EXETF - Extendicare

[thecynic]

Anyone know if the expected settlement is material?  It wasn't asked on the call.

 

I think even if it was asked, the management would not answer. Right now, the govt is probably playing an open ended game and does not know what EXE management thinks a fair settlement amount is. Why should EXE reveal its cards publicly? This is what the q1 report says:

".. As at May 7, 2014, settlement discussions between the OIG and DOJ and EHSI and its outside counsel were not sufficiently advanced for EHSI to be able to predict the possible outcomes of the investigations (or any possible related litigation if a settlement with the OIG and DOJ is not reached) and the Company is unable to reliably estimate the range or the amount of the associated costs or loss that may be incurred..."

 

Anyways, I found via google that Ensign group settled with the government for $50M in Nov 2013. The Ensign case involved six facilities submitting false claims between 1999 and 2011, while the EXE case involves eight facilities in the time period 2006-2009.

http://www.justice.gov/opa/pr/2013/November/12-civ-1235.html

[jch548]

I've looked at this a couple of times and have a hard time seeing the value.

 

Not counting number of beds but the U.S. ebitda has been declining yearly. I assume they have been selling some properties.  The other U.S. comps SKH, NHC and ENSG trade at 7 to 9 times ebitda EVs. If they sell the U.S. for seven times they are looking at $500mm. With only Canada left and debt paydown EXE would be at around an EV of 22 times ebitda.

[magno111]

I've looked at this a couple of times and have a hard time seeing the value.

 

Not counting number of beds but the U.S. ebitda has been declining yearly. I assume they have been selling some properties.  The other U.S. comps SKH, NHC and ENSG trade at 7 to 9 times ebitda EVs. If they sell the U.S. for seven times they are looking at $500mm. With only Canada left and debt paydown EXE would be at around an EV of 22 times ebitda.

 

IMO you should review your numbers.

 

run-rate EBITDA  in US operations is around 110M$ if you exclude especial items, ( if you look at the last quarter ebitda is up 15% from the last Q1 2013)

 

EBITDA 2013 at Canadian operations were 72M

 

The market values owner-operators at around 8x ebitda, but they are selling the properties. Any health-care REIT could pay 100k per bed or 7K/rent unit and be inmediatly accretive for them since they trade at much higher . Plus they could find a better operator like Ensign/caretrust REIT pay 9x and improve the EBITDA margin.

 

Even at 8x EBITDA you could net around 400M( 300M after tax...)

[Guest roark33]

Ok, very late to the game on this.  Just started researching this this week.  Few questions:

 

1. Why no discussion of downside here? 

 

2. No one seems to want to size up the settlement? 

Few data points on recents healthcare/medicare fraud billing issues: Amed--$150m (2014), ENSG ($50m), GTIV (appr. $50m--2012). 

 

The "valuation arbitrage" looks initially interesting and the catalyst appears there, but as I have heard others mention, this is a C- mgmt team in a B- industry. 

 

Those are my initial thoughts and concerns after reading a few filings and conference calls. 

[Andy Dufresne]

roark33

 

1a. Barring a market pull-back, since it halved its dividend in April 2013, there shares have generally been oscillating around 6.50, occasionally dropping down to 6ish ... so you have a 15-20% downside

 

1b. The market has likely already priced in the fact that the spin-off / sale of the US assets is late. If they were continue to delay, which, given their announcements and the CEO's remarks during the Q1 conference call, I suspect is unlikely, I do not believe the pull-back would be more than what I stated above

 

2. I don't know enough to answer your question ... hopefully someone else will be able to do that

 

This is a classic event-driven play, where you get handsomely paid to wait (dividend yield now circa 6.5%). Only the passage of time will unlock value and the usual suspects - management - seem to be on the right side here ...

 

For me the biggest issue is the value of the US operation - depending on how you value it you will probably get a range of IV/share giving you anywhere from 15% to 150% (depending also on what happens - spin off or sale) - see two valuations here:

 

http://seekingalpha.com/article/2227133-extendicare-better-late-than-never-especially-when-at-least-30-percent-upside-is-likely

 

http://seekingalpha.com/article/2227173-extendicare-strong-catalyst-in-2-months-with-50-percentminus-150-percent-upside

 

Also note that the price paid for the assets, if a sale occurs, will likely be influenced by their continued underperformance ...

 

But even so, assuming the upside is "only" 15% and this happens in one year (which is reasonable IMHO), you'll get about a 21.5% return which is relatively safe as the cashflows here are quite clear.

 

Hope this helps a bit  :)

[Guest roark33]

I am going to throw out PHH as an example of a company that was splitting of its non-core assets that did not turn out as well (or hasn't since the announced sale).  I think the valuation of the US business is questionable, hence the reason for the delays.  I am still working through this idea, but I think the expectations on the sale of the US business (net of DOJ payments ) might turn out to be less than expected.  That being said, I am thinking about this more in terms of downside protection than potential upside risk. 

[Myth465]

I believe they are doing the right thing. Moving all debt to US holding company, and closing up the US via a sale.

There is likely value in the US business, but the Canadian business is going well and can fund the dividend / has a bit of growth.

 

Basically I have collected 7% for a year or so and will get some sort of equity return. They have a buyer in the US so must have gotten a decent price.

The Canadian business is doing well, and we should capture whatever upside is gained from the US business & removal of debt via equity returns. We get paid to wait, and I think there will be some sort of return on a sale of the US assets and more importantly the transfer of debt.

[Compounder]

I believe they are doing the right thing. Moving all debt to US holding company, and closing up the US via a sale.

There is likely value in the US business, but the Canadian business is going well and can fund the dividend / has a bit of growth.

 

Do you still believe the Canadian business on a stand alone basis can fund the dividend of C$0.48 per share a year? I'm very interested to know how you get to that?

 

My estimate is the dividend works out to ~C$41.9m p.a. The Canadian business at 1Q14 had AFFO of C$7.5m or CF$30m annualised, so there seems to be a C$10m hole. What am I missing?

[yadayada]

it seems the value is in the real estate? Not really in the US business.

 

Also the nursing bussiness has a lack of supply. So you want to be in the skilled nursing business as well, there you get paid more for that lack of supply it seems. And EXE is kind of lagging in this regard. But there is enourmous operating leverage. If gross profit ticks up a bit, SG&A is pretty much fixed.

 

Does anyone know how much management owns? I cannot find that anywhere.

 

To be more clear about US business:

Assuming that 87.5% of Sabra’s enterprise value comes from the 87.5% of its rental income that comes from SNFs, and applying that value to SBRA’s 10,826 beds yields a per bed valuation of $130,000.  Applying that $130,000 figure to EXE’s 16,095 US owned beds yields a valuation on EXE’s US real estate of $2.1b

From VIC write up.

 

So basicly if they would sell the US business, the buyer could put all those beds in a reit and let that be run by someone else. In theory. And that is not even the better Canadian business.

 

This US asset is hidden in their costs (or cost savings) right?

 

Let's say revenue is 1.2 billion for US nursing business and they now do not pay 70 million$ in leases on those beds (because they own them), but pay extra interest instead (due to required leverage to own those assets) and some maintenance costs. This is basicly a untapped asset hidden in costs.

 

If they would seperate the two, operating business would be close to worthless in it's current state, and would then lease from the newly formed US Nursing beds REIT. And this REIT would get like a 20x multiple on 60-70 million and be very simmilar to what Sabra is, except bigger. And this REIT would be very low risk (hence the 20x multiple) . That is where the upside comes from here.

 

ANd then there is the Canadian operation which operates in a better enviroment then the US one, and that is worth about 5-600 million as well.

 

And basicly management is not very good, their skilled nursing mix is not up to par with competition. That is probably why they are going for a sale?

[Myth465]

I believe they are doing the right thing. Moving all debt to US holding company, and closing up the US via a sale.

There is likely value in the US business, but the Canadian business is going well and can fund the dividend / has a bit of growth.

 

Do you still believe the Canadian business on a stand alone basis can fund the dividend of C$0.48 per share a year? I'm very interested to know how you get to that?

My estimate is the dividend works out to ~C$41.9m p.a. The Canadian business at 1Q14 had AFFO of C$7.5m or CF$30m annualised, so there seems to be a C$10m hole. What am I missing?

 

Apologies for the delayed response.

In the various write ups I have read, most have stated that Management bought the dividend down to number that could be sustained by the Canadian Ops in the event of a sale.

 

After looking at the numbers - Canadian AFFO is on average $11 million a year. I would assume it includes interest on the debentures which will move to the US side. Dividends appear to be $10.5 per quarter. it would be quite tight, but they will also have serveral million from the US sale, and they can use that cash to expand or reduce debt.

 

http://www.extendicare.com/uploads/public/51/docs/EXE-AGM2014-v24-pc_2up_Framed.pdf

 

http://www.extendicare.com/uploads/public/51/docs/EXE%20Q1-2014%20Conf%20Call%20Slides_v4-website.pdf

 

Yes when I first saw this idea it reminded me of Sabra. The only issue is the US Business doesnt make much money, so why would the REIT be worth 20x CF. It would be captive to a sick tenant. Either way there is value there. I think the US side will make decent money, its just not worth Management's time inmo. A spin-off with a decent valuation for the property is really all they should be looking for. I believe the cause in the drop of profitability centered around Medicare changes where funding hadnt been provided.

 

I liked the thesis and like what I heard regarding a sale. The sale also seemed easy with the REIT valuations in the US. It has taken longer than I had hoped. Hopefully we get some good news this quarter. If not, I will be forced to learn a bit more about the US business which seems complex vs. the Canadian business, which is consistently profitable and has good growth prospects.

[yadayada]

I don't think you should look at what US side makes. That is irrelevant here. The value of doing a REIT here is hidden in the cost side of things.

 

i think you can compare it to a airliner who buys it's own airplanes when the industry is in a bad spot to increase margins. But the do a somewhat poor job operating them. Cleary the leasing airplane business is much better then operating them. The guys leasing them out made more money over the last decade then guys who leased it from them. Same story here. Except here barriers to entry of operating these facilities are higher then with the airliner business I think.

 

I think this is why they are selling, clearly the leasing side of things holds a lot of value, but they don't want to turn the operating part around that would lose money if you would seperate them. Probably a better idea here would be to consolidate the operating part (to a strategic buyer), and deleverage it by just leasing everything. This would be difficult if they owned everything, it would require a lot of leverage to scale up more quickly? Now they can have two structures, a leasing part that would generate steady dividends, and a consolidated operating part that has low leverage and can now benefit from larger revenue on their fixed costs.

 

Another comparison could be Altisource and all it's spin offs.

 

At least that is my read on things here. feel free to correct me if im wrong.

[Myth465]

I think you are half right...

 

I learned a few years ago a company cant make money selling to an entity which loses money. Eventually it all comes home to roost.

A captive REIT with a customer which losses money isnt worth 20x CF. Also the company cant really have a REIT side and a Canadian healthcare side. Well they could, but they would trade at 7-10x CF. Canadian reits dont trade for 20x CF.

 

I think thats the issue. The US side got into a tough situation with Medicare changes / sequestration (I think but cant remember). It will be profitable again, but it has been a bit of a rough patch.

 

You are right, best to sell to a strategic US buyer, as long as you get paid properly for the property.

Hopefully that is what they have done, but only time will tell. Its been a good year, though. Its the sale which never seems to happen.....

[yadayada]

yea that is a good point, but how much of it is due to bad management on EXE's side? It seems their revenue mix isn't up to par compared to other providers.

 

Even with a 12% yield, there is several 100 million upside in the US business. 14k beds vs SBRA's 10k now I think. If they get half for them what SBRA values them, that would still be 700 million.

 

I cannot find anything about  how much management owns. Any idea where I can find that information?

[yadayada]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/117276

 

Similar situation, now valued at over  1 billion with about 10k beds both being seperated. EXE has 24k beds I think.. Including canadian part of it.

 

So I think clearly management is not doing a good job here? Just seems there is value here. And a very large margin of safety. Clearly this example has better management and that shows.

 

My impression is, they make pretty much nothing from government sponsored healthcare, but regulation makes them take on this business for at least a certain %? Management's job is then to create value by getting non gov sponsored healthcare business (or skilled nursing) to make a profit.

 

Also it seems they can triple or quadruple their business by merging since SG&A costs seems pretty much fixed.

[magno111]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/117276

 

Similar situation, now valued at over  1 billion with about 10k beds both being seperated. EXE has 24k beds I think.. Including canadian part of it.

 

So I think clearly management is not doing a good job here? Just seems there is value here. And a very large margin of safety. Clearly this example has better management and that shows.

 

My impression is, they make pretty much nothing from government sponsored healthcare, but regulation makes them take on this business for at least a certain %? Management's job is then to create value by getting non gov sponsored healthcare business (or skilled nursing) to make a profit.

 

Also it seems they can triple or quadruple their business by merging since SG&A costs seems pretty much fixed.

 

EXE has 15k beds in USA, you can't compare with Ensg because they are the very best operators in the SNF world, plus all of their beds are 4stars+ rated. Market valued ENSG+CTRE at 1500M EV. Even if you aplly a 25% discount. EXE should be worth around 1100EV for the US part, equity value should be around 600M...

[yadayada]

yeah certainly don't value them like that. But it shows the potential of their real estate in the hands of a very skilled operator. So even with a huge discount and a slightly worse operator, upside should be at least 60-70%.

 

It also seems that if you seperate the two you can more easily scale up. All it requires now are leasing some  beds, hiring a bunch of people and then work your magic as a management team. Isn't that what they are going to do? diversify away with their US beds in a REIT, and also rent to operators like Ensign? And sell off the US operating business for peanuts to more skilled operators.. Or will they sell the beds off as well?

[Evolveus]

A fair amount of good news today:

 

https://finance.yahoo.com/news/extendicare-announces-2014-second-quarter-210100537.html

 

Let's see if market cares or continues to yawn until a sale is announced. 

[Myth465]

Yes I would say these guys know what they are doing.

$10 million improvement in AFFO due to US transaction with more to come.

 

They also retained ownership of the assets which makes a sale fairly easy.

 

Thats massive considering the $26 million in leasing. Also shows that the lack of having to self insure in the US will be another source of upside.

 

REITS put 15-20x CF on that $26 million in leasing which makes for some interesting calcs.

[yadayada]

how much of this 26 mill will be AFFO?

 

hmm 2700 beds. They have 15k beds? so that is like 150 mill in revenue. SBRA has 150 mill in revenue with slightly less beds, and about 70-80 mill in AFFO? Curious what theyr cost structure is. But seems clear this will at least get them 50-60 mill in AFFO. A 15x multiple on that and I get 825 mill.

 

Let's wait and see I guess :)

[magno111]

A fair amount of good news today:

 

https://finance.yahoo.com/news/extendicare-announces-2014-second-quarter-210100537.html

 

Let's see if market cares or continues to yawn until a sale is announced.

 

people are finally conecting the dots, since the announcement of the last  transaction. 15% up on huge volume. shares still worth 14$-16$.

[magno111]

this 50 min. video explains in very detail why Extendicare is worth at least 14$-16$. ( trading currently around 8$)

 

https://www.dropbox.com/s/dmygkp2noxxj52e/Eric-Almeraz-and-Kamran-Moghtaderi-at-Equity-Income-Summit-2.mp4

 

partial transaction anounced in Q2 was the first catalyst ( share is up 18% on huge volume), management also said in Q2 cc the sale is expected to close in 3-5 months, that will be major catalyst.

 

note that, in the video they made valuation based on 7500$ rent per bed per year. And the partial transaction in Q2 was made at 8500$ rent per bed per year. Public comps like sabra receive around 7K-8k per bed and they trade for 15x based on that rent. if you apply this multiples to Extendicare US business it is worth 8$ a share, Canada business unit is very easy to value it is worth 5$-6$. that gets you to at least 14$, with a very strong catalyst by year-end.

 

great hedge funds are betting in the name, Denali investors, Kerrisdale...

 

enjoy it

 

 

[yadayada]

Not sure their latest is very representative of their entire bed portfolio in the US.

 

http://seekingalpha.com/article/2405395-extendicares-exetf-ceo-tim-lukenda-on-q2-2014-results-earnings-call-transcript?page=5

 

Read the call.

 

Murray, I understand what you're saying and the analysis, the arithmetic of what your -- the analysis you're doing. I think it would be an aggressive assumption to think that this applies everywhere. I'll give just one measuring stick, our transaction in Kentucky we ended up basically holding our EBITDA steady. So we didn't gain EBITDA on that lease transaction, but we avoided growth in future liability cost and essentially maintained the same level of EBITDA.

 

In this one there is a pickup in the EBITDA because of the trajectory and degree to which the liability cost were growing and the occupancy is much higher NPA than our average building. It's closer to 95% compared to 85% for the balance of our centers.

 

So I understand what you're saying directionally, but I don't think it’s a safe assumption to just extrapolate the valuation of this particular portfolio across the organization. It's why frankly we picked this group out to do this. We thought it add a value to the overall entity more than doing it with other components of the business. But I do hear what you're saying.

 

Im less bullish now. Might only be worth 10-12$. But I guess there iwll be a 3-5 month catalyst, so i can wait.

[magno111]

this 50 min. video explains in very detail why Extendicare is worth at least 14$-16$. ( trading currently around 8$)

 

https://www.dropbox.com/s/dmygkp2noxxj52e/Eric-Almeraz-and-Kamran-Moghtaderi-at-Equity-Income-Summit-2.mp4

 

partial transaction anounced in Q2 was the first catalyst ( share is up 18% on huge volume), management also said in Q2 cc the sale is expected to close in 3-5 months, that will be major catalyst.

 

note that, in the video they made valuation based on 7500$ rent per bed per year. And the partial transaction in Q2 was made at 8500$ rent per bed per year. Public comps like sabra receive around 7K-8k per bed and they trade for 15x based on that rent. if you apply this multiples to Extendicare US business it is worth 8$ a share, Canada business unit is very easy to value it is worth 5$-6$. that gets you to at least 14$, with a very strong catalyst by year-end.

 

great hedge funds are betting in the name, Denali investors, Kerrisdale...

 

enjoy it

 

yada,

 

i forgot one thing. the resulting entity will be doing around 110M EBITDA and 60M AFFO. current AFFO at canada biz is around 38M but they are going to keep this 3k beds recently leased for 27M on a triple-net basis so this will produce around 22-24M extra AFFO.

 

Canada comps trade for 15x P/AFFO or 16x EV/EBITDA. this means CANADA biz alone is worth 900M or 10$ a share. plus 5$ a share from  the sale of US biz.

[BG2008]

Does anyone know what price the Kentucky Leasees can buyout the properties at?  Is that a pre-set buyout price for the PA leasees as well?

[BG2008]

People have been talking about the Canadian biz is worth this much and the US biz is worth this much.  No one is really talking about this event driven trade from the "most likely event unfolding perspective"

 

Here's my lay of the land and here's what I think will happen:

 

US subsidiary Debt $662mm

Can Subsidiary Debt $367mm

Canadian Parent Debt $121.9mm

 

US EBITDA $110mm (annualized based on Q1 and Q2, includes $15mm in Kentucky lease and prior to $27mm PA leases)

Can EBITDA ($72mm)

EBITDA to AFFO bridge

 

$182mm less $20mm for FFEC (furniture/fixture = maintenance cap ex) depreciation, $4mm accretion cost, $60.8mm interest expenses) equals roughly $95mm Pre-Tax earnings.  Less $28.3mm in tax @30% of the pre-tax figure gets us to a $66.7mm figure.  Add back amortization of financing cost, principal portion of govt cap equates to $77.0mm AFFO as is. 

 

Pro-Forma Transformation

 

Company retains $15mm + $27mm of Kentucky and PA lease and sells the rest of the centers off.  Let's say they can get $876mm (11269@$77.8k per owned bed) for assets other than Kentucky and PA.  This figure would equate to 12.8x EV/EBITDA.  The buyer will probably just assume the debt and write a check for the equity portion of $876mm less $662mm of debt.  In my opinion, the most "likely" use of the excess cash of ($876 less $662mm = $214mm) will be to pay off the Can Parent debt of $121.9m.  There will be an excess of $92mm of cash from the transaction. 

 

Post Deal – The EBITDA to AFFO Bridge looks like this

 

$72 Can EBITDA + $42mm US Lease EBITDA = $114mm of total EBITDA.  FFEC drops to $8mm a year.  Interest is now $20mm, Accretion cost is $1.4mm.  Pre-tax earnings is $84.4mm.  Less $25.3mm of taxes @30%.  FFO is only $59mm versus $62mm previously.

 

The problem here is capturing the Lease revenue from PA and Kentucky in the Canadian entity.  At 15X FFO, we’re looking at $885mm market cap.  Doesn’t seem like a lot of upside here.  More upside available if the Kentucky and PA properties can be spun off into a separately traded REIT.  $42mm at 12x EV/rent multiple is $504mm or $5.72 per share.  A generous valuation would be $630mm @ 15x EV/Rent equating to $7.15 per share.  The Can standalone will generate about $30mm of FFO.  At 15x FFO, that's $450mm of market cap or $5.11 per share.  Add back $1.05 per share of excess cash.   

 

In a best case scenario, we're looking at a $11.10 if they keep the US properties in the holdco.  $11.88 if they spin off the RE and the market value it at 12X EV/Rent and $13.31 in the best case scenario.  Love to hear some feedback from people.  I'm using large multiples to get to a max value figure.