DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating on Chartwell Retirement Residences (Chartwell or the Trust) at BBB (low), both with Negative trends. DBRS Morningstar notes that the Trust’s flexibility within the credit rating category has been exhausted and its credit risk profile is unable to absorb any further unforeseen shocks or deterioration in financial risk assessment metrics.
The Negative trends reflect, in part, the impact the Coronavirus Disease (COVID-19) has had on Chartwell’s operations. The six waves of the coronavirus pandemic have materially affected the entire senior housing industry. Occupancy rates at both retirement homes and long-term care (LTC) homes declined meaningfully because of higher departures and restrictions on admissions, partially offset by fewer move-outs during periods of lockdown. This resulted in weaker EBITDA for 2021, primarily as a result of lower retirement property occupancy and higher operating expenses, especially agency staffing, personal protective equipment, and insurance, in both LTC and retirement sectors. Although considered temporary, the effects of the pandemic persist, and will likely continue to be felt for some time yet. Notwithstanding coronavirus, DBRS Morningstar is of the view that Chartwell’s business risk assessment remains intact.
The Negative trends also incorporate DBRS Morningstar’s expectation that Chartwell’s financial risk assessment will remain weak for longer (year-end 2021 total debt-to-EBITDA and EBITDA-to-interest were 10.1 times (x) and 2.65x, respectively) as the pandemic wears on. Prior expectations for improvement during 2022 were predicated on a return to more normal operating conditions and the incremental EBITDA contributions from stabilizing and stabilized developments, but successive new waves of coronavirus quickly invalidated those assumptions.
Although there have been recent positive events including increased vaccination rates for staff and residents and improving leading indicators for move-ins approaching pre-pandemic levels, these have yet to translate into higher occupancy rates. Additionally, there is some clarity and visibility on the execution of Chartwell’s strategy to become more focused on the retirement business, with the acquisition of three recently built Ontario retirement homes, ongoing development completions, and the announced sale of Chartwell’s relatively small and lower growth LTC business.
The rating confirmations are supported by (1) the superior property and tenant diversification of the portfolio, (2) the high credit quality of residents, (3) Chartwell’s leading position in the Canadian seniors’ housing industry, complemented by the quality of its real estate portfolio, which offers accommodation (retirement) and related services that provide cash flow stability, and (4) a solid pipeline of strategic growth opportunities supported by strong demand fundamentals. On the other hand, Chartwell’s ratings are constrained by (1) high leverage, (2) a short lease maturity profile compared with other real estate issuers’ rated by DBRS Morningstar, (3) a labour-intensive cost structure, and (4) moderate geographic concentration in the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar).
DBRS Morningstar will consider a rating downgrade should Chartwell’s financial performance deteriorate such that financial risk assessment metrics fail, or are deemed likely to fail, to meet or exceed DBRS Morningstar’s near-term expectations of 10.1x for total debt-to-EBITDA and 2.65x EBITDA-to-interest by the end of 2022. DBRS Morningstar may consider restoring the trends to Stable should Chartwell show demonstrable material improvement in financial risk assessment metrics.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).
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 email@example.com.
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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