DBRS Limited (DBRS Morningstar) comments on Sienna Senior Living Inc.’s (Sienna or the Company; rated BBB with a Stable trend by DBRS Morningstar) acquisition of additional retirement properties, as announced on February 3, 2022. Sienna, jointly on a 50-50 basis with Sabra Health Care REIT (Sabra), entered into an agreement (the Transaction) with Extendicare Inc. for the purchase of 11 retirement residences in the Province of Ontario and Province of Saskatchewan for $307.5 million.
DBRS Morningstar expects this Transaction, as announced, will lead to weaker financial risk metrics than previously anticipated and to reduced flexibility within existing ratings to withstand further deterioration or unforeseen shocks. Specifically, this reflects: (1) a debt-financed acquisition that will result in a pro forma consolidated debt-to-EBITDA ratio above 8.0 times—the threshold indicated in our October 6, 2021, confirmation press release; (2) a business mix weighted more heavily toward retirement with generally lower credit fundamentals (vis-à-vis long-term care); and (3) the ongoing negative impact of the Coronavirus Disease (COVID-19) pandemic and omicron variant that was not anticipated when the ratings were last confirmed in October 2021. Any material increase in leverage, further delays in the recovery in profitability resulting from the coronavirus pandemic, expense pressures, or other unforeseen events could lead to negative rating actions.
Jointly, on a 50-50 basis with Sabra, Sienna will acquire a portfolio of seven retirement residences in Ontario and four retirement residences in Saskatchewan consisting of 1,048 suites for $307.5 million. Sienna’s share of the purchase price will be $153.8 million and is expected to be financed on an interim basis using a combination of (1) a $150 million unsecured term loan facility; (2) proceeds from the sale of two properties (Rideau Retirement Residence and Camilla Care Community); and (3) draws on existing credit facilities. The 11 facilities are all unencumbered with an average age of approximately six years and average occupancy of 90% through the first nine months of 2021 (excluding one facility currently in lease-up). DBRS Morningstar notes that the Transaction is consistent with Sienna’s long-stated goal to expand its retirement residence portfolio.
The transaction is expected to close in Q2 2022, subject to required health authority and regulatory approvals as well as satisfaction of customary closing conditions.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Canadian Long-Term Care Industry (August 18, 2021; https://www.dbrsmorningstar.com/research/383214), Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615), 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; https://www.dbrsmorningstar.com/research/373262).
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