EXETF - Extendicare

[thomcapital]

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?

 

Speaking of that hedgie write up, and seeing your handle, I had to chuckle a little.  :)

 

[yadayada]

Well they did almost completely fk it up, and fair value is still around 7-8$... So that looked like a pretty good proposition.

[no_free_lunch]

Thom,

 

Haha, you got me there.  I definitely set my handle that way as a reminder to myself.  Trust but verify, trust but verify, trust but verify...

[thomcapital]

Thom,

 

Haha, you got me there.  I definitely set my handle that way as a reminder to myself.  Trust but verify, trust but verify, trust but verify...

 

Well I don't know if you owned it, but I did, so really it's directed at myself. However, it's also a good reminder that mistakes happen, by us as investors, "unforced" errors on the part of management, etc. You try and minimize them, but mistakes can't be eliminated, it's part of the game.  :)

[doc75]

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?

 

You make a very good point. LW seems much better managed. Their cost of debt is also significantly lower -- 3.9% currently, avg term 5.2 years.  (They just issued a bunch of convertible debt at 3.x% and retired a bunch at 4.y%.  Compare with EXE, which issued convertibles last year at 6%.)

 

 

[yadayada]

LW has Affo of 50m$ now? But EXE's AFFO is about 40m$? It seems that some costs will go down with lower debt? Also net debt is much lower for EXE. So they should be able to refinance.they got 94m$ in cash now. And after transaction, total debt for Canada will be 490m$.

 

So about 300m$ canadian for the US business, that is 100m$ in net debt, vs like 500m+ for LW.

 

At the very least they should have very low interest payments with leverage that low.

[no_free_lunch]

I don't think they can use the cash to pay down debt.  Interest is 4-5% (just guessing) while comps trade at 10x affo or a 10% yield, so I think you would lower the stock price by paying down debt.

 

If you did a special dividend, you could give out the $220M cash, then you have maybe $40M AFFO * 10 = $400M market cap.  So $620M total value.  Right now market cap is $608M.  Maybe the AFFO is a bit low, maybe the multiple should be an 11 but at this point I don't see there being huge upside is the point while you continue to run the risk of management destroying shareholder value.

[yadayada]

Yeah, but there is almost 400m$ of cash... That should count for something. You would have growth priced in or something. Maybe they get pressured to pay 200m$ in dividend, and put the rest in expansion, and possibly some operating leverage. So 12x 40m affo (+6m + possible profit share) is about 680m$. Yeah i guess not much upside :) .

[doc75]

Yeah, but there is almost 400m$ of cash... That should count for something. You would have growth priced in or something. Maybe they get pressured to pay 200m$ in dividend, and put the rest in expansion, and possibly some operating leverage. So 12x 40m affo (+6m + possible profit share) is about 680m$. Yeah i guess not much upside :) .

 

Where are you getting $400mm of cash?

 

The Canadian biz had $33mm IIRC. Add to that $250mm from the sale and maybe another $15-20mm for the sale of remaining assets. 

 

 

 

 

[yadayada]

hmm so some of that 97m went to the US operation. I guess your right then. Still 200m of net debt is not a lot.

[doc75]

hmm so some of that 97m went to the US operation. I guess your right then. Still 200m of net debt is not a lot.

 

I think 97m was in the US ops and 33m was at Canadian holdco. From the PR:

 

"After accounting for tax, working capital and other closing adjustments, the Company expects to receive net cash proceeds from the Transaction of approximately US$222 million (C$253 million at the current exchange rate), which is expected to close in the second quarter of 2015."

 

I assume the "accounting for working capital" part implies a total of $222m cash will flow to the Canadian biz.  Am I looking at this wrong?

 

 

[yadayada]

isn't working capital just receivables - payables?

[doc75]

isn't working capital just receivables - payables?

 

Current assets less current liabilities is my understanding of the term.

 

But I just looked over the slides from the conference call.  (They haven't yet posted Q3 results on SEDAR, so this is the best we can do right now for a snapshot.)

Total purchase price $870mm, plus cash adjustments of $102mm, less debt of $665m gives pretax net of $307.  Less (implied) tax gives $222m net cash back to Canada.

 

As at Sept 30, Canadian biz had $31m cash.  So they should end up with somewhere just shy of $300m cash once they complete the sale of the US ops (including assets still held for sale).  They haven't provided segmented balance sheets, but they do give total assets / total liabilities for the Canadian and US sides.  As of June 30 the Canadian side had $494m assets and $624m liabilities.  I don't understand why.  Anyone?

 

It's not expensive at these levels but  no_free_lunch makes a very good point.  The operating metrics of LW are significantly better, pretty much in every way. It appears to be a better managed company on all fronts. The most charitable thing we can say is that perhaps EXE management has been distracted with the issues in the US ops for some time and can now focus on optimizing the Canadian biz.

[yadayada]

yeah the problem is, I need to figure out if I want to sell. Not really want to hold LW instead.

 

My understanding of working capital is that you need it for operations. I don't think they need about 60m$ for operations? That number is probably more like 10-15m$? Anyway, not a big difference.

 

You do have to factor in that they are very underlevered. LW has like 50m affo? While having almost 600m of net debt. EXE has like 45m in affo (counting in the 6m), and net debt of 200m$. This could be even higher if they refinance (due to lower risk now). So you will need to see either a dividend worth 250-300m$, or expansion priced in. If they can get returns of 10% on capital with acqusitions, that is another 25m in affo in the next 2-3 years (assuming operating leverage as well), so then you get either 70m$ in affo, or a dividend.

 

But yeah, hold the stock and hope it goes back to 7.4$ where I bought it, get some dividends in the mean time, or sell and invest elsewhere .. Im not sure if Lw is really better. They don't have room for expansion or a large dividend. I think EXE is probably slightly cheaper then LW, but not by much. Cannot just go on a affo multiple here imo. And I think the risk of money being pissed away in canadian ops is low. These guys know how to operate SNF's. And it is not like they are investing it in a unrelated business. Only thing that sucks is that it will take a few years before Affo is being grown doing this.

[krazeenyc]

yeah the problem is, I need to figure out if I want to sell. Not really want to hold LW instead.

 

My understanding of working capital is that you need it for operations. I don't think they need about 60m$ for operations? That number is probably more like 10-15m$? Anyway, not a big difference.

 

You do have to factor in that they are very underlevered. LW has like 50m affo? While having almost 600m of net debt. EXE has like 45m in affo (counting in the 6m), and net debt of 200m$. This could be even higher if they refinance (due to lower risk now). So you will need to see either a dividend worth 250-300m$, or expansion priced in. If they can get returns of 10% on capital with acqusitions, that is another 25m in affo in the next 2-3 years (assuming operating leverage as well), so then you get either 70m$ in affo, or a dividend.

 

But yeah, hold the stock and hope it goes back to 7.4$ where I bought it, get some dividends in the mean time, or sell and invest elsewhere .. Im not sure if Lw is really better. They don't have room for expansion or a large dividend. I think EXE is probably slightly cheaper then LW, but not by much. Cannot just go on a affo multiple here imo. And I think the risk of money being pissed away in canadian ops is low. These guys know how to operate SNF's. And it is not like they are investing it in a unrelated business. Only thing that sucks is that it will take a few years before Affo is being grown doing this.

 

I don't own Extendicare anymore but...

 

It's definitely cheaper than LW.

You can't count the $6mm as part of the AFFO -- I would use DCF to value that $$. Use whatever discount rate is reasonable -- how about 6%?

Right now the Extendicare valuation is all about how they put that 250+ CAD to use -- growth, dividend, buyback... all of them work.

Remember that EHSI doesn't really have $97MM going to the buyers as a chunk of that is earmarked for as part of the settlement.

The Canadian business is much easier to run -- current management should do just fine running their existing properties.

 

It's possible they weren't totally screwed in the deal -- SNF properties in the US are all over the map in terms of valuation. It's possible that investors and hedgies were overly optimistic on value. I was reading a paper a month or so ago on SNF valuations and it was interesting reading about how much divergence there is on a per bed valuations.  Mom and pop operators are working their butts off to get up to 25-35k per bed, while top operators have many beds worth 100k+. 

 

Where management seemed to do well on this deal is that they were able to keep the tax very low.  If you had a strong capital allocator in place at Extendicare I think it would be a buy. As it stands now it's kind of in no man's land. 

[doc75]

It's definitely cheaper than LW.

You can't count the $6mm as part of the AFFO -- I would use DCF to value that $$. Use whatever discount rate is reasonable -- how about 6%?

Right now the Extendicare valuation is all about how they put that 250+ CAD to use -- growth, dividend, buyback... all of them work.

Remember that EHSI doesn't really have $97MM going to the buyers as a chunk of that is earmarked for as part of the settlement.

The Canadian business is much easier to run -- current management should do just fine running their existing properties.

 

It's possible they weren't totally screwed in the deal -- SNF properties in the US are all over the map in terms of valuation. It's possible that investors and hedgies were overly optimistic on value. I was reading a paper a month or so ago on SNF valuations and it was interesting reading about how much divergence there is on a per bed valuations.  Mom and pop operators are working their butts off to get up to 25-35k per bed, while top operators have many beds worth 100k+. 

 

Where management seemed to do well on this deal is that they were able to keep the tax very low.  If you had a strong capital allocator in place at Extendicare I think it would be a buy. As it stands now it's kind of in no man's land.

 

Good point RE: the settlement reserve. 

 

For what it's worth, there have been a couple substantive insider purchases since the stock tanked.  Nice at least to see that the CEO has some confidence in his abilities, even if the broad market doesn't. ;)

 

https://canadianinsider.com/node/7?menu_tickersearch=exe

 

 

 

 

[blackdog]

http://www.sys-con.com/node/3265595

[doc75]

Anybody else still tracking this?  As far as I can tell, they haven't yet acted on the substantial NCIB they put in place last month.  Today's news suggests they had something else in mind with their cash:

 

http://finance.yahoo.com/news/extendicare-announces-significant-acquisition-expand-110000255.html

 

I enlarged my position yesterday in the low $6.20s.  I don't expect the investment to knock out the lights, but I don't think they'll have trouble further expanding the business in Canada and making at least a mediocre return on the sale proceeds.  Insiders have been taking reasonably large bites since the post-sale selloff, which is historically unprecedented for this stock.  And with the substantial weakening of the C$, that $6M annual income stream from the Penn leases is marginally more valuable.  In any case, seems like a reasonably safe 7.5% yield in uncertain times.