DBRS Morningstar Changes Trends on Sienna Senior Living Inc. to Negative from Stable, Confirms Ratings at BBB

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Senior Unsecured Debentures of Sienna Senior Living Inc. (Sienna or the Company) at BBB. DBRS Morningstar also changed the trends on both ratings to Negative from Stable.

The Negative trends reflect DBRS Morningstar’s expectation of a deterioration in financial risk metrics over the near term as a result of the expected incurrence of development debt.

The ratings are supported by 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. Moreover, the Company has experienced improved and stabilized occupancy rates in both LTC and retirement homes.

Sienna has experienced improved occupancy in both retirement and LTC properties, helped by the relaxation of public health measures as the impact of the Coronavirus Disease (COVID-19) pandemic continues to subside in conjunction with strong sales and marketing initiatives. In addition, the ability to pass on rental increases is further helping to offset inflationary cost pressures while the Company has seen agency staffing costs return to pre-pandemic levels.

The Company continues to expand its retirement property portfolio and prepare for the redevelopment of older LTC properties. During the first nine months of 2023, Sienna acquired a long-term care and retirement property in Ontario and entered into an agreement to increase its ownership of a long-term care facility in British Columbia. Moreover, on November 1, 2023, Sienna made its inaugural entry into Alberta by entering into a management contract for a 70-suite retirement residence in Calgary.

The expected incurrence of development debt combined with the impact of rising interest rates on floating-rate debt has slowed the near-term improvement in Sienna's key financial metrics. However, as occupancy continues to improve, the positive contribution from newly acquired homes is realized, and the Company completes its development projects, DBRS Morningstar expects further improvement in adjusted EBITDA. DBRS Morningstar expects the consolidated debt-to-EBITDA ratio to rise above 8.5 times (x) in 2023 through 2025. Similarly, the consolidated EBITDA-to-interest ratio is expected to be around 3.6x in 2023, before declining below 3.0x beyond 2024. These projections reflect DBRS Morningstar’s assumption of further improvement in the LTC segment resulting from improved funding, retirement rental increases in line with inflation, and improving retirement property occupancy rates. DBRS Morningstar cautions that these 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 operations. All ratios are DBRS Morningstar adjusted.

CREDIT RATING DRIVERS
The ratings could be downgraded if the pro forma financial risk metrics do not improve on a sustained basis. In particular, DBRS Morningstar may consider a negative rating action if the (DBRS Morningstar-adjusted) consolidated debt-to-EBITDA ratio remains materially above 8.0x and consolidated EBITDA interest coverage trends less than 3.5x.

A positive rating action is unlikely in the near term, given the negative trend. DBRS Morningstar would consider changing the trends to Stable if there were sufficient visibility of Sienna achieving a consolidated debt-to-EBITDA ratio below 8.0x and a consolidated EBITDA interest coverage trending above 3.5x on a sustained basis. DBRS Morningstar would also consider changing the trend to Stable if there were an improvement in more than one business risk assessment factor.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023); https://www.dbrsmorningstar.com/research/412477

-- Rating Companies in the Canadian Long-Term Care Industry (August 15, 2023); https://www.dbrsmorningstar.com/research/419275

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223

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 protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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