Desjardins Securities analyst Lorne Kalmar thinks the combination of supply constraints and obsolescence has created a “compelling fundamental backdrop” for the Canadian seniors housing sector.
Also emphasizing an acceleration in the population aged over 75, he sees occupancies and net operating income margins exceeding pre-pandemic levels and providing “a long runway of earnings growth.”
“The long-term care sector is also seeing green shoots, with many homes now at full occupancy and waitlists for beds continuing to grow,” he added. “There is also an enhanced focus from the provincial governments on improving the funding model from both an operational and development perspective, which should benefit operators and residents alike.
“While staffing shortages — which were severely exacerbated by the pandemic—continue to impact the industry, larger operators have been able to mitigate the impact through the implementation of new recruiting and retention programs, as well as a more structured approach to agency usage. This has translated into a dramatic decrease in agency costs, with both CSH and SIA reporting that these costs returned to pre-pandemic levels in 4Q23.”
In a research report released Thursday, Mr. Kalmar initiated coverage of Chartwell Retirement Residences and Sienna Senior Living Inc. with “buy” recommendations, seeing further upside despite a “strong” performance since the beginning of 2023 “as the sector continues to recover from the pandemic, particularly considering their relative performance since the beginning of 2020, their relative valuation vs U.S. peers and the fundamental set-up.”
“As two of the largest and most sophisticated seniors housing operators in Canada, we believe both CSH and SIA are well-positioned to capture the anticipated acceleration in demand while continuing to successfully navigate the complex operating environment, high grade their portfolios and generate strong earnings growth,” he said.
For Mississauga-based Chartwell, Mr. Kalmar set a target of $15, representing 15-per-cent upside from its Wednesday closing price and exceeding the average target on the Street of $14.60, according to LSEG data.
“CSH is Canada’s only publicly traded pureplay retirement homeowner/operator,” he said. “The trust offers investors exposure to an asset class which is still in recovery postpandemic and is wellpositioned to generate outsized earnings growth over the medium term. Demand is expected to be supported by an aging population, while the threat of new supply is currently at a minimum owing to the rise in construction and financing costs. We also see further upside through the trust’s acquisition, capital recycling and development programs. Despite the significant outperformance of its unit price in 2023, we believe its current valuation still represents a compelling entry point to gain access to a highquality retirement residence portfolio with a 25-per-cent forecast twoyear FFOPU CAGR [funds from operations per unit compound annual growth rate] and further upside potential as fundamentals continue to improve.