DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB to Sienna Senior Living Inc. (Sienna or the Company) and confirmed the Senior Unsecured Debentures (the Debentures) rating at BBB. All trends are Stable. The Issuer Rating is based on DBRS Morningstar's updated “Rating Companies in the Canadian Long-Term Care Industry” methodology released on September 9, 2020 (see related press release “DBRS Morningstar Assigns Issuer Ratings to Long-Term Care Operators,” published September 14, 2020). The rating confirmation is based on Sienna’s position as a leading provider of seniors housing across the continuum of care in Canada, high-quality portfolio of retirement and long-term-care (LTC) properties, stable and predictable LTC funding, and strong track record of adhering to strict LTC regulatory requirements. Although the Coronavirus Disease (COVID-19) pandemic has materially affected Sienna's operations, the impact on key financial risk assessment metrics (FRAs) is likely to be temporary and supports the Stable trends. The ratings continue to be constrained by Sienna’s geographic concentration in the Province of Ontario (Ontario; rated AA (low) with a Stable trend by DBRS Morningstar) and the Province of British Columbia (British Columbia; rated AA (high) with a Stable trend by DBRS Morningstar) and the competitive nature of retirement residence markets (excluding LTC).
Prior to the pandemic, Sienna's operating performance was strong and its FRAs were improving, consistent with DBRS Morningstar’s expectations when finalizing the provisional rating on the Debentures in November 2019. However, the coronavirus pandemic has led to elevated mortality of LTC residents, reduced retirement occupancy, and significantly disrupted operations. This has led to increased regulatory and public scrutiny, potential for lasting reputational damage, and uncertainty about the longer-term impacts on Sienna's business, resulting in a modestly weaker assessment of Sienna's market position and operating efficiency. Notwithstanding these challenges, there is governmental support to operators, such as incremental funding for coronavirus expenses in Ontario and British Columbia and a revamped capital funding formula for LTC in Ontario.
While there has been a notable decline in EBITDA, we expect extraordinary pandemic expenses to gradually subside and to be partially recovered through government grants. As such, we believe that Sienna's Q2 2020 results likely reflect the depth of the deterioration in its financial metrics because of the pandemic, and we anticipate a gradual recovery in the coming quarters as strong demand and stable government funding continue to support revenue and extraordinary pandemic expenses subside. For 2020, DBRS Morningstar expects the consolidated debt-to-EBITDA ratio, excluding cash set aside for debt repayment, to rise to 7.3 times (x), from 6.6x in 2019, before improving to 6.6x in 2021. Similarly, the consolidated EBITDA-to-interest ratio is likely to drop to 3.7x in 2020 before recovering to 4.2x in 2021. All ratios are DBRS Morningstar-adjusted.
While considerable uncertainty remains about the ongoing transmission and duration of the coronavirus, Sienna is well positioned to benefit from strong demand for seniors housing given its portfolio of high-quality residences. Furthermore, the Company continues to take steps to mitigate the impact of a second wave of the coronavirus, including enhanced staffing and training, improved infection control measures, and proactive procurement of personal protective equipment.
Although not anticipated, DBRS Morningstar may consider a negative rating action if the pro forma financial risk metrics deteriorate on a sustained basis, with a consolidated debt-to-EBITDA ratio trending toward 8.0x or above and a consolidated EBITDA interest coverage trending toward 3.5x or below. DBRS Morningstar cautions that the above-noted metrics are cited on a consolidated basis, while DBRS Morningstar assesses Sienna's key financial risk metrics on a segmented basis for LTC and retirement. A positive rating action is unlikely in the near term given the challenging operating environment and deterioration in financial metrics.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Canadian Long-Term Care Industry (September 9, 2020), Rating Entities in the Real Estate Industry (June 4, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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