CA - Sienna Senior Living: Occupancy Rate Improving And Cost Under Control

2023-12-20 22:24:41 ET

Summary

• Sienna Senior Living's operations are stabilizing, with improving occupancy rates and rental increases to offset inflation.
• The company delivered a strong Q3 2023, with net operating income and adjusted funds from operations per share showing growth.
• Canada's aging population and declining construction starts in the long-term care sector indicate a positive long-term outlook for Sienna.

Investment Thesis

We wrote an analysis of Sienna Senior Living ( LWSCF ) ( SIA:CA ) in 2019. At that time, we viewed Sienna as a good company to own for dividend investors. However, the company faced some serious challenges in the past few years due to pandemic, staff shortages, and inflation. The good news is that its operations are finally showing signs of stabilization. Its occupancy rates are improving in both its long-term care and retirement portfolios. The company has also been able to apply rental increases to offset inflation. Given the fact that Sienna needs to refinance about a quarter of its total debts in 2024, the company may endure higher interest expenses in 2024 and beyond. Therefore, its stock price may continue to be under pressure in the near term. Given its long-term positive outlook, investors may want to take this opportunity to start accumulating shares and add more on any share price weaknesses.

Earnings and Growth Analysis

Improving Q3 2023

Sienna delivered a good Q3 2023 as the company saw its same property net operating income grew from C$35 million in Q3 2022 to C$37.5 million in Q3 2023. This represented a growth rate of 6.7% year over year. The growth in SPNOI also helped to improve its adjusted funds from operations per share to C$0.269 in Q3 2023 from C$0.227 in Q3 2022. This improvement in SPNOI and AFFO was due to several factors. First, a much better occupancy ratio in its long-term care portfolio helped to drive better revenue growth. As can be seen from the table below, its long-term care occupancy ratio improved by 250 basis points year over year to 98.4%. We will discuss the retirement occupancy ratio next. Second, the company’s policy to increase its rental rate to match or beat inflation has caused better revenue growth. Third, the company's effort to reduce agency staffing to pre-pandemic levels continued to significantly reduce its operating costs. In fact, the company has reduced its agency cost by 60% year over year from C$11.6 million in Q3 2022 to C$4.8 million in Q3 2023.

Source: Company Reports, Created by author

Improving occupancy rate in its retirement portfolio

Sienna’s occupancy rate in its retirement portfolio reached its near-term trough in June 2023. This trough was caused by some of its residents moving from its retirement portfolio to its long-term care portfolio. As can be seen from the chart below, the retirement portfolio’s occupancy rate was only 86.5% in June 2023. However, it has now improved to 88% in October 2023. Management in the conference call also indicated that occupancy rate should gradually improve in the final two months of 2023. This will help grow its revenue in Q4.

Outlook remains positive

Canada’s population is aging quickly. In fact, according to CTV News, the number of people aged 65 or older is expected to grow from 7.6 million people in 2023 to 11 million in 2043. At the same time, construction starts as the percentage of long-term care inventory has been in a declining trend. As the chart below shows, construction starts as percentage of inventory has declined from the peak of 5.6% to only 2.2% and is expected to fall to 1.5% in 2023. Therefore, we expect supply and demand imbalance to come to the surface in a few years.

A quarter of its debts will expire through 2024

About 24% of Sienna's total debts will expire between now and the end of 2024. These soon-to-be expired debts have an average interest rate of only 3.4%. Given the current elevated rate environment, refinancing these debts may result in much higher interest expense. Therefore, we expect Sienna's share price to be under pressure in the near term.

Valuation and Dividend Analysis

Sienna currently pays a monthly dividend of C$0.078 per share. This is equivalent to a dividend yield of about 7.5%. The company’s dividend payout ratio is about 87%. This is much better than last year's 103%. The company has only increased its dividend twice in the past 10 years. Given its high payout ratio, we do not see the company increasing its dividend anytime soon as management must worry about refinancing nearly a quarter of its total debts in 2024 at a higher interest rate than before.

Sienna’s AFFO was C$0.787 per share in the first 9 months of 2023. We think the company will likely earn C$0.25 per share in Q4 2023. Therefore, its AFFO in 2023 is expected to be about C$1.04 per share. Therefore, Sienna currently trades at a price to 2023 AFFO ratio of 10.9x. The company’s P/AFFO ratio was about 13x in 2019. However, we do not think Sienna deserves to trade at this pre-pandemic valuation given the current high rate environment unless Bank of Canada significantly lower its rate in the near term.

Investor Takeaway

Sienna is an attractive long-term play for patient investors as Canada's population is aging. Its operations are improving in the near term. Sienna’s 7.5%-yielding dividend is also attractive. However, a significant portion of its total debts will need to be refinanced in 2024. This might add some pressure to its share prices. Keen investors may wish to use this opportunity to accumulate shares now and buy more on any price weaknesses.

Additional Disclosure : This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

Sienna currently trades at the Toronto Stock Exchange under the ticker SIA. U.S. investors interested in the stock can either invest through OTC or check with their brokers to see if investing in the company through Toronto Stock Exchange is possible or not. There is a higher risk for investors investing through OTC as trading volumes are much lower.

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