Chartwell Retirement Residences

Chartwell Retirement Residences (TSX: CSH.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. It operates through two segments: Retirement Operations and Long Term Care Operations.

Key highlights

• An Income play: The company has an excellent track record of dividend distribution, reflecting the operational resiliency and healthy cash flow generation capabilities. This dividend pay-out practice translates into an essential factor for regular income-seeking investors with a long-term horizon. Moreover, at the last closing price, the stock was offering a dividend yield of 5.7%, which is lucrative amid low interest rate environment.

• One of the most significant player in retirement operations: The company is one of 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 holds nearly 26% share in the industry.

Source: Company

• Robust outlook: There is a significant future demand in Canada for Long Term Care and Retirement units, where the Current supply is 425,000 suites, and 600,000 new suites are required by 2036. The company has a Development pipeline of 827 suites with four projects (574 suites) in construction and two projects (253 suites) in pre-construction to tap this tremendous opportunity. Furthermore, the group made collaboration with Batimo to add another 2,233 suites to their portfolio over time.

Source: Company

• Operational Update, along with robust liquidity: Recently, the company completed the sale of three non-core retirement residences in Alberta for an aggregate sale price of USD 30.8 million. Furthermore, on November 5, 2020, the REIT’s liquidity amounted to CAD 408.6 million, including CAD61.6 million of cash and cash equivalents and CAD 347 million of available borrowing capacity on our credit facilities. Besides, its share of cash and cash equivalents held in its equity-accounted joint ventures was CAD 14.1 million. 

• Event Update: The company would release its financial results for the three months and year ended December 31, 2020 on the afternoon of March 4, 2021.

Financial Overview of Q3 2020 (In millions of CAD)

Source: Company

• In Q3 2020, the company posted revenue of CAD 233.2 million, higher than CAD 229.6 million in the previous corresponding period. The improvement was driven by higher resident income and higher lease revenue from joint ventures.

• The group reported a loss before income taxes of CAD 9 million, higher than the loss of CAD 2.1 million in pcp, primarily due to higher amortization of intangible assets and finance costs.

• The average occupancy rate of the company stood at CAD 83.3%, as compared to CAD 89.7% in the previous corresponding period.

• Net loss in the reported quarter widened to CAD 6.766 million, as compared to CAD 0.816 million in Q3 2019.

Risks associated with investments

Any fluctuation in rent collection or occupancy rate would affect the group’s overall performance. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters)

Stock recommendation

The pace of decline in occupancy has slowed since the onset of the pandemic in mid-March, with move-in activity steadily increasing. The tenant credit quality remains strong; given Canadian seniors' typical investment profile, the occupancy level also improved on a sequential-quarter basis. Substantially all October and November rents and service charges have been collected is a key positive. Furthermore, we believe that the demand would be increasing tremendously for the retirement suites and to encash that demand, the company is already making many efforts. Based on the rationales discussed above and valuation, we recommend a "Buy" rating at the closing price of CAD 10.72 on February 22, 2021. We have considered SmartCentres Real Estate Investment Trust, Killam Apartment REIT, RioCan Real Estate Investment Trust, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

InterRent Real Estate Investment Trust

InterRent Real Estate Investment Trust (TSX: IIP.UN) is a growth-oriented real estate investment trust engaged in increasing Unitholder value and creating a growing and sustainable distribution through the acquisition and ownership of multi-residential properties.

Key Highlights:

• Improved Sequential Performance: The group reported improved operational metrics driven by a revival in the sector, which is a key positive. The company reported a higher gross profit of CAD 31.06 million and operating income of CAD 17.51 million in Q3FY20, compared to CAD 29.59 million and CAD 15.59 million in Q2FY20, respectively. Moreover, the company reported solid growth in its bottom-line at CAD 32.51 million versus CAD 22.71 million in the previous quarter, which is encouraging.
• Better than industry margins: The company reported solid operational efficiencies that is visible from its key margins, which stood higher than the industry median. EBITDA margin and operating margin stood at 61.2% and 44.1% in Q3FY20, as compared to 56.9% and 28.2% of the industry median. Net margin stood at 81.8%, as compared to the industry median of 13.3%.
• Increase in Average Monthly rents: Despite a fall in the real estate demand due to COVID-19 pandemic, the company has managed to report higher average monthly rents in the recent past, which is a key positive. Average monthly rents of all properties stood at CAD 1,302 in September 2020, higher than CAD 1,270 in March 2020 and CAD 1,291 in June 2020, respectively.                             

Source: Company Report

Q3FY20 Financial Highlights:

• UN announced it quarterly results, wherein the group posted operating revenues of CAD 39.719 million, improved from CAD 37.630 million in the previous corresponding period (pcp).
• Total operating expenses stood at CAD 13.491 million, increased from CAD 11.845 million in pcp, primarily due to property operating costs (CAD 6.617 million versus CAD 5.416 million in pcp), and an increase in Utilities expenses (CAD 2.042 million versus CAD 1.941 million in pcp).
• Net operating income came at CAD 26.228 million, higher than CAD 25.785 million in pcp.
• The group reported a net income of CAD 32.506 million, lower than CAD 69.489 million in pcp, primarily due to a significant increase in fair value adjustments of investment properties amounting to CAD 75.049 million, as compared to CAD 2.304 million in pcp.
• The corporation reported a cash balance of CAD 38.524 million, while total assets were recorded at CAD 3,110.551 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company’s profitability is impacted by the lower valuation of real estate coupled with the lower demand for real estate properties. Moreover, fluctuation in occupancy rates would dampen the overall performance of the company.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The company reported an improved Funds from Operations for the third- quarter of FY20 at CAD 17.170 million, higher than CAD 15.955 million a year ago, which is encouraging. We expect a gradual revival in the real estate sector would benefit the company in the next few quarters, also the group would likely to report a higher occupancy rate in the coming quarters, which would further support the overall performance. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Financials) mean on NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 13.07 on February 22, 2021.

IIP.UN Daily Technical Chart (as on February 22^nd, 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.