quic research report€¦ · quic research report quic research reports focus on emerging...

The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to constitute specific legal, accounting,

financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss

or damages whatsoever (including direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this

document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part

without the prior written consent of QUIC and Queen’s University.

QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many factors may affect the applicability of any

statement or comment that appear in our documents to an individual's particular circumstances.

© Queen’s University 2014

QUIC RESEARCH REPORT

QUIC Research Reports focus on

emerging investment themes that

affect current portfolio companies

and companies under coverage.

Cash Yield

Introduction

Chartwell Retirement Residences REIT (TSX:CSH.UN) is an open-ended

real estate investment trust that operates within the senior living

subsector. The REIT owns, manages, and operates a portfolio of

various senior housing communities, ranging from independent

through assisted living to long-term care.

The purchase of CSH would provide the QUIC portfolio an opportunity

to capitalize on changing demographic trends in Canada. As the

Canadian population ages, there will be a greater number of citizens

who will opt to move into retirement residences and drive demand for

senior care.

Investment Theses

Thesis I: Market Position

Thesis II: Focus on Operational Efficiency

Thesis III: Strong Development Pipeline

Valuation

Using a blended valuation of Net Asset Value and Comparable analysis,

we arrived at a price target of $15.50. This represents an implied twelve

month share price return of 4.98%, and a total return of 8.81%.

Chartwell Retirement Residences Pitch (TSX: CSH.UN)

September 19, 2016

Adam Cotterill

Simon Rezene

Brendan Blaikie

Canada’s Aging Population Needs to Live Somewhere

QUIC Research Report

September 19, 2016

September 19, 2016

Table of Contents

Canadian Demographic Outlook 3

Canadian Senior Housing REITs 4

Chartwell Retirement Residences: Company Overview 5

Investment Theses 6,7

Catalysts & Risks 8

Valuation 9,10,11

References 12


September 19, 2016

September 19, 2016 3

The aging of the Baby Boomer generation has had

an effect on economic activity in practically every

stage of their lives, and the impending retirement

of this demographic is not likely to break the trend.

The population of seniors age 75 years and older in

Canada is expected to grow by 111.2% between

2014 and 2034 (Statistics Canada), while the

population of Canada is only expected to increase

by 19.1% during that time period. Canada’s

population is aging and many baby boomers are

entering the prime age where they consume the

most healthcare services.

One such health care service is senior housing, and

Canada’s demographic transition is expected to

create a surge in demand for senior housing,

especially in Canada’s major markets. Seniors will

begin to look to transition from their family homes

into a home which more accurately meets their

needs. Coupled with the current unaffordability of

residential housing in some of Canada’s major

cities, senior citizens in Canada who will represent

more and more of the population will begin to look

more seriously at senior housing.

With there being a clear, foreseeable increase in

demand for healthcare services in Canada, investors

have started to take notice. The interest in Senior

Housing properties served to push cap rates down,

and while cap rate compression is expected on high

quality property, the sector experiences a

remarkable 75-100 bps drop in cap rates for the

highest quality assets. Furthermore, in 2015,

vacancy rates for senior housing came down in

virtually every market in Canada.

The increase in the activity of Canada’s Senior

Housing Market is also indicative of the public’s

awareness that Canada’s population is aging

quickly. The entry of US REITs into the Canadian

senior housing market has only served to put

further downward pressure on cap rates. Ultimately,

this wave of activity culminated with the OTPP’s

purchase of Amica in 2015 but the increase in

activity within the sector is dramatic beginning in

2012.

Exploiting Canada’s Aging Demographic

Source: Capital IQ

$0.4 $0.4

$1.2

$0.8

$2.4 $2.3

$2.9

2008 2009 2010 2011 2012 2013 2014

2.50 MM 2.56 MM3.02 MM

3.77 MM

4.61 MM

5.46 MM

2015 2016 2021 2026 2031 2036

EXHIBIT II: Canadian Population Over 75 Years of Age

EXHIBIT I: CDN Senior Housing Deal Activity


September 19, 2016


Business Overview

Extendicare is a leading provider of care and

services for seniors in Canada, with a network of

118 senior care and living centres, 64 of which are

owned and 54 of which are managed by the REIT.

Extendicare’s properties are comprised of long-

term care, retirement living, and home health care

spaces, with the majority of these properties

located in Ontario.

EXE focuses on long-term and home health care, as

these two property segments make up ~85% of the

REIT’s NOI. EXE is geographically exposed to

Ontario, with 60% of the portfolio concentrated in

the province.

Over the past year, EXE has performed very well,

posting year-over-year gains of 12% for total

revenue and NOI, a 19% increase in EBITDA, and a

69% increase in AFFO. In EXE’s most recent quarter,

the REIT beat analysts’ AFFO/Unit estimates by

~53%, coming in at $0.21/Unit

Investment Thesis

1, Long-Term Care Focus

As long-term care is primarily needs-driven,

demand should remain stable throughout weak

economic periods as Canada’s population continues

to age. With 60% of the REIT’s properties located in

a strong Ontario senior care market, EXE is

positioned well to continue to deliver strong long-

term SPNOI growth.

2. Strong Distribution Yield/Payout Ratio

Combination

EXE’s management has been able to guide the REIT

well over the past few years, simultaneously

maintaining an attractive yield of 5.6% while

lowering its payout ratio to just 76%, down from

84% in 2015. It is estimated that EXE’s payout ratio

will continue to decrease throughout the next few

years, settling at 66% in 2018. This low payout ratio

will allow the REIT to use the excess FFO to finance

acquisitions and developments; an integral part of

management’s plan to increase NOI over the next

five years.

3. Clear-Cut Plan For Growth

Management has strictly outlined a plan to grow

NOI by ~30% over the next five years through

development. The plan involves the redevelopment

of 21 “Class C” long-term care facilities, planning to

spend ~C$350MM over the next five years, as well

as four retirement housing Greenfield development

projects, expected to bring in an additional

~C$8MM in NOI//year. With D/GBV currently

standing at 40% (14% lower than its closest peer),

EXE’s balance sheet is ready to be levered to

finance these developments. Together, these

developments are expected to bring in an

additional C$36MM in NOI each year.

Extendicare (TSX:EXE)

Source: Capital IQ, Company Reports

EXHIBIT III: NOI Breakdown by Property Type

55.0%

30.0%

7.0%

5.0%3.0%

Long-Term Care Home Health Care

Other Canadian Retirement

US Ops


September 19, 2016


Business Overview

Sienna Senior Living (TSX: SIA) owns and operates

54 high-quality seniors living residences in key

markets in Ontario and British Columbia,

comprising 7,923 beds/suites serving the

continuum of independent living, assisted living,

long-term care and specialized seniors programs

and services. The Company is one of Canada's

largest owners of seniors living and the largest

licensed long-term care provider in Ontario, with

approximately 8,800 employees dedicated to

helping residents live fully, every day.

Investment Thesis

1. Retirement Residences Driving Growth

SIA has reaped the benefits of the aging Baby

Boomer population in Canada as the REIT’s

retirement residences (~27% of NOI) generated

19.3% SPNOI growth year-over-year in 2Q16. This

increase can be attributed largely to occupancy

growth of 530bps year-over-year. Rental rate

increases will begin to take over as the key driver

for growth, as demand for retirement residences is

increasing steadily, and so should retirement

residence occupancy.

2. Portfolio Repositioning

SIA is currently repositioning its portfolio to

increase exposure to private-pay tenants. The REIT’s

management has outlined a pro-forma portfolio of

20% private-pay properties and 80% government

funded properties, while the current portfolio is

17.4% and 82.6% respectively. This increase in

exposure should provide strong rental rate growth

in the long-term, as well as cash flow stability, as

government funded properties are highly regulated

and leave less room for organic growth.

3. Strong Cash Retention and Growth Initiatives

During 2Q/16, SIA retained ~C$23MM of funds

from operations to fund strategic growth initiatives,

such as the redevelopment of long-term care

homes, as well as strategic acquisition

opportunities. SIA’s management is exploring the

possibility of redeveloping Class B and Class C

long-term care properties, as well as leasing up four

non-stabilized retirement communities. These

retained funds are expected to be used to help

fund these growth initiatives, as well as any

acquisition opportunities, and will be a key growth

driver when retirement residences become

stabilized.

Sienna Senior Living (TSX:SIA)

Source: Capital IQ, RBC Capital Markets

EXHIBIT IV: Post-Acquisition Pro Forma Portfolio

82.6%

17.4%

Portfolio as at Q2/16

80.0%

20.0%

Pro Forma Portfolio

Government Funded Private-Pay


September 19, 2016


Business Overview

Chartwell Retirement Residences (TSX:CSH.UN)

owns, manages, and operates a portfolio of various

senior housing communities, ranging from

independent through assisted living to long-term

care. These communities include meal service,

twenty-four hour supervision, and general

household services, with more patient-specific care

options available for assisted living tenants.

The REIT’s portfolio consists of 24,619 suites across

170 facilities, with just under 90% of its properties

located in Ontario and Quebec

CSH’s management has outlined a strategy

comprised of five key strategic priorities of: growing

core property portfolio contribution, maintaining a

strong financial position, improving the quality and

efficiency of corporate support services, building

real estate portfolio value, and providing

exceptional services and care

Year-to-date, CSH has done well to increase

occupancy by 1.7% and increased revenue by 4.6%

for the six months ended June 30th, 2016. This has

resulted in an SPNOI increase of 8.6% during the

same period. However, Chartwell still has

occupancy gains to make as they currently sit just

above 92% occupancy.

Chartwell Retirement Residences (TSX:CSH.UN)

EXHIBIT VII: Year-to-Date Share Price Performance Versus Benchmark

121.4

113.1

90

100

110

120

130

140

16-Sep-15 15-Dec-15 14-Mar-16 12-Jun-16 10-Sep-16TSX:CSH.UN S&P/TSX Capped REIT Index

Source: Capital IQ, Company Reports

1.7%

8.5%

53.7%

40.0%

(2.0%)

Average

Occupancy

SPNOI Total AFFO AFFO/Unit Debt/GBV

EXHIBIT VI: Q2/16 YoY Growth/Decline

EXHIBIT V: Market Statistics

C$MM except per share amounts or otherwise noted

Share Price (September 16, 2016) $14.67

52-Week High $16.14

52-Week Low $11.74

F.D. Shares Outstanding 192.5

F.D. Market Capitalization $2,824

Add: Net Debt $1,722

Enterprise Value $4,575


September 19, 2016


Investments Theses

Thesis I: Market Position

CSH is the largest provider of senior housing in

Canada by a wide margin. The REIT has ~38%

market share of the Retirement Care (RC) market

which makes up 73% of its portfolio. In its Long

Term Care (LTC) segment, CSH is the 4th largest

operator behind players such as Extendicare who

dominate the LTC space. Given the REIT nearly

doubles its next closest competitor within the RC

market, it is best positioned to capitalize on a

demographic shift where there will be a growing

population of senior citizens. By 2020, the number

of Canadians over the age of 75 is expected to

increase to 7.7% from 6.7%, and eventually hit

9.1% by 2025. According to RBC Capital Markets,

there could be nation-wide demand for an

additional 4,000 – 5,000 private-pay seniors

housing suites annually for the next 15 years.

CSH’s leading market position implies that long-

term demographic trends are in the REITs favour.

With little supply risk expected to disrupt CSH’s

market share, the REIT is comfortably able to

maintain 93.4% same property occupancy with

room for some upside. With significant non-core

divestments in 2014, the Ontario portfolio has

been repositioned toward more competitive

properties which should help drive ongoing

occupancy improvements. The REITs scale in

Canada ensures its development pipeline and

acquisition activity will protect its market share as

major players look to ramp up supply over the

next 10+ years.


The REIT has been able to create an economic

moat through a focus on developing and acquiring

operationally efficient residences. Management

has continually invested in branding, marketing

and sales initiatives to continue to increase

awareness of Chartwell’s name and drive traffic to

its residences. From a cost control standpoint, the

REIT is able to manage its controllable costs

through annual efficiency reviews, a centralized

purchasing system, and energy management

programs. Historically, the REIT has boasted

industry leading NOI margins at ~30%, while

competitors’ margin fall in the low to high teens.

Source: Company Reports

24,619

12,175

8,694 8,5507,603 7,579

EXHIBIT VIII: Suite Count Among Dominant

Players in Canadian Senior Housing

0%

10%

20%

30%

40%

2013 2014 2015

Chartwell Extendicare Sienna Senior Living

EXHIBIT IX: Industry Leading NOI Margins



September 19, 2016



(Cont’d)

Due to the elasticity of demand with private pay

residences, CSH is able to charge higher rates to its

customers and thus sustainably increase rental rates

2-3% annually. The REITs focus on its Ontario

market – which makes up ~45% of NOI – is a

testament to management’s commitment on

maintaining strong operating margins. Market rent

in Ontario is higher than any other province by

nearly 30%, and CSH’s growth prospects in Ontario

ensure the REIT will be able to maintain NOI

margins in the 30-35% range over the long term. In

addition to margin expansion from an increased

presence in Ontario, CSH’s brand and scale as the

largest player in Canada has allowed the REIT to

grow revenues from additional care and services.

Thesis III. Strong Development Pipeline

CSH’s scale and entrepreneurial management team

has enabled the REIT to maintain a strong

development pipeline and consistently pursue

strategic acquisitions in its core markets. Year to

date, Chartwell has completed 5 acquisitions, with 4

of them in Ontario. As previously mentioned, a

focus on acquisitions in its highest margin province

reflects management’s focus on growing the

business in the right areas. In 2015, the REIT

acquired just under C$600MM of 13 new properties

in core markets at a weighted-average cap rate of

6.2%. CSH’s development pipeline includes 12

projects encompassing 2,129 suites. Management

has sought to develop modern, market-specific,

and operationally efficient senior home

communities. These projects are estimated to have

a total cost of C$235MM, with completion dates

ranging from the beginning of 2017 through 2018.

Due to the sale of its entire U.S. portfolio at U.S.

$847MM, the REIT has been able to improve its

balance sheet position. D/GBV has decreased from

57% to 49% since 2013, giving management the

option to raise funds through debt to continue

acquiring and developing properties.

Investment Theses


53%

34%

10%

3%

$1,000

$2,000

$3,000

$4,000

0%

20%

40%

60%

Ontario Quebec British

Columbia

Alberta

Breakdown by Number of Suites

Assisted Living Monthly Rates

EXHIBIT X: Geographic Breakdown by # of

Suites

951

1170

1772

Under Development Joint Ventures Acquisitions

EXHIBIT XI: Development and Acquisition

Activity in 2015



September 19, 2016


Catalysts

1. Development Opportunities

A large component of CSH’s strategy is to develop

modern, market-specific senior housing

communities, using these developments as a means

to grow NAV/unit and earnings. As Canada’s

population ages, demand for new supply of both

retirement housing and long-term care properties is

projected to increase sharply. By 2021, it is

expected that ~17,000 new suites will need to be

developed each year. CSH’s ability to capitalize on

this increase in demand will be key to long-term

growth..

2. Mortgage Debt Restructuring

CSH currently has a large portion of mortgage debt

maturing in 2018-2020, totalling 41% of total debt.

CSH’s management intends to refinance at least

~C$297.0MM of the mortgage debt with long-term,

CMHC insured mortgages, bringing annual

mortgage maturities below the REIT’s targeted

maximum of C$175MM of expiries per year. This

possible restructuring will decrease the REIT’s debt

exposure during those three years, freeing up funds

to continue developing and acquiring new

properties.

3. Ontario Occupancy Gains

The Ontario senior housing market is expected to

continue to benefit from an aging Baby Boomer

population, resulting in increased demand for

senior housing, and therefore increasing CSH’s

portfolio occupancy. With ~2.5% contractual rental

rate increases yearly, increased occupancy will

continue to bolster SPNOI growth, exemplified by

CSH’s 11.3% increase in Ontario SPNOI year-over-

year.

Risks

1. Government Intervention

Long-term care and senior housing facilities are

subject to much government regulation and

intervention, with legal limits on rental rate

increases, thereby decreasing CSH’s growth

prospects. Though the majority of the REIT’s

properties are non-government funded, private-pay

properties, government regulation, especially in

Ontario (53% of Suites) will remain a key factor

driving rental rate growth going forward.

2. Canadian Retirement Exposure

With 89% of CSH’s portfolio comprised of

retirement housing suites, any material change in

regulations or a wealth of new supply brought

online in retirement housing markets may decrease

demand for retirement housing suites, thus

decreasing CSH’s ability to keep rental rate growth

at the current ~2.5% level.

Catalysts & Risks

Source: Capital IQ, BMO Capital Markets

EXHIBIT XII: Stable Development Pipeline

$28$44 $38

$17

$62$45

$234

0.0%

2.5%

5.0%

7.5%

10.0%

$0

$50

$100

$150

$200

$250

Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 TotalCost ($MM) Unlevered Yield


September 19, 2016


Comparable Companies Analysis

Source: Capital IQ

Market Enterprise Prem (Disc) Debt / Net Debt / Price / FFO Price / AFFO Dividend

Company Price Cap Value to NAV EV EBITDA 2016E 2017E 2016E 2017E Yield

Chartwell Retirement Residences $15.10 $2,907 $4,625 7.2% 0.4x 7.3x 16.7x 15.7x 17.8x 16.9x 3.7%

Mainstreet Health Investments $10.76 $3,432 $3,686 10.7% 0.1x 9.1x 12.1x 7.6x 15.8x 10.0x 9.0%

NorthWest Healthcare Properties REIT $10.44 $921 $2,826 0.7% 0.6x 9.1x 11.6x 10.9x 12.4x 11.6x 7.7%

Sienna Senior Living $16.98 $781 $1,380 8.0% 0.5x 7.3x 13.9x 13.2x 12.5x 12.2x 5.3%

Extendicare $8.68 $768 $1,176 (5.1%) 0.4x 3.7x 15.9x 13.9x 13.5x 13.0x 5.5%

Average 4.3% 0.4x 7.3x 14.0x 12.3x 14.4x 12.7x 6.2%

Median 7.2% 0.4x 7.3x 13.9x 13.2x 13.5x 12.2x 5.5%

Canadian Senior Housing Comparables

AnalysisMultiple Valuation

Implied Target

Metric (C$) Multiple (x) Price

P / FFO

FY2016 0.95 16.5x $15.68

FY2017 0.99 16.0x $15.84

P / AFFO

FY2016 0.89 17.5x $15.58

FY2017 0.92 17.0x $15.64

Chartwell Retirement Residences trades at a

premium to Senior Housing peers on a P / FFO

and P / AFFO basis. We believe this premium is

justified as a result of a number of factors,

including Chartwell’s dominant market-leader

position and relatively superior development

pipeline. While other names in the peer set may

seem more attractive, no other REIT has a similar

market share profile as Chartwell and the ability to

consistently achieve NOI margins in the ~30%

range. While intuitively Chartwell should be

trading above peers, the significant premium at

which they trade is a concern as we look at

potentially adding the name to our holdings.


September 19, 2016


Net Asset Value Model

Source: Capital IQ

NAV Summary

FTM NOI $285

Blended Cap Rate 6.94%

Value of Capitalized Income $4,106

Non-Real Estate Assets $200

Total Assets $4,306

Less: Liabilities $1,870

Less: Claims on Equity 0

Net Asset Value: $2,436

Dilluted Shares Outstanding 179

Net Asset Value Per Share $13.62

Assigned Prem / (Disc) to NAV 10%

Implied Share Price $14.98

NAV Build Blended Capitalization Rate

$15.00

$14.75

$14.50

14.09

$14.03

$13.25

BMO

TD

GMP

Consensus

Canaccord Genuity

CIBC

Capitalization Rate Formula

𝐶𝑎𝑝 𝑅𝑎𝑡𝑒 =𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒

𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑉𝑎𝑙𝑢𝑒

Blended Capitalization Rate

Geography Properties Size (beds) % of Total Cap Rate

Ontario, CAD 108 7,933 45.9% 6.84%

Quebec, CAD 44 7,122 41.2% 7.13%

British Columbia, CAD 18 1,539 8.9% 6.56%

Alberta, CAD 7 707 4.1% 7.02%

Total 177 17,301 100.0% 6.94%

Analysis

Chartwell Retirement Residence’s Net Asset Value is ~$13.60. The capitalization used was a geographically

blended cap rate, taking into account Chartwell’s exposure to four separate senior housing markets in

Canada. After attributing a 10% Premium to Chartwell’s Net Asset Value, we arrive at an implied share price

of $14.98 or $15.00. We took a conservative approach in assigning a premium to Chartwell’s Net Asset

Value as we wanted to consider current valuation levels and investor expectations for the REIT reflected in

its current share price. With that being said, we believe this Premium is justified given Chartwell’s ability to

consistently drive successful developments to market and dominate the Retirement Care market in Canada.


September 19, 2016


Chartwell Retirement Residences would be a great addition to the Cash Yield portfolio, and would allow for

exposure to the Specialty sub-sector and to take advantage of Canada’s impending demographic

transition. From a valuation standpoint, Chartwell’s currently trades at a significant premium to peers on a

comparable basis, and at a significant premium to NAV on an intrinsic value basis. Occupancy levels for

Chartwell’s Quebec (~94%) and Western (~95%) occupancy are likely approaching their peaks which

should plateau NAV/unit growth until development projects come online. While we continue to favour

management’s strategy of upgrading the quality of their portfolio through the acquisition/development of

new properties, we believe the market has captured its growth prospects in its current share price.

Chartwell is a fundamentally sound business, but is currently too expensive. We believe the senior housing

market in Canada as a whole is overlooked, and a more attractive entry point into Chartwell would be a

great way to gain exposure to an industry exhibiting favorable trends through a growing population of

seniors.

Valuation

Source: Capital IQ

Blended QUIC Valuation Analyst Price Targets

$15.00

$15.50

$16.00

$16.00

$16.00

$16.50

$17.50

CIBC World Markets

QUIC

Scotia Capital

RBC Capital Markets

Canaccord Genuity

BMO Capital Markets

TD Securities

Method Weighting Target Price

NAV Target Price 50% $15.00

Comps Target Price 50% $15.75

Implied Target Price $15.40

Share Price (September 16, 2016) $14.67

Implied Share Price Return 4.98%

Dividend Yield 3.83%

Implied Total Return 8.81%

Implied Prem / (Disc) to NAV 13.07%

Conclusion


September 19, 2016

September 19, 2016

References

13

1. Company Reports

2. Capital IQ

3. Forbes

4. Bloomberg

5. SEDAR

6. The Globe & Mail

7. RBC Capital Markets

8. BMO Capital Markets

quic research report€¦ · quic research report quic research reports focus on emerging...

Documents