Sienna Senior Living Inc T.SIA

Scotia comments after conference

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Can't Be a Laggard Like This... We Expect Some Price Catch-Up

OUR TAKE: Slightly Positive. We remain positive on seniors housing sector heading into 2024. CSH has been our top pick – see CSH note titled “Outsized AFFOPU growth next year = Outperformance next year”. We recognize that CSH is showing much higher AFFOPU growth than SIA next year.

But, SIA’s valuation discount makes it a rating upgrade candidate. Our NAVPS on SIA is $13.50 (unchanged) assuming 6.5% cap rate on in-place Retirement Home NOI and 8% on in-place Long Term Care (LTC) NOI. This implies 20% discount to our NAV (Exhibit 11 for details). Distribution yield is 8.7% and our 2024E AFFO payout ratio is 89%. We think, at this price, we can’t complain about limited visibility on LTC income. We recognize there has been some volatility on LTC NOI in the last three years, but management thinks we have found a base in 2023 and it can grow from there. So, we are fairly comfortable with our NAV estimate and our 2024E FFOPS is slightly increased (+2.3%). We understand SIA FFOPS implies +6% y/y growth in 2024 – middle-of-the-pack but think market has to narrow the valuation gap. Keeping our target of $13.50 and keeping our SP rating.

KEY POINTS

For details on Q3 – see our glance note. We were pleased with earnings beat and meaningful reduction in agency staffing costs.

We need to get comfortable with LTC for a rating upgrade: Management expects 2023 LTC NOI to mid-to-high single digit% higher than 2022. No guidance for 2024 was provided, but it was mentioned that no negative surprise is expected. Still, we don’t know what could be upside but looks like a base has been established. We think stability and modest growth in LTC NOI will be instrumental in SIA stock price playing a catch-up.

Retirement Home Occupancy is looking good but still a lot of work to be done on NOI margins: SIA expects RH occupancy to average 88% in Q4/23, and then work towards stabilized occupancy target of 92.5%. Resident move-outs to LTC/ Hospitals have stabilized in Q3 after seeing an elevated pace in H1/23. We expect 36.4% NOI margin on an average in 2023 and then 37.5% in 2024. We do note that pre-pandemic NOI margins were in 44-45% range.

No major unsecured debenture maturity until Q4/24: Next major debt maturity in Nov. 2024 ($150M unsecured debenture). $30M mortgages expiring in Q4/23 and ~$60M in 2024. There were some CMHC-insured financing done during the quarter to pay down Credit Facility.

Q3/23 Earnings Summary

(+) Beat: FFOPS came in at $0.275 in Q3, ~12% ahead of Scotia estimate of $0.247, and slightly above consensus estimate of $0.269 (wide range =$0.24-$0.29). Similar to Q2, beat was mostly on higher LTC NOI while RH NOI was mostly in line with us. No retroactive govt. funding or tax adjustments were there which led to the beat. FFOPS was up ~12% on y/y basis (solid growth).

(+) Meaningful reduction in agency staffing costs and essentially returned to pre-pandemic levels: 60% y/y decrease in agency staffing costs (last q it was down 40% y/y – so further improvement made this q).

(+) RH Occupancy flat q/q (in line with Scotia estimate) but has already moved up to 88.0% in Oct’23 (up 80bp m/m): SIA expects RH occupancy to average 88% in Q4/23, and then work towards stabilized occupancy target of 92.5%. Resident move-outs to LTC/ Hospitals have stabilized in Q3 after seeing an elevated pace in H1/23.

(=) LTC NOI guidance at mid-to-high single digit % growth in 2023 y/y: With Q3 beat, our Q4 estimate is in line with management guidance (so don’t expect our Q4 estimate to go up).

(=) Similar to last time, SIA expects RH NOI margins to improve 100 to 150bp y/y in 2023. Our model implies 120bp y/y increase which is right in line.

(+) LTC occupancy increased 40bp q/q at 98.4%: Sienna LTC total occupancy was 98.4% (up 170bp y/y) vs 98.0% in Q2, above occupancy target of 97%. SIA mentioned that they expect the current occupancy trends to continue for the remainder of the year.

(=) Entered AB market with a property management arrangement with Sabra (US peer). Also, SIA to acquire remaining stake in LTC in BC. Update on ongoing developments – Niagara Falls RH completed and lease-up begins in early 2024. LTC re-development projects ongoing but no new updates.

(+) No major unsecured debenture maturity until Q4/24: Next major debt maturity in Nov. 2024 ($150M unsecured debenture). $30M mortgages expiring in Q4/23 and ~$60M in 2024. There were some CMHC-insured financing done during the quarter to pay down Credit Facility.

(=) Funding changes with respect to 3rd and 4th beds in multi-bed rooms- no new update in this filing: As previously mentioned, effective Apr’23, some funding will stay for a couple of years but some envelope will be phased out gradually. SIA has ~350 3rd and 4th beds in ON and there will be some impact (not quantified so far). No new information related to funding requirements for LTC development: In December 2022, ministry announced an increase to construction funding subsidy up to $35 per bed per day over 25 years for projects with a construction start by Aug 31, 2023. Subsidies offset the spike in costs/inflation and makes them economical, thus SIA expects to have 480 beds under construction by mid-2023. Total estimated development pipeline of $275M with expected yield of 7.5% to 8.0%.