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© Queen’s University 2014
QUIC RESEARCH REPORT
QUIC Research Reports focus on
emerging investment themes that
affect current portfolio companies
and companies under coverage.
Cash Yield
Introduction
Chartwell Retirement Residences REIT (TSX:CSH.UN) is an open-ended
real estate investment trust that operates within the senior living
subsector. The REIT owns, manages, and operates a portfolio of
various senior housing communities, ranging from independent
through assisted living to long-term care.
The purchase of CSH would provide the QUIC portfolio an opportunity
to capitalize on changing demographic trends in Canada. As the
Canadian population ages, there will be a greater number of citizens
who will opt to move into retirement residences and drive demand for
senior care.
Investment Theses
Thesis I: Market Position
Thesis II: Focus on Operational Efficiency
Thesis III: Strong Development Pipeline
Valuation
Using a blended valuation of Net Asset Value and Comparable analysis,
we arrived at a price target of $15.50. This represents an implied twelve
month share price return of 4.98%, and a total return of 8.81%.
Chartwell Retirement Residences Pitch (TSX: CSH.UN)
September 19, 2016
Adam Cotterill
Simon Rezene
Brendan Blaikie
Canada’s Aging Population Needs to Live Somewhere
QUIC Research Report
September 19, 2016
September 19, 2016
Table of Contents
Canadian Demographic Outlook 3
Canadian Senior Housing REITs 4
Chartwell Retirement Residences: Company Overview 5
Investment Theses 6,7
Catalysts & Risks 8
Valuation 9,10,11
References 12
QUIC Research Report
September 19, 2016
September 19, 2016 3
The aging of the Baby Boomer generation has had
an effect on economic activity in practically every
stage of their lives, and the impending retirement
of this demographic is not likely to break the trend.
The population of seniors age 75 years and older in
Canada is expected to grow by 111.2% between
2014 and 2034 (Statistics Canada), while the
population of Canada is only expected to increase
by 19.1% during that time period. Canada’s
population is aging and many baby boomers are
entering the prime age where they consume the
most healthcare services.
One such health care service is senior housing, and
Canada’s demographic transition is expected to
create a surge in demand for senior housing,
especially in Canada’s major markets. Seniors will
begin to look to transition from their family homes
into a home which more accurately meets their
needs. Coupled with the current unaffordability of
residential housing in some of Canada’s major
cities, senior citizens in Canada who will represent
more and more of the population will begin to look
more seriously at senior housing.
With there being a clear, foreseeable increase in
demand for healthcare services in Canada, investors
have started to take notice. The interest in Senior
Housing properties served to push cap rates down,
and while cap rate compression is expected on high
quality property, the sector experiences a
remarkable 75-100 bps drop in cap rates for the
highest quality assets. Furthermore, in 2015,
vacancy rates for senior housing came down in
virtually every market in Canada.
The increase in the activity of Canada’s Senior
Housing Market is also indicative of the public’s
awareness that Canada’s population is aging
quickly. The entry of US REITs into the Canadian
senior housing market has only served to put
further downward pressure on cap rates. Ultimately,
this wave of activity culminated with the OTPP’s
purchase of Amica in 2015 but the increase in
activity within the sector is dramatic beginning in
2012.
Exploiting Canada’s Aging Demographic
Source: Capital IQ
$0.4 $0.4
$1.2
$0.8
$2.4 $2.3
$2.9
2008 2009 2010 2011 2012 2013 2014
2.50 MM 2.56 MM3.02 MM
3.77 MM
4.61 MM
5.46 MM
2015 2016 2021 2026 2031 2036
EXHIBIT II: Canadian Population Over 75 Years of Age
EXHIBIT I: CDN Senior Housing Deal Activity
QUIC Research Report
September 19, 2016
September 19, 2016 4
Business Overview
Extendicare is a leading provider of care and
services for seniors in Canada, with a network of
118 senior care and living centres, 64 of which are
owned and 54 of which are managed by the REIT.
Extendicare’s properties are comprised of long-
term care, retirement living, and home health care
spaces, with the majority of these properties
located in Ontario.
EXE focuses on long-term and home health care, as
these two property segments make up ~85% of the
REIT’s NOI. EXE is geographically exposed to
Ontario, with 60% of the portfolio concentrated in
the province.
Over the past year, EXE has performed very well,
posting year-over-year gains of 12% for total
revenue and NOI, a 19% increase in EBITDA, and a
69% increase in AFFO. In EXE’s most recent quarter,
the REIT beat analysts’ AFFO/Unit estimates by
~53%, coming in at $0.21/Unit
Investment Thesis
1, Long-Term Care Focus
As long-term care is primarily needs-driven,
demand should remain stable throughout weak
economic periods as Canada’s population continues
to age. With 60% of the REIT’s properties located in
a strong Ontario senior care market, EXE is
positioned well to continue to deliver strong long-
term SPNOI growth.
2. Strong Distribution Yield/Payout Ratio
Combination
EXE’s management has been able to guide the REIT
well over the past few years, simultaneously
maintaining an attractive yield of 5.6% while
lowering its payout ratio to just 76%, down from
84% in 2015. It is estimated that EXE’s payout ratio
will continue to decrease throughout the next few
years, settling at 66% in 2018. This low payout ratio
will allow the REIT to use the excess FFO to finance
acquisitions and developments; an integral part of
management’s plan to increase NOI over the next
five years.
3. Clear-Cut Plan For Growth
Management has strictly outlined a plan to grow
NOI by ~30% over the next five years through
development. The plan involves the redevelopment
of 21 “Class C” long-term care facilities, planning to
spend ~C$350MM over the next five years, as well
as four retirement housing Greenfield development
projects, expected to bring in an additional
~C$8MM in NOI//year. With D/GBV currently
standing at 40% (14% lower than its closest peer),
EXE’s balance sheet is ready to be levered to
finance these developments. Together, these
developments are expected to bring in an
additional C$36MM in NOI each year.
Extendicare (TSX:EXE)
Source: Capital IQ, Company Reports
EXHIBIT III: NOI Breakdown by Property Type
55.0%
30.0%
7.0%
5.0%3.0%
Long-Term Care Home Health Care
Other Canadian Retirement
US Ops
QUIC Research Report
September 19, 2016
September 19, 2016 5
Business Overview
Sienna Senior Living (TSX: SIA) owns and operates
54 high-quality seniors living residences in key
markets in Ontario and British Columbia,
comprising 7,923 beds/suites serving the
continuum of independent living, assisted living,
long-term care and specialized seniors programs
and services. The Company is one of Canada's
largest owners of seniors living and the largest
licensed long-term care provider in Ontario, with
approximately 8,800 employees dedicated to
helping residents live fully, every day.
Investment Thesis
1. Retirement Residences Driving Growth
SIA has reaped the benefits of the aging Baby
Boomer population in Canada as the REIT’s
retirement residences (~27% of NOI) generated
19.3% SPNOI growth year-over-year in 2Q16. This
increase can be attributed largely to occupancy
growth of 530bps year-over-year. Rental rate
increases will begin to take over as the key driver
for growth, as demand for retirement residences is
increasing steadily, and so should retirement
residence occupancy.
2. Portfolio Repositioning
SIA is currently repositioning its portfolio to
increase exposure to private-pay tenants. The REIT’s
management has outlined a pro-forma portfolio of
20% private-pay properties and 80% government
funded properties, while the current portfolio is
17.4% and 82.6% respectively. This increase in
exposure should provide strong rental rate growth
in the long-term, as well as cash flow stability, as
government funded properties are highly regulated
and leave less room for organic growth.
3. Strong Cash Retention and Growth Initiatives
During 2Q/16, SIA retained ~C$23MM of funds
from operations to fund strategic growth initiatives,
such as the redevelopment of long-term care
homes, as well as strategic acquisition
opportunities. SIA’s management is exploring the
possibility of redeveloping Class B and Class C
long-term care properties, as well as leasing up four
non-stabilized retirement communities. These
retained funds are expected to be used to help
fund these growth initiatives, as well as any
acquisition opportunities, and will be a key growth
driver when retirement residences become
stabilized.
Sienna Senior Living (TSX:SIA)
Source: Capital IQ, RBC Capital Markets
EXHIBIT IV: Post-Acquisition Pro Forma Portfolio
82.6%
17.4%
Portfolio as at Q2/16
80.0%
20.0%
Pro Forma Portfolio
Government Funded Private-Pay
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September 19, 2016
September 19, 2016 6
Business Overview
Chartwell Retirement Residences (TSX:CSH.UN)
owns, manages, and operates a portfolio of various
senior housing communities, ranging from
independent through assisted living to long-term
care. These communities include meal service,
twenty-four hour supervision, and general
household services, with more patient-specific care
options available for assisted living tenants.
The REIT’s portfolio consists of 24,619 suites across
170 facilities, with just under 90% of its properties
located in Ontario and Quebec
CSH’s management has outlined a strategy
comprised of five key strategic priorities of: growing
core property portfolio contribution, maintaining a
strong financial position, improving the quality and
efficiency of corporate support services, building
real estate portfolio value, and providing
exceptional services and care
Year-to-date, CSH has done well to increase
occupancy by 1.7% and increased revenue by 4.6%
for the six months ended June 30th, 2016. This has
resulted in an SPNOI increase of 8.6% during the
same period. However, Chartwell still has
occupancy gains to make as they currently sit just
above 92% occupancy.
Chartwell Retirement Residences (TSX:CSH.UN)
EXHIBIT VII: Year-to-Date Share Price Performance Versus Benchmark
121.4
113.1
90
100
110
120
130
140
16-Sep-15 15-Dec-15 14-Mar-16 12-Jun-16 10-Sep-16TSX:CSH.UN S&P/TSX Capped REIT Index
Source: Capital IQ, Company Reports
1.7%
8.5%
53.7%
40.0%
(2.0%)
Average
Occupancy
SPNOI Total AFFO AFFO/Unit Debt/GBV
EXHIBIT VI: Q2/16 YoY Growth/Decline
EXHIBIT V: Market Statistics
C$MM except per share amounts or otherwise noted
Share Price (September 16, 2016) $14.67
52-Week High $16.14
52-Week Low $11.74
F.D. Shares Outstanding 192.5
F.D. Market Capitalization $2,824
Add: Net Debt $1,722
Enterprise Value $4,575
QUIC Research Report
September 19, 2016
September 19, 2016 7
Investments Theses
Thesis I: Market Position
CSH is the largest provider of senior housing in
Canada by a wide margin. The REIT has ~38%
market share of the Retirement Care (RC) market
which makes up 73% of its portfolio. In its Long
Term Care (LTC) segment, CSH is the 4th largest
operator behind players such as Extendicare who
dominate the LTC space. Given the REIT nearly
doubles its next closest competitor within the RC
market, it is best positioned to capitalize on a
demographic shift where there will be a growing
population of senior citizens. By 2020, the number
of Canadians over the age of 75 is expected to
increase to 7.7% from 6.7%, and eventually hit
9.1% by 2025. According to RBC Capital Markets,
there could be nation-wide demand for an
additional 4,000 – 5,000 private-pay seniors
housing suites annually for the next 15 years.
CSH’s leading market position implies that long-
term demographic trends are in the REITs favour.
With little supply risk expected to disrupt CSH’s
market share, the REIT is comfortably able to
maintain 93.4% same property occupancy with
room for some upside. With significant non-core
divestments in 2014, the Ontario portfolio has
been repositioned toward more competitive
properties which should help drive ongoing
occupancy improvements. The REITs scale in
Canada ensures its development pipeline and
acquisition activity will protect its market share as
major players look to ramp up supply over the
next 10+ years.
Thesis II: Focus on Operational Efficiency
The REIT has been able to create an economic
moat through a focus on developing and acquiring
operationally efficient residences. Management
has continually invested in branding, marketing
and sales initiatives to continue to increase
awareness of Chartwell’s name and drive traffic to
its residences. From a cost control standpoint, the
REIT is able to manage its controllable costs
through annual efficiency reviews, a centralized
purchasing system, and energy management
programs. Historically, the REIT has boasted
industry leading NOI margins at ~30%, while
competitors’ margin fall in the low to high teens.
Source: Company Reports
24,619
12,175
8,694 8,5507,603 7,579
EXHIBIT VIII: Suite Count Among Dominant
Players in Canadian Senior Housing
0%
10%
20%
30%
40%
2013 2014 2015
Chartwell Extendicare Sienna Senior Living
EXHIBIT IX: Industry Leading NOI Margins
Source: Company Reports
QUIC Research Report
September 19, 2016
September 19, 2016 8
Thesis II: Focus on Operational Efficiency
(Cont’d)
Due to the elasticity of demand with private pay
residences, CSH is able to charge higher rates to its
customers and thus sustainably increase rental rates
2-3% annually. The REITs focus on its Ontario
market – which makes up ~45% of NOI – is a
testament to management’s commitment on
maintaining strong operating margins. Market rent
in Ontario is higher than any other province by
nearly 30%, and CSH’s growth prospects in Ontario
ensure the REIT will be able to maintain NOI
margins in the 30-35% range over the long term. In
addition to margin expansion from an increased
presence in Ontario, CSH’s brand and scale as the
largest player in Canada has allowed the REIT to
grow revenues from additional care and services.
Thesis III. Strong Development Pipeline
CSH’s scale and entrepreneurial management team
has enabled the REIT to maintain a strong
development pipeline and consistently pursue
strategic acquisitions in its core markets. Year to
date, Chartwell has completed 5 acquisitions, with 4
of them in Ontario. As previously mentioned, a
focus on acquisitions in its highest margin province
reflects management’s focus on growing the
business in the right areas. In 2015, the REIT
acquired just under C$600MM of 13 new properties
in core markets at a weighted-average cap rate of
6.2%. CSH’s development pipeline includes 12
projects encompassing 2,129 suites. Management
has sought to develop modern, market-specific,
and operationally efficient senior home
communities. These projects are estimated to have
a total cost of C$235MM, with completion dates
ranging from the beginning of 2017 through 2018.
Due to the sale of its entire U.S. portfolio at U.S.
$847MM, the REIT has been able to improve its
balance sheet position. D/GBV has decreased from
57% to 49% since 2013, giving management the
option to raise funds through debt to continue
acquiring and developing properties.
Investment Theses
Source: Company Reports
53%
34%
10%
3%
$1,000
$2,000
$3,000
$4,000
0%
20%
40%
60%
Ontario Quebec British
Columbia
Alberta
Breakdown by Number of Suites
Assisted Living Monthly Rates
EXHIBIT X: Geographic Breakdown by # of
Suites
951
1170
1772
Under Development Joint Ventures Acquisitions
EXHIBIT XI: Development and Acquisition
Activity in 2015
Source: Company Reports
QUIC Research Report
September 19, 2016
September 19, 2016 9
Catalysts
1. Development Opportunities
A large component of CSH’s strategy is to develop
modern, market-specific senior housing
communities, using these developments as a means
to grow NAV/unit and earnings. As Canada’s
population ages, demand for new supply of both
retirement housing and long-term care properties is
projected to increase sharply. By 2021, it is
expected that ~17,000 new suites will need to be
developed each year. CSH’s ability to capitalize on
this increase in demand will be key to long-term
growth..
2. Mortgage Debt Restructuring
CSH currently has a large portion of mortgage debt
maturing in 2018-2020, totalling 41% of total debt.
CSH’s management intends to refinance at least
~C$297.0MM of the mortgage debt with long-term,
CMHC insured mortgages, bringing annual
mortgage maturities below the REIT’s targeted
maximum of C$175MM of expiries per year. This
possible restructuring will decrease the REIT’s debt
exposure during those three years, freeing up funds
to continue developing and acquiring new
properties.
3. Ontario Occupancy Gains
The Ontario senior housing market is expected to
continue to benefit from an aging Baby Boomer
population, resulting in increased demand for
senior housing, and therefore increasing CSH’s
portfolio occupancy. With ~2.5% contractual rental
rate increases yearly, increased occupancy will
continue to bolster SPNOI growth, exemplified by
CSH’s 11.3% increase in Ontario SPNOI year-over-
year.
Risks
1. Government Intervention
Long-term care and senior housing facilities are
subject to much government regulation and
intervention, with legal limits on rental rate
increases, thereby decreasing CSH’s growth
prospects. Though the majority of the REIT’s
properties are non-government funded, private-pay
properties, government regulation, especially in
Ontario (53% of Suites) will remain a key factor
driving rental rate growth going forward.
2. Canadian Retirement Exposure
With 89% of CSH’s portfolio comprised of
retirement housing suites, any material change in
regulations or a wealth of new supply brought
online in retirement housing markets may decrease
demand for retirement housing suites, thus
decreasing CSH’s ability to keep rental rate growth
at the current ~2.5% level.
Catalysts & Risks
Source: Capital IQ, BMO Capital Markets
EXHIBIT XII: Stable Development Pipeline
$28$44 $38
$17
$62$45
$234
0.0%
2.5%
5.0%
7.5%
10.0%
$0
$50
$100
$150
$200
$250
Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 TotalCost ($MM) Unlevered Yield
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September 19, 2016
September 19, 2016 10
Comparable Companies Analysis
Source: Capital IQ
Market Enterprise Prem (Disc) Debt / Net Debt / Price / FFO Price / AFFO Dividend
Company Price Cap Value to NAV EV EBITDA 2016E 2017E 2016E 2017E Yield
Chartwell Retirement Residences $15.10 $2,907 $4,625 7.2% 0.4x 7.3x 16.7x 15.7x 17.8x 16.9x 3.7%
Mainstreet Health Investments $10.76 $3,432 $3,686 10.7% 0.1x 9.1x 12.1x 7.6x 15.8x 10.0x 9.0%
NorthWest Healthcare Properties REIT $10.44 $921 $2,826 0.7% 0.6x 9.1x 11.6x 10.9x 12.4x 11.6x 7.7%
Sienna Senior Living $16.98 $781 $1,380 8.0% 0.5x 7.3x 13.9x 13.2x 12.5x 12.2x 5.3%
Extendicare $8.68 $768 $1,176 (5.1%) 0.4x 3.7x 15.9x 13.9x 13.5x 13.0x 5.5%
Average 4.3% 0.4x 7.3x 14.0x 12.3x 14.4x 12.7x 6.2%
Median 7.2% 0.4x 7.3x 13.9x 13.2x 13.5x 12.2x 5.5%
Canadian Senior Housing Comparables
AnalysisMultiple Valuation
Implied Target
Metric (C$) Multiple (x) Price
P / FFO
FY2016 0.95 16.5x $15.68
FY2017 0.99 16.0x $15.84
P / AFFO
FY2016 0.89 17.5x $15.58
FY2017 0.92 17.0x $15.64
Chartwell Retirement Residences trades at a
premium to Senior Housing peers on a P / FFO
and P / AFFO basis. We believe this premium is
justified as a result of a number of factors,
including Chartwell’s dominant market-leader
position and relatively superior development
pipeline. While other names in the peer set may
seem more attractive, no other REIT has a similar
market share profile as Chartwell and the ability to
consistently achieve NOI margins in the ~30%
range. While intuitively Chartwell should be
trading above peers, the significant premium at
which they trade is a concern as we look at
potentially adding the name to our holdings.
QUIC Research Report
September 19, 2016
September 19, 2016 11
Net Asset Value Model
Source: Capital IQ
NAV Summary
FTM NOI $285
Blended Cap Rate 6.94%
Value of Capitalized Income $4,106
Non-Real Estate Assets $200
Total Assets $4,306
Less: Liabilities $1,870
Less: Claims on Equity 0
Net Asset Value: $2,436
Dilluted Shares Outstanding 179
Net Asset Value Per Share $13.62
Assigned Prem / (Disc) to NAV 10%
Implied Share Price $14.98
NAV Build Blended Capitalization Rate
$15.00
$14.75
$14.50
14.09
$14.03
$13.25
BMO
TD
GMP
Consensus
Canaccord Genuity
CIBC
Capitalization Rate Formula
𝐶𝑎𝑝 𝑅𝑎𝑡𝑒 =𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑉𝑎𝑙𝑢𝑒
Blended Capitalization Rate
Geography Properties Size (beds) % of Total Cap Rate
Ontario, CAD 108 7,933 45.9% 6.84%
Quebec, CAD 44 7,122 41.2% 7.13%
British Columbia, CAD 18 1,539 8.9% 6.56%
Alberta, CAD 7 707 4.1% 7.02%
Total 177 17,301 100.0% 6.94%
Analysis
Chartwell Retirement Residence’s Net Asset Value is ~$13.60. The capitalization used was a geographically
blended cap rate, taking into account Chartwell’s exposure to four separate senior housing markets in
Canada. After attributing a 10% Premium to Chartwell’s Net Asset Value, we arrive at an implied share price
of $14.98 or $15.00. We took a conservative approach in assigning a premium to Chartwell’s Net Asset
Value as we wanted to consider current valuation levels and investor expectations for the REIT reflected in
its current share price. With that being said, we believe this Premium is justified given Chartwell’s ability to
consistently drive successful developments to market and dominate the Retirement Care market in Canada.
QUIC Research Report
September 19, 2016
September 19, 2016 12
Chartwell Retirement Residences would be a great addition to the Cash Yield portfolio, and would allow for
exposure to the Specialty sub-sector and to take advantage of Canada’s impending demographic
transition. From a valuation standpoint, Chartwell’s currently trades at a significant premium to peers on a
comparable basis, and at a significant premium to NAV on an intrinsic value basis. Occupancy levels for
Chartwell’s Quebec (~94%) and Western (~95%) occupancy are likely approaching their peaks which
should plateau NAV/unit growth until development projects come online. While we continue to favour
management’s strategy of upgrading the quality of their portfolio through the acquisition/development of
new properties, we believe the market has captured its growth prospects in its current share price.
Chartwell is a fundamentally sound business, but is currently too expensive. We believe the senior housing
market in Canada as a whole is overlooked, and a more attractive entry point into Chartwell would be a
great way to gain exposure to an industry exhibiting favorable trends through a growing population of
seniors.
Valuation
Source: Capital IQ
Blended QUIC Valuation Analyst Price Targets
$15.00
$15.50
$16.00
$16.00
$16.00
$16.50
$17.50
CIBC World Markets
QUIC
Scotia Capital
RBC Capital Markets
Canaccord Genuity
BMO Capital Markets
TD Securities
Method Weighting Target Price
NAV Target Price 50% $15.00
Comps Target Price 50% $15.75
Implied Target Price $15.40
Share Price (September 16, 2016) $14.67
Implied Share Price Return 4.98%
Dividend Yield 3.83%
Implied Total Return 8.81%
Implied Prem / (Disc) to NAV 13.07%
Conclusion
QUIC Research Report
September 19, 2016
September 19, 2016
References
13
1. Company Reports
2. Capital IQ
3. Forbes
4. Bloomberg
5. SEDAR
6. The Globe & Mail
7. RBC Capital Markets
8. BMO Capital Markets