EXETF - Extendicare

[doc75]

I'm just listening to the call now.  Should've done so before making my last post but didn't know it would be available online so quickly. Apologies!

 

Certainly doesn't seem like management is on top of this whole thing.

 

Just last year they cut the dividend to a pretty conservative payout ratio, apparently NOT because they had this transaction in mind.  Now they intend to keep the dividend at current level post-sale... which means that they'll want to invest the bulk of the sale proceeds pretty quickly to make up the cash shortfall. Yet apparently they don't have any definitive plans along those lines (e.g. an acquisition pipeline).  This has the makings for some bad/rushed investments. 

 

 

[Sunrider]

The use of the proceeds and the fact that they have negotiated a poor deal (which they likely don't understand). A PE buyer? Really? By definition to paying a price that is far below what the market would pay (for otherwise the PE buyer wouldn't buy as they'd not have an exit strategy).

 

Anyway, frustrating. 1.8m for the whole BOD ... no surprise then.

 

I go back to what was said above - lesson is that one shouldn't trust management teams that have shown that they can't manage themselves out of a paper bag and certainly not if capital allocation is in doubt.

 

C.

 

I think the price / transaction and announcement are a frigging disaster and a management team doing what it wants, rather than what is right for shareholders. The reaction is probably because (1) price is well below most estimates bandied around (saw figures in the 1.5bn range) and (2) Management will use the proceeds to go an gamble some more on entry in "verticals".

 

I don't know who owns how much of this but I hope that some of the smaller hedge funds will raise a stink and maybe pressure on management gets them to do the right thing. Or maybe we're lucky and the other side doesn't get financing - then back to the drawing board.

 

Absolutely disgusted (and not just because I'm long).

C.

 

 

What do you mean by management doing "what they want" as opposed to what is right for shareholders?  Are you just saying that they wanted to get a deal done at any cost so they ended up with a shitty deal?  Or are you referring to their "plan" for the proceeds?  Both? 

 

Certainly not a great deal and I took a big hit today.  But frankly there were some pretty pie-in-the-sky scenarios being bandied about.  I saw the 1.5bn figure, too.  Seemed very much like wishful thinking. 

 

Prior to today I think the market was pricing the stock at $8-$8.5 because the expectation was for a deal of  roughly $900mm  but with a large chunk of the proceeds flowing directly to shareholders in short order.  The negative reaction comes from the lack of windfall and acceptance that the regular dividend will now have to decrease until the the proceeds from the sale start earning some cash (and of course the risk that they won't!).

 

The Canadian ops generated about 25.7mm AFFO over the past 9 months, or  $8.5mm = $0.097 per share per quarter.  That will be bumped up a bit by the retained cash stream from the US operations and decreased a bit over time due to current shortfall in gov't funding for increased PSW wages.  So without further growth in the Canadian ops we're looking at around 0.10 per share quarterly AFFO.  The current dividend is 0.12 per quarter at approx 60% payout ratio.  The stock will be crushed if they cut the divi in half, so I expect they'll keep it up as much as possible and try to live with a very high payout  ratio for a while.  Let's say they manage to pay $0.10 per quarter - that's a 5.7% yield for a $7 stock. The yield as of yesterday was roughly 5.7%, so today the market seems to be repricing to that level.

 

FYI:  Someone on here was asking about inside ownership a while back.  Collectively the BOD hold about 1.8mm shares.  Not a big percentage; still real money.

[yadayada]

Who holds this stock? Seems like an easy target for activist investing? This is v disappointing , could have been worth like 1.4 bn if they just paid out.

 

Edit wtf?? They got just over 200 m after tax? Why didn't they just turn the beds into a REIT?

 

Seems they get 6 m royalty like. Stream and Canadian affo about 33 m ?

 

Then there is also the profit share on sold assets? That could be material? Seems that could be 50 %of affo on us ops they sold. So not such a bad deal after all? Seems the market overreacted a bit? Growth and profit share income is mostly discounted.

[Andy Dufresne]

yadayada

 

They also kept ~10 locations in the US which they estimate are worth USD 30-40 m - see slide #6 here:

 

http://www.marketwire.com/library/MwGo/2014/11/4/11G025540/EXE_Q3-2014_Conf_Call_Slides_v16-928654577855.pdf

 

The ideal activist would be Armoyan of Clarke Inc., but I doubt he can stop the fleecing on time - management doesn't apparently need shareholder approval here ... if its truly a USD 0.5 bn shortchanging of EXE shareholders, then its as bad as the sale of Red Lobster by Darden!

[doc75]

yadayada

 

They also kept ~10 locations in the US which they estimate are worth USD 30-40 m - see slide #6 here:

 

http://www.marketwire.com/library/MwGo/2014/11/4/11G025540/EXE_Q3-2014_Conf_Call_Slides_v16-928654577855.pdf

 

The ideal activist would be Armoyan of Clarke Inc., but I doubt he can stop the fleecing on time - management doesn't apparently need shareholder approval here ... if its truly a USD 0.5 bn shortchanging of EXE shareholders, then its as bad as the sale of Red Lobster by Darden!

 

I may be wrong, but my interpretation of the 10 locations was that they were undesirable and therefore omitted from the sale package, as opposed to being kept for strategic reasons.  They were identified as "underperforming" on the conference call.

 

Can't remember the exact numbers but they are "held for sale" on the balance sheet at somewhere in the $35mm range.  I think they said there's about $10mm of debt on those.    Again, just going from memory.

[NoCalledStrikes]

I have to believe that if the 10 underperforming locations were worth anything close to their stated value they would have been sold in this package.  This leads me to believe that they must be seriously impaired and not worth anything close to stated value.

 

 

 

 

[doc75]

I have to believe that if the 10 underperforming locations were worth anything close to their stated value they would have been sold in this package.  This leads me to believe that they must be seriously impaired and not worth anything close to stated value.

 

I initially figured the same, but am now not so sure.  On the call they were asked specifically about those properties. Regarding the carrying value, management said "yes, we believe those are fair values for those properties".  And they also said there was interest and they had offers at various stages and expect the properties to be sold in the near term.

 

So if there has been buying interest and if the preliminary offers are nowhere close to the stated value then they've gone on record as indicating the opposite. I'll have to go back and listen again.

 

On that point... I should've listened to some previous calls before investing.  Usually I do that, but in this case I just read past reports and was happy with the underlying value.  If today's call is any indication, then they certainly don't  inspire confidence in management.  "What do you think is a good rate of leverage for the company?  Do you have a target?"  "No.  We knew we wanted it lower but we don't have a target."  (I have paraphrased inside the quotations.)  What the hell?  Many similar things like this on the call it seemed.

[thecynic]

It was funny(and quite sad for the shareholders) but I felt that the management were really pleased with themselves when the analysts congratulated them on the call. Perhaps they had not looked at the market reaction yet!

 

I think that one of the analysts on the call, Blaine Marder, really has better handle on the situation than the management. I am not sure how much stock he or his company own but he sounded quite irritated. His point was that with $250M cash proceeds, the company would be much more under leveraged compared to peers and the management should just do a dutch tender offer. Blaine said he would be taking this up offline.

[doc75]

It was funny(and quite sad for the shareholders) but I felt that the management were really pleased with themselves when the analysts congratulated them on the call. Perhaps they had not looked at the market reaction yet!

 

I think that one of the analysts on the call, Blaine Marder, really has better handle on the situation than the management. I am not sure how much stock he or his company own but he sounded quite irritated. His point was that with $250M cash proceeds, the company would be much more under leveraged compared to peers and the management should just do a dutch tender offer. Blaine said he would be taking this up offline.

 

Yes, either they're good actors, or they think they're doing something very positive.

 

FYI, from the Loeb King website:  Mr. Marder is the Portfolio Manager of Event-Driven and Value investing at Loeb King Capital Management. Additionally, he is Portfolio Manager for the Loeb King Asia Fund.

 

 

[yadayada]

Where do you see shareholder structure? It seems once one shareholder goes activist, the rest follows

 

What about that 50%profit share on sold operations? They did not provide a lot of detail on that. That might be material

[doc75]

Where do you see shareholder structure? It seems once one shareholder goes activist, the rest follows

 

What about that 50%profit share on sold operations? They did not provide a lot of detail on that. That might be material

 

Morningstar lists some top fund holders:

 

http://quote.morningstar.ca/quicktakes/Stock/s_ca.aspx?t=EXE&region=CAN&culture=en-CA

 

I don't know how accurate the information is. They don't have any funds listed with more than 0.7% equity stake, which I find a little hard to believe.  But there aren't any 10% holders listed in the management information circular so any activism would likely come from recent buyers?

 

I interpret their lack of clarity/enthusiasm for the profit share to mean they don't expect considerable upside above the $6mm stream that they mention separately. (All of this money comes from the recently leased Penn/Del assets, to my understanding.) 

 

 

 

 

 

 

 

 

 

 

[doc75]

In the PR regarding the sale, they give the following numbers YTD (to Sept 30) for the purchased assets:

 

Revenue: 869mm

NOI: 106mm

Adj. EBITDA: 73mm

AFFO: 28.5mm

 

All figures in $US.

 

In the Q4 supplemental (found here: http://www.extendicare.com/uploads/public/51/docs/Webanal_2014%2009.pdf) the entirety of the US ops had YTD numbers as follows:

 

Revenue: 930mm

NOI: 105mm

Adj. EBITDA: 70.6mm

AFFO:  24.4mm

 

Doing a blind comparison says the retained assets generated 61mm in revenue and resulted in a 2.4mm EBITDA loss and a $4.1 million hit to AFFO.  But roughly $15mm of revenue was generated by the "Virtual Care" segment, which they said on the call was EBITDA positive.  So the remaining retained assets generated $46mm in revenue with an EBITDA loss of over $4mm, and presumably have had a significantly negative impact on AFFO?

 

Is this coming solely from 10 "under performing" retained care centres?  If so,  then netting $14-19mm for them ($30-35mm stated value less $16mm liability) seems like a great idea.  They indicated in the last report that they expected to close those sales by end of year. 

 

[Sunrider]

Yup  -  that pissed me off the most about this --- they sounded so entirely pleased with themselves, shame there weren't any analysts on the call that truly said what needed to be said "WFT do you think you're doing and where did you learn Finance (if at all)?" Then again, who knows, maybe they are buddies with the buyers or have an interest in the vehicle.

 

I truly do hope that someone out there is able to apply some pressure -- sadly not enough shares here to do that, although I may send something to the Board at some point:

 

1. Sale not the only option - on a low-ball offer: evaluate splitting into REIT and OpCo and distribute to shareholders (the latter with new management that actually knows what they are doing)

2. Selling to a PE buyer by definition means you're leaving money on the table - they will do the above in short order.

3. Leverage in structure - even marginal increase in per bed price would be hugely accretive to shareholders

4. If TX does go ahead - money to be returned to shareholders, not left to management who seem to struggle to manage themselves out of a paper bag.

 

 

 

It was funny(and quite sad for the shareholders) but I felt that the management were really pleased with themselves when the analysts congratulated them on the call. Perhaps they had not looked at the market reaction yet!

 

I think that one of the analysts on the call, Blaine Marder, really has better handle on the situation than the management. I am not sure how much stock he or his company own but he sounded quite irritated. His point was that with $250M cash proceeds, the company would be much more under leveraged compared to peers and the management should just do a dutch tender offer. Blaine said he would be taking this up offline.

[yadayada]

It is interesting that head of canadian operations bought some shares a few month ago. He expected a pop on the stock?

 

It is really strange that they got about 300m$ on 15k beds though. SBRA is worth 1.48 billion and they have the same amount of beds? They did say that their beds would be about the same quality early 2014? And now they said they might not be in their latest call?

 

This was already bad though, in their last call:

Murray McKeown - CIBC Wood Gundy

No. And I understand that. And I complement you on taking the action that you are. I guess it just goes to, if you don't know, heart of the matter of Extendicare as a lessee of properties and the value of the real estate versus Extendicare as an operator of the properties.

 

So, back of the envelop what this is suggesting is that you guys own something like 16,000 beds in United States, so if this transaction is indicative of what your other beds are valued from a lease perspective, you could effectively have a 60% bump in your EBITDA by transitioning your business to leasing your business.

 

You're getting $26 million on 2,700 beds. That implies a $160 million of EBITDA on our U.S. operations if that was indicative of the rest of your operations. You're only earning $100 million of EBITDA on those operations today. So it just points to this.

 

I guess what everybody saying is, if it’s the transaction happening where you're selling the real estate, I trust that this analysis will be done at the valuable receipt to reflect. Because otherwise we better do not bother selling it to somebody and just convert all our properties, become a lessee on the real estate, lease it out. We don't have any of the liability issues. They are all carried by someone else, and carry on. And I guess that's my point.

 

Tim Lukenda - President and CEO

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.

 

Allthough now with lower leverage, their interest should go down with less risk? So Canadian affo should go up? I really should have sold at 8.60$  :-X

[thecynic]

Allthough now with lower leverage, their interest should go down with less risk? So Canadian affo should go up? I really should have sold at 8.60$  :-X

 

I'm thinking that even though the sale price of US assets was somewhat disappointing, the value is even more clearer now, though the upside is lower.

 

It would be interesting to know what Denali & Kerrisdale are doing. I'm speculating, but perhaps we'll at least see a letter to management from one of them?

 

 

 

[doc75]

Allthough now with lower leverage, their interest should go down with less risk? So Canadian affo should go up? I really should have sold at 8.60$  :-X

 

I'm thinking that even though the sale price of US assets was somewhat disappointing, the value is even more clearer now, though the upside is lower.

 

It would be interesting to know what Denali & Kerrisdale are doing. I'm speculating, but perhaps we'll at least see a letter to management from one of them?

 

 

Even without investing the sale proceeds they should be looking at about $10mm (Canadian) AFFO per quarter, which is a 100% payout ratio with today's yield.  I don't trust management very far, but I do trust that they'll do as they say and maintain the dividend for now.  So at today's prices you get a 7+% dividend yield from a poorly managed company with predictable cash flows and a conservative balance sheet.  If the transaction were complete as of today then I think it's trading around  9-10x EBITDA/EV, which I believe is well below competitors. 

 

I fantasize that much of the buy-side volume over the past few days is a big player enlarging their stake with the intention to eventually push back on the BOD regarding their interpretation of "crystallizing value".  Likely not the case, but a guy's gotta dream.  The break fee is high enough that I think the transaction is going to go through regardless.  At least they could be pressured to do a substantial buyback or send back at least some of the cash via a special dividend. 

 

[Myth465]

I have to do a deep dive but I am kind of ok with this transaction.

I havent read the 10Q but based on what I see things line up ok.

 

We have a few components.

 

The migration of debt to the US sub which will be paid off

The sale

The lease of the owned properties

The remaining properties to be sold

The remaining assets which have a bit of value

 

I think if you add all of those components up with a decent cap rate on the leased assets then I think the totals are ok.

Then you have what they will do with the cash.

They have an easy to run Canadian business, which is very underlevered and a boat load of USD which will translate nicely into CDN

 

I think they will be scrambling and can be convinced to do a buyback or debt reduction.

Due to be underlevered they can buy back stock, converts, pay down debt, and buy additional properties...

I will run the numbers, listen to the call, and then post my thoughts.

 

I dont like the share price reaction, but may buy more if things line of or I can be convinced of the allocation plans.

[magno111]

I have to do a deep dive but I am kind of ok with this transaction.

I havent read the 10Q but based on what I see things line up ok.

 

We have a few components.

 

The migration of debt to the US sub which will be paid off

The sale

The lease of the owned properties

The remaining properties to be sold

The remaining assets which have a bit of value

 

I think if you add all of those components up with a decent cap rate on the leased assets then I think the totals are ok.

Then you have what they will do with the cash.

They have an easy to run Canadian business, which is very underlevered and a boat load of USD which will translate nicely into CDN

 

I think they will be scrambling and can be convinced to do a buyback or debt reduction.

Due to be underlevered they can buy back stock, converts, pay down debt, and buy additional properties...

I will run the numbers, listen to the call, and then post my thoughts.

 

I dont like the share price reaction, but may buy more if things line of or I can be convinced of the allocation plans.

 

i think you should forget the lease transaction announced on Q2... in the last CC one analyst about how many beds they sold and they clearly said 14500, so you can assume they have include the PA beds... wich makes even worse the transaction...

 

Look at the US business it was generating 40m AFFO, they sold it for 228m... wich means 5x ( 6x pretax...)... that's very silly and the market is punishing them...

[yadayada]

Well more then that. The 6m a year, or whatever it is is not included there. And there is potentially some profit share. So it probably is somewhere in the 3-400m$ range.

 

Still bad though... They should have just sold operations and turned it into a REIT. If SBRA can be worth 1.4bn$.. I think the idea was that they were screwing up operations, and as a REIT it would be worth a lot to a skilled operator. So somewhere closer to a  billion$ would have been more reasonable.

[doc75]

Well more then that. The 6m a year, or whatever it is is not included there. And there is potentially some profit share. So it probably is somewhere in the 3-400m$ range.

 

Still bad though... They should have just sold operations and turned it into a REIT. If SBRA can be worth 1.4bn$.. I think the idea was that they were screwing up operations, and as a REIT it would be worth a lot to a skilled operator. So somewhere closer to a  billion$ would have been more reasonable.

 

I think they were pretty clear about what they sold and what they retained.

 

The $6mm per year flows from the recent Penn leases, and there is additional profit sharing possible on top of that (50-50 split above a $4mm hurdle). 

 

They also kept Virtual Care, which does about $2.6mm annual EBITDA, and 10 underperforming assets that have been held for sale for at least a couple quarters.  I think these will be gone by end of year, and it sounds like they expect to fetch something like $30-35mm from them, less debt of $10.2mm and potentially some other attached liabilities of around $6mm.  So probably the'll net somewhere around $15-20mm. (I think $20mm is an upper bound.)

 

THey say that the strategic review considered all options, including leasing, but I think management really wanted to sell so they could get their hands on a chunk of capital. I think they pushed the process in that direction and ended up taking a pretty bad deal, even if it was the best offer on the table.

 

The banks have revised their targets to $7 and $6.50 (down from $8.75 or so).  I don't think those targets are particularly rational. They're being punished.

[yadayada]

Yeah I think there is some serious human misjudgement going on here. Don't think it is malicious.

 

On the other hand, Henry singleton never had a plan either. Allthough not having an idea about leverage on a steady cash flow machine like this is pretty bad and inexcusable.

 

Honestly think the market is overreacting and it isn't as bad as people make it sound. It is not like they are setting up a beverage company with that 300m. They are investing it in their area of competence. And there is demand on the canadian side, so they are not totally talking out of their ass.

[Sunrider]

Yada - fine with the market "over" reacting - that's not really the question for me. The question is how to get management to either not be stupid or, if stupidity prevails with the transaction, how to get them to do something more value enhancing with the capital?

 

Wish one could get Carl Icahn involved - my view is that the BOD and management should be not be allowed to run any more than a roadside stall in the future.

 

[doc75]

The CEO was asked on the call if he intended on moving up to Canada now that it is essentially the company's sole focus.  He answered in a very longwinded fashion, basically saying it was his intention to remain CEO if that is the board's wish, but never (to my ear) committing to moving if that was the case.

 

The reason I bring this up is that they also currently have a separate president of Canadian ops.  So there's potentially a redundancy to deal with moving forward.  You'd think the board would notice that the market obviously doesn't trust current management to return much value to shareholders.  The stock performance has been terrible over the past decade.

[yadayada]

interesting that the head of canada ops actually bought some stock right before this thing. Not much, but still.. Maybe he will be in charge soon?

[no_free_lunch]

So EXE has a dividend yield currently of about 7.3%, which is sustainable if they make a reasonable acquisition.  Meanwhile LW has a 6.5% yield, which is about 65% of AFFO and thus should be very sustainable.  You don't have as many questions on management as they have actually grown AFFO per share over the past few years.  So given those numbers, after the sale has closed, why even take the risk on EXE when you can get such a similar yield?  There is probably a bit more short-term upside with EXE as if they make the right acquisition perhaps they can sustain similar dividend yield and maybe they move up 10 or 15% but it's certainly not a double like the one hedgie write-up predicted.  So given the actual track record why take the risk?