TD's thoughts on Sienna's earningsEvent Forecast update.
For our initial thoughts, click here. Impact: SLIGHTLY NEGATIVE Sienna continues to make good strides as it relates to the recovery of occupancy and in turn revenue in its retirement portfolio. Leading indicators continue to trend in the right direction (leads +29% in Q4/22), and Sienna expects SP occupancy to average +90% in 2023 — which we view positively (was +20bps q/q to 88.6% in Q4). On the flip side, costs, especially as it relates to labour/agency staffing, are expected to remain stubbornly high and hence will continue to impede the recovery of Sienna's NOI, both in the retirement and LTC segments. Management's guidance calls for margins in the retirement portfolio to improve just 150bps-200bps in 2023 versus FY2022 margins of 35.7% (we had previously forecast +460bps), while LTC NOI is expected to remain flat (we had forecast low double-digit growth). We now expect retirement margins to improve +170bps and LTC NOI to increase 2% in 2023.
Management's LTC guidance may prove conservative as it only assumes annual funding increases of 2% (in line with long-term averages). Historically, these increases have been based on CPI (usually trailing one-year), although the pandemic has thrown timing/increase amounts out of balance (there was no increase in 2022).
The industry is currently advocating for a 9% increase, which would catch up funding in order to match inflation since 2019 and result in NOI above the current guidance. Although we view it as unlikely, one potential headwind could be a negative decision around funding for three- and four-bed wards, which are not re-opening. Management assumes it will still receive some funding to cover common area costs (heating, maintenance, etc.). Forecasts. Our 2023/2024 AFFO/share estimates decline 9% reflecting higher operating cost assumptions.
Our $15.80 NAV/share estimate is -6.5% on a lower stabilized retirement home operating margin. TD Investment Conclusion Sienna continues to demonstrate strong operating capabilities, delivering good occupancy growth in a challenging environment. That said, cost pressures remain, slowing Sienna's overall recovery. On the positive side, we see earnings/NAV upside through its development program.
We are maintaining our BUY rating but lowering our target price to $15.00 from $16.00. Real Estate S