Chartwell Retirement Residences

Chartwell Retirement Residences (TSX: CSH.UN) is an unincorporated, open-ended trust. The group is engaged in the ownership, operation, and management of retirement and long-term care communities in Canada.

Key Update:

• An income Play: The group has reported a stable dividend payment across economic cycles, which indicates operational resiliency, and consistent cash flows. At the last closing price, the stock was offering a dividend yield of ~5.46%, which was higher than the yield of TSX Composite of ~3.32%.

• Operational Update: Recently, the group completed the sale of three non-core retirement residences and received net cash proceeds of CAD 42.2 million. On the liquidity front, the group reported a liquidity level of CAD 465.5 million, which seems to be sufficient to fund its near-term working capital needs. At the end of November 30, 2020, the company reported its same property retirement occupancy of 81.5%.

• Bullish Technical Indicator: At the last closing price, the stock traded above the long-term simple moving averages (SMAs) of 100-days, 150-days and 200-days, indicating a bullish price trend in the stock. Moreover, its shares have generated ~32% return in the last nine months and heading towards the 52-weeks high price of CAD 14.62. Also, at the last closing CSH shares are approximately 79% up from its year’s bottom, indicates a strong recovery in the stock.

• Improved Sequential Performance: Despite the ongoing economic turmoil, the group has maintained financial performance on a sequential basis. Total revenue and operating income, during Q3FY20, stood at CAD 233.3 million and CAD 19.3 million, respectively, slightly higher than CAD 230.7 million and CAD 17.9 million in the previous quarter, respectively. Moreover, the corporation reported a higher cash balance of CAD 51.4 million in Q3FY20, compared to CAD 48.9 million in the last fiscal quarter, implies bolstered liquidity position.

Q3FY20 Financial Highlights:

• The group declared its quarterly results, wherein the company posted revenue of CAD 233.290 million, higher than CAD 229.610 million in the previous corresponding period (pcp). 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 9.052 million, stood higher than the loss of CAD 2.179 million in pcp. During the quarter, the company reported a lower amortization of intangible assets (CAD 1.897 million versus CAD 0.448 million in pcp) and higher finance costs (CAD 23.409 million versus CAD 21.633 million in pcp).
• 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 widened to CAD 6.766 million, as compared to CAD 0.816 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The Management highlighted that the company would continue to witness higher costs for its retirement residences and long-term care segments due to additional staffing, housekeeping, extended dining services, additional care services, personal protective equipment and supplies etc. Thus, the goup might witness margin pressure in the coming quarters. The group might face additional challenges due to the continuation of COVID-19 outbreaks across long term care homes.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

With the commencement of Canada’s vaccination program, the Government has decided to prioritize residents and staff in both long term care homes and retirement residences, which is a key positive for the group. Moreover, the tenant credit quality remains strong, considering the typical investment profile of Canadian seniors across the targeted customer demographic. Also, occupancy improved on a sequential quarter basis. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Sienna Senior Living Inc, U.S. Physical Therapy Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 11.17 on January 21, 2021.

CSH.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Mainstreet Equity Corp.

Mainstreet Equity Corp. (TSX: MEQ) is a residential real estate company in Canada which focuses on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings in Canadian markets.

Key Updates:

• Elevated Performance Metrics: During FY20, the group reported impressive growth in its operating performance and posted higher Rental Revenue, increase in Net Operating Income, increase in the number of suites and growth in the funds from operations as compared to FY19, which is encouraging. Moreover, the group reported a solid collection rate during FY20. At the end of October 2020, the collection rates stood at 99%, higher than 98% during July 2020 to September 2020.

Source: Company Reports

• Growing Asset base to support future operations: The group reported an elevated asset value that indicates consistent growth of the company’s assets. Despite the current downturn, the group has managed to report improved gross book value and appreciation of its asset base, which reflects the operational resiliency.

Source: Company Reports

• Improved Margins: The company posted improved operational performance during FY20.The group’s operating margin and net margin stood at 28.7% and 45.8%, respectively, improved from 28.3% and 42.6%, respectively in FY19.

FY20 Financial Highlights:

• Total rental and ancillary revenue stood at CAD 149.770 million, higher than CAD 137.613 million in FY19. The increase was driven by improved rental income from British Columbia and Alberta regions.
• Net operating income stood higher to CAD 93.033 million, versus CAD 86.308 million in Q3FY19, supported by higher income and a marginal increase in property operating expense.
• Profit before Fair value gain and income tax was reported at CAD 43.030 million, higher than CAD 39.008 million in the previous corresponding period (pcp). The quarter was marked by higher financing costs (CAD 36.861 million versus CAD 34.771 million in FY19) and higher depreciation (CAD 0.871 million versus CAD 0.505 million in FY19), while general and administrative expenses stood at par with FY19 (CAD 12.477 million versus CAD 12.463 million in FY19).
• Net profit and total comprehensive income increased to CAD 68.550 million, from CAD 58.685 million in FY19. The increase in the bottom-line was supported by a higher gain from change in fair value (CAD 37.211 million versus CAD 26.908 million in FY19).
• The group reported cash and cash equivalents of CAD 38.472 million, while total assets were recorded at CAD 2,238.311 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Any fluctuation in occupancy rate and collection rate would affect the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

As per the management, the mid-market rental segment is likely to remain a safe asset class, driven by the long-term market fundamentals, like rising populations and relatively low supply of new rental units. Being the leading providers of inner-city Millennial living, MEQ is well-positioned to be one of the leading providers of the affordable housing space and would continue to benefit from the rising demand dynamics. Moreover, the group has available liquidity of ~CAD 240 million, which is expected to be sufficient for the next 12 months. We have valued the stock using 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 peers like Killam Apartment REIT, Storagevault Canada Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 77 on January 21, 2021.

MEQ Daily Technical Chart (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.