TD Analyst Jonathan Kelcher named Chartwell Retirement Residencesas his top pick for TD Cowen’s “Canada Best Ideas” list, touting a “long runway for growth supported by favourable fundamentals.”
“SPNOI [same-property net operating income] growth turned positive in Q4/22 and has accelerated to 20-per-cent-plus levels as occupancy has recovered to pre-pandemic (high 80 per cent) levels,” he said. “We see further gains (to 95 per cent) driving near-term AFFO [adjusted funds from operations] growth with favourable industry supply/demand fundamentals driving earnings/NAV growth in 2026+. We do not believe this growth is fully reflected in the current valuation.”
Mr. Kelcher expects Chartwell to deliver above-average earnings/NAV growth over his forecast period, seeing “retirement fundamentals set to remain strong over the next several years (on the back of very little new supply and 4-per-cent annual growth in the 80+ population).
“We also see potential upside to our NAV estimates. While not officially forecast, we expect to see NAV growth of 30 per cent over the next two years with the potential of it being materially higher should cap rates compress or NOI growth be stronger than forecast (see sensitivity analysis),” he added.
He has a “buy” rating and Street-high $18 target for Chartwell. The average is $16.21.
“While CSH has had strong recent share price performance (up 90 per cent since Dec ‘22), it still trades at a 27-per-cent discount to its U.S. peers (LTA: 13 per cent) despite having a significantly higher growth profile (25 per cent vs. 11-per-cent 23-26 AFFO CAGR),” the analyst said. “CSH trades at a 108 per cent of our current NAV estimate vs. US peers at 167 per cent.”
“We have a very favourable view of Canadian retirement home fundamentals over both the short and medium terms. As the largest pure-play publicly traded seniors housing provider, we believe Chartwell is best-positioned to benefit from these fundamentals. In the near term, we expect above-average occupancy growth and margin expansion to drive high-single/highdouble-digit SPNOI growth metrics and above-average earnings growth. Despite a better near-term earnings growth outlook, Chartwell is trading at a significant discount to its U.S. peers. Near-term potential catalysts include earnings growth, positive estimate revisions, and acquisitions.”