As many have noted, the demographics around this industry are interesting. In 2020, 45% of baby boomers are 65 and over, with the others joining their ranks over the decade. By age 80, one in 10 will be living in a seniors' residence or nursing home, a number that will jump to one in four by the time they're 85.There will be about 650,000 people living in Canadian seniors' residences or nursing homes in 2030, up from 450,000 now. Public and private resources needed to build the extra capacity will cost at least $140 billion.
Canadian Baby Boomers are sitting on a tremendous amount of property wealth and many of those benefited from strong post retirement pension benefits. Affordability for Retirement Residences should not be a limiting factor for Sienna and the industry.
The business is split between Retirement Residences (funded primarily by residents, insurance plans, extended family, etc) and Long-Term Care (predominantly government funded).
The Covid crisis has impacted RETIREMENT and LTC occupancy, with the latter deficiency covered by the government. However, the most recent update by the company shows that occupancy for RETIREMENT finally ticked back up to 82%, and increased new prospects. Demand shouldn’t be a problem looking ahead. To illustrate, there are 38,000 people currently on the waiting list for Long-term care.
I went back to 2012 and tabulated dollars in versus dollars out until 2019 (rather than the "adjusted" jargon used by many companies). It isn’t a bad business. Cash flow from operations (CFO) after working cap changes has lifted from $19 million in 2012 to $86 million in 2019. Sustaining and growth internal capex has totalled around 15-25% of CFO. Construction funding from the government was 15% of CFO. In fact, internal capex($100mm) has equalled construction funding ($97mm) over that period. The Free cash flow margin (CFO less capex) has been improving, from 5% in 2012 to 8-10% in the period 2017-2019.
The amalgamation of CFO less capex plus construction funding has easily covered the dividend for the cumulative 8 year period, with the former of $397 million (CFO of $400mm less $100mm in cap + $97mm in construction funding) easily exceeding the latter (dividend payments) of $274 million.
The growth has been accelerated in-organically, with ~$817mm spent in the past 8 years on acquisitions. How was this funded? $544mm in equity was raised while debt increased by $234mm, totaling $778 million.
What has happened in the first two quarters of 2020? Cash flow from operations has been $49 million, sustaining cap ex of $6.5 million, with construction funding of $6 million. The free cash flow margin was 13%. The dividends paid of $28 million was easily covered by the cash flow. The company did issue another $145 million in debt, in order to shore up liquidity.
The balance sheet looks fine, with $840mm in unencumbered assets and liquidity around ¼ of a billion dollars. A recent debt financing termed out maturities and allowed the company to redeem the 2021 debentures.
Not an easy environment to manage in, but the enormity of the industry demand over the next 10-15 years means the government needs private industry and private capital to fund much of this growth. With incumbency comes both opportunity (continued industry growth) and threat (covid lawsuits, increased regulation), but the latter appears to be less of a risk than perhaps some worried about a few months ago.
Not particularly challenging to see an environment post-COVID (2H/2021), where the YIELD eases back to 6%, which at $0.936 annualized dividend, would mean a share price of $15.60 possibly within 18 months. Next couple of months likely to see continued volatility due to Covid, but we are also fairly close to approved vaccines, so wouldn't expect massive drawdown on this one...
good luck.