Chartwell Retirement Residences

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.

Key highlights

• An Income play: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, it declared a cash distribution of CAD 0.051 per share.  Moreover, the stock is offering a dividend yield of 5.3%, which is lucrative, considering the current interest rate environment.

Source: Refinitiv

• Significant Future Demand: There is a significant future demand in Canada for Long Term Care and Retirement units, where the current supply is 480,000 suites, and 470,000 new suites are required by 2037. The company has a development pipeline of 972 suites with three projects (518 suites) in construction and three projects (454 suites) in pre-construction to tap this tremendous opportunity. Furthermore, the group made collaboration with Batimo to add another 1,917 suites to its portfolio.

Source: Company

• The most significant player in retirement operators: The company is the most influential player in retirement operations segment in Canada. Through this segment, the company is generating almost 91% of its NOI. While in Long term care operations, the company grabs a fourth rank with 3,320 suites.

Source: Company

Financial overview of FY2020 (In thousands of Canadian dollars)

Source: Company

• In FY2020, the company posted higher revenue at CAD 928.6 million, against CAD 915.3 million in the previous corresponding period. The improvement was driven by provision of additional care and services, partially offset by lower occupancies and the disposition of properties.

• The group’s Income before income tax stood at CAD 11.0 million, against CAD 11.2 million in pcp. The slight decline in EBIT was due to higher property operating expenses and higher finance cost.

• Net income in the reported period increased to CAD 14.9 million, against CAD1.0 million in 2019, primarily due to higher deferred tax benefit. 

Risks associated with investment

The revenue and operating results depend significantly on the occupancy levels and rent collection; hence, fluctuations in occupancy levels and business volumes would affect the overall performance. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Due to pandemic-related restrictions on resident activities and periodic restrictions on visitations and personalized tours, the group’s occupancies declined in 2020. It continued to decline in the first two months of 2021 also. Recently, the vaccinations started in retirement residences of the company; as of March 3, 2021, 74% of residents and 34% of staff have received first doses of vaccines, and 23% of residents and 22% of staff have received second doses of vaccines. As more seniors are vaccinated in its residences and the community at large, with an expansion of rapid testing, and the gradual easing of the restrictions, we expect move-ins and occupancies to begin recovering, which would result in better financial performance going forward. Also, the stock is offering a lucrative dividend yield amid a low interest rate environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 11.52 as on March 25, 2021. We have considered Sienna Senior Living Inc, RioCan Real Estate Investment Trust, NorthWest Healthcare Properties REIT. as the peer group for the comparison.

1-Year Price Chart (as on March 25, 2021). Source: Refinitiv (Thomson Reuters)

Timbercreek Financial Corp

Timbercreek Financial Corp (TSX: TF) is a Canada-based non-banking commercial real estate lender which provides shorter-duration, customized financing solutions to professional real estate investors.

Key highlights

• An income play:The Company has a strong history of dividend distribution, which establishes that the company’s business is resilient and has reported stable cash flows over the years. Recently, the group declared a monthly cash dividend of CAD 0.0575 per common share, payable on April 15, 2021. Moreover, the stock carries an impressive dividend yield of 7.8%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.

Source: Company

• Strong transaction activities: Industry-wide transaction activity improved in the fourth quarter, relative to Q3 2020. Despite COVID-19 challenges, the Company funded 11 new net mortgage investments totalling CAD 212.5 million and made additional advances of CAD 68.4 million. Portfolio turnover increased to 19.6%, compared with 12.3% in Q3 2020.

Source: Company

• Implying the strategy of conservative positioning: The company’s exposure to first mortgages was 90.3% of the net mortgage portfolio at year-end, while the current weighted average loan-to-value ratio increased modestly to 68.5% compared to 68.2% in Q3 2020, reflecting its conservative positioning. Despite this positioning, the company has maintained its margins and rates, which is noteworthy.

Source: Company

• Well balanced portfolio: The company’s business is not concentrated across one product-line or any specific geography. This is a crucial aspect and offers excellent diversification. The group has 84.9% of income-producing properties and 52.3% multi-residential assets in a basket provides stable and secure returns, helping the group amidst the current challenging time. The net mortgage portfolio remains heavily weighted toward Canada’s largest provinces, with approximately 97.1% of the mortgage portfolio invested in Ontario, British Columbia, Quebec and Alberta.

Source: Company

Financial overview of FY2020

Source: Company

• In FY2020, Net investment income decreased by CAD 2.6 million to CAD 95.9 million against 98.5 million in 2019, primarily due to reduced interest income from net mortgage and collateralized loan investments.
• The Company generated income from operations of CAD 62.6 million, decreased by CAD 22.4 million, against CAD 85 million in 2019, after adjusting for unrealized fair value loss on financial assets.
• The group's net income stood at CAD 32 million, compared to CAD 54.7 million in the previous corresponding period, primarily due to a lower income from operations and unrealized fair value loss of CAD 4 million.  

Risks associated with investment

The company is exposed to various risks which include decline in the general real estate market, interest rates changing markedly, lack of adequate mortgage investment opportunities and change in currency rates.

Valuation Methodology (Illustrative): Price to Book Value

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite the rapidly changing operating environment in 2020, which presented new challenges for some of the company's borrowers and resulted in an industry-wide slowdown in commercial real estate transaction activity, the company delivered decent numbers. Over the past 16 quarters, it has maintained an average dividend payout ratio of 94.9% on distributable income despite the historically low-interest-rate environment, demonstrating its ability to maintain a steady income. In Q4 2020, collections remained high and largely unaffected by COVID-19. The company collected approximately 99.2% of December 2020 interest payments, which was materially in line with historical collection rates. Furthermore, the stock carries an impressive dividend yield of 7.8%, which translates into an essential factor for regular income-seeking investors with a long-term horizon. Therefore, based on the above rationale and valuation, we recommend a "BUY" rating at the closing price of CAD 8.83. We have considered Equitable Group Inc, Home Capital Group Inc, Atrium Mortgage Investment Corp, etc. as the peer group for comparison.

1-Year Price Chart (as on March 25, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.