DBRS Morningstar Confirms Rating of BBB (low) with a Stable Trend on Chartwell Retirement Residences’ Senior Unsecured Debentures

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of Chartwell Retirement Residences (Chartwell or the Trust) at BBB (low) with a Stable trend. The rating confirmation is based on high property and tenant diversification, good tenant quality, Chartwell’s leading position in the Canadian seniors’ housing industry, the quality of its seniors’ housing portfolio, the offering of seniors’ housing accommodation (retirement and long-term care (LTC)) and health-care services and cash flow stability. The rating is constrained by rising leverage, Chartwell’s significant geographic concentration in Ontario, a relatively short lease maturity profile compared to other real estate issuers rated by DBRS Morningstar, the competitive nature of the retirement sector (excluding LTC) and a labour-intensive cost structure.

The Stable trend reflects DBRS Morningstar’s anticipation that the Trust’s earnings profile will continue to improve as a result of expected full-year contributions from acquisitions and stabilization of development completions, modest same-property revenue growth and cost-control initiatives. The Stable trend also incorporates DBRS Morningstar’s expectation that Chartwell’s financial risk assessment metrics remain close to current levels, as measured by total debt-to-EBITDA and EBITDA interest coverage, as growth in EBITDA will offset incremental debt to finance growth initiatives. To the extent other sources of capital are used to finance growth, forecasted metrics could change. Leverage and coverage metrics would deteriorate over the next few years as acquisitions and new developments complete and net operating income begins to stabilize. Leverage ratios, as measured by total debt-to-EBITDA, are forecast to rise from 8.0 times (x) for F2018, to 8.1x for 2019E and 8.4x for 2020E. Coverage ratios, as measured by EBITDA-to-total interest, would decline from 3.46x in F2018 to 3.14x in 2019E and 2.82x in 2020E.

A positive rating action could result if Chartwell’s EBITDA improves such that total debt-to-EBITDA falls below 7.9x and EBITDA interest coverage rises above 3.2x on a sustained basis, all else being equal. Although unlikely in the near term, a negative rating action could occur if Chartwell’s financial metrics deteriorate significantly, such that total debt-to-EBITDA exceeds 9.3x and EBITDA interest coverage falls below 2.2x, on a sustained basis, all else being equal.

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

The principal methodologies are Rating Entities in the Real Estate Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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@dbrs.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.

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