Good business aided by demographic tailwinds It has been a tough 12 months for retirement/LTC companies. However, the assisted living sector will be totally vaccinated within the next 30 days and we can return to the positive demographic trends and positive traits in this sector. Sienna looks appealing for the following reasons:
(1) LTC is supply constrained today and increasingly so looking ahead. I think the wait list number cited by Sienna was 38,000 people. Government doesn't have the money, infrastructure, training or incentive to take over large swaths of this industry. The noise created by NDP around governments running all the assisted living facilities is nonsense, both legally and the staggering cost given the housing requirements over the next 10-20 years. Private capital requiring an adequate return will fund much of this infrastructure buildout, as it should be.
(2) The movement towards more hours spent per resident per day (from 2.75 to 4 over next few years) announced by Ford in Ontario will require more funding for private operators to meet this threshold.
(3) By 2026, the number of seniors living in a retirement home, supportive housing, or a long-term care home will grow to over 610,000 (Conference Board of Canada). From Statscan: "In 2016, 16.9% of Canadians were aged 65 years or older, and 2.2% were aged 85 years or older, representing a 20.0% increase in these age groups since 2011. The proportion of the Canadian population aged 65 years and older is expected to increase to 20.0% by 2024. These demographic shifts raise concerns about the future need for nursing home (NH) care, because age is a strong predictor of admission to an NH. According to the 2016 Census, 6.8% of Canadians aged 65 years and older were living in an NH or residence for senior citizens (hereafter referred to as a seniors’ residence, SR): this proportion jumps to 30.0% among Canadians aged 85 years and older." If current patterns hold, by 2026 Canada will need an additional 131,000 spaces for Canadian seniors, growing to an additional 240,000 spaces by 2046. Despite SIENNA being one of the larger players in the industry, its COMBINED total bed count is just 11.5k, so room to grow is not in doubt for established operators.
(4) The Covid overhang has no doubt acted as an inhibitor for potential new entrants into this space (given the regiment of rules and regulations associated, coupled with more difficult to finance for a newbie), which benefits the incumbents. I also believe that scale is even more important and consolidation could occur .
(5) The Retirement side of the business (about 50% of Sienna) is well positioned demographically, with the age of Baby Boomers and their relative wealth (equity in family homes and pension benefits) of elderly Canadians. While temporarily stifled due to Covid, this will swing back and occupancy will rise.
(6) These businesses have similar characteristics to apartment REITs, except that occupancy for assisted living is higher, as is rent inflation, and government funds 40% of Sienna's business (LTC). Well run apartment REITs are very good businesses, as are assisted living residences.
(7) Assuming that a chunk of the COVID expenses dissipate once facilities are fully vaccinated, the distribution coverage looks fine. Ex-COVID expenses, payout was 74.8%.
(8) Debt was termed out to an average of 5 years from 4 years and unencumbered asset pool is now $840 million, up from $540 million. The company's balance sheet looks fine.
(9) Similar to legislation already enacted in other provinces, Ontario passed Bill 128, which retroactively provides civil liability protection for businesses, workers, and volunteers that make a “good faith” or “honest” effort to follow public health guidelines and laws relating to COVID-19. Early in the crisis, government were learning and sending out mixed messages and didn't provide adequate PPE guidelines, so this legislation makes sense and does truncate any massive lawsuit risk to Sienna and the LTC industry.
good luck...