South Carolina Nursing Home Blog : South Carolina Nursing Home Lawyer & Attorney : Poliakoff & Associates Law Firm : Elderly Care, Senior Care

Barron's Online recently discussed Sun Healthcare Group's stock prices, and future expected profits.  The company gets three-fourths of its revenues from Medicare and Medicaid.  Though up since late March, the stock is 54% off the record high from January 2008.  Barron's argues that  investors underestimate Sun's prospects for expanding profits next year especially with a record-low price-to-earnings multiple that's well below the broader industry.

In August, the federal government will set Medicare rates for 2010. Though officials have proposed a 1.2% cut, rates should remain flat, or rise slightly, boosting Sun's profits beyond what's expected next year.  Meanwhile, Sun remains focused on improving profitability by reducing its dependence on Medicaid, which covers two-thirds of the nation's nursing-home patients. (Medicaid pays for custodial or long-term care for poor seniors who are too frail and sick to live alone. It's Sun's single largest revenue source.)  Sun and other operators want more patients coming off hospital stays, and are thus eligible for Medicare or private-insurance benefits that doll out far bigger payments.  Last quarter, Medicaid generated 43.7% of Sun's in-patient revenues, down from 45% the previous year. Medicare's contribution rose to 33.2% from 31.7%. Private insurers made 6.3% of Sun's revenues, up from 5.5% last year, while private-paying patients fell below 16%, thanks to a weak economy.

Founded in 1989, Sun has survived bankruptcy and grown into the fifth-largest player in the $99 billion nursing-home industry.  The vast majority of the company's revenues come from 185 nursing homes that provide short- and long-term skilled nursing care. This year, profits are expected to grow 23% to $1.14 a share, and climb another 8% in 2010, according to Thomson Reuters.

Thankfully, Sun has plenty of cash -- almost $100 million as of March 31. Meanwhile, the company sees free cash flow rising as much as 17% this year to $53 million. And Oppenheimer's Wiederhorn expects almost 57% of revenues next year to come from Medicare, private-pay and privately insured patients.

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Extendicare Real Estate Investment Trust ("Extendicare REIT" or the "REIT") (TSX: EXE.UN) reported improved 2009 first quarter results.

Highlights:

- EBITDA of $64.8 million in Q1 2009 increased 18.4%, relative to $46.2 million in Q1 2008.

- EBITDA margins improved to 11.1% in Q1 2009 from 9.7% in Q1 2008 from "cost saving initiatives" and the back-to-basics plan. No details as to what initiatives they mean but it wa sprobably cutting budgets for staff and food!

- Medicare Part A and Managed Care rates grew 8.5% and 13.4%, respectively, from Q1 2008; and 2.1% and 2.6%, respectively, from Q4 2008.

- Cash on hand of $120.1 million with no significant debt maturities until 2011 and beyond.

Adjusted funds from continuing operations improved $6.0 million, or 33.0%, to $24.2 million ($0.332 per basic unit) in the 2009 first quarter from $18.2 million ($0.258 per basic unit) in the 2008 first quarter.  Distributions declared in the 2009 first quarter of $15.3 million, or $0.07 per unit per month, represented 63.2% of adjusted funds from continuing operations.

EHSI SKILLED NURSING FACILITY REVENUE RATES

The average daily Medicare Part A rate for our wholly owned U.S. subsidiary, Extendicare Health Services, Inc. (EHSI), grew 8.5% to US$445.71 in the 2009 first quarter from US$410.69 in the 2008 first quarter. The October 1, 2008, market basket inflationary increase accounted for approximately 3.4% of the rate increase, with the remainder primarily related to higher average acuity levels among Medicare patients served. In comparison to the 2008 fourth quarter, our average daily Medicare Part A grew 2.1% due to a continued improvement in the mix of Medicare residents.

Our percentage of Medicare residents in the nine highest Resource Utilization Groupings (RUGs) classifications increased to 41.0% this quarter from 37.2% in the 2008 first quarter, as well as increasing from 38.9% in the 2008 fourth quarter. In addition, we experienced an increase in the percentage of Medicare residents receiving therapy services to 89.4% this quarter from 87.5% in the 2008 first quarter, as well as from the 2008 fourth quarter of 88.0%.

The average revenue rate for Managed Care clients increased 13.4% to US$379.58 this quarter from US$334.86 in the 2008 first quarter, and increased 2.6% from the 2008 fourth quarter. This is an important revenue growth opportunity as it represents the second highest rate component of our quality mix of residents.

EHSI'S TOTAL AND SKILLED CENSUS

While our same-facility average daily census (ADC) remained relatively unchanged from the 2008 fourth quarter level of 14,984, we did see an improvement in our skilled mix of 188, or 5.6%, to 3,544. We experienced a similar trend last year from the 2007 fourth quarter to the 2008 first quarter. Our same-facility ADC from EHSI's skilled nursing centers declined 217, or 1.4%, to 14,981 in the 2009 first quarter from 15,198 in the 2008 first quarter.

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Here is an article from Long Term Living online editor John Oberlin that indicates that the economic slowdown will not affect the profits by the nursing home industry.  Cambridge Chairman Jeffrey A. Davis points out that all components of the senior housing sector appear to be in good shape, with nursing homes, assisted living, and independent living facilities all at their highest occupancy levels in years

Although the economy apparently is at a tipping point, the outlook for the senior housing/healthcare industry remains remarkably upbeat, one industry expert maintains.

"While no industry is completely recession-proof, owners and operators of senior housing/healthcare properties are better positioned to deal with an economic downturn than they've been at other periods in the past," believes Jeffrey A. Davis, chairman of Cambridge Realty Capital Companies, a senior/healthcare debt and equity financing firm.

"Historically, the pattern has been for the industry to go through debilitating boom/bust cycles. However, at this time, there's no over-building and occupancy levels for all product types are high," he observes.

Davis points out that all components of the senior housing sector appear to be in good shape, with nursing homes, assisted living, and independent living facilities all at their highest occupancy levels in years.

"This time around, there has been significant restraint regarding new construction. Generally speaking, management appears to be more enlightened in this regard and consumers more aware of the expanding range of products available to them. Even if the economy tanks, the industry will not be as vulnerable as some other segments of the commercial real estate market because there hasn't been an artificial demand component working against sound economic judgment," he said.

"Going forward, capital will continue to be available but more constrained in 2008. The crisis in confidence has impacted various lenders in different ways, and underwriting criteria has become more stringent across-the-board.

"But credit will be available from sources attracted to the industry by its long-term outlook. Investors and commercial lenders notice that demographics for the industry continue to move in a positive direction, and that the product that has emerged in the marketplace today has a much broader appeal to users than it did 25 years ago," he said.

HUD has emerged as the preeminent lender of choice for qualified borrowers in the skilled nursing home and assisted living segments and continues to solidify its role as a capital provider to under-served markets. But capital will also be coming from a variety of other sources, including Fannie Mae, Freddie Mac, commercial banks, insurance companies, private equity firms, and credit companies, he noted.

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