Summary:
Bottom Line:
We are initiating coverage on the Canadian seniors housing space with Outperform
recommendations on Chartwell Retirement Residences ($18.00 target price), our top
pick, and Sienna Senior Living ($17.00 target price). Extendicare ($11.00 target price)
is rated Market Perform. On balance, our recommendations reflect a bias towards
private-pay retirement residence exposure in the current environment. With
pandemic disruptions firmly in the rearview mirror and an aging population now upon
us, we believe an attractive supply/demand picture will help drive a multi-year period
of above-average organic growth.
Key Points
In good shape—pandemic disruptions in the rearview mirror. Operating
performance, including occupancy rates, has clearly inflected over the past 12-24
months, supercharging organic growth. While expenses, particularly labour, are always a
risk given the services component of the offering, operators appear to have established
a much better footing. Agency costs have been trending lower through 2024 and in
some cases now sit under 2019 levels. Additionally, with improved balance sheets and
lower costs of capital, we expect inorganic activity to be a key theme to watch.
The boomers are here—demographic tailwinds will support demand for years…
As baby boomers age, growth in Canada’s seniors population is materially accelerating.
Individuals aged 75+ are expected to reach circa 5.3 million people over the next 10
years (absolute growth of 1.8 million people), representing a CAGR of just over 4%
(vs. <3% CAGR over past 20 years). Against Canada’s reset immigration targets, we’d
highlight seniors housing as a needs-driven business. Accordingly, we see the space as
much more insulated from these recent changes relative to other real estate subsectors.
…at a time when supply is constrained. A confluence of factors from cost inflation,
interest rate increases, and COVID-19 has blunted new supply starts. On the decline
since peaking in 2017, construction starts sat at a recent low of about 1% of inventory
in 2023. Amid five-year development cycles, and new-build economics, which broadly
speaking do not pencil today, we see a multi-year runway of limited supply.
LTC—funding improvements drive an improved picture. Following a number of
funding enhancements over the past year, we see improved stability for long-term care
operators moving forward. Strides have also been made with respect to incentivizing
redevelopment/development, though we expect a significant sector-wide wait list
(>40,000 people today in Ontario) will continue to support high occupancy rates for
years to come. We believe LTC performance will return to a more normalized low-single-
digit NOI growth profile moving forward.
Valuation appears reasonable and reflects backdrop. Following strong
outperformance in the stocks over the past 12 months, multiples have generally
expanded. Nonetheless, in our minds, current levels appear reasonable with stronger
retirement exposure correlating to higher valuations vs. historical levels. In the context
of growth forecasts, strong operating fundamentals and improving balance sheets, we
think this is supportable.