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Extendicare REIT Announces 2008 Third Quarter Results MARKHAM, ONTARIO--(MARKET WIRE)--Nov 6, 2008 -- Extendicare Real Estate Investment Trust ("Extendicare REIT"
or the "REIT") (Toronto:EXE-UN.TO - News) today reported 2008 third quarter
results with the following highlights:
- EBITDA for Q3 2008 of $51.6 million versus $50.2 million in Q3 2007 and $45.4 million in Q2 2008. - Continued improvement in average Medicare Part A and HMO/CI rates, up 6.9% and 11.6%, respectively, from Q3 2007 mainly due to inflationary increases and higher average acuity levels among Medicare patients served. - Increase in same-facility skilled mix census to 23.7% from 22.6% in Q3 2007 attributable to a continued increase in the number of HMO/insurance clients. - Effective October 1, 2008, received 3.4% market basket increase in Medicare Part A rates. - Distributions of $0.0925 per unit per month declared for each of November and December. Adjusted funds from continuing operations was $19.7 million ($0.266 per basic unit) for the three months ended September 30, 2008, compared to $21.3 million ($0.302 per basic unit) for the same period in 2007 and $15.3 million ($0.215 per basic unit) in the second quarter. Included in the 2008 third quarter adjusted funds from operations (AFFO) was a net charge of $2.5 million ($0.034 per basic unit) related to an adjustment in our actuarial reserve and premium expense within our Laurier captive as outlined below. "We continue to make progress towards achieving our goals. While certain factors, both external and company specific, negatively impacted performance, management remains focused on its turnaround plan of increasing overall occupancy, optimizing revenue from our skilled mix census, and reducing costs," said Tim Lukenda, President and CEO of Extendicare REIT. "In the third quarter, we initiated administrative cost savings that are anticipated to yield $5.0 million in annualized savings. We also received increases in average Medicare Part A rates commencing October 1, 2008, that are expected to result in additional annual revenue of approximately US$13.3 million." "Looking ahead, the realities of the current credit market conditions dictate that we adopt a more measured approach to our future development projects and acquisition growth. While we intend to complete the projects currently underway, we are reviewing the timing and suitability of certain other planned projects at this time. We are fortunate to have a strong balance sheet and the majority of our long-term debt does not mature until 2011 or later," continued Mr. Lukenda. ACQUISITIONS Both the Michigan and Wisconsin acquisitions continue to exceed expectations. Since we acquired Tendercare in Michigan last fall, its skilled nursing total average daily census (ADC) on a same-facility basis has grown by 12.9%, or 57, and its Medicare Part A rates have increased 12.3% or US$44.53 per Medicare day. In addition, Tendercare's annualized 2008 year-to-date EBITDA has increased by 17.2%, or US$3.8 million, to US$25.9 million, from its annual 2007 performance. We implemented time-tracking software in Michigan in August 2008, which will enhance our ability to manage labour costs. We are also pleased with the results from the five other single senior care facility 2007 acquisitions in Wisconsin that have generated an unlevered return on our investment of 12.9% based upon their 2008 year-to-date performance. Their performance continues to improve as we make enhancements to the facilities and launch programs to attract a higher acuity clientele. DEVELOPMENT PROJECTS We currently have four construction projects underway with completion dates of: - April 2009, 100-bed skilled nursing facility in Okemos, Michigan; - October 2009, 100-bed skilled nursing facility in Summit, Wisconsin; - November 2009, 60-unit assisted living facility in Summit, Wisconsin; and - May 2010, 280-bed continuing care centre in Red Deer, Alberta. There are nine other projects in various stages of pre-construction development and we are evaluating commencement dates based upon a number of factors. For the remaining seven Canadian projects, some of the factors that may influence a decision to delay the start of some or all of the projects involve the timing of tenders to reduce construction costs. Proceeds from our $120.6 million financing in June of this year, together with construction financing from Canada Mortgage and Housing Corporation, will finance 100% of these projects. Currently, our estimated leveraged returns on net investment from the U.S., Alberta and Ontario projects are projected at over 30%, 30% and 14%, respectively. We received final approval from the new Alberta Health Services Board for construction of a 140-unit designated assisted living centre in Lethbridge, Alberta. The new centre is intended as a replacement for our existing nursing home in Lethbridge, however we are having ongoing discussions about the continued operation of the existing facility as a nursing home or an alternative use. We are also awaiting final approval from the Alberta Health Services Board for the 180-bed Edmonton, Alberta continuing care centre, which is intended as a replacement for our existing 113-bed nursing home in Edmonton. To date, there have been no discussions with respect to the timing of closure of the existing Edmonton facility. The current combined annual EBITDA of our two existing facilities in Lethbridge and Edmonton is approximately $1.8 million, while the projected combined annual EBITDA of the two new facilities, once fully operational, is expected to exceed $5.0 million. As of September 2008, the average occupancy at our new facility in Sequim, Washington was 71% after having been fully operational for eight months, while the average occupancy at our new facility in Holland, Michigan was 87%, having been fully operational for five months. The Medicare, skilled and quality mix at these facilities for the month of September were: 31%, 34% and 44%, respectively, for Sequim; and 40%, 58% and 82%, respectively, for Holland. EHSI SKILLED NURSING FACILITY REVENUE RATES The average daily Medicare Part A rate for Extendicare Health Services, Inc. (EHSI) in the 2008 third quarter was US$419.53, an increase of 6.9% from US$392.38 in the 2007 third quarter, and an increase over US$417.75 in the 2008 second quarter. Approximately half of the increase from the 2007 third quarter related to a 3.3% market basket inflationary increase effective October 1, 2007, with the remainder primarily related to higher average acuity levels among Medicare patients served. Excluding the Michigan facilities, the percentage of Medicare residents in the nine highest Resource Utilization Groupings (RUGs) classifications increased to 37.7% this quarter from 37.5% in the 2007 third quarter. This was a slight decline from 38.1% in the 2008 second quarter. The percentage of Medicare residents receiving therapy services increased to 88.2% this quarter from 85.3% in the same 2007 period, and from 87.1% in the 2008 second quarter. We received a 3.4% market basket increase in Medicare Part A rates effective October 1, 2008, which is estimated to increase EHSI's average Medicare Part A rate by US$13.38, resulting in additional annual revenue of approximately US$13.3 million, based on our Medicare ADC for the first nine months of 2008. The average revenue rate for Health Maintenance Organization (HMO) and commercial insurance (CI) clients, an important revenue growth opportunity as it represents the second highest rate component of quality mix, increased 11.6% to US$362.95 this quarter from US$325.10 in the 2007 third quarter, and increased from US$358.94 in the 2008 second quarter. EHSI'S TOTAL AND SKILLED CENSUS On a same-facility basis, EHSI's skilled nursing facility ADC increased by 36 in the 2008 third quarter to 12,240 from the 2008 second quarter. The increase was mainly due to our marketing efforts, along with census improvements in six facilities, previously identified as clinically challenged, accounting for over half of the increase. Four of these facilities have returned to a profitable status. This quarter-over-quarter improvement compares favourably to 2007 wherein our same-facility ADC declined 57 to 12,449 in the 2007 third quarter from the 2007 second quarter. In comparison to the 2007 third quarter, our same-facility ADC from skilled nursing facilities declined 209, or 1.7%, in the 2008 third quarter. Almost half of this decline, or 101 ADC, resulted from a voluntary slowdown in admissions at the clinically challenged facilities. EHSI's same-facility skilled mix ADC increased to 2,899 this quarter, or 2.9%, from the 2007 third quarter primarily due to growth in HMO/CI of 168 ADC, or 26.3%. The increase over 2007 in our HMO/CI residents is due to our focus on the premium payor market segment and the number of Medicare beneficiaries opting out of traditional Medicare Part A benefits and selecting coverage through a Medicare HMO product. In comparison to the 2008 second quarter, our skilled mix ADC declined by 198 from 3,097. The decline in Medicare ADC this quarter from the 2008 second quarter is not unusual. Medicare admissions generally begin to decline during the latter portion of the second quarter, are at their lowest level during the summer months when fewer elective surgeries are performed, and typically begin to increase in the latter part of the year. ACTUARIAL RESERVES As a result of the level of loss experience under our claims-made reinsurance policy for the three-year period covering 2005 to 2007, we are exercising our option to commute our reinsurance coverage for that period. This will provide us with a return premium of US$7.0 million to be received in January 2009. We had already accrued for the minimum commutation option of US$4.0 million over the three-year term of the policy, and therefore, have recorded an additional US$3.0 million reduction in premium expense in the 2008 third quarter. Following our usual practice of completing an interim independent actuarial review of our resident care liabilities during the third quarter, we have decided to strengthen the level of our reserves by US$5.5 million this quarter. The volume of claims and their average settlement values have remained constant, but certain claims have been settled faster than usual this year, which has prompted the independent actuary to increase his estimate of our ultimate liability. While we believe the early settlement of these particular claims is an anomaly, which will not necessarily continue in the future, we believe it prudent to record the higher reserve at this time. The net result of the reduction in premium expense and increase in reserves was a decline in EBITDA and net earnings of $2.5 million and $2.2 million, respectively. CLASS ACTION LAWSUITS As previously announced, two class action lawsuits have been filed against wholly owned U.S. based subsidiaries of the REIT in a federal district court in Seattle, Washington and in a state court in Minneapolis, Minnesota. Both claims involve the same law firm as co-counsel and allege that residents relied on false and misleading advertising and marketing materials to their detriment. The claims also include allegations that the facilities admitted residents without due regard to their needs. The Washington complaint involves 15 facilities during a four-year period beginning in August 2004; and the Minnesota complaint involves 10 facilities during a six-year period beginning in October 2002. The determination of the merits for class certification for the Washington claim will probably not be made until the summer of 2009. Since the Minnesota claim was only recently filed, the timing of the determination of the merits for class certification is not yet known. At this time, a trial date has not been set for either claim. Plaintiffs have yet to identify their specific theory for damages. We believe that the allegations in these cases are without merit, and we intend to vigorously defend against the lawsuits in court. Since the announcement of the Washington suit in August 2008, we have seen a decline in ADC at our Washington facilities of 46 in skilled mix and 24 in total ADC, primarily, we believe, as a result of the negative press coverage. 2008 THIRD QUARTER FINANCIAL REVIEW
TABLE 1 Q3 Q3 Q2
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2008 2007 2008
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(millions of dollars unless otherwise noted)
Revenue
U.S. operations (US$) 343.6 268.7 338.4
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U.S. operations (C$) 357.5 281.4 341.8
Canadian operations 149.5 142.4 151.4
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Total Revenue 507.0 423.8 493.2
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EBITDA (1)
U.S. operations (US$) 34.5 33.5 32.4
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U.S. operations (C$) 35.9 35.0 32.7
Canadian operations 15.7 15.2 12.7
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Total EBITDA 51.6 50.2 45.4
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Average US/Canadian dollar exchange rate 1.0406 1.0477 1.0102
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(1) Refer to discussion of non-GAAP measures.Revenue Comparison to 2007 Third Quarter and 2008 Second Quarter Revenue for the 2008 third quarter grew 19.6% to $507.0 million from $423.8 million in the 2007 third quarter. In comparison to the 2008 second quarter, revenue this quarter grew $13.8 million, or 2.8%, and exclusive of the impact of the weaker Canadian dollar revenue increased $3.4 million. EBITDA Comparison to 2007 Third Quarter EBITDA for the 2008 third quarter grew $1.4 million, or 2.8%, to $51.6 million compared to $50.2 million for the 2007 third quarter. EBITDA from U.S. operations in U.S. dollars improved US$1.0 million this quarter. New facilities contributed US$7.9 million of EBITDA this quarter and US$0.2 million in the 2007 third quarter. Same-facility EBITDA declined US$6.7 million, of which US$2.5 million resulted from this quarter's increase in actuarial reserves, net of a reduction in premium expense, and US$1.6 million was from the 2007 release of actuarial reserves and lower investment earnings. The balance of the decline of US$2.6 million was due to increases in health benefits, bad debts and supplies costs, partially offset by increases in rates and improvements in payor mix. EBITDA from Canadian operations improved $0.5 million to $15.7 million this quarter from $15.2 million in the 2007 third quarter, primarily due to funding enhancements and timing of spending under the Ontario nursing home envelope system. EBITDA Comparison to 2008 Second Quarter EBITDA for the 2008 third quarter was $51.6 million compared to $45.4 million in the 2008 second quarter. Excluding the weaker Canadian dollar, EBITDA grew $5.1 million, or 11.2%. EBITDA from U.S. operations this quarter was higher by US$2.1 million from the 2008 second quarter. Exclusive of the US$2.5 million increase in actuarial reserves, net of a reduction in premium expense, EBITDA increased US$4.6 million, as a result of the following items: - improvement in start-up costs at two facilities and clinical challenges at six facilities of US$1.7 million; - lower workers' compensation and property taxes of US$1.7 million pertaining to prior years; and - improvement of US$1.2 million in remaining operations. EBITDA from Canadian operations improved by $3.0 million this quarter due to a second quarter $2.4 million charge for compensation arrangements. Operations otherwise improved by $0.6 million between quarters primarily due to funding enhancements and a seasonal decline in utility costs. Earnings from Continuing Operations
TABLE 2 Three months ended September 30
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2008 2007
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Per Per
Components of Earnings from After diluted After diluted
Continuing Operations (1) -tax unit -tax unit
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(thousands of dollars except per unit amounts)
Continuing Operations before Undernoted (1)
U.S. operations (US$) 4,901 8,888
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U.S. operations (C$) 5,131 9,196
Canadian operations 3,265 4,714
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8,396 $0.12 13,910 $0.20
Gain (loss) on derivative financial
instruments and foreign exchange (3,197) (0.05) 2,162 0.03
Gain (loss) from asset impairment,
disposals and other items (1,491) (0.02) - -
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Earnings from continuing
operations 3,708 $0.05 16,072 $0.23
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(1) Refer to discussion of non-GAAP measures.Earnings from continuing operations in the 2008 third quarter were $3.7 million ($0.05 per diluted unit). During the 2008 third quarter, we recorded a pre-tax loss from asset impairment, disposal and other items of $2.3 million ($1.5 million after tax), of which $1.3 million related to the impairment of a leased facility, which has had ongoing performance issues, and the remaining $1.0 million pre-tax loss was primarily related to a permanent market value decline in one of our investments held for self-insured liabilities. The 2008 third quarter pre-tax loss on derivative financial instruments and foreign exchange of $3.0 million ($3.2 million after tax), is primarily due to the weakening Canadian dollar and its impact on recording the non-cash market value change of our foreign currency forward contracts. Earnings from continuing operations prior to separately reported items, as outlined in Table 2 above, were $8.4 million ($0.12 per diluted unit) in the 2008 third quarter compared to $13.9 million ($0.20 per diluted unit) in the 2007 third quarter. The $5.5 million decline in earnings was impacted by the change in the actuarial reserve provision, return of insurance premium paid, and lower investment earnings in our captive insurance company of $3.9 million. Exclusive of this, net earnings declined by $1.6 million this quarter due to the previously discussed improvement in EBITDA, offset by increases in depreciation and financing costs due primarily to acquisitions and capital expenditures. 2008 NINE MONTH FINANCIAL REVIEW
Nine months ended
TABLE 3 September 30
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2008 2007
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(millions of dollars unless otherwise noted)
Revenue
U.S. operations (US$) 1,020.2 798.7
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U.S. operations (C$) 1,039.0 882.9
Canadian operations 443.2 420.9
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Total Revenue 1,482.2 1,303.8
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EBITDA (1)
U.S. operations (US$) 103.6 103.4
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U.S. operations (C$) 105.5 114.3
Canadian operations 37.8 40.5
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Total EBITDA 143.3 154.8
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Average US/Canadian dollar exchange rate 1.0184 1.1055
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(1) Refer to discussion of non-GAAP measures.EBITDA Comparison to First Nine Months of 2007 EBITDA for the first nine months of 2008 was $143.3 million compared to $154.8 million for the same 2007 period. Excluding the negative impact of a stronger Canadian dollar, EBITDA declined by $2.5 million. EBITDA from U.S. operations was US$103.6 million in the first nine months of 2008 compared to US$103.4 million in the same 2007 period. New facilities contributed US$22.5 million to EBITDA to date in 2008 and US$0.2 million in the same 2007 period, whereas same-facility EBITDA declined US$22.1 million and was impacted by the following items: - start-up costs at two facilities and clinical challenges at six facilities of US$5.2 million; - a decrease of US$5.0 million due to the 2007 release of actuarial reserve provisions and lower investment earnings in our captive insurance company; - a decrease of US$2.5 million due to the 2008 accrual for actuarial reserves, net of a premium expense reduction; - an increase in bad debts of US$2.2 million due to specific facilities in Pennsylvania; - an increase in workers' compensation and property taxes of US$2.6 million pertaining to prior years; and - a US$4.6 million decline in remaining operations due to a decline in total census and higher year-over-year operating costs. EBITDA from Canadian operations declined $2.7 million to $37.8 million in the first nine months of 2008 from $40.5 million in the same 2007 period, due to a $4.2 million increase in administrative costs, of which $2.4 million related to the compensation arrangements recorded in the 2008 second quarter. Prior to administrative costs, net operating income improved by $1.5 million primarily due to funding enhancements. Earnings from Continuing Operations
TABLE 4 Nine months ended September 30
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2008 2007
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Per Per
Components of Earnings from After diluted After diluted
Continuing Operations (1) -tax unit -tax unit
-----------------------------------------------------------------------
(thousands of dollars except per unit amounts)
Continuing Health Care Operations before Undernoted (1)
U.S. operations (US$) 17,005 31,668
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U.S. operations (C$) 17,325 35,073
Canadian operations 5,596 9,986
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22,921 $0.32 45,059 $0.64
Gain (loss) on derivative financial
instruments and foreign exchange (4,799) (0.07) 14,580 0.21
Gain (loss) from asset impairment,
disposals and other items (1,491) (0.02) 1,428 0.02
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Earnings from continuing health
care operations 16,631 $0.23 61,067 $0.87
Share of equity accounted earnings - - 1,541 0.02
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Earnings from continuing
operations 16,631 $0.23 62,608 $0.89
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(1) Refer to discussion of non-GAAP measures.As outlined in Table 4 above, earnings from continuing health care operations, prior to separately reported items, were $22.9 million ($0.32 per diluted unit) in the first nine months of 2008 compared to $45.1 million ($0.64 per diluted unit) in the same 2007 period. The $22.2 million decline in earnings was impacted by the following items: - stronger Canadian dollar reduced earnings by $1.5 million; - 2007 favourable tax adjustment pertaining to the 2006 reorganization of $1.4 million; - a decrease of $5.5 million due to the 2007 release of actuarial reserve provisions and lower investment earnings in our captive insurance company; - a decrease of $2.2 million due to the 2008 accrual for actuarial reserves, net of a premium expense reduction; - a $1.6 million after-tax charge for our former CEO's compensation arrangements; and - interest costs associated with the March 2007 US$90.0 million financing for payment of taxes associated with the distribution of Assisted Living Concepts, Inc. of $0.7 million. Exclusive of the above, health care net earnings declined by $9.3 million due to the previously discussed decline in EBITDA, and increases in depreciation and financing costs due primarily to acquisitions and capital expenditures. ADJUSTED FUNDS FROM OPERATIONS 2008 Third Quarter AFFO AFFO from continuing operations was $19.7 million ($0.266 per basic unit) in the 2008 third quarter compared to $21.3 million ($0.302 per basic unit) in the 2007 third quarter, representing a decline of $1.6 million ($0.036 per basic unit). The results were impacted by the following items: - 2008 third quarter actuarial reserve provision, net of a premium expense reduction, of $2.5 million; and - 2007 third quarter release of actuarial reserve provision and lower investment earnings in our captive insurance company of $1.7 million; partially offset by - lower maintenance capital expenditures of $1.3 million between periods. Exclusive of the above, AFFO improved by $1.3 million due to improvements in EBITDA, partially offset by increased financing costs. In comparison to the 2008 second quarter AFFO from continuing operations of $15.3 million, the 2008 third quarter AFFO increased by $4.4 million, primarily due to the improvements in EBITDA and $1.0 million in lower spending of facility maintenance costs, partially offset by higher financing costs. 2008 Nine Month AFFO AFFO from continuing operations was $53.4 million ($0.742 per basic unit) in the first nine months of 2008 compared to $68.0 million ($0.967 per basic unit) in the same 2007 period, representing a decline of $14.6 million ($0.225 per basic unit). The results were impacted by the following items: - stronger Canadian dollar reduced AFFO by $3.6 million; - 2007 favourable tax adjustment pertaining to the 2006 reorganization of $1.4 million; - 2007 first nine months release of actuarial reserve provision and lower investment earnings in our captive insurance company of $5.5 million; - 2008 third quarter actuarial reserve provision, net of a premium expense reduction, of $2.5 million; - 2008 second quarter after-tax charge of $1.6 million for our former CEO's compensation arrangements; and - interest costs associated with the March 2007 US$90.0 million financing for payment of taxes associated with the distribution of Assisted Living Concepts, Inc. of $0.7 million; partially offset by - lower maintenance capital expenditures of $2.9 million between periods. Exclusive of the above, AFFO declined by $2.2 million primarily due to an improvement in EBITDA, offset by increased financing costs. Annual facility maintenance costs are anticipated to be between 1.5% to 2% of revenue, which is consistent with our objective to maintain and upgrade our facilities. In the first nine months of 2008, we spent $18.8 million in facility maintenance costs, and anticipate spending $32.0 million for the year in 2008. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2008, we had cash and cash equivalents of $126.2 million compared with $44.2 million at December 31, 2007. Cash provided by operating activities was $58.8 million in the first nine months of 2008 compared to $87.7 million in the same 2007 period. The decline reflected a reduction in earnings and an unfavourable change of $13.9 million in operating assets and liabilities between periods primarily related to an increase in accounts receivable and income taxes payable, partially offset by an increase in accounts payable. The 2008 increase in accounts receivable primarily resulted from trade receivables due to funding improvements and the number of HMO residents served. The comparability of changes in income taxes and accounts payable were impacted by a net income tax refund in 2007 related to 2006, and the payment in 2007 of a prior year Medicare settlement. Capital additions to property and equipment, excluding acquisitions, were $51.6 million in the first nine months of 2008 compared to $53.1 million in the same 2007 period. Growth expenditures totalled $32.8 million to date in 2008 versus $31.4 million in the same 2007 period, while facility maintenance costs were $18.8 million and $21.7 million, respectively. These costs fluctuate on a quarterly basis with the timing of projects and seasonal weather conditions. We are expecting to spend $32.0 million in facility maintenance capital expenditures and $50.0 million in growth capital expenditures in 2008. Long-term debt, including current portion, was $1,210.4 million at September 30, 2008, and was net of $30.5 million of financing costs. At September 30, 2008, long-term debt (at face value and including current portion) represented 45.5% of adjusted gross book value (37.9% excluding the convertible debentures). Our consolidated leverage ratio, or debt to trailing twelve months EBITDA, is 6.5 times. We are confident that our cash from operating activities, together with available bank credit facilities, will be sufficient to fund the current requirements of our ongoing operations, maintenance capital expenditures, and debt repayment obligations. The REIT structure necessitates raising funds through debt financings and the capital markets to fund strategic acquisitions and growth capital expenditures. The financing completed in June 2008, in addition to other cash on hand will adequately cover our planned growth capital expenditures and development projects. The decision to proceed or defer certain of these projects is being made on a case-by-case basis. Given the current economic conditions we plan to be prudent to ensure we meet our future operational and capital commitments. NOVEMBER AND DECEMBER DISTRIBUTIONS DECLARED The Board of Trustees of the REIT today declared a cash distribution of $0.0925 per unit per month for each of November and December 2008, payable to unitholders of record at the close of business on November 28, 2008 and December 31, 2008, respectively, and will be paid on December 15, 2008 and January 15, 2009, respectively. Extendicare Limited Partnership (the "Partnership") also announced that it has declared a cash distribution of $0.0925 per Class B limited partnership unit per month for each of November and December 2008, payable to unitholders of record at the close of business on November 28, 2008 and December 31, 2008, respectively, and will be paid on December 15, 2008 and January 15, 2009, respectively. Management estimates that approximately 70% of the 2008 distributions of the REIT and Partnership will be characterized as tax deferred returns of capital for Canadian residents. The remaining 30% of distributions of the REIT paid in 2008 are expected to be taxed as dividends and those paid to Canadian residents are eligible dividends as per the Income Tax Act (Canada) (the "Act"). To the extent a portion of the remaining 30% of distributions of the Partnership allocated in 2008 is taxed as dividends, those paid to Canadian residents are eligible dividends as per the Act. Extendicare REIT is not required to, and does not, calculate its "earnings and profits" pursuant to the United States Internal Revenue Code of 1986, as amended (the "Code"), and therefore no portion of its distributions represent qualified dividend income for U.S. tax purposes. As previously announced, a portion of the November distribution will be treated as U.S. source interest income in the hands of the unitholders of the REIT and Partnership. The amount of the U.S. source interest income in the November distribution is approximately $0.0331 per unit. This U.S. source interest income is subject to U.S. withholding tax for non-U.S. residents, and U.S. backup withholding tax for U.S. holders. Unitholders may be eligible for the portfolio interest exemption under Sections 871 and 881 of the Code by submitting a valid Form W-8BEN or Form W-9, as applicable to their broker or administrator. ABOUT US Extendicare REIT, through its wholly owned subsidiaries, is a major provider of short and long-term care services for seniors in North America. We operate 266 nursing and assisted living facilities in North America, with capacity for approximately 30,000 residents. As well, we offer medical specialty services such as subacute care and rehabilitative therapy services in the United States, and home health care services in Canada, and employ approximately 38,100 people in North America. CONFERENCE CALL AND WEBCAST On November 7, 2008, at 10:00 a.m. (ET), we will hold a conference call to discuss our results for the 2008 third quarter. The call will be webcast live and archived in the investors/presentations & webcasts section of our website at www.extendicare.com. Alternatively, the call-in number is 1-888-789-9572 or 416-695-7806, conference ID number 3273137. A taped rebroadcast of the call will be available until midnight on November 21, 2008. To access the rebroadcast, dial 1-800-408-3053 or 416-695-5800, conference ID number 3263137. Slides accompanying remarks during the call will be posted to our website as part of the live webcast. Also, a supplemental information package containing historical quarterly financial results and operating statistics can be found on the website under the investors/financial reports section. Certain 2007 figures have been revised to conform to the presentation in 2008, mainly for discontinued operations. Non-GAAP Measures Extendicare REIT assesses and measures operating results and financial position based on performance measures referred to as "EBITDA", "continuing health care operations before undernoted", "Distributable Income", "Funds from Operations", "Adjusted Funds from Operations" and "Adjusted Gross Book Value". These are not measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. These non-GAAP measures are presented in this document because either: (i) management believes that they are a relevant measure of the ability of the REIT to make cash distributions; or (ii) certain ongoing rights and obligations of the REIT may be calculated using these measures. Such non-GAAP measures may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to similarly titled measures as reported by such issuers. They are not intended to replace earnings (loss) from operations, net earnings (loss) for the period, cash flow, or other measures of financial performance and liquidity reported in accordance with Canadian GAAP. Reconciliations of these non-GAAP measures from net earnings and/or from cash provided by operations, where applicable, are provided in this press release. Detailed descriptions of these terms can be found in the disclosure documents filed by Extendicare REIT with the securities regulatory authorities, available at www.sedar.com and on the REIT's website at www.extendicare.com. Forward-looking Statements Information provided by Extendicare REIT from time to time, including this release, contains or may contain forward-looking statements concerning anticipated financial events, results, circumstances, economic performance or expectations with respect to the REIT and its subsidiaries, including its business operations, business strategy, and financial condition. Forward-looking statements can be identified because they generally contain the words "expect", "intend", "anticipate", "believe", "estimate", "plan" or "objective" or other similar expressions. Forward-looking statements reflect management's beliefs and assumptions and are based on information currently available, and the REIT assumes no obligation to update any forward-looking statement. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the REIT to differ materially from those expressed or implied in the statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on the REIT's forward-looking statements. Further information can be found in the disclosure documents filed by Extendicare REIT with the securities regulatory authorities, available at www.sedar.com and on the REIT's website at www.extendicare.com.
EXTENDICARE REIT
Condensed Consolidated Earnings
(thousands of Canadian dollars Three months ended Nine months ended
except per unit amounts) September 30 September 30
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2008 2007 2008 2007
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Revenue (revised) (revised)
Nursing and assisted living centres
United States 345,450 269,412 1,003,682 843,889
Canada 110,488 105,155 324,825 308,829
Home health - Canada 36,382 35,200 110,196 105,603
Outpatient therapy - United States 3,286 2,986 9,412 9,481
Other 11,379 11,028 34,113 36,030
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506,985 423,781 1,482,228 1,303,832
Operating expenses 435,296 354,806 1,275,277 1,091,083
Administrative costs 16,827 15,650 54,018 48,617
Lease costs 3,271 3,084 9,598 9,316
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EBITDA(1) 51,591 50,241 143,335 154,816
Depreciation and amortization 14,819 11,433 42,786 35,637
Accretion expense 376 308 1,110 961
Interest expense 23,552 19,704 66,128 56,812
Interest income (1,882) (3,160) (4,766) (6,292)
Loss (gain) on derivative financial instruments
and foreign exchange 3,046 (3,425) 5,213 (20,479)
Loss (gain) from asset impairment, disposals
and other items 2,315 - 2,315 (2,192)
----------------------------------------------------------------------------
Earnings from continuing health care
operations before income taxes 9,365 25,381 30,549 90,369
----------------------------------------------------------------------------
Income tax expense (recovery)
Current 6,523 6,404 17,868 20,526
Future (866) 2,905 (3,950) 8,776
----------------------------------------------------------------------------
5,657 9,309 13,918 29,302
----------------------------------------------------------------------------
Earnings from continuing health care
operations 3,708 16,072 16,631 61,067
Share of equity accounted earnings - - - 1,541
----------------------------------------------------------------------------
Earnings from continuing operations 3,708 16,072 16,631 62,608
Discontinued operations (105) 156 1,227 (2,705)
----------------------------------------------------------------------------
Net earnings 3,603 16,228 17,858 59,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and Diluted Earnings per Unit ($)
Earnings from continuing operations 0.05 0.23 0.23 0.89
Net earnings 0.05 0.23 0.25 0.85
----------------------------------------------------------------------------
(1) Refer to discussion of non-GAAP measures.
----------------------------------------------------------------------------
EXTENDICARE REIT
Condensed Consolidated Cash Flows
Three months ended Nine months ended
(thousands of Canadian dollars) September 30 September 30
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Operating Activities
Net earnings 3,603 16,228 17,858 59,903
Adjustments for:
Depreciation and amortization 15,078 11,803 43,734 36,926
Provision for self-insured
liabilities 9,067 2,786 16,181 8,840
Payments for self-insured
liabilities (6,945) (2,683) (21,267) (14,982)
Future income taxes (853) 3,017 (2,014) 6,516
Loss (gain) on derivative financial instruments
and foreign exchange 3,046 (3,425) 5,213 (20,479)
Loss (gain) from asset impairment, disposals
and other items 2,315 - 2,315 (2,192)
Loss (gain) from asset impairment,
disposals and other items
from discontinued operations - - (474) 5,675
Undistributed share of earnings from equity
accounted investments - - - (1,541)
Other 2,626 1,777 6,346 4,206
----------------------------------------------------------------------------
27,937 29,503 67,892 82,872
Net change in operating assets and liabilities
Accounts receivable 1,117 (1,968) (9,107) 2,726
Supplies and prepaid expenses 3,221 2,016 (4,264) (3,511)
Accounts payable and accrued
liabilities 2,177 (1,170) 7,784 (16,357)
Income taxes 5,684 5,661 (3,502) 21,993
----------------------------------------------------------------------------
40,136 34,042 58,803 87,723
----------------------------------------------------------------------------
Investing Activities
Capital additions (21,239) (18,034) (51,581) (53,123)
Acquisitions - (13,159) - (24,648)
Net proceeds from dispositions - - 2,569 2,228
Return of equity accounted investment - 39,808 - 81,445
Other assets 3,104 1,347 4,883 (1,319)
----------------------------------------------------------------------------
(18,135) 9,962 (44,129) 4,583
----------------------------------------------------------------------------
Financing Activities
Issue of long-term debt 10,378 - 154,707 246,695
Issue on line of credit 1,018 8,291 1,018 8,291
Repayment of long-term debt (5,418) (5,740) (67,796) (11,161)
Decrease in investments held
for self-insured liabilities 782 1,824 8,631 11,832
Distributions paid (19,982) (19,000) (57,828) (62,050)
Issue of units - - 34,580 -
Financing costs (1,075) (45) (10,485) (9,995)
Income taxes paid re: the
distribution of ALC - - - (120,220)
Other 1,973 (2,029) 3,894 294
----------------------------------------------------------------------------
(12,324) (16,699) 66,721 63,686
----------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held
in foreign currency 219 (1,392) 558 (6,237)
----------------------------------------------------------------------------
Increase in cash and
cash equivalents 9,896 25,913 81,953 149,755
Cash and cash equivalents at
beginning of period 116,291 151,899 44,234 28,057
----------------------------------------------------------------------------
Cash and cash equivalents at
end of period 126,187 177,812 126,187 177,812
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EXTENDICARE REIT
Condensed Consolidated Balance Sheets
(thousands of Canadian dollars, September 30 December 31
unless otherwise noted) 2008 2007
----------------------------------------------------------------------------
Assets (revised)
Current assets
Cash and short-term investments 133,112 44,234
Invested assets 1,395 2,439
Accounts receivable, less allowances 236,997 214,305
Income taxes recoverable 6,565 2,640
Future income tax assets 31,834 27,504
Supplies and prepaid expenses 23,312 25,467
----------------------------------------------------------------------------
433,215 316,589
Property and equipment 878,063 842,648
Goodwill and other intangible assets 176,142 162,481
Other assets 133,914 118,445
----------------------------------------------------------------------------
1,621,334 1,440,163
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Unitholders' Deficiency
Current liabilities
Outstanding cheques in excess of bank balance 6,925 -
Accounts payable 34,300 35,963
Accrued liabilities 228,279 203,084
Accrual for self-insured liabilities 13,492 12,392
Current portion of long-term debt 25,229 75,241
----------------------------------------------------------------------------
308,225 326,680
Accrual for self-insured liabilities 32,897 30,018
Long-term debt 1,185,146 996,470
Other long-term liabilities 66,939 63,978
Future income tax liabilities 49,163 46,595
----------------------------------------------------------------------------
1,642,370 1,463,741
Unitholders' deficiency (21,036) (23,578)
----------------------------------------------------------------------------
1,621,334 1,440,163
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Closing US/Cdn. dollar exchange rate 1.0642 0.9913
----------------------------------------------------------------------------
EXTENDICARE REIT
Financial and Operating Statistics
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------------------------
(amounts in Canadian dollars,
unless otherwise noted) 2008 2007 2008 2007
----------------------------------------------------------------------------
Health Care Earnings from Continuing Operations (millions)
United States (US$) $(0.1) $11.2 $8.7 $41.5
----------------------------------------------------------------------------
United States $(0.1) $11.6 $8.8 $45.8
Canada 3.8 4.5 7.9 15.2
----------------------------------------------------------------------------
$3.7 $16.1 $16.6 $61.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Health Care Net Earnings (millions)
United States (US$) $(0.2) $11.4 $9.9 $39.2
----------------------------------------------------------------------------
United States $(0.2) $11.8 $10.0 $43.1
Canada 3.8 4.5 7.9 15.2
----------------------------------------------------------------------------
$3.6 $16.2 $17.9 $58.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Skilled Nursing Facility Statistics
Percent of Revenue by Payor Source (same-facility basis, excluding prior
period settlement adjustments)
Medicare (Part A and B) 33.5 % 34.1 % 35.4 % 35.9 %
HMO/CI 9.8 7.5 9.4 7.3
----------------------------------------------------------------------------
Skilled mix 43.3 41.6 44.8 43.2
Private/other 9.4 9.8 9.0 9.7
----------------------------------------------------------------------------
Quality mix 52.7 51.4 53.8 52.9
Medicaid 47.3 48.6 46.2 47.1
----------------------------------------------------------------------------
Average Daily Census by Payor Source (same-facility basis)
Medicare 2,093 2,180 2,249 2,343
HMO/CI 806 638 792 628
----------------------------------------------------------------------------
Skilled mix 2,899 2,818 3,041 2,971
Private/other 1,308 1,358 1,258 1,344
----------------------------------------------------------------------------
Quality mix 4,207 4,176 4,299 4,315
Medicaid 8,033 8,273 7,971 8,190
----------------------------------------------------------------------------
12,240 12,449 12,270 12,505
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Revenue per Resident Day by Payor Source (excluding prior period
settlement adjustments) (US$)
Medicare Part A only $419.53 $392.38 $415.92 $389.68
Medicare (Part A and B) 460.98 433.29 453.82 426.17
HMO/CI 362.95 325.10 353.20 324.42
Private/other 206.02 200.24 205.07 200.64
Medicaid 169.28 162.64 167.09 159.59
Weighted average 234.26 222.48 233.49 222.22
----------------------------------------------------------------------------
Average Occupancy (excluding managed facilities) (same-facility basis)
U.S. skilled nursing facilities 88.9 % 90.2 % 89.0 % 90.5 %
U.S. assisted living facilities 85.1 84.2 83.8 82.6
Canadian facilities average occupancy 98.2 98.6 97.9 98.2
----------------------------------------------------------------------------
Capital Additions to Property and Equipment (thousands)
Growth expenditures 14,637 10,127 32,836 31,438
Facility maintenance 6,602 7,907 18,745 21,685
----------------------------------------------------------------------------
Consolidated reported 21,239 18,034 51,581 53,123
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average US/Cdn. dollar exchange
rate 1.0406 1.0477 1.0184 1.1055
----------------------------------------------------------------------------
(1) Amounts may not add due to rounding.
----------------------------------------------------------------------------
EXTENDICARE REIT
Supplemental Information - FFO and AFFO
The following table provides a reconciliation of EBITDA to Funds
from Operations (FFO), Distributable Income (DI) and Adjusted Funds
from Operations (AFFO) for the periods ended September 30, 2008 and 2007(1)
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------------------------
(thousands of Canadian dollars
unless otherwise noted) 2008 2007 2008 2007
----------------------------------------------------------------------------
EBITDA from continuing health
care operations 51,591 50,241 143,335 154,816
Depreciation for furniture,
fixtures, equipment and computers (4,842) (3,360) (13,575) (10,400)
Interest expense, net (21,670) (16,544) (61,362) (50,520)
----------------------------------------------------------------------------
25,079 30,337 68,398 93,896
Current income tax expense(2) (6,261) (6,599) (16,747) (19,957)
----------------------------------------------------------------------------
FFO (continuing operations) 18,818 23,738 51,651 73,939
Amortization of deferred financing
costs 2,104 1,572 5,288 3,810
Principal portion of government
capital funding payments 539 510 1,620 1,534
----------------------------------------------------------------------------
DI (continuing operations) 21,461 25,820 58,559 79,283
Additional maintenance capital
expenditures(3) (1,760) (4,547) (5,170) (11,285)
----------------------------------------------------------------------------
AFFO (continuing operations) 19,701 21,273 53,389 67,998
AFFO (discontinued operations)(4) 285 662 1,751 2,206
----------------------------------------------------------------------------
AFFO 19,986 21,935 55,140 70,204
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Basic Unit ($)
FFO (continuing operations) 0.254 0.338 0.718 1.052
AFFO (continuing operations) 0.266 0.302 0.742 0.967
AFFO 0.270 0.311 0.767 0.998
----------------------------------------------------------------------------
Per Diluted Unit ($)
FFO (continuing operations) 0.248 0.328 0.712 1.040
AFFO (continuing operations) 0.248 0.289 0.713 0.951
AFFO 0.251 0.298 0.735 0.982
----------------------------------------------------------------------------
Distributions declared 20,582 19,530 60,042 58,542
Distributions declared per unit ($) 0.2775 0.2775 0.8325 0.8325
----------------------------------------------------------------------------
Basic weighted average number of
units (thousands) 74,156 70,372 71,920 70,311
Diluted weighted average number of
units (thousands) 88,041 76,151 80,746 72,449
----------------------------------------------------------------------------
(1) "EBITDA", "funds from operations", "distributable income" and "adjusted
funds from operations" are not recognized measures under GAAP and do not
have a standardized meaning prescribed by GAAP. Refer to the discussion
of non-GAAP measures.
(2) Excludes current tax with respect to the loss (gain) from derivative
financial instruments, foreign exchange, restructuring charges, asset
disposals and other items that are excluded from the computation of
AFFO.
(3) Represents total facility maintenance capital expenditures less
depreciation for furniture, fixtures, equipment and computers already
deducted in determining DI.
(4) The impact of discontinued operations reduces FFO, DI and AFFO by the
same amount.
----------------------------------------------------------------------------
Reconciliation of Cash Provided by Three months ended Nine months ended
Operating Activities to DI & AFFO September 30 September 30
----------------------------------------------------------------------------
(thousands of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by operating activities 40,136 34,042 58,803 87,723
Add (Deduct):
Net change in operating assets and
liabilities (12,199) (4,539) 9,089 (4,851)
Current tax expense (recovery) on gain or loss from
derivative financial instruments, foreign
exchange, asset impairment, disposals
and other items 370 (195) (798) 696
Net provisions and payments for
self-insured liabilities (2,122) (103) 5,086 6,142
Depreciation for furniture, fixtures,
equipment and computers (4,842) (3,360) (13,575) (10,400)
Other (136) 127 85 645
Principal portion of government
capital funding payments 539 510 1,620 1,534
----------------------------------------------------------------------------
DI 21,746 26,482 60,310 81,489
Additional maintenance capital
expenditures (1,760) (4,547) (5,170) (11,285)
----------------------------------------------------------------------------
AFFO 19,986 21,935 55,140 70,204
----------------------------------------------------------------------------
----------------------------------------------------------------------------Contact: Contacts:
Extendicare REIT
Douglas J. Harris
Senior Vice President and Chief Financial Officer
(414) 908-8855
(905) 470-4003 (FAX)
Email: djharris@extendicare.com
Visit Extendicare's Website @ http://www.extendicare.com
Source: Extendicare REIT
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