Chartwell Retirement Residences T.CSH.UN

TD

[retiredcf]

Chartwell Retirement Residences

(CSH.UN-T) C$8.65

Expect Occupancy to Improve in 2023; Costs to Remain Elevated

Event

Forecast update. For our initial thoughts click here.

Impact: SLIGHTLY NEGATIVE

Chartwell's retirement portfolio occupancy improved in Q3/22, however it continues to be hindered by the lingering impact of the pandemic. Retirement same-property occupancy improved 60bps q/q and 50bps y/y to 77.6% and increased a further 50bps to 78.1% in October. The recovery in occupancy continues to be slowed down by four markets with oversupply issues (Ottawa, Durham, Calgary and Quebec City), which on average have declined 130bps from April to September. The remaining 11 of Chartwell's top 15 markets were +280bps during the same time period. Chartwell currently has four assets classified as for repositioning. We believe management is taking an asset by asset approach in its four weaker markets and we would expect to see more of the worst performing assets (those with low occupancy or flat/negative NOI) added to the repositioning bucket over time.

Path to Covered Distribution. Management addressed the overpayment on the conference call noting that it sees a path to fully covering the distribution within a reasonable time frame. Our revised forecast has Chartwell covering the distribution by H2/23. We note that Chartwell has ample liquidity ($180mm+ immediate plus north of $1b in unencumbered assets) to fund a short term over-distribution. Assuming operating fundamentals continue to improve, we do not expect a distribution cut.

Forecast. Looking to 2023, we expect further occupancy gains and rental rate increases to benefit margins. However this is being more than offset by an increase in our expense assumptions (largely pandemic related), resulting in a decline in our NOI margin forecasts. Our NOI margin forecasts decline 280bps in 2023 to 33.6%, while 2024 is 290bps lower to 35.7%. Our 2022/23/24 AFFO/unit estimates are 7%/20%/16% lower on lower NOI, while our $12.50 NAV/unit estimate is -4%.

TD Investment Conclusion

Our long-term positive view on Chartwell remains unchanged. Over the short term, we are hopeful that occupancy gains begin to accelerate, which we would view as a positive catalyst for the stock. At current price levels, we view the risk/reward as attractive. We are maintaining our BUY recommendation and lowering our target price to $11.00 from $11.50.