Morningstar DBRS Confirms Chartwell Retirement Residences at BBB (low) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures credit rating of Chartwell Retirement Residences (Chartwell) at BBB (low), both with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The Stable trends consider (1) Chartwell's continued execution of its portfolio optimization and capital recycling initiatives and (2) Chartwell's improved operating and financial performance over the past few quarters, with average same-property occupancy expected to reach 87.7% from January to November 2024, a notable improvement over the prior year. Chartwell has also been successful in implementing rental and service rate increases as well as reducing the impact of agency staffing, thus mitigating inflationary pressures on expenses. Levels of new and active construction continue to remain at historic lows for the Canadian seniors' housing industry, and pent-up demand from the pandemic coupled with favourable demographic trends in Canada continue to support strong leasing momentum and near- to medium-term occupancy recovery for Chartwell. Chartwell's high grading of its retirement portfolio continues to support asset quality and cash flow stability through acquisitions and developments of newer, higher quality assets and dispositions of significantly older assets.

CREDIT RATING DRIVERS
Morningstar DBRS may consider negative rating actions should Chartwell's total debt-to-EBITDA ratio increase above 9.3 times (x) (from 8.5x for the last 12 months ended June 30, 2024 (LTM)), and EBITDA interest coverage deteriorate below 2.3x (from 2.80x LTM), on a sustained basis, all else equal. Morningstar DBRS notes that Chartwell's improved EBITDA interest coverage metric relative to prior expectations provides more financial flexibility at the current rating. A positive rating action would require a material change in Chartwell's financial policy (e.g., significantly lower leverage, unencumbered balance sheet, etc.) and is not currently contemplated.

FINANCIAL OUTLOOK
Morningstar DBRS expects Chartwell's total debt-to-EBITDA and EBITDA interest coverage ratios to remain near current levels in the near to medium term, notwithstanding immediately higher leverage as a result of Chartwell's recent acquisition of over $700 million of stabilized and nearly stabilized income producing properties in the second half of 2024 funded in combination with debt and equity (via $345 million bought deal equity offering in June 2024). The expectation for a relatively stable debt-to-EBITDA metric is primarily driven by the annualized impact of recent acquisitions and continued improvement in key operating metrics such as occupancy. Morningstar DBRS also expects Chartwell to continue executing its capital recycling strategy whereby acquisitions are partially funded with dispositions of noncore assets.

CREDIT RATING RATIONALE
The credit ratings continue to be supported by (1) the superior property and tenant diversification of the portfolio; (2) the high credit quality of residents; and (3) Chartwell's leading position in the Canadian seniors' housing industry, complemented by the quality of its real estate portfolio, which offers retirement accommodation and related services that provide cash flow stability. The ratings continue to be constrained by (1) relatively high leverage, (2) an inherently short lease maturity profile compared with other commercial real estate property types, (3) a labor-intensive cost structure, and (4) modest concentration in the Province of Ontario (rated AA, Stable by Morningstar DBRS).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Chartwell, the BRA factors were considered in the order of importance contemplated in the methodology.

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

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

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

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

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

Morningstar DBRS credit ratings may use of 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.

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/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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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