Retirement residences ready for boom

Of course, few people go into retirement homes or nursing homes at age 65, so the more important demographic is those aged 75 or older. Statistics Canada expects this age group to account for about five million people, or 12% of the total population, by 2033. That’s more than double today’s level of 2.4 million people (about 7% of the total population).

There are significant differences in the types of RRs available. The first level of RRs is simply that – complexes in which only seniors can live. There may be some services available, such as social activities, but the assumption is that the residents don’t need other support services.

The second level of RRs, “independent supported living” (ISL), offers some support, usually meals, housekeeping and social activities.

The third level of RRs, “assisted living” (AL), provides personal care assistance and administration of medication and nursing services in addition to meals, housekeeping and social activities.

Regulation for RRs falls under provincial jurisdiction and can vary. Generally, RRs aren’t regulated beyond quality and safety standards if they don’t offer “care” services. In Ontario, for example, only RRs that offer two or more care services are regulated.

Then, there are LTC homes. These are for residents who can live independently no longer and need a high level of care. The basic medical care is covered under government health programs. These RRs are heavily regulated and their prices must be approved.

Three publicly traded Canadian companies in the retirement residence space are Vancouver-based Amica Mature Lifestyles Inc., Chartwell Retirement Residences of Mississauga, Ont., and Markham, Ont.-based Leisureworld Senior Care Corp.

Chartwell and Leisureworld offer both RRs and LTC care, although most of Chartwell’s business is in ISL while most of Leisureworld’s business is LTC. Amica offers only RRs.

All three firms own most of their residences/homes. That means that depreciation and/or amortization is a large expense item even though there is no cash outlay. As a result, these firms can have losses while being fundamentally profitable. Thus, analysts look at adjusted funds from operations (AFFO) – which adds depreciation and amortization back into net income, then subtracts recurring capital expenditures used to maintain the quality of the assets – to determine whether a stock price is cheap, reasonable or expensive.

For example, a report from analysts with TD Securities Inc. in Toronto has a “buy” rating on all three companies. Each firm reported substantial losses in the six months ended June 30, but all three firms had positive and increasing AFFO and are maintaining attractive dividends.

Here’s a look at the three companies in more detail:

– Amica Mature Lifestyles Inc.‘s focus is on “luxurious” retirement living that features round-the-clock security. Clients can buy condominiums or rent suites. Rentals have AL options in most locations, allowing residents to move from one level of service to another. There also are suites that can be rented for short-term stays for reasons such as post-operative convalescence, respite and vacations.

Rental services, which also are available to condo owners, include gourmet dining, social excursions and activities, exercise rooms, lounges, libraries and activity rooms. Housekeeping and weekly laundry is available.

Amica has 3,183 suites, including condo units, and another 439 units under development or in pre-development.

The firm operates in British Columbia and Ontario, with one property in Alberta. The occupancy rate has fallen in B.C. because of excess supply and increased competition – and that drop has more than offset a modest rise in occupancy in Ontario.

The TD Securities report assumes that Amica’s problems in B.C. aren’t likely to continue. Indeed, based on increased occupancy and margin expansion, the report forecasts AFFO per share of 53¢ in fiscal 2015, which ends on June 30 of that year, and 68¢ a share in fiscal 2016, up significantly from 43¢ a share in 2014.

A report from analysts in Toronto with Montreal-based National Bank Financial Ltd. (NBF) is more cautious. Although this report says Amica has “one of the highest-quality portfolios in the industry,” the stock is rated as only “sector perform” because of “ongoing earnings headwinds” and few positive catalysts.

Amica had AFFO of $6.7 million on revenue of $69.7 million in the six months ended May 31, 2014, vs AFFO of $6.5 million on revenue of $65.2 million in the corresponding period in 2013.

The TD Securities report’s price target is $9.50 a share; the NBF report’s price target is $8 a share. The 30.8 million outstanding shares closed at $6.93 on Sept. 26.

Amica pays a quarterly dividend of $10.5¢ a share, which represents a 6% yield.

– Chartwell Retirement Residences has almost 30,000 suites/beds: 23,638 in Ontario, B.C., Alberta and Quebec, and 5,815 in the U.S. in Texas, Colorado and Florida. Most (76%) are RRs with housekeeping support but no personal care. There are 1,313 suites with no services, 1,186 AL RR suites, 4,033 LTC beds and 422 memory-care suites for those with Alzheimer’s disease.

Different levels of care seldom are offered at the same location. Chartwell’s 2014 annual information form says that although the firm recognizes that some element of “aging in place” is desirable, company management believes that separate residences for each level of service meets residents’ requirements better and also are more efficient to operate. Thus, Chartwell’s approach is to have all levels of service within the same community and then encourage residents to move among facilities as residents’ needs change.

Ian Nakamoto, director of research with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto, likes Chartwell, which trades as a real estate income trust. He notes that Chartwell faced some problems several years ago but brought in new management, which has turned things around. Nakamoto particularly likes the way Chartwell “constantly culls” properties to keep its high-quality portfolio.

The TD Securities report states that Chartwell’s unit price does not reflect the firm’s ability to “deliver consistent and stable earnings.”

Chartwell’s AFFO was $61.9 million on revenue of $432.4 million in the six months ended June 30, vs AFFO of $59.9 million on revenue of $421.7 million in the corresponding period in 2013.

The TD Securities report and a report from Toronto-based RBC Dominion Securities Inc. (DS) have a “buy” and “outperform” rating, respectively, on the units. The TD Securities and DS reports’ price targets are $12.50 and $11.50 a unit, respectively. The 176.9 million outstanding units closed at $10.94 on Sept. 26.

Chartwell pays a monthly distribution of $4.5¢, which represents a 5% yield.

– Leisureworld Senior Care Corp. has 35 LTC homes in Ontario (5,733 beds); 10 RRs in Ontario and B.C., which provide both ISL and AL (1,065 suites); and also provides home care and consulting services. However, most of the firm’s revenue (87%) comes from LTC, with just 9% from RRs, 4% from home care and less than 1% from consulting.

Nevertheless, the TD Securities report says the RRs are important because they add to earnings growth because there’s “less regulation and greater ability to lift rental rates.” Generally, RRs are rented on a monthly basis along with a meal and service plan.

Demand for LTC is very strong. Leisureworld’s 2014 annual information form notes that there was a wait list in Ontario for 21,800 LTC beds as of September 2013. The total number of LTC beds in the province was estimated at 77,500 as of Dec. 31, 2013.

Leisureworld’s AFFO was $24.8 million on revenue of $224 million in the six months ended June 30, vs AFFO of $16.7 million on revenue of $166.9 million in the corresponding period in 2013.

The TD Securities report has a “buy” rating on the stock, with a price target of $14.50 a share. The DS report rates the stock as “sector perform” with a price target of $14. The 36.3 million outstanding shares closed at $13.39 on Sept. 26.

Leisureworld pays a quarterly distribution of 22.5¢, which represents a 6.7% yield.

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