Chartwell Retirement Residences (TSX: CHS.UN) is a Canada-based open-ended real estate trust engaged in the ownership, operations and management of retirement and long-term care communities in Canada. 

Why Should Investors Book Profit?

• Degrading KPI’s: As a result of reduced occupancy and sustained investments in resident care and infection prevention and control measures, same property adjusted net operating income fell 6.5% in Q3 2021 and funds from operations fell 10.7% in Q3 2021 compared to Q3 2020.

• Increasing uncertainties: The resurgence of new variant of covid-19 has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. Due to this we believe the occupancy level of the group can fall further.

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin, operating margin, and net margin, which exhibits the extreme pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group

• Heavily leveraged: The company’s debt to equity ratio at the end of September 2021, stood at 2.85x, which is too high against the industry median of 0.61x. Additionally, its % LT Debt to Total Capital stood at 63.8% against the industry median of 24.2%. These factors imply higher balance sheet risks.

• Exhausted technical indicators: On the daily price chart, the stock has recently experienced a good rally and has moved close to the upper band of the Bollinger band, indicating that the company is possibly overbought and due for a price correction or consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group 

Stock recommendation

In the reported period the company witnessed decline in its same property occupancy level to 78.2% from 83.2% in the previous corresponding period, because of 6.5% decline in the same property adjusted “NOI” and funds from operations also fell at lower levels. Furthermore, the new variant of Covid-19 has sparked many worries, and it may have an impact on the company's operations and cash flows for next few months. Furthermore, its liquidity profile is on the lower end of the industry, indicating that it is under pressure. Also, the group is heavily leveraged, implying higher balance sheet risks. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Hence, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 12.27 on January 12, 2022.

 *The reference data in this report has been partly sourced from REFINITIV.

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