DBRS Morningstar Confirms Ratings on Chartwell Retirement Residences at BBB (low), With Negative Trends

DBRS Limited (DBRS Morningstar) confirmed its Issuer Rating and Senior Unsecured Debentures rating on Chartwell Retirement Residences (Chartwell) at BBB (low), both with Negative trends.

The rating confirmations are based on (1) the superior property and tenant diversification of the portfolio, (2) the high credit quality of tenants, (3) Chartwell’s leading position in the Canadian seniors’ housing industry, supported by the quality of its real estate portfolio, which offers accommodation (retirement and long-term care (LTC)) and related services that provide cash flow stability, and (4) a solid pipeline of strategic growth opportunities supported by strong demand fundamentals. From a business risk assessment perspective, Chartwell’s ratings are constrained by (1) high leverage, (2) a short lease maturity profile compared with other real estate issuers rated by DBRS Morningstar, (3) its focus on the more competitive retirement sector (versus LTC) of seniors’ housing, (4) a labour-intensive cost structure, and (5) moderate geographic concentration in the province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar).

The Negative trends reflect the impact the Coronavirus Disease (COVID-19) has had on Chartwell’s operations. The coronavirus pandemic has materially affected seniors' housing providers through widespread infection and mortality of residents in LTC homes, restricted admissions to both LTC and retirement properties, and increased costs. This has resulted in weaker EBITDA primarily as a result of lower retirement property occupancy and higher operating expenses in both LTC and retirement sectors. Although considered temporary, these effects will likely linger throughout the duration of the pandemic. Notwithstanding the coronavirus pandemic, DBRS Morningstar is of the view that Chartwell’s business risk assessment remains intact.

The Negative trends incorporate DBRS Morningstar’s expectation that Chartwell’s financial risk assessment will continue to deteriorate in 2021 such that total debt-to-EBITDA will rise to the high 9.0 times (x) range and EBITDA interest coverage will decline to the 2.8x range before improving in 2022. These expectations are predicated on a return to more normal operating conditions and the incremental EBITDA contributions from stabilizing and stabilized development completions over the last few years.

DBRS Morningstar may consider restoring the trends to Stable should Chartwell demonstrate its ability to manage through the coronavirus pandemic, resulting in financial risk assessment factors meeting or exceeding DBRS Morningstar’s near-to-medium term expectations. Conversely, DBRS Morningstar will likely consider a rating downgrade should Chartwell’s financial performance deteriorate more than currently anticipated. DBRS Morningstar expects to resolve the Negative trends within the next 12 months.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021).

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 info@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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