DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Chartwell Retirement Residences (Chartwell or the Trust) at BBB (low), and changed the trends on the ratings to Negative from Stable.
The Negative trends reflect the significant impact the Coronavirus Disease (COVID-19) pandemic has had on Chartwell's operations, (which has negatively affected DBRS Morningstar’s expectations for key financial risk metrics) and the elevated level of uncertainty associated with the impact of the pandemic going forward. Notwithstanding the coronavirus pandemic, DBRS Morningstar is of the view that Chartwell's business risk assessment remains intact as supported by the following factors.
The rating confirmations are based on (1) superior property and tenant diversification; (2) high-credit-quality tenants; (3) Chartwell’s leading position in the Canadian seniors’ housing industry, which is supported by the quality of its seniors’ housing portfolio, offering of seniors’ housing accommodation (retirement and long-term care (LTC)) and health-care services providing cash flow stability; and (4) Chartwell’s ample access to liquidity of $391.0 million as of October 14, 2020. From a business risk assessment prospective, the ratings are constrained by (1) a short lease maturity profile compared with other real estate issuers rated by DBRS Morningstar, (2) Chartwell’s moderate geographic concentration in the Province of Ontario (Ontario; rated AA (low) with a Stable trend by DBRS Morningstar), (3) the Trust's focus on and the competitive nature of the retirement sector (excluding LTC) and (4) a labour-intensive cost structure.
The Negative trends take into consideration DBRS Morningstar’s expectation that the Trust’s financial risk assessment will continue to deteriorate in the near to medium as a result of the coronavirus pandemic, such that total debt-to-EBITDA deteriorates to the high 9 times (x)-range from 8.7x for the last 12 months (LTM) ending June 30, 2020, and EBITDA interest coverage deteriorates to the 2.7x-range from 3.17x for the LTM ending June 30, 2020. Leverage and coverage metrics are expected to deteriorate as significantly reduced occupancy and modestly lower net operating margins weigh on EBITDA through 2020, and as incremental debt is expected to fund capital expenditures including continued acquisitions and developments which will take longer to stabilize than originally anticipated.
DBRS Morningstar may consider changing the trends on the ratings to Stable should Chartwell demonstrate its ability to manage through the coronavirus pandemic, resulting in an improving financial risk assessment relative to DBRS Morningstar’s near- to medium-term expectations, contributing to a reduced level of uncertainty in DBRS Morningstar’s view. Conversely, DBRS Morningstar will likely consider a rating downgrade should Chartwell’s operating environment deteriorate further such that total debt-to-EBITDA and EBITDA interest coverage deteriorate more than DBRS Morningstar’s near to medium term expectations outlined above. DBRS Morningstar expects to resolve the Negative trends within the next 12 to 18 months.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at email@example.com.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
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