2023-04-07 02:28:24 ET
Summary
- Sienna Senior Living stock has fallen about 30% in the last 12 months.
- Operating challenges include higher labor costs and interest rates.
- Sienna stock offers a yield of 8.7%.
- The high payout ratio leaves the company with very little room for error.
- If Sienna does not cut its dividend, it can potentially return about 36% over the next 12 months. Longer term, it should also benefit from a growing aging population.
A few months ago, I published an article on Sienna , from which you can learn about its portfolio and business model, as I won't be repeating it here. Since reporting its Q4 and full-year 2022 results on February 23, Sienna Senior Living ( OTCPK:LWSCF ) ( SIA:CA ) stock has declined about 13%. As an owner and operator of senior living residences, its occupancy is important.
(The company reports in Canadian dollars, so the figures in this article are in CAD$ unless otherwise noted.)
What's Weighing on the Stock?
From an occupancy standpoint, Sienna's retirement and long-term care ("LTC") portfolios appear fine. Sienna's Q4 and full-year 2022 occupancy improved for both portfolios. Specifically, for 2022, its retirement portfolio occupancy witnessed 6.5% improvement to 87.3%, and its LTC occupancy improved by 3.6% to 88.8%. So, something else must be triggering the stock decline of 13%.
On digging a little deeper, the culprit appears to be the LTC portfolio, which saw its net operating income ("NOI") falling 20.6% to $70.5 million for the year. In contrast, the retirement portfolio witnessed the adjusted NOI rising 18.7% higher to $63.4 million. As stated in the 2022 Report to Shareholders, management noted that the LTC portfolio experienced higher same-property operating expenses mainly because of "higher expenses related to an increase in government-funded direct care, higher labour, insurance and utilities costs."
For Q4 and full-year 2022, the company managed to increase its adjusted revenue. For the full year, the climb was 10.2% to $736.8 million. However, it experienced reductions in same-property NOI. For Q4, it was a decline of 4.4%. For 2022, it was a decline of 6.7% to $128.8 million. As noted earlier, the decline is due to LTC.
Overall, Sienna's operating expenses have increased at higher rates than its revenue increase. This is not surprising given the recent relatively high inflation as well as higher costs related to the pandemic.
Moreover, year over year, its interest expense rose 11.2% to $33.8 million. The interest expense was across a mix of debt, including on mortgages, debentures, term loan, credit facilities, and right-of-use assets.
As the Q4 and full-year 2022 press release, Sienna also recorded restructuring costs of $6.6 million for the closure of one of its LTC homes in Ontario, which sustained substantial damage linked to the original building design and construction predating Sienna's ownership.
Adding that the stock increased its share count, and its operating funds from operations ("OFFO") per share dropped 15.9% to 0.965, it resulted in a payout ratio of 97.0%. With the adjusted FFO per share falling 13.1%, the more stringent adjusted FFO payout ratio was 99.3%. This leaves investors hanging on whether the big dividend might be cut.
Sienna's Dividend
Sienna has a decent history of paying dividends. Since 2011, it has maintained or increased its dividend every year. Given its high yield, you can imagine that even when it does hike its dividend in the local Canadian currency, the rate won't be high. For reference, its 5-year dividend growth rate is 0.80%.
Currently, Sienna pays out a monthly dividend of $0.078 per share, which equates to an annualized payout of $0.936 per share.
At the recent quotation, Sienna yields just over 8.7%. Its high payout ratio gives it very little room for error. So, there's a chance it would reduce its dividend. That said, it has been managing its retirement and LTC portfolios well by increasing their occupancy.
Other than its cash flow generation that should be the source of dividend payments, the company also maintains sufficient liquidity. As of the end of 2022, the company had liquidity of $287 million, including $38.05 million in cash and cash equivalents, and $248.5 million of available funds from credit facilities. Compare this to its annualized dividend payments total about $68.2 million.
Returns Potential
In the long run, Sienna should benefit from a growing aging population. Sienna highlighted in its November 2022 presentation that according to the 2021 census, the Canadian seniors' population in the 85+ age group is projected to triple over the next 25 years. And one in four people who are 85+ years old is already living in a seniors' living setting.
As the stock has declined 30% over the last 12 months, the stock provides a margin of safety from its valuation. At $10.74 per share at writing, it trades with a discount of about 21% and a high yield of just above 8.7%.
Yahoo Finance
According to the analyst consensus 12-month price target of $13.64 the stock can appreciate 27% over the next 12 months. This implies near-term total returns potential of approximately 35.7%.
Investor Takeaway
In summary, investors should not jump into Sienna for its big yield due to the possibility of a dividend cut. Although if it does cut its dividend, it's unlikely to eliminate it altogether because the dividend its typically what largely attracts investors to the stock.
As it appears to be a high-risk total return idea over the next few years, it may be considered as a long idea for short-term trading while keeping the size of the position appropriate. By taking a position, you may be counting on lowering inflation and perhaps even interest rate cuts, as Canada is expected to enter a mild to moderate recession.
References
For further details see:
Sienna Senior Living: A High-Risk Trade That Pays A Nice Dividend