Extendicare REIT Yield: 8.3%

Extendicare REIT is a fully integrated owner/operator of skilled nursing and long term care facilities in North America. It is one of my top 5  holdings currently for which I purchase in December 2010. The REIT's owned and leased portfolio comprises more than 220 facilities with a resident capacity ~25,000. Extendicare also manages, on behalf of third parties, more than 30 facilities with a resident capacity ~ 3,000. Approximately 70% of the REIT's owned and leased beds are situated in 12 northern U.S. states. The REIT's Canadian operations are predominantly carried out in Ontario, but also include properties and businesses in Alberta, Saskatchewan and Manitoba.

Extendicare REIT ("EXE") recently reported Q1/11 results. Q1/11 FFO/unit (diluted) of $0.25 was virtually unchanged from Q1/10’s $0.26 and below estimates. The bottom line “miss” was primarily driven by a shortfall at the EBITDA line where cost pressures stunted margin expansion in what we expected to be an easy YoY comparison in light of favourable changes on the reimbursement front in late-2010.
Since the Q1/11 release, EXE's units have declined >10%. We believe this reflects the weaker than expected results, compounded by ongoing uncertainty, most notably on the reimbursement front. While EXE's U.S. SNFs are currently enjoying YoY double digit Medicare and Managed Care rate growth (owing to the transition to RUGs-IV), the potential for an 11% funding reduction (noted by CMS in late-April 2011)beginning Oct-1-11 has investors on edge.
I Still See Interesting Total Return Potential For Investors With Adequate Risk Tolerance. An attractive distribution (>8% annualized yield) combined with unit price upside over time, appears to offer interesting total return potential for the more risk tolerant. The current $0.84 annual distribution equates to ~80% of revised 2012E AFFO.
Following CMS’s final determination of reimbursement rates for 2012 (expected in the next 3 months), the Board will consider a distribution increase “in the context of other potential value-enhancing opportunities”.