Kindred to Cease Owning, Operating Skilled Nursing Facilities

A one-time giant among skilled nursing facility (SNF) operators has decided to entirely exit that business.

After years of pruning its SNF portfolio, Kindred Healthcare (NYSE: KND) will be getting out for good, the Louisville-based company announced Monday. The move is meant to achieve stronger cash flow and higher margins while reducing the capital needs for the company. Kindred currently operates 91 skilled nursing facilities.

The decision is the latest signal that skilled nursing is facing severe headwinds due to a host of factors, including Medicare and Medicaid reimbursement pressures, tight regulatory oversight, increasing patient acuity, labor challenges, and rising competition from home health and other senior housing and care sectors. Other large skilled nursing providers also have been struggling with declining share prices, Department of Justice investigations and settlements, and stresses related to operational shifts.

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Owners of skilled nursing facilities, including large public real estate investment trusts (REITs), have been seeking to limit their exposure to the skilled nursing asset class. Last week, several transactions were announced in which REITs offloaded or spun off these properties.

Chicago-based Ventas (NYSE: VTR) was one of the earliest to make such a move, when it spun out the majority of its skilled nursing assets into Care Capital Properties (NYSE: CCP) last year. However, Ventas held onto its Kindred properties, and currently owns 36 Kindred SNFs.

Kindred’s strategy in the last years has been to diminish its concentration of SNFs to create a more varied post-acute care continuum involving SNFs, IRFs, LTACs, home health, hospice, and community care. The idea has been that the company will be well-positioned for changes under 2010’s Affordable Care Act, which incentivize greater coordination across the health care continuum.

“Our strategic decision to exit the skilled nursing facility business as an owner and operator is the final step in a process that began years ago when Kindred operated approximately 300 skilled nursing facilities,” President and CEO Benjamin A. Breier stated in a press release. “This decision will reduce annual rent obligations by approximately $90 million and annual capital expenditures by approximately $30 million.”

In addition, about $70 million to $100 million in corporate overhead are anticipated to be eliminated, as the company no longer will have to support skilled nursing facilities.

Following the blockbuster acquisition of Gentiva Health Services in 2014, Kindred became the largest home health and hospice provider in the nation. Roughly half of earnings will come from the home health side of the company after the skilled nursing exit and an associated cost realignment initiative are complete, Breier stated. The remainder of the company’s earnings are expected to come from its long-term acute care hospitals and rehabilitation services division.

The news that Kindred will be exiting the skilled nursing business came as the company announced its results for the third quarter of 2016. Its earnings per share of $0.05 missed analyst estimates by $-0.01, but its revenue of $1.8 billion beat expectations by $30 million.

Its home health and hospice division, Kindred at Home, recorded revenue of $638.5 million, a 5.5% increase year-over-year. Home health episodes grew 6.9% year-over-year on a same-store basis, while hospice admissions grew 8.3%.

Revenue declined in all the company’s other primary divisions of hospitals, rehab services, and skilled nursing.

The company reduced its outlook for core diluted earnings per share from continuing operations. Previously, the range was $0.80 to $1.00 per share, and now it stands at $0.70 to $0.80 per share. The challenges facing skilled nursing centers are largely to blame, Breier stated.

Kindred plans to update its 2017 guidance when it announces its fourth quarter 2016 earnings, and at that time will take into account the exit from the SNF business.

Kindred shares were down more than 19% in after-hours trading.

The company plans to share further details related to earnings and the SNF exit during a conference call Tuesday morning.

Written by Tim Mullaney

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