Driving the future prospects of Chartwell Retirement Residences is nothing less than the inexorable march of time.
An aging population will ensure growing customer demand for seniors’ housing for many years to come, providing a fundamental support for a company some consider undervalued.
Recent acquisition activity in the sector by big U.S. health-care players has made Chartwell look very cheap by comparison, said Derek Warren, portfolio manager at Morguard Corp., which owns shares of Chartwell.
“That’s bringing large pools of capital into the space and it’s something I don’t think people are valuing appropriately in Chartwell,” he said. “They have really good properties and they have the operational expertise.”
Chartwell is not the same company it was before the financial crisis.
Having overbuilt in the heady days of the real estate boom, the company was vulnerable to a housing downturn, Mr. Warren said.
Retirement home REITs such as Chartwell are indirectly exposed to the residential real estate market, as prospective residents often have to sell their homes to afford the rent.
From its 2008 peak to its 2009 trough, Chartwell’s unit price fell by more than 80 per cent.
Demand increases helped work through the excess supply, and will continue to support sector growth. Statistics Canada estimated that 6.7 per cent of Canadians were over the age of 75 in 2012. That segment is expected grow at three times the rate of the broader population over roughly the next 10 years.
Beyond demographics, Chartwell divested many of its non-core U.S. assets, and focused on “maximizing the return from its existing portfolio, via rate increases, cost control, and internal growth,” RBC Dominion Securities analyst Neil Downey said in a recent note. “Chartwell does not shy away from external growth initiatives, it just approaches them more prudently now than in its more formative years.”
But the stock is still sensitive to the interest rate environment, as demonstrated in May, 2013, when the U.S. Federal Reserve first speculated about reducing its monetary expansion program.
Chartwell stock, which like many REITs thrived in a low-yield environment, was pushed down by 16 per cent over a couple of weeks.
“The taper tantrum affected everyone in yield land and it got sold down to irrational levels,” said Greg Newman, senior wealth adviser at Newman Group, a ScotiaMcLeod affiliate.
The stock has rebounded as rates have declined this year, but Chartwell has yet to return to its pretaper unit price.
But even once rates do eventually rise, Chartwell has positioned itself to weather a possible rotation out of income stocks, Mr. Warren said.
“If you want a sustainable business in a rising rate environment, you want lower debt, you want a lower payout, so that you have more cash to handle the ups and downs of the business and also to grow internally.”
Chartwell has been slowly reducing its debt, and Mr. Downey sees further asset sales and organic growth taking another 300 to 500 basis points off the current debt-to-capital ratio of about 57 per cent.
But perhaps the best argument for a higher valuation is a recent deal that didn’t involve Chartwell at all. In June, Ventas Inc., one of the biggest U.S. health-care REITS, announced a $980-million deal to acquire Holiday Retirement’s portfolio of 29 seniors’ housing properties in Canada.
The deal values the Holiday portfolio at about $292,000 per suite, compared to $151,000 per retirement suite for Chartwell, Mr. Downey estimated. He has an “outperform” rating on the stock and an $11.50 price target. Of all the analysts covering the stock, six rate it a “buy,” two rate it a “hold,” and one a “sell,” at an average price target of $11.42.
While Chartwell, which is by far Canada’s largest provider of seniors’ housing, is not an imminent takeover target, the Ventas acquisition helps make the case that Chartwell’s stock is cheap, Mr. Warren said.
“It puts a floor on the stock. If there’s some sort of blip or external crisis and the stock gets cheap, it will get snapped up. There are enough buyers in the market.”