Executive Summary

• CSH, a prominent Canadian Senior Housing stock, has the potential to appreciate by 50% from its current price as the market grows more confident in the management's capability to attain peak occupancy levels. This optimism is fueled by the robust tailwinds created by an aging demographic. In the near term, the company is poised to realize both top-line growth and cost reductions. Moreover, its strategic shift towards becoming a pure-play independent living entity positions it as an attractive M&A prospect, especially as the seniors housing transaction market shows signs of invigoration.

Company Overview

• Chartwell Retirement Residences has a market cap of approximately $2.4 billion.
• With a wide network of 195 properties encompassing nearly 30,000 suites, Chartwell stands as a dominant name in independent living retirement homes across Canada.
• The prime locations of its residences are in Ontario (40%) and Quebec (30%).
• Commanding its position as Canada's largest retirement operator, CSH emerges as an indisputable leader in the retirement real estate niche.

Key Investment Thesis Points:

1. Occupancy Rebound Story - Peer Catchup
• Regular monthly occupancy updates set the stock on an upward trajectory for rerating. By mid-September, occupancy is anticipated to touch 82% by management, significantly overcoming the Q3 2021 COVID trough of 76.4%. Management estimates CSH can achieve 95% occupancy by 2025, up from their pre-COVID Q4 2019 rate of 88.5%.
• In comparison to their Canadian counterpart, CSH has some catching up to do. For context, Sienna Senior Living's retirement segment was at around 87% occupancy as of Q2/2023 vs. CSH's 79% rate at the same time period.
• The return to peak occupancy levels will drive industry-leading top-line and FFO growth in the near term, serving as the primary catalyst for the stock.

2. Subsector Tailwinds - Attractive Demand vs. Supply Dynamic
• The graying baby boomer generation is steering a steady increase in the 75+ demographic, forecasting a 4.3% CAGR from 2023 to 2030, a rise from the historic  3.1% CAGR pre-covid.
• The pandemic-induced halt in construction and mounting interest on loans have reversed the previous oversupply concerns. Senior housing's construction starts as % of inventory has come down to a cyclical low of 1.5% forecasted for 2023 by Cushman and Wakefield
• Current implied valuations of CSH on a $ per suite basis trade a t ~$250k per suite significantly below replacement costs highlighted in Cushman Wakefield's September 2023 Seniors Housing Report ranging from $750K-$1mm in certain markets; supressing new supply.
• The sector is also benefiting from the pentup demand accumulated during the pandemic and the progressively optimistic market sentiment.

3. Current Macro Fears Don't Apply to CSH as Much
• Retirement assets under CSH are sensitive to a higher for longer interest rate environment, given their higher spot cap rates of around 6%. Vs. traditional Greater Toronto area listed apartment REITs with cap rates sub 4%. The outlook of CSH stock is therefore centered around its occupancy rebound story.
• Historically, during economic downturns, senior housing has showcased remarkable resilience, registering positive same-property NOI growth in the GFC.

4. NOI Margins Set to Accelerate Driven by Top-line Growth and Cost Cuts
• With the pandemic-induced expenditures waning and staffing costs reverting to normalcy, a surge in NOI margins is on the horizon. Management's predictions place margins closer to 37.5% in the near-term coming from sub 30% as of Q2/23. It's worth noting properties under management by Cogir (Welltower's Canadian Operating Partner) have hit NOI margins of up to 40% currently, painting an optimistic picture for CSH's future.

5. Deep Discount to Stabilized NAV and to US Peer with a Similar Story
• If management meets their ambitious 95% occupancy target alongside 37.5% NOI margins, CSH is on track to reach a NAV of an impressive $15.5 by 2025, predicated on a 6% cap rate and barring any major interest rate plunges.
• The stock trades at roughly $10.50, reflecting a sharp +30% discount to the projected stabilized NAV (This presents an upside of ~50% before including an annual dividend yield of 5.9%)
• US-based senior housing owner Welltower (WELL), despite a Q2/23 occupancy of 80%, is trading at a hefty 40% premium to their 1 yr forward NAV, outshining CSH's 20% discount on the same 1 yr metric. Investors are able to see the return to peak occupancy thesis for WELL but have yet to build the confidence for CSH, this will come soon and allow for a quick re-rate of CSH stock as occupancy updates roll in and spur confidence.

6. Takeout Potential Acts as a Backstop
• CSH's recent divestment of 16 long-term care homes in early September 2023 steers them more towards being a pureplay independent living entity.
• This strategic move potentially earmarks CSH as a coveted M&A candidate, given it has the opportunity to cut costs in the hands of a different operator.
• Welltower's recent disclosures about their expansion ambitions in Canada and their ongoing JV relationship with CSH could make CSH a potential candidate to be acquired.
• Considering the stark discount of CSH to its stabilized NAV, any acquisition proposition would likely be at a significant premium, possibly over 30%, to its prevailing share price.

Potential Risks and Mitigating Factors for Chartwell Retirement Residences

• Execution Risk
• Risk: While demographic tailwinds are favorable, individual submarkets can behave unpredictably. The onus lies on the operator's quality to elevate occupancy and margins. There exists the inherent risk of missing established targets.
• Mitigating Factor: A pronounced demand-supply imbalance is evident. The entry of new supply into the market has been stymied due to elevated construction costs, offering an advantage to existing operators.
• Dependency on Detached Home Sales to Fund Retirement Home Rent
• Risk: Tenants frequently use proceeds from the sale of their homes to fund retirement home rent. A slump in home prices, possibly precipitated by soaring mortgage rates, might deter demand for retirement homes. Potential tenants might defer their move, awaiting a more conducive market to offload their property.
• Mitigating Factor: The senior housing sector is fundamentally a needs-driven industry. The pandemic has led to significant pent-up demand, as numerous prospective tenants postponed their move.
• Resurgence of a Harmful COVID Strain
• Risk: Catering to a health-sensitive demographic with relatively compromised immune systems, the emergence of a virulent COVID strain could potentially stall occupancy recovery.
• Mitigating Factor: Recent trends suggest that while new COVID variants have emerged, they have generally been less severe, with consequent strains displaying a reduction in virulence.