DBRS Morningstar Confirms Sienna Senior Living Inc.’s Ratings at BBB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Sienna Senior Living Inc.'s (Sienna or the Company) Issuer Rating and Senior Unsecured Debentures rating of BBB. All trends are Stable. The rating confirmations are based on Sienna’s position as a leading provider of seniors’ housing across the continuum of care in Canada, high-quality portfolio of retirement and long-term care (LTC) properties, stable and predictable LTC funding, and strong track record of adhering to strict LTC regulatory requirements. As the impact of the Coronavirus Disease (COVID-19) pandemic continues to subside, improving occupancy is helping to offset ongoing cost pressures, while the Company continues to expand the retirement portfolio and prepares for the redevelopment of older LTC properties. As such, the improvement in Sienna's key financial risk metrics have been dampened by elevated costs and increased debt.

Sienna has experienced improved occupancy in both retirement and LTC properties, helped by a relaxation of public-health measures, and the launch of new branding efforts and leasing strategies. In addition, the ability to pass on rental increases is further helping to offset inflationary cost pressures caused by ongoing staffing challenges and supply chain disruptions. During the second quarter of 2022, the Company acquired a portfolio of 12 retirement properties in Saskatchewan and Ontario, as it seeks to add scale and diversity to its retirement portfolio.

Ongoing cost pressures, combined with the incurrence of acquisition-related debt and the impact of rising interest rates on floating-rate debt has slowed the improvement in Sienna's key financial metrics in the near term. However, as occupancy continues to improve, and the positive contribution from newly acquired homes is realized, DBRS Morningstar expects further improvement in adjusted EBITDA. After making adjustments to exclude the net impact of pandemic expenses/recoveries, DBRS Morningstar expects the consolidated debt-to-EBITDA ratio to remain below 8.5 times (x) in 2022, before falling below 8.0x in 2023. Similarly, the consolidated EBITDA-to-interest ratio is expected to be around 3.7x in 2022, improving to 4.0x or above in 2023. These projections reflect DBRS Morningstar’s assumption of further improvement in the LTC segment resulting from improved funding and/or reduced agency staff costs. At the same time, DBRS Morningstar has not assumed any additional debt for development. All ratios are DBRS Morningstar adjusted.

RATING DRIVERS
DBRS Morningstar may consider a negative rating action if the pro forma financial risk metrics do not improve on a sustained basis, with a consolidated debt-to-EBITDA ratio materially above 8.0x and a consolidated EBITDA interest coverage trending less than 3.5x (both figures are DBRS Morningstar adjusted). DBRS Morningstar cautions these metrics are cited on a consolidated basis, while DBRS Morningstar assesses Sienna's key financial risk metrics on a segmented basis for LTC and retirement operations. A positive rating action is unlikely in the near term, given the challenging operating environment and deterioration in financial metrics.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:
The principal methodologies are Rating Companies in the Canadian Long-Term Care Industry (August 22, 2022; https://www.dbrsmorningstar.com/research/401670) and Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577