TD commentsImpact: NEUTRAL
Operations continued to improve in the quarter with retirement occupancy up to 88% in October (versus 86.9% in Q2), a level management expects to sustain for Q4/23. Looking ahead, management has seen evidence of strong leading indicators (qualified leads up +30% y/y) and good momentum on lease ups. The elevated number of moveouts from retirement to LTC that occurred in H1/23 has also moderated (back to historical levels), and management remains committed to achieving its 92.5% stabilized occupancy goal.
Agency costs return to pre-pandemic levels with further room for improvement. Management expects agency costs to trend lower by the end of this year, and also noted that the majority of costs ($4.8mm in Q3) would be covered by government funding. Sienna continues to reduce the number of staffing agencies it works with (down to 15 from over 100 last year), and has seen success across its various employee retention and recruitment initiatives. Additionally, management has seen minimal impacts from COVID-19 outbreaks (which are now more similar operationally to flu outbreaks) compared to the last few years, which should further lower the use of agency staffing.
Entry into Alberta. With the post-Q3 announcement of its management contract with Sabra Health Care REIT (for a 70-suite retirement home in Calgary), management expects to grow its exposure to Alberta markets and would consider both portfolio and single-asset acquisitions.
Forecasts. Management reiterated FY23 guidance calling for 100-150bps y/y retirement margin expansion and ~88% average 2023 SP retirement occupancy.
Our forecast calls for +110bps/+250bps/+120bps margin expansion for 2023/24/25, and we expect occupancy to reach 92.0% by year-end 2025. Our 2023 AFFO/ share estimate is +1% on lower interest and G&A expense, while our 2024 and 2025 estimates are unchanged. Our NAV/unit is -4.0% to $14.50.
TD Investment Conclusion Sienna continues to demonstrate strong operating capabilities, delivering good occupancy growth in a challenging environment, and continued improvement on the cost front. With a well-covered ~9% dividend yield, solid balance sheet, and improving industry fundamentals, we view Sienna as attractively valued. We are maintaining our BUY rating and $13.00 target price.
Real Estate Valuation Sienna currently trades at 9.9x our 2024 AFFO estimate versus Extendicare and its U.S. peer group average of 10.2x and 14.1x, respectively. On a price/NAV basis, Sienna trades at a 28% discount to our $14.50 NAV/share estimate (previously $15.10) versus the historical average of a 4% discount (Exhibit 6).
Justification of Target Price Our $13.00 target price (unchanged) is based on a 12.0x-12.5x multiple to our 2024E AFFO/share (unchanged). Our target price equates to a 10% discount to our $14.50 pretax NAV/share estimate.