Our view: Notwithstanding the shortfall in Q4 results versus our forecast, no harm done to our constructive outlook. We’re particularly encouraged by operating momentum through 2024 to date, with multiple tailwinds supporting solid occupancy gains. Coupled with stronger rent growth and easing cost pressures, we expect NOI margins to significantly improve, recouping lost ground over the pandemic. In short, we continue to see attractive earnings upside and maintain our Outperform rating, $14 PT.
Key points:
Softer finish than our call, but traction is building. Total Q4 NOI was short of our forecast on lower margins. However, SP NOI rose a solid 21% YoY (+14% YTD) from higher occupancy and rents/service rates. Results were strong across the board, led by QC (+39% YoY), followed by ON (+24%) and W. CDA (+12% YoY). Average Q4 SP-occupancy rose to 84.1% (+270 bps QoQ, +460 bps YoY), with CSH forecasting Apr-2024 at 85.7%. Notably, that’s +80 bps from Dec-2023 and marks a reversal of the average -180 bps over the same months in 2017-19. While warmer weather and fewer outbreaks have helped, CSH’s more effective sales/marketing initiatives have resulted in higher quality leads and improved closing ratios (14% in 2023, +150 bps YoY). Tailwinds from pent-up demand and slowing new starts are also at work. CSH did not provide a Q4/24 SP-occupancy target (vs. prior ~89%) but expects it to rise this year and reiterated its 95% Q4/25 target. Coupled with 5% targeted rate growth and easing cost pressures, SP NOI margins should improve, with CSH guiding 2024 at 38% (+400 bps YoY). All said, we believe drivers are lined up for double-digit NOI growth in 2024.
Tone on capital deployment is becoming more constructive. 2023 marked an active year of repositioning, including the LTC portfolio sale and the Welltower JV wind-up scheduled for Q2/24. In Q1/24, CSH expects to acquire a property from Batimo for $85MM, while Batimo also exercised its put rights on another property ($85MM at 100%). Both properties are stabilized (96% occupancy), with cap rates at low-to-mid-6%. Other acquisitions and developments are also under consideration. However, we expect a disciplined approach given management's aim to reduce leverage (7.5x D/EBITDA target vs. current 10x and our 2024E of ~9x).
Solid growth profile. Our 2024E-25E FFOPU are $0.67 (-$0.01) and $0.75 (+ $0.01), with revisions for modestly lower NOI offset by lower interest costs. Our 23A-25E CAGR is a robust 16%, well ahead of its seniors housing peers (4%) and our universe (3%). Our current/1YR FWD NAV remain at $12/$13.
Maintaining Outperform, $14 price target. CSH is trading at 1% above NAV (20x 2024E AFFO/6.3% implied cap), ahead of its seniors housing comps (15% NAV discount) and the sector (24% discount). While valuation has rebounded well over the past year, we continue to see attractive upside supported by recovering fundamentals, a compelling growth outlook, and anticipated improvements in leverage.