CIBCEQUITY RESEARCH
November 15, 2024 Earnings Update
CHARTWELL RETIREMENT RESIDENCES
Acquisitions Ramping Up – Get Them While You Can
Our Conclusion
CSH posted a Q3/24 beat, and as expected produced strong operational
results as it continues to lap lagging pandemic-depressed numbers (which is
all part of the recovery thesis) from the comparative period in the prior year.
Adjusted SPNOI remains top of class at ~17%, and we expect the
occupancy recovery story to continue unabated. CSH has outperformed the
broader REIT complex year-to-date, and we view the share price as having
additional runway for growth as occupancy continues to recover to, and
eventually exceed, pre-pandemic levels given slow construction starts and
increasing demand. However, the unexpected announcement of an ATM
program could weigh on the near-term unit price, prompting concerns
regarding potential near-term dilution. Concurrent with the quarter, we are
releasing our inaugural 2026 estimates and increasing our price target to
$19.00 (from $16.50), based on parity with our $19.00 NAV estimate.
Key Points
Q3/24 Results: Reported FFO of $0.20/unit (+33% Y/Y) was slightly ahead
of consensus on a modest occupancy beat of 60 bps, lower G&A and a one-
time retroactive payment related to the LTC portfolio sale (~$0.005/unit).
Retirement Residence: Retirement residence same-property occupancy
increased an outsized 610 bps Y/Y to 88.5% (+540 bps for the total portfolio
to 87.9%), and all platforms achieved occupancy gains Y/Y: Quebec SP
occupancy increased 650 bps while Ontario and Western Canada increased
520 bps and 730 bps, respectively. Adjusted SPNOI increased an impressive
~17% Y/Y, driven by higher revenue from rental and service rate increases,
200 bps of SPNOI margin expansion and higher occupancy. SPNOI in
Western Canada increased ~17%, while in Ontario it increased ~14%, both
as a result of revenue growth from rental and service rate increases, as well
as growth in occupancy. Quebec showed the largest increase at ~32%. We
note that the Quebec region was the most affected by the use of agency
costs, and the increase is bolstered by both rental rate and occupancy
increases, as well as a reduction in the former usage of agency staffing.
Debt And The Interest Rate Environment: As the interest rate environment
continues to stabilize, we are being presented with a more normalized view
of what to expect in terms of debt rolls. CSH’s current weighted-average
interest rate is ~4.4% and as of today it has ~$99MM of mortgage debt
maturing in the remainder of 2024 at a WAIR of 7.08%. Given that CSH
estimates current CMHC financing at 4.08% (and five-year conventional
mortgage financing at ~5%), the roll should serve to provide a marginal
tailwind through 2025. Chartwell’s debt ladder is structured such that it
should serve to provide a modest tailwind (and in some cases maturities will
roll flat) through the next several years. Through to the end of 2027 the
consolidated weighted average interest rate of maturing debt exceeds 4%,
while maturities in the 2%-3% range do not roll until 2028.