More thoughts on EXE post transactionThe more I read about this one, the more interested I become. They just sold a business that generated NOI of just $11.9 million in 2019 and $13.8 million in 2020, comprising 7.6% and 8.6% of NOI, respectively, for almost $310 million. The press release indicates a cap rate of 6% on a more normalized earnings (in company release, they called it stabilized operating income), which would indicate the normalized NOI at $18.6 million, versus current ~$13 million run rate.
The current EV of Extendicare is about $1.106 billion, and this sale of $310 million will equate to 28% of current EV, yet just 10% of run rate NOI. The share price reaction to this was a relative yawn, with a $20 million market cap bump, despite the clear value creation.
Looking ahead post-Covid, assuming LTC margins (with additional govt funding) can get back to 11.5% post Covid NOI margin (was ~12% in 2018/2019), and Home Health reaches 8.5% NOI margin and Other Operations $15 million in absolute NOI, business could be generating ~$130 million in NOI run rate. Maybe this is optimistic, but even more modest numbers still provide considerable upside.
Current market cap is $680 million + net debt post ESPRIT transaction of $139 million for total Enterprise value (market cap + net debt) of $819 million. Offsetting this is ~$130 million in potential NOI.
My opinion that the market appears to be mispricing the rest of Extendicare’s business (remember they just got a 6% cap rate on NORMALIZED NOI for the Retirement business).
The Saskatchewan LTC operations are losing $1.3 million in NOI and -$1.5 million in AFFO, so getting that off the books will also be a net positive.
And the debt repayment of $172 million removes 31% of the gross long-term debt. The interest expense run rate is currently $6.7 million per quarter, or $26.8 million annually. Without knowing what the interest rate on the repaid debt will be, assume company average. This means below the NOI-line savings of $8.3 million per annum (30.8% of $26.8 million) on the debt repayment, which obviously benefits AFFO (to the tune of $0.0912 per share per annum, or $0.0076 per share per month). For interest’s sake, this added to the current dividend would be a 19% increase ($0.04 to $0.0476 per share per month)
I understand the political angles associated with this company (and the LTC industry), which likely prohibits dividend bumps in the near term (or buybacks or specials). If the Covid backdrop were not present, a special dividend or 10% dutch auction would(should) be announced by the company with the excess cash proceeds (after debt repayment) associated with this divestment, especially for its long suffering shareholders. However, time will pass and if value isn’t recognized by the market, a suitor is likely to come along IMO.
If I am just out to lunch here, please don’t hesitate to let me know. I don’t spend a lot of time in this segment of the market, but demographics around the LTC industry going forward do interest me. Good luck.