Sienna Senior Living Inc T.SIA

Scotia comments

[incomedreamer11]

7.0% Dividend Yield + 19% Discount to NAV = Get Paid While You Wait

OUR TAKE: Neutral. In our recent CSH note (link), we explained that public markets will price housing stocks based on FY1 earnings estimates and not stabilized earnings – see CSH note for more details. We think seniors housing playbook is “One Year at a Time”. So, look at Exhibit 1 – if we value SIA’s portfolio based on 2023E NOI, we get NAVPS of $15.00 for SIA. However, if we use 2024E NOI, our NAV jumps to $17.40. So, we think, as we get closer to Christmas and the Street starts introducing 2024 estimates, we will see a re-rating in the name. In the context of occupancy and NOI recovery that is not dependent upon the economic environment, we reiterate our $17.00 target.

SIA dividend yield of 7.0% (Exhibit 2) @ 93% payout ratio, is now second-highest within our coverage universe. Similar to late-2020, the stock is again in the territory of “get paid while you wait.” SIA is now trading at 19% discount to our NAV (Exhibit 17) and perhaps 28% discount to stabilized NAV of $18.50. Our 12-month target implies ~30% total return potential. We already have one SO rating with CSH (now pure-play RH operator) to play the sector, but see value in SIA (53% RH and 47% LTC based on our portfolio valuation) at the current price.

KEY POINTS

RH occupancy is almost getting there...now the fight is for RH NOI Margins and LTC NOI Margins. RH occupancy is taking place nicely within SIA portfolio, i.e., SP occupancy was down 800bp from peak-to-trough and now recovered 900bp from the trough (Exhibit 7). We expect 86.5% average occupancy in 2022 and 90% in 2023 (Exhibit 9). Management guidance of 87% to 89% occupancy by Dec ’22 is unchanged, although Apr ’22 occupancy is already 87%. However, our RH NOI margins are still 790bp lower than pre-pandemic level in 2022 and 620bp in 2023.

Our 2022 AFFOPS estimates are reduced 7.3% and 2023 AFFOPS by 5% as we reduced our NOI margins for LTC as well as RH: We have reduced our 2022 NOI margin for LTC to 14.0% now (vs 15% previously) vs 17.0% pre-pandemic. We understand margin pressure from staff agency costs (housekeeping, kitchen et.c), higher utility costs, insurance etc. Our RH NOI margin for 2022 is unchanged but we have slightly reduced our 2023 NOI margin to 38.5% from 39%. Our NAVPS is largely unchanged at $16.40 (+$0.10/share).

Valuation (Exhibits 13 to 17): We provide a side-by-side comparison with CSH in Exhibits 15 and 16. CSH is trading at 11% discount to NAV vs SIA at 19%. CSH at 16.7x P/AFFO FY23 vs SIA at 10.4x. The valuation gap is explained by the property mix (i.e., CSH pure-play RH vs SIA a mix of RH and LTC).