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Time Is on Their Side
02/03/2010 12:01 am EST
Nursing home operator Extendicare is generating very fit returns from North America's booming population of the aged and the infirm, writes Ryan Irvine in KeyStone's Income Stock Report.
Founded in 1968, Extendicare REIT (TSX: EXE.UN) is a major provider of long-term and short-term senior care services in North America, operating 258 senior care centers with capacity for 28,728 residents.
The REIT’s wholly-owned US subsidiary, Extendicare Health Services Inc. (EHSI), operates 175 senior care centers with capacity for 17,117 residents and has a significant presence (more than 10% of its resident capacity) in Pennsylvania, Michigan, Wisconsin, Ohio, and Kentucky. EHSI offers a continuum of health care services, including: nursing care, assisted living, and related medical specialty services, such as post-acute care and rehabilitative therapy on an inpatient and outpatient basis.
The REIT’s wholly-owned subsidiary, Extendicare (Canada) Inc., (ECI), operates 83 senior care centers in Canada with capacity for 11,611 residents. ECI has a significant presence in Ontario, where 75% of its residents are served. Also, through its ParaMed Home Health Care (ParaMed) division, ECI is a major provider of home health care in Ontario and Alberta.
The REIT has been paying income tax since 2007 and will not be further impacted by [Canada’s] new SIFT tax on income trusts effective in 2011.
During 2009, Extendicare REIT benefited substantially from cost-control initiatives, as well as increases in government medical expenditures in Canada and the United States. For the third quarter of 2009, Extendicare grew revenues by 8.6%. Earnings per unit grew from five cents (Canadian) in the third quarter of 2008 to 40 cents.
In the United States, health care is at the forefront of political debate. It appears that there will be [modest] funding cuts made to the government’s two public health care plans, Medicare and Medicaid. We do not believe the impact will be fundamentally damaging [to Extendicare].
The long-fundamentals are very favorable. Extendicare is in an excellent position to benefit from the demographic trend of an aging population in North America. The US Census Bureau reported that the number of Americans aged 65 to 84 will increase by 36.2% between 2010 and 2020, compared to a total population growth of 10%. In Canada, the demographic trend is very similar.
We [believe] that the current yield of 8.9% is compelling and that the payout ratio of 52% of free cash flow is conservative enough to keep the distribution safe. We are forecasting that Extendicare will generate approximately C$1.20 in earnings per unit and $2.25 in cash flow per unit for 2010. This puts the current valuation at 7.8x forecasted earnings and 4.5x forecasted cash flow, which we believe is a very attractive entry point.
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