Emeritus Corporation has a market cap of $791 million; its shares were traded at around $17.71 with and P/S ratio of 0.6. Emeritus Corporation had an annual average earning growth of 7.7% over the past 10 years. GuruFocus rated Emeritus Corporation the business predictability rank of 1-star.
Highlight of Business Operations:We previously operated the Blackstone JV Communities on behalf of the Blackstone JV under management agreements between us and each of the Blackstone JV Communities (the “Blackstone JV Management Agreements”). As a result of the completion of the acquisition of the Blackstone JV Communities, each of the Blackstone JV Management Agreements was terminated. The Blackstone JV Management Agreements provided for management fees equal to 5.0% of gross collected revenues. We earned management fees of approximately $602,000 and $1.5 million in the three and six months ended June 30, 2011, respectively. The Blackstone JV Communities incurred no management fee expense from us subsequent to June 1, 2011, and our management fee revenue and the Blackstone JV management fee expense have been eliminated in the pro forma operating results above.
As of June 30, 2012, we have a working capital deficit of $73.0 million compared to a working capital deficit of $100.1 million at December 31, 2011. We are able to operate in the position of a working capital deficit because we often convert our revenues to cash more quickly than we are required to pay the corresponding obligations incurred to generate those revenues, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities. Our operations result in a low level of current assets to the extent we have used cash for business development expenses or to pay down long-term liabilities. Additionally, the working capital deficit includes the following non-cash items: a $22.1 million deferred tax asset and, as part of current liabilities, $37.0 million of deferred revenue and unearned rental income. A $22.1 million deferred tax liability is included in other long-term liabilities. We do not expect the level of current liabilities to change from period to period in such a way as to require the use of significant cash in excess of normal requirements, except for $30.9 million in final (“balloon”) payments of principal on long-term debt maturing in the next 12 months, which is included in current portion of long-term debt as of June 30, 2012.
Revenues from government reimbursement programs, which are the federal Medicare and state Medicaid programs, represented 12.4% of our community revenues in the first six months of 2012 compared to 12.9% in the comparable 2011 period. Future changes in revenues from Medicare and Medicaid programs in our existing communities will depend upon factors that include resident mix, levels of acuity among our residents, overall occupancy and government reimbursement rates. There continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future. On July 29, 2011, the Center for Medicare and Medicaid Services (“CMS”) issued its final rule reducing Medicare reimbursement rates by an average of 11.1%, which took effect on October 1, 2011. Although we have taken steps to offset a portion of the decrease through cost savings and improved occupancy in our skilled nursing operations, the potential impact of the lower reimbursement levels totals approximately $8.0 million annually, beginning with the October 1, 2011 effective date. We are currently unable to estimate the potential impact of other possible governmental cost containment measures.
The equity losses in the three months ended June 30, 2012 were comprised primarily of equity losses from the Sunwest JV. As described in Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition, we acquired the 24 communities that we previously managed for the Blackstone JV and have included them in our Consolidated Portfolio effective on the June 1, 2011 acquisition date. The equity losses in the three months ended June 30, 2011 were comprised of equity losses of $530,000 from the Sunwest JV, equity earnings of $489,000 from the Blackstone JV, and equity losses of $20,000 from joint ventures with Wegman.
The Company has incurred significant operating losses since its inception, and we had working capital deficits of $73.0 million and $100.1 million as of June 30, 2012 and December 31, 2011, respectively. Due to the nature of our business, it is not unusual to operate in the position of a working capital deficit because we collect revenues much more quickly, often in advance, than we are required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities. Our operations result in a very low level of current assets to the extent cash has been deployed in business development opportunities or to pay down long-term liabilities. Along those lines, the working capital deficit as of June 30, 2012 included a $22.1 million deferred tax asset and, as part of current liabilities, $37.0 million of deferred revenue and unearned rental income. A $22.1 million deferred tax liability is included in other long-term liabilities. We do not expect the level of current liabilities to change from period to period in such a way as to require the use of significant cash, except for $30.9 million in balloon payments of principal on long-term debt maturing during the next 12 months, which is included in current portion of long-term debt as of June 30, 2012. We intend to refinance, extend, or retire these obligations prior to their maturities. Given the continuing instability in worldwide credit markets, there can be no assurance that we will be able to obtain such refinancing or be able to retire the obligations.
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