DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating on Chartwell Retirement Residences (Chartwell or the Trust) at BBB (low), both with Negative trends.
The Negative trends reflect DBRS Morningstar's expectation that the sale of Chartwell’s Ontario long-term care (LTC) portfolio (2,418 beds) will close in 2023 and that the redevelopment of Chartwell Ballycliffe Long Term Care Residence (Ballycliffe LTC) will be completed by Q3 2023. DBRS Morningstar expects that the estimated net proceeds from both the sale of the Ontario LTC portfolio ($205 million) and the forward sale contract relating to the development completion of Ballycliffe LTC ($63 million) (together, the LTC Transactions) will be largely used to pay down debt. Previously, DBRS Morningstar cited near-term expectations of 10.1 times (x) for total debt-to-EBITDA and 2.65x EBITDA interest coverage by YE2022. While Chartwell failed to meet those expectations (10.9x total debt-to-EBITDA and 2.53x EBITDA interest coverage as at December 31, 2022), pro forma the LTC Transactions highlighted above, DBRS Morningstar expects significant improvement in leverage such that Chartwell would be compliant with the previously cited expectations. DBRS Morningstar expects total debt-to-EBITDA to trend toward approximately 9.0x by YE2024 and EBITDA interest coverage to modestly improve from current levels.
The Negative trends also consider Chartwell's slower-than-expected occupancy recovery and elevated operating expense environment, largely attributable to agency staffing and Coronavirus Disease (COVID-19) pandemic-related expenses. Although considered temporary, the effects of the pandemic continue to pressure operating metrics in the retirement sector. However, positive industry fundamentals continue to support the near- and long-term outlook for the Canadian seniors' housing sector. Chartwell’s high grading of its retirement portfolio continues to support asset quality through the acquisitions and developments of newer, higher-quality assets and dispositions of significantly older assets. DBRS Morningstar expects Chartwell to improve operating metrics and increase net operating income margins, as the effects of agency staffing are expected to taper off in 2023. As a result of the rise in construction costs and inflationary pressures, levels of new and active construction reached historic lows for the Canadian seniors' housing industry, which should support near- to medium-term occupancy recovery for Chartwell. In DBRS Morningstar’s view, Chartwell’s business risk assessment remains intact.
The rating confirmations are based on (1) the superior property and tenant diversification of the portfolio; (2) the high credit quality of residents; (3) Chartwell’s leading position in the Canadian seniors’ housing industry, complemented by the quality of its real estate portfolio, which offers accommodation (retirement) and related services that provide cash flow stability; and (4) a solid pipeline of strategic growth opportunities supported by strong demand fundamentals. On the other hand, 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) a labour-intensive cost structure, and (4) moderate geographic concentration in the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar).
DBRS Morningstar will consider changing the trends to Stable in the next couple of quarters in the event that (1) the LTC Transactions are consummated in a manner consistent with DBRS Morningstar’s aforementioned expectations and (2) Chartwell demonstrates a trend of improving operating performance as expected. On the contrary, rating downgrades could occur should either the LTC Transactions or improvement in Chartwell’s operating performance fail to materialize such that DBRS Morningstar can reasonably expect Chartwell’s total debt-to-EBITDA to consistently remain above 9.8x.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023; https://www.dbrsmorningstar.com/research/412477)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022; https://www.dbrsmorningstar.com/research/407058)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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