A contrarian case for investing in this long-term care stock
BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Friday May 1, 2020
As our society deals with an unprecedented lockdown in response to COVID-19, the long-term care industry has come sharply into focus. There is a public outcry to do more to protect people in these residences even as attempts are being made to safeguard them.
Extendicare (EXE) operates 120 senior care and retirement living centres in Canada, and provides home health care services. Benj bought the stock in 2014 for $7.01 a share and added to it in 2018 at $6.62. Since we wrote about the company in September, the world of eldercare has been thrown into turmoil as the coronavirus preys on the aged, with 79 per cent of all Canadian COVID-19 deaths connected to long-term care and seniors’ homes.
When contemplating whether to invest in EXE or other outfits in this sector, investors have some major negatives to consider because of the coronavirus. One is the huge additional cost needed to keep the facilities spanking clean. Plus, more money is needed for masks, gloves and gowns. Meanwhile, salaries are being bumped up and absenteeism has jumped as employees get sick and self-quarantine, while some choose to avoid the risk altogether and not go to work.
This kind of problem might discourage young people from embarking on careers as health care workers. While many seek out opportunities to help others, lots of folks embarking on their careers might decide that the rewards are not worth the risk. That will make it more difficult to fulfill future staffing needs.
Another danger for investors is that many homes have been experiencing a far higher rate of deaths than the historical norm. That raises the question of whether there will be future lawsuits. While the risk exists, EXE can point to the fact that it deals with viral threats and influenza on a continuing basis. Certainly, class action lawsuits are more likely in the litigious United States than in Canada. Still, the gravity of this situation is different than anything we’ve seen, and a proposed class action has already been filed against another owner of nursing and retirement facilities in Canada.
Meanwhile, as residents die – whether of natural causes or the coronavirus – prospective residents are generally not being admitted because of the lockdown. That lower occupancy can translate into reduced revenue. Eventually, of course, those beds will be filled; there is plenty of pent-up demand. The demographic of age 75 and over is expected to grow by about 4 per cent a year for the foreseeable future, according to the company.
One key question for Extendicare is whether the bottom line can remain black. Given the $29-million profit last year, there seems to be margin to work with. There is also the question of the security of the monthly dividend of 4 cents a share, or 48 cents annually. The most recent dividend cut was necessitated by the red ink of 2014, the last time the enterprise lost money. This would suggest the company will decrease the payout – now yielding a very tempting 7.2 per cent – as required. It’s worth noting that when the stock price teetered in March of this year, the dividend reinvestment plan was cancelled because it was decided that the exchange for shares was at too low a price. Nonetheless, more than $123-million in the kitty should help cover some future payouts.
Extendicare continues to grow. Over the past year and a half, 281 units have been added. Redevelopment is happening at 21 facilities, which will also increase the number of beds. Occupancy in most of its long-term care homes remains above 97 per cent, notwithstanding the current crisis, while retirement-home occupancy is at about 93 per cent, the company says. In addition, it is providing third-party services to about 64,800 residents in non-Extendicare facilities such as those owned by Amica Senior Lifestyles. Third-party growth has been huge, up approximately 27 per cent since the end of 2018.
While governments deem many services non-essential during these turbulent times, and the definition varies from province to province, there is no question that housing for seniors is vital. Extendicare says more than 90 per cent of its business lines are government funded, offering additional security for investors.
Extendicare appears to be a reasonable investment. The shares did drop somewhat in March but have recouped some ground. While the payout could be the best reason to invest, it would not surprise us to see capital appreciation of better than 50 per cent over the next five years.