More Occupancy, More Growth Our Conclusion
Chartwell reported an in-line Q1/24, continuing to post solid gains in
occupancy as it laps pandemic-depressed numbers from the prior year.
Normalized SPNOI remains top of class at ~25%, and we expect the
occupancy recovery story to continue unabated. CSH has outperformed the
broader REIT complex year to date, and we view the share price as having
additional runway for growth as occupancy continues to recover to and
eventually exceed pre-pandemic levels (although we acknowledge that this
will take some time).
Our price target remains unchanged at $15.00, based on parity with our
$15.00 NAV estimate, on a 6.25% cap rate (previously 6.5%). CSH remains
Outperformer rated.
Key Points
Q1/24 Results: Reported FFO of $0.16/unit was in line with consensus and
fell just short of our $0.17/unit estimate.
Retirement Residence: Retirement residence same-property occupancy
increased an outsized 610 bps Y/Y to 86.2%, and all platforms achieved
occupancy gains Y/Y: Quebec SP occupancy increased 90 bps while Ontario
and Western Canada increased 150 bps and 190 bps, respectively. Adjusted
SPNOI increased an impressive ~25% Y/Y, driven by higher revenue from
rental and service rate increases and higher occupancy. SPNOI in Western
Canada increased 20.1%, while in Ontario it increased 25.8%, both as a
result of revenue growth from rental and service rate increases, as well as
growth in occupancy. Quebec showed the largest increase at 33.3%. We
note that the Quebec region was the most affected by the use of agency
costs, and the increase is bolstered by both rental rate and occupancy
increases, as well as a reduction in the former usage of agency staffing.
Balance Sheet: Leverage has decreased 30 bps since year-end 2023 to
48.7%. Liquidity is ample at ~$291MM ($25MM cash and $266MM undrawn
credit).
Debt And The Interest Rate Environment: As the interest rate environment
continues to stabilize, we are being presented with a more normalized view
of what to expect in terms of debt rolls. CSH’s current weighted-average
interest rate is 4.11% and it has ~$266MM of secured debt maturing in 2024
at a 3.57% weighted-average interest rate. Given that CSH estimates current
CMHC financing at 4.57%, the roll should serve to marginally increase its
financing costs through 2025.
Welltower Loans: During the quarter, Welltower extended two loans to
Chartwell for ~$33MM and ~$41MM at interest rates of 6.71% and 6.85%,
respectively, as bridge financing for two properties with mortgages that
matured in Q1/24. The first loan will be settled upon the sale of one property
to Welltower, while the second matures on February 15, 2025.