Extendicare REIT Blindsides Investors; Downgraded by Analyst

Investors were “blindsided” by Extendicare Real Estate Investment Trust’s (EXETF.PK)  decision to raise C$126.6-million, according to a Bay St. analyst who says the REIT may be forced to cut its distribution.

In a damning note to investors titled, “Questionable Capital Allocation,” Michael Smith, of National Bank Financial, said Extendicare offered no clue it was planning any new issue.

Mr. Smith said:

There was no indication of a need to raise capital in Extendicare’s Q1 disclosure, including its management discussion and analysis press release and discussions on a conference call.

Last week, Extendicare said it had closed an offering of C$92-million of 7.25% convertible subordinate debentures and an equity issue of C$34.6-million.

Even more disturbing, Mr. Smith suggested the former chairman of the REIT, David Hennigar, may have given up on Extendicare. “It appears Mr. Hennigar was so upset he has also given up — within a few days of the announcement he sold all holdings directly in his name,” said Mr. Smith, adding the former chairman’s influence on Scotia Investments could lead the bank to sell as well. Scotia Investments is the REIT’s largest shareholder.

A further concern is the safety of the distribution, according to the analyst.

Mr. Smith said:

Prior to being blindsided on the convert/equity financing we would have said it was unlikely that the REIT would cut distributions barring any surprises operationally. However, we are not nearly as confident to make that statement today.

The analyst lowered his stock rating on Extendicare to “underperform” — the worst rating possible — and set a 12-month target price of C$10, down from C$13.25.

Mr. Smith, who had downgraded the stock before in April, said:

At this point, we just can’t envision the REIT performing in line with its peers despite its valuation. Hence, we are downgrading again.