DBRS Assigns Provisional Rating of BBB (low) with a Stable Trend to Chartwell Retirement Residences’ Senior Unsecured Debentures

DBRS Limited (DBRS) has today assigned a provisional rating of BBB (low) with a Stable trend to Chartwell Retirement Residences’ (Chartwell or the Trust) Senior Unsecured Debentures. As of May 23, 2017, the Trust had no Senior Unsecured Debentures outstanding. If Senior Unsecured Debentures were to be issued, DBRS would expect the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS.

DBRS’s rating reflects Chartwell’s leading position in the Canadian seniors housing industry, supported by a reasonably large, well-maintained seniors housing portfolio that offers a spectrum of services across retirement and long-term care (LTC). The industry has favourable demographic trends because of the aging of the population and is relatively more resilient to economic cycles compared with other real estate asset types, although lease terms are much shorter in duration. Over the medium to long term, DBRS believes Chartwell is positioned to capitalize on these demographic trends given the Trust’s size, scale, range of facility types within the retirement segment and exposure to LTC. Nevertheless, the rating is limited by the competitive nature of the seniors housing industry, Chartwell’s significant geographic concentration in Ontario and Québec, its labour- and capital-intensive cost structure and its exposure to changes in government policies and funding related to its LTC segment.

Following the sale of Chartwell’s lower-quality U.S. retirement portfolio in 2015, Chartwell’s EBITDA exhibited steady growth, as the Trust used the sale proceeds to acquire higher-quality Canadian retirement assets. Chartwell’s strong relationship with tenants and its leasing capabilities and development expertise have contributed to a steady improvement in its overall occupancy levels over the last several years, resulting in average same-property net operating income growth of 2.8% over the last six years.

The Stable trend is based on DBRS’s expectation that the Trust’s earnings profile will continue to be supported by its size, scale and market position in the senior housing sector. The earnings profile should also benefit from recent investments in property upgrades, sales and marketing and cost-control initiatives. DBRS believes Chartwell will continue to recycle capital by selling older non-core assets and reinvesting in newer properties in its existing markets, which should enhance earnings stability going forward. The Stable trend also incorporates DBRS’s expectation that Chartwell will operate near current levels by continuing to generate moderate growth in operating cash flow from its retirement and LTC segments and to increase its unencumbered asset base.

Compared with its similarly rated peers by DBRS, Chartwell’s financial risk assessment metrics are relatively conservative, as measured by EBITDA interest coverage and debt-to-EBITDA. The Trust’s unencumbered asset base was approximately $81.3 million as at Q1 2017 and is anticipated to increase in the near term. DBRS expects Chartwell will maintain key credit metrics and financial flexibility commensurate with the current rating category.

RATING DRIVERS
Although unlikely in the near term, a negative rating action could occur if Chartwell’s financial metrics deteriorate significantly, such that debt-to-EBITDA exceeds 8.7 times (x) and EBITDA interest coverage falls below 2.7x on a sustained basis.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Entities in the Real Estate Industry (April 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.