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

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

The trend changes reflect the improvement in Sienna's key financial metrics stemming from government funding increases for long-term care (LTC), improved occupancy in both retirement and LTC properties, and the announcement of an equity offering that will be used to partly fund some of the Company's strategic growth initiatives.

KEY CREDIT RATING CONSIDERATIONS
Through the first six months of 2024, net operating income grew by 45.6% to $109.5 million compared with the same period in 2023, while EBITDA increased by 53.6% to $91.5 million. These improvements can largely be attributed to significant one-time and retroactive government funding to support cost increases in recent years and increases to LTC funding to offset recent inflationary pressures along with improved operational performance in both lines of business. Sienna continues to see improvements in occupancy in both retirement and LTC properties, while pandemic- and agency-related expenses have declined. Moreover, LTC properties continue to benefit from higher preferred accommodation revenues, while retirement properties have improved because of annual rental rate increases and higher care and ancillary revenues.

Sienna continues to expand its retirement property portfolio with the opening of a new retirement residence in Niagara Falls, Ontario, in Q4 2023 and by making its inaugural entry in Alberta by entering into a management contract for a 70-suite retirement residence in Calgary. The LTC portfolio has also grown as Sienna entered into an agreement to increase its ownership of a LTC facility in British Columbia. Additionally, Sienna has advanced the redevelopment of its older LTC properties, with the Company announcing in Q1 2024 that it would move forward with the redevelopment of its LTC community in Keswick, Ontario, and the previously announced redevelopment of properties in North Bay, Ontario, and Brantford, Ontario, are both proceeding according to plan.

At June 30, 2024, Sienna's debt totaled $1.1 billion, a 4.6% increase from the first six months of 2023 as a result of the addition of property-level mortgages.

CREDIT RATING DRIVERS
A positive rating action could arise from a combination of a material and sustained improvement in pro forma key financial metrics and an improvement in more than one business risk assessment factor.

A negative action could arise from a material deterioration in pro forma key financial metrics or business risk assessment factors.

FINANCIAL OUTLOOK
Morningstar DBRS expects Sienna's leverage, as measured by consolidated debt-to-EBITDA, to gradually improve over the medium term to the mid-7.0 times (x) range by 2027. Similarly, the consolidated EBITDA-to-interest ratio is expected to be in the high-3.0x range over the same period. These projections reflect Morningstar DBRS' assumptions of further improvement in the LTC segment resulting from improved funding, retirement rental increases in line with inflation, improving retirement property occupancy rates, and positive contributions from newly acquired homes and the completion of development projects. All ratios are Morningstar DBRS adjusted.

CREDIT RATING RATIONALE
The ratings are supported by Sienna's position as a leading provider of seniors' housing across the continuum of care in Canada, strong demand for senior's housing, high-quality portfolio of retirement and 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 properties. The ratings remain constrained by Sienna's debt level trajectory, limited ability to grow LTC revenues, the fragmented nature of the retirement market, and geographic concentration.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Sienna, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Sienna, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Sienna, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431170

Rating Companies in the Canadian Long-Term Care Industry (August 9, 2024)
https://dbrs.morningstar.com/research/437699

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024, https://dbrs.morningstar.com/research/431186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024)
https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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