DBRS Morningstar Changes Chartwell Retirement Residences Trends to Stable From Negative, Confirms Ratings at BBB (low)

DBRS Limited (DBRS Morningstar) changed the trends on Chartwell Retirement Residences’ (Chartwell) Issuer Rating and Senior Unsecured Debentures to Stable from Negative and confirmed the credit ratings at BBB (low).

The trend changes reflect (1) the successful sale of the Ontario long-term care portfolio; (2) Chartwell's recent operating improvement over the past few quarters, with full-year same-property occupancy expected to reach 84.2% in December 2023—a 480-basis point growth for the full year of 2023. Chartwell has been successful in implementing rental and service rate increases as well as reducing the impact of agency staffing, thus mitigating inflationary pressures on expenses. Levels of new and active construction continue to remain at historic lows for the Canadian seniors' housing industry, and pent-up demand from the pandemic coupled with favourable demographic trends in Canada continue to support strong leasing momentum and near- to medium-term occupancy recovery for Chartwell.

The trend changes also acknowledge the recently announced wind-up of the existing joint venture with Welltower Inc. (Welltower), where under the terms of the agreement, Chartwell will convey ownership interest in 23 assets to Welltower in exchange for Welltower's ownership interest in 16 assets and $97.2 million in cash. The resulting net change to total debt will be a reduction of approximately $51.0 million, before any impact of cash considerations. DBRS Morningstar expects that the estimated net proceeds from both the wind-up of its joint venture ($71.0 million) and the forward sale contract relating to the development of Ballycliffe LTC ($63 million) (together, the Transactions) will largely be used to pay down debt by Q2 2024. Pro forma the Transactions, DBRS Morningstar expects further improvement in leverage such that total debt-to-EBITDA trends below 9.0 times (x) by YE2025 (9.4x for the last 12 months ended September 30, 2023) partially offset by a modest decline in EBITDA interest coverage (2.44x for the last 12 months ended September 30, 2023).

The rating confirmations are supported by (1) the superior property and tenant diversification of the portfolio; (2) the high credit quality of residents; and (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. 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 Positive trend by DBRS Morningstar).

DBRS Morningstar may consider negative rating actions should Chartwell's total debt-to-EBITDA ratio consistently remain above 9.3x on a sustained basis all else equal. This leverage threshold for a negative rating action is lower contrasted to the prior review because of DBRS Morningstar's expectation for declining EBITDA interest coverage. A positive rating action would require a material change in Chartwell's financial policy (e.g., significantly lower leverage, unencumbered balance sheet, etc.) and is not currently contemplated.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- 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 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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit 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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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