The decision by Kindred Healthcare (NYSE: KND) to get out of the skilled nursing facility sector might seem like a drastic move to free the company from a major drag on its financial performance. But that’s not the story that executives at Kindred and Ventas Inc. (NYSE: VTR), one of Kindred’s major landlords, were telling on Tuesday.
Instead, ceasing to own and operate any SNFs is the culmination of a strategy that has been years in the making, said Kindred President and CEO Benjamin A. Breier.
“If you look at the actions that we at Kindred have taken over the last number of years, our desire to exit the SNF business shouldn’t come as any surprise to investors,” he said during a call with analysts. “It’s never been about whether we wanted to be in it or not, but about finding a path to making a full exit.”
This may be true, but the fact remains that the path to an exit still is not entirely clear, and it appears that Kindred will be facing tough tests even if it can make a clean and hasty departure from the SNF scene.
Kindred over the past few years has whittled its number of SNFs down from about 300 to the current 91. At the same time, it has become the largest home health and hospice provider in the nation, while maintaining a strong presence with its long-term acute care (LTAC) hospitals and inpatient rehabilitation facilities (IRFs).
The strategy has been to create a full continuum of post-acute settings, to be aligned with new payment frameworks—such as bundled payments—that reward more coordinated management of patient populations.
But this approach requires dedicating attention and resources to all these different parts of the continuum, and maintaining an overlapping footprint among all the different provider types in various markets.
“We think there are a lot of nursing center operators out there that under their structure can do a better job of running these [properties] than we can today,” Breier said.
For instance, these operators can have more of a focus on getting greater SNF penetration in their local market, he said. Kindred plans to partner closely with SNF operators moving forward, and does not expect that its referral stream from SNFs to home health will take much of a hit.
Chicago-based Ventas currently owns 36 Kindred SNFs, and the real estate investment trust (REIT) also characterized this move as one that fits into an existing strategy—namely, to decrease the SNF concentration in the Ventas portfolio, in favor of private pay senior housing and other types of assets. Ventas made a big move last year in spinning off the majority of its SNF assets into a separate, publicly traded REIT, Care Capital Properties (NYSE: CCP).
“This represents an opportunity to continue our de-emphasis of the skilled nursing business that began with our successful spin off of most of our SNF business in 2015,” Ventas Chairman and CEO Debra Cafaro said in a press release issued Tuesday. “Because of the strong relationship between Ventas and Kindred, and the track record of working together, we are confident we will find a mutually beneficial agreement that benefits both companies.”
Ventas and Kindred already have been in discussions as to the terms on which the REIT will consent to the sale of the 36 skilled nursing facilities, the two companies stated. The Kindred SNFs generate annual cash rent of $49 million and represent about 4% of Ventas’ annual net operating income.
Under the terms of the master lease, Ventas’ consent is required for this transaction, and the company has not yet granted its consent. This leverage likely means that Kindred’s exit from skilled nursing will have little or no effect on Ventas’ cash flow stream, Mizuho analyst Richard Anderson stated in a note.
As to the timing of the sale or what “mutually beneficial” terms might look like, both sides remained mum. Kindred also would not specify whether its SNFs will be sold in a piecemeal fashion versus in large portfolios, but Breier did say that the company has received a great deal of interest from potential buyers.
“[We’re] hopeful you’ll hear about that in the near term,” Breier told analysts of the deal flow and structures.
Bailing on the ‘Ultra-Marathon’
A host of challenges have beset SNFs, and Kindred’s third-quarter results show just how stiff these headwinds are. Revenues from skilled nursing were $40 million to $50 million worse than Kindred anticipated in its 2016 operating plan, Breier told analysts, citing labor and census challenges in particular. Following the earnings release, shares tanked and were down nearly 30% at the end of the day Tuesday.
And Kindred’s decision to bail on the sector may be an indication that these headwinds not only are stiff but are likely to last for a long time, Green Street analyst Michael Knott told Senior Housing News.
“The skilled nursing business will be a challenge for years as it transitions to bundled- and value-based payments over a long time frame,” he said. “The transition certainly won’t be a sprint, and it may not even be a marathon. It may be an ultra-marathon. Kindred understandably wants to focus on its other business lines.”
The major public health care REITs have sent a similar message, losing their appetite for the skilled nursing asset class. In addition to the CCP spin-off, Ventas peers Welltower (NYSE: HCN) and HCP Inc. (NYSE: HCP) also recently have spun off or sold large portions of their skilled nursing portfolios.
In the meantime, privately held companies may be more well-suited to run the ultra-marathon, if they believe that ultimately SNFs can come out winners as the health care system stabilizes and the aging baby boomer generation hits critical mass. It’s a point made by Welltower, after that company offloaded 64 SNFs in a $1.1 billion transaction.
“The private investors who are buying this real estate wanted to establish a position in the sector because they are focused on long-term investment prospects, and are happy to manage potential near-term volatility that comes with owning government-pay real estate,” Welltower stated to SHN. “We listened to our shareholders and the portfolio respositioning we announced will reduce our concentration of long-term post-acute assets and significantly increase our private pay revenue mix.”
But investors in the public markets, specifically REITs with skilled nursing exposure, may have their already shaky confidence further eroded by this Kindred move.
“We see it part company-specific (diversified KND has long turned its attention away from SNFs), but another tangible indicator of the stresses to the skilled/post-acute business model,” Anderson wrote in his note on the SNF exit. “As such, we expect some read-through based volatility to be the order of the day for many of the health care REITs, regardless of the immediate outcome/response from VTR.”
Perhaps supporting this idea, shares of major skilled nursing REITs were down as of market close Tuesday: Omega Healthcare Investors (NYSE: OHI) was down 3.02%; Care Capital Properties (NYSE: CCP) was down 3.42%; and Quality Care Properties (NYSE: QCP), the recent HCP spin-off that began trading on Nov. 1, was down 4.15%.
Complexity and Confusion
Ventas shares also were down, losing 1.93% to end the trading day at $63.09. This may be due to investor uncertainty around the Kindred situation, which could raise the “complexity meter” at Ventas, according to Anderson.
Not only is it unclear how and when the KND assets will be sold, but there is some question as to how closely aligned Kindred and Ventas are on this move. Kindred announced its SNF exit on Monday evening, while Ventas did not issue a formal statement about it until the next morning.
“Usually situations like this involving an operator and landlord are announced in coordinated fashion—not the case this time,” Anderson wrote. Still, this does not mean that Ventas was taken by surprise, and the two companies have indicated that they were in discussions behind the scenes, he noted.
Ventas investors may have been somewhat taken aback by any SNF-related issue come up at all, surmised Green Street’s Knott.
“Its stock has enjoyed a nice valuation halo since it has been largely out of SNFs, so investors were probably a bit surprised to see a SNF issue crop up at Ventas,” he said.
Still, he believes that this will be a temporary setback at most for the REIT, which came into its own by helping to create Kindred.
“Ventas has long had a magic potion of ‘fix it’ for its migration away from Kindred over the years, and this is likely to be no different,” he said. “It is a bump in the road for Ventas, but not a pothole.”
More serious questions relate to the future of Kindred. While the company touted its increased home health revenue for the third quarter, the home health volume growth appears to be slowing, Mizuho analyst Sheryl Skolnick wrote. That’s a serious concern, given that the company expects half of its revenue to come from its home health and hospice division after the SNF exit is complete.
Moreover, this latest restructuring only creates more complexity for a company that already is a tough proposition for investors, with its multi-layered business leading to complicated financials. While it does not want to run the SNF ultra-marathon, Kindred may now find itself sprinting. That’s because getting through this latest transformation speedily, to prevent adding too much more “filigree around the core numbers,” could be the key to cleaner financials and the ability attract investors, according to Skolnick.
“How long it will take to exit the SNF business is a key question (and determinant of likely future stock performance),” she wrote.
Written by Tim Mullaney