Analyst $17 Target Very bullish!
Against a waning economic backdrop,” National Bank Financial analyst Giuliano Thornhill thinks Canadian seniors’ housing represents “a logical shift for investor sentiment as valuations remain at a spread to the cost of financing, margins are improving, while near-term supply risks appear to be muted.”
In a research report released Thursday, he initiated coverage of the sector, predicting it will continue to climb from occupancy lows with pricing gains to follow with it.
Demographics are finally working (4-per-cent growth seniors for the next decade), resulting in industry occupancy to exceed pre-COVID levels by next year,” said Mr. Thornhill. “Suite availability will decline as the industry approaches these higher occupancy levels. A stretched LTC [long-term care] system should also turn into a key tenant demand driver. These trends will shift pricing power in the operators’ favour, as supply deliveries fade like other asset classes, and lead to a window of outsized rental growth.”
The analyst calls seniors’ housing “an alternative way to play the tight Canadian multi-family space.”
“Multifamily is well-liked across income/REIT funds,” he noted. “Seniors’ has many of the same drivers, with a few caveats, but also benefits to investors. For starters, these too are short duration leases that reset in a more predictable fashion than multi-family (MF) and may be sought after if the housing market enters a deadlock state. While rent controlled, seniors’ has a substantial services component that differentiates them from their purely real estate peers. This does bring operating risks with it, and we believe that a declining number of firms reporting labour shortages may ease staffing pressures felt by operators over the previous two years. In addition, seniors’ housing has 240 basis points higher dividend yields, 17-per-cent lower valuation (on average P/FFO 2025) and trades at an implied cap rate at a positive spread to the average cost of financing.”
In the report, titled Seniors’ Housing: A Wise Investment, Mr. Thornhill gave both Chartwell Retirement Residences (andSienna Senior Living Inc. (
increase
) “outperform” recommendations, seeing “a confluence of factors leading to a 2-3-year window where demand will outstrip supply, until caught by new deliveries.”
He set a target of $15 per unit for Chartwell, calling it “s the sector proxy with a diversified portfolio, and a primary beneficiary of the retirement rebound.” The average target on the Street is $15.30, according to LSEG data.
“Recent initiatives to simplify the story, including exiting LTC, the removal of a large JV partner and less development, have zeroed focus on higher growth retirement,” said Mr. Thornhill. “As occupancy recovers, CSH will retain a greater ability to pass on rental/service increases than in the previous decade as demographic demand takes shape, new suite supply/availability decline. We see the occupancy uplift driving NOI margins higher, as properties require full staffing levels prior to fully occupied status. Leverage ratios are on a downward trajectory, providing debt capacity that may be utilized for additional capex or external M&A. The latter of these two options features transaction cap rates at a positive spread to financing sources, unlike other industries under coverage. CSH has effectively refreshed its portfolio over the previous decade – we see this continuing.”
Seeing Sienna “exposed to many of the same tailwinds as its larger peer, and should feature lower earnings volatility thanks its steady LTC segment,” the analyst set a $17 target. The average is $16.33.
“Half of NOI is generated from LTC, which we view as effectively an infrastructure-like asset and providing predictability to results,” said Mr. Thornhill. “While there may be heightened political/operating risks, strict regulations and growing waitlist insulate this segment to supply risks. Ultimately, regulators need these private operators within the healthcare system. Q1 2024 featured a pair of announcements which signalled their commitment to the asset class, as operators were nearly made whole of pandemic expenses accrued and received the long-awaited 11.5-per-cent increase in accommodation funding to catch up with inflationary pressures. This restored LTC’s predictability that had begun to be called into question.
“Despite the LTC redevelopment headwind and lower growth vehicle, SIA and CSH trade in tandem, offering investors a cheaper valuation and higher yield. Outperformance of SIA is best realized when held for an extended period, as the additional income from LTC, alongside growth from retirement, is likely to lead to steadier performance.”