November 11, 2022
Chartwell Retirement Residences
Slow, but making the turn nonetheless
Our view: We remain constructive on CSH, despite Q3 results that were modestly short of our call. Notably, occupancy appears to be turning the corner, even if it’s slower than we’d like. As well, we’re encouraged by the numerous strategic and operational initiatives underway to drive further advances, which coupled with an eventual easing of cost pressures, should support a material recovery in cash flows. Layering on a discounted valuation, we maintain our Outperform rating; PT reduced to $12 ($1.50).
Key points:
Slow, but making the turn nonetheless. SP NOI was -1.1% YoY (-10.2% YTD) as higher occupancy was offset by higher operating costs. However, average SP-retirement occupancy rose 60 bps QoQ to 77.6%, its largest gain since the pandemic’s onset. CSH forecasts a further +50 bps by Dec-2022, the bulk of which came in Oct. (+40 bps). Importantly, numerous localized operational and sales/marketing initiatives are underway, including leasing suites to hospitals, expanding relationships with resident referral agencies, service model changes, targeted incentives, and capital upgrades. Notably, CSH is exploring select property conversions to traditional apartments, which could expedite lease-up amid tight supply. On costs, CSH has negotiated better rates by reducing the number of staffing agencies it works with. While we curbed our NOI outlook on the carryover of cost pressures, we expect occupancy gains to drive a substantial 2023 recovery.
More asset sales ahead; payout ratio’s elevated, but CSH expects to grow its way back onside. The BC LTC property sales ($112MM) are on track for Q4, while the sale of ON LTC properties ($447MM) should close in Spring 2023. CSH also expects to sell four retirement homes in the year ahead, with further dispositions possible as portfolio optimization continues. As for the distribution, we believe investor concern over a potential cut has weighed on the units since August. Indeed, our 2023E AFFO payout ratio remains elevated at 106%. However, CSH remains confident that initiatives underway will drive a recovery in cash flows, which coupled with available liquidity should support the current distribution level.
A sizeable runway for growth. Our 2022E-24E FFOPU are $0.53 (-$0.04), $0.63 (-$0.05), and $0.79 (-$0.01) with revisions for lower NOI and higher interest costs. Our 2021A-24E CAGR is a solid 10%, well above its seniors housing peers (1%) and the sector (3%). Our $12 NAVPU is unchanged, with our $13 one-year forward NAVPU reflecting strong 8% YoY growth.
Maintaining Outperform, PT reduced to $12 (-$1.50) on a lower target multiple (~8% discount to forward NAV vs. prior 3% premium) for its higher payout ratio and heightened macro uncertainty. CSH is trading at 29% below NAV (7.4% implied cap rate/15x 2023E AFFO), well below its seniors housing peers (18% NAV discount), and our universe (17% discount). In short, we see a discounted entry point to a name with an attractive growth profile and long-term demographic tailwinds at its back.