DBRS Confirms Chartwell’s Senior Unsecured Debentures at BBB (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the Senior Unsecured Debentures rating of Chartwell Retirement Residences (Chartwell or the Trust) at BBB (low) with a Stable trend. The rating confirmation is based on Chartwell’s leading position in the Canadian seniors housing industry, supported by the quality of its seniors housing portfolio offering of seniors housing accommodation (retirement and long-term care (LTC)) and health-care services. The rating is limited by the competitive nature of the retirement sector (excluding LTC), labour- and capital-intensive cost structure, Chartwell’s significant geographic concentration in Ontario and Québec, and its exposure to policy changes from provincial governments, regional health authorities and/or social service agencies.

Given the pronounced post-war baby boom and the prediction of a rising average life expectancy, the demographic profile of Canada favours future demand for seniors housing, lending to stability for Chartwell’s cash flows. DBRS believes Chartwell is positioned to capitalize on these long-term demographic trends given its experience, market position and spectrum of seniors housing accommodations, which provide prospective residents with multiple entry points to Chartwell’s facilities, depending on level of care needed, and preferred accommodation type, while also providing Chartwell with the ability to retain existing residents.

The Stable trend reflects DBRS’s anticipation that the Trust’s earnings profile will continue to improve as a result of expected development completions, modest same-property revenue growth and cost-control initiatives. More recently, the same-property occupancy rate in the retirement operating segment (excluding LTC) has had some deterioration on a quarterly basis relative to the same quarter in the prior year. DBRS anticipates the occupancy rate stabilizing over 2019 as newly built supply gets absorbed. At the same time, rental rate growth is anticipated given the strong demand for retirement housing in a number of Chartwell’s core markets. The Stable trend also incorporates DBRS’s expectation that Chartwell’s financial risk assessment metrics remain relatively conservative, as measured by debt-to-EBITDA and EBITDA interest coverage, compared with its similarly rated peers. DBRS expects the pace of growth in EBITDA to be in line with that of incremental debt, thereby leading to relatively stable leverage levels from the current 8.0 times (x) for the last 12 months ending September 30, 2018, and resulting in total debt-to-EBITDA of 8.1x for 2019E.

DBRS expects that Chartwell will maintain key credit metrics and financial flexibility commensurate with the current rating category. 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 8.7x and EBITDA interest coverage falls below 2.7x on a sustained basis. A positive rating action could result if Chartwell’s EBITDA grows such that EBITDA interest coverage rises above 3.5x and debt-to-EBITDA falls below 7.3x on a sustained basis, all else equal.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.