Yesterday, Extendicare announced that a wholly owned subsidiary of the company had acquired Empire Crossing Retirement Community for $20.2-million from a subsidiary of the Nautical Lands Group, which is a private developer of retirement homes in Ontario.
“This is an acquisition of a new community in a region with favourable demographic trends that delivers on Extendicare’s strategy to grow across the continuum of care and increase the proportion of private-pay revenue within our overall business mix,” said CEO Tim Lukenda. “This transaction will ultimately deploy approximately $7-million of proceeds from the sale of our U.S. operations in a strategic fashion, and supports our overriding objective of creating sustainable and growing value for our shareholders.”
Loe says that the pickup doesn’t “move the needle” on his valuation, but that a series of similar acquisitions would.
“The transaction does not dramatically impact our financial forecasts on its own, but it is certainly consistent with Extendicare’s clear intention to deploy the capital derived from its US nursing home divestiture in FQ215 into Canadian assisted living infrastructure,” he says. “Extendicare’s pro forma cash in mid-August was around $223M, and clearly will be minimally impacted by the $7M reduction to fund Empire Crossing. Weighted average interest rate ascribed to Extendicare’s existing CMHC mortgages is 4.2%, so assuming the new transaction will require new debt of around $12M, the new annual interest expense should be in the $0.5M range, and cumulatively result in projected total interest expense this year of $30.8M.”
In a research update to clients today, Loe maintained his “Buy” rating and one year target price of $10.00 on Extendicare, implying a return of 27.1% at the time of publication.