Kindred Healthcare (NYSE: KND) is expected to pay $700 million to purchase 36 skilled nursing facilities (SNFs) from Ventas Inc. (NYSE: VTR). The SNFs currently are operated by Kindred.
The news comes one week after Louisville-based Kindred, one of the largest post-acute care providers nationally, announced that it intends to exit the SNF sector entirely. The agreement announced Monday gives Kindred and Chicago-based real estate investment trust (REIT) Ventas some different options for how they could dispose of the SNF properties they currently are partners on.
Kindred could buy the Ventas properties outright and then sell them to a different owner/operator on its own timetable. Kindred also could find a suitable buyer and the assets will pass directly from Ventas’ hands to that entity. Another option being left on the table is that Kindred will not buy the properties itself or find a third-party buyer, and the leases will renew under current terms—but this is not in keeping with the company’s recently detailed plan to cease owning and operating SNFs entirely.
Specifically, Kindred has the option to purchase some or all of the 36 SNFs owned by Ventas by Oct. 31, 2018 for $700 million. This represents a 7% yield on current annual rent.
If Kindred locates a new owner/operator for its Ventas-owned SNFs, Ventas has agreed to transition those properties if Kindred pays an allocable portion of the $700 million portfolio purchase price.
“With the option to cause the sale of the Ventas Properties, we have the flexibility to pay Ventas as we sell these properties, in conjunction with the sale of our other nursing center assets,” Kindred President and CEO Benjamin Breier stated in a press release. “While the timing of our exit from the skilled nursing facility business depends on a number of factors, we are targeting completion of the exit prior to the end of 2017.”
Any Kindred SNFs still owned by Ventas as of April 30, 2018 automatically will have their leases renewed until 2025 at current rent levels.
While no outcome is guaranteed, it is “expected” that Kindred will go through with the $700 million portfolio purchase, Ventas stated in a press release.
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“We are delighted to reach these agreements with Kindred, which enhance our strong relationship and position both companies for success,” Ventas Chairman and Chief Executive Officer Debra A. Cafaro said in the release. “With these agreements, we are improving our portfolio and enhancing our ability to deliver reliable growth and income for our shareholders … The agreements also provide Kindred with strategic flexibility and significant cost savings, as it continues to re-shape its business.”
Once the Kindred SNFs are no longer in its portfolio, skilled nursing will be only 1% of Ventas’ business, Cafaro added. The company significantly reduced its exposure to the SNF sector by spinning out most its skilled nursing assets into a separate REIT last year.
Government reimbursement pressures, tight labor markets, regulatory actions, census challenges, and other issues have beset skilled nursing in recent years, prompting other REITs also to reduce their exposure, and prompting Kindred’s decision to get out of the business and focus more on home health, hospice, inpatient rehabilitation facilities, and long-term acute care hospitals (LTACs).
In addition to the Ventas-owned SNFs, Kindred is seeking to offload 26 owned nursing centers, 25 that are leased to other parties, four that it manages, five assisted living centers that it leases, and two assisted living centers that it owns.
“We expect the after-tax net proceeds from the sale of these assets will range from $100 million to $300 million after transaction costs, severance expenses, and the amount payable to Ventas for the sale of the Ventas Properties,” said Stephen D. Farber, executive vice president and CFO of Kindred. “We expect to apply these anticipated net proceeds to reduce funded debt, which combined with the impact of our cost realignment initiative, the elimination of approximately $90 million of annual rents, and the reduction of approximately $30 million of annual capital expenditures will reduce our leverage.”
Ventas also owns 31 Kindred LTACs, and renewed the leases for eight of these properties in conjunction with the agreement on the SNF portfolio. These were scheduled to expire in 2018 and 2020, and now will last through 2025 at current rent levels.
Written by Tim Mullaney