TSX:CSH.UN - Post Discussion
Post by
retiredcf on May 13, 2024 12:29pm
TD 2 (Raise Target)
GAINING CONFIDENCE THAT CHARTWELL CAN ACHIEVE 95% OCCUPANCY GOAL
THE TD COWEN INSIGHT
Improving industry fundamentals are beginning to translate into higher earnings (Q1 FFO/ unit +58%), a trend we expect to continue, albeit at a slower pace. Despite strong YTD relative performance (CSH +9% vs. REIT index -6%), we view CSH's current valuation as attractive in light of the strong forecast earnings, and see potential catalysts coming from further occupancy gains/margin improvements.
Impact: NEUTRAL Initial views: here
Despite what is usually a weaker seasonal quarter, Q1/24 SP occupancy gained ground on Q4/23 (+210bps to 86.2%). Gains have continued, with Q2/24 occupancy estimated to be ~87%. Combined with very strong industry fundamentals (link), our confidence is increasing that management will be able to achieve its 95% target by Q4/25, although that is not yet the base case in our forecast. Our revised forecast calls for 87.0%/91.0% overall occupancy at year-end 2024/2025, which would imply SP occupancy of ~91%/93%. Should Chartwell achieve its occupancy/margin goals, our 2025 estimate would need to increase ~10%+.
As retirement homes approach higher occupancy, management also expects to gradually reduce the targeted incentives that had been put in place, which should provide further upside on rent growth and operating margins.
NOI Margin Guidance Reiterated. Chartwell reported +35.2% NOI margins (+350bps y/y) and remains on track to meet its 38% target by year-end. We expect margin expansion to be supported by 5% rental/service rate growth and further occupancy gains. Our forecast calls for 17.3%/9.5% SPNOI growth in 2024/2025.
Acquisitions/Dispositions. On the two assets that Chartwell is acquiring from Batimo
this year (Le Prescott and Trait-Carre), management expects to replace existing high-rate debt (8%+ on both) with CMHC-insured financing by year-end. There are two additional assets that Batimo has the right to "put" to Chartwell. Management noted that it is not currently in active discussions on either. Management terminated its forward sales contract at Ballycliffe following the recent favourable funding increases for the LTC sector (+11.5% OA funding). Management will commence a sales process (and is already in discussion with the original buyer) and expects to achieve pricing above the original $64.5mm forward sales contract. Our forecast does not include any unannounced acquisitions/dispositions.
Forecasts. We have increased our 2024/2025 AFFO/unit estimates modestly by 1% on higher NOI (from occupancy gains). Our $14.00 NAV/unit estimate is +7% (higher NOI).
We have a very favourable view on Canadian retirement home fundamentals over both the short and medium terms. As the largest pure-play publicly traded seniors housing provider, we believe Chartwell is best-positioned to benefit from these fundamentals. In the near term, we expect above-average occupancy growth and margin expansion to drive high-single/low- double-digit SPNOI growth metrics and above-average earnings growth. Chartwell is trading at a significant discount to US peers. Near-term potential catalysts include earnings growth, positive estimate revisions and acquisitions. We are increasing our target price to $16 from $15 on the back of increased confidence in near term occupancy growth.
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