NAV and an uptick in our target multiple (~8% premium to FWD NAV vs. prior +5%) on improving growth. CSH is trading at 2% below NAV (20x 2024E AFFO/6.4% implied cap rate), ahead of its seniors housing comps (8% NAV discount) and our broader coverage (24% discount). Supported by its superior growth profile, demographic tailwinds, and a visible path to lower leverage, we continue to see attractive upside from current levels.