Chartwell Retirement Residences Should Continue To Outperform Its Peers

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About: Chartwell Retirement Residences (CWSRF), Includes: EXETF, LWSCF
by: Ploutos Investing
Summary

Chartwell Retirement Residences owns and operates a portfolio of seniors housing communities in Canada.

Chartwell's portfolio consists of mostly higher margin retirement residences.

The company’s focus in Ontario should allow it to operate more efficiently than its peers.

Chartwell’s strategy to expand its portfolio through development should allow it to achieve better yields than its peers who seek growth through acquisitions.

Investment Thesis

Chartwell Retirement Residences (OTC:CWSRF) (TSX:CSH.UN) owns and operates a portfolio of seniors housing communities in Canada. The company has outperformed its Canadian peers in the past 5 years and should continue to perform well because of the following reasons. First, most of Chartwell's portfolio consists of higher margin retirement residence units. Second, the company's focus in Ontario allows it to operate more efficiently and achieve better economies of scale. Third, its strategy to develop its own retirement residence units should allow it to achieve better yields than its peers who seek growth through acquisitions. Finally, it also has a good track record of increasing its dividends in the past. Therefore, we believe Chartwell deserves to trade at a premium to its peers. We also continue to believe the stock is a good long-term investment choice for investors.

Source: YCharts

Reasons why we believe Chartwell will continue to outperform its peers

Higher Concentration of Retirement Suites

About 83% of Chartwell's portfolio consists of retirement residence units (including independent supportive living, independent living, and assisted living). This is advantageous as retirement homes have much higher margins than long-term care units. In Q1 2018, its retirement residence units have an NOI margin of about 37.7%. This is much higher than the 10.8% NOI margin of its long-term care units. Its competitors Extendicare (OTCPK:EXETF) and Sienna Senior Living (OTCPK:LWSCF) both do not have a high percentage of retirement homes in their portfolios. In fact, most of Extendicare's portfolio consists of long-term care units. Sienna Senior Living's long-term care units still represent over 50% of its portfolio.

Source: Investor Presentation

Demand is expected to more than double by 2036

Below is a chart that shows the required annual supply for long-term care units and retirement residence units in Canada from 2018 to 2036. As can be seen, total demand is expected to more than double from the current level today, with long-term care and retirement residences each representing about half of the total demand. Chartwell, with the highest concentration of retirement residence units than Extendicare and Sienna Senior Living, should be able to outgrow its revenue and even expand its margin.

Source: Investor Presentation

Geographic location

About 55% of Chartwell's properties are located in Ontario, Canada's most populous province. This allows the company to manage its retirement residences efficiently and achieve economies of scale.

Source: Investor Presentation

Four Consecutive Years of Dividend Increase

Chartwell has increased its dividend for four consecutive years since 2014. While its dividend increase in the past 5 years is not impressive (only 2.1% in 2018), it is much better than its Canadian peers. Both Sienna Senior Living and Extendicare have not raised their dividends in the past 5 years. Sienna Senior Living and Extendicare are good stocks for income investors. However, Chartwell is obviously a better choice for investors seeking to grow their dividends over time.

Source: Created by author; Company Reports

Source: YCharts

A development pipeline that continues to pivot towards growth in its retirement residence segment

Chartwell is focused towards growth through property developments. The company has about C$310 million worth of development pipeline that is pivoted towards growth in its retirement residence segment. These development projects have an estimated average yield of around 7% (see table below). This yield is much higher than the yields of properties acquired through acquisitions. Chartwell's should be able to fund the development with its healthy balance sheet (BBB rated by DBRS, and 36% debt to capitalization ratio).

Source: Investor Presentation

Premium Valuation

Chartwell is currently trading at a premium to its Canadian peers. As can be seen from the table below, its price to 2018 AFFO ratio of 16.8x is significantly higher than Extendicare's 12.3x and Sienna Senior Living's 12.4x. Likewise, its price to 2019 AFFO ratio is also much higher than Extendicare and Sienna Senior Living. Given its better portfolio mix and past track record, I believe its valuation is warranted.

P/AFFO 17

P/AFFO 18E

P/AFFO 19E

P/NAV

Chartwell

17.6x

16.8x

15.3x

92%

Extendicare

13.3x

12.3x

11.7x

83%

Sienna Senior Living

12.3x

12.4x

11.9x

96%

Average

14.4x

13.8x

13.0x

90%

Source: Created by author; TD Securities

Risks and Challenges

Investors should keep in mind that Chartwell's retirement residence segment could be impacted by a rising supply. Although demand continues to outweigh supplies in the national level in the near term, things may be quite different a few years from now. In fact, as management indicated in the conference call, there are some new supply issues in some markets such as in Calgary or Ottawa.

Investor Takeaway

Chartwell Retirement Residences should continue to outperform its peers as it has a higher concentration of retirement residence units in its portfolio. These units generally have higher profit margin than long-term care units. Chartwell's focus in Ontario also allows it to operate more efficiently than its peers. In addition, its focus on developing its own retirement residence units will allow it to achieve better yields than through acquisitions. Therefore, we believe Chartwell deserves to trade at a premium to its peers. As such, we continue to recommend Chartwell to investors seeking both dividend growth and capital appreciation.

Note: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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