Nursing Home Sale Comes with Huge Costs and Charges

Strange Tony,

Kindred executives revealed the financial bath the company will take to dump its nursing home division.

The Company now confirms that (1) the Company expects to incur $315 million to $350 million in costs and charges related to this transaction, all of which have been or will be booked in discontinued operations, consisting of $30 million to $40 million of transaction costs, $30 million to $40 million of severance costs, and $255 million to $270 million of lease termination charges (calculated primarily as the difference between the aggregate consideration of $700 million payable to Ventas and that portion of the Purchase Price allocable to the fair value of the real estate and operations for the Ventas facilities, less certain Ventas rent credits on the balance sheet), and (2) during the second quarter of 2017, the Company recorded asset impairment charges of $134.6 million in continuing operations related to the previously acquired RehabCare trade name ($97.4 million) and customer relationship intangible asset ($37.2 million) due to the expected loss of affiliated contracts related to the SNF divestiture and cancellation of non-affiliated contracts.

When Kindred purchased Gentiva it sought to reduce the borrowing load on the combined company.

Kindred expects pro forma adjusted net leverage will be roughly 5.5x Adjusted Debt to Acquisition Adjusted EBITDAR at closing, and to reduce its outstanding indebtedness to below 5.0x Adjusted Debt to Acquisition Adjusted EBITDAR by the end of the second full year following closing. Kindred reiterates its commitment to a steady-state target leverage profile of 4.5x to 5.0x 

Wall Street analysts estimated leverage to go much higher with the nursing home sale. Kindred CEO Ben Brier tried to paint a brighter picture on the company's debt load.

"The primary part of the deal is we will get paid $700 million for the assets. And then we will use that $700 million to essentially pay for the real estate and buy our way out of the leases with Ventas that are being conveyed as part of the deal.

I would focus on the lease buyouts because, remember, as part of the deal, we will be eliminating $88 million worth of lease expense. So if you combine that with the hospital closures and sort of other tweaks around minor leases that we've been making, we have -- or we expect by the end of the year to have eliminated $100 million of lease expense, which, Sheryl, I know you and your cohorts put an 8x multiple on in terms of our leverage. So getting rid of that lease expense is a very significant item in terms of our overall capitalization. 

Our view is as we approach the end of the year and we clean up all this stuff, our leverage should get down to right around the sort of 6.0, 6.1 level on an adjusted debt-to-adjusted EBITDAR basis. And as we get into next year and based on the guidance we provided, we expect to sort of punch through 6.0 and continue to deleverage from there. Now look, I mean, this is not where any of us had hoped that our leverage would be, but it is a natural result not of an increase of debt but in terms of the EBITDAR challenges that we've had as a result of LTAC criteria and, to some extent, all of the sort of constructive transformation that we've been making with the overall business. So we do expect to get back into the high-5s over the course of next year, and we are extremely focused on making progress from there."

I recall Gentiva CEO Tony Strange trying to explain how the company repeatedly failed to meet both its profit and de-leveraging goals.  Kindred's Ben Breier has a similar challenge, promising something and having to explain management's failure to achieve. 

We appreciate everybody working hard to continue to follow what we know can sometimes be a complicated story.

Kindred missed their $1 billion EBITDAR target and its goal to de-lever by 1 - 1.5x.  How much performance pay will the Board give executives for driving up leverage 1 - 1.1x?

Kindred bought Gentiva's equity for $720 million.  As of Friday's stock market close Kindred's equity stood at $629 million, nearly $100 million less than the equity value for what became Kindred at Home. 

KND stock had a bad run recently.  Shrinking a company is a delicate operation.  Delicate is a word I do not associate with Kindred management, which can be extremely self serving. 

Anonymous (one of 100,000 deeply appreciated Kindred teammates)

Bad News: Kindred Executives to Focus on Hospice

Kindred President Ben Brier and CFO Stephen Farber talked to Wall Street analysts on Friday about the company's second quarter performance.  I searched the earnings call transcript and found their statements mentioning hospice. 

"Our primary objective was to exit the skilled nursing facility business and grow our Home Health, Hospice and hospital rehab businesses."

Kindred was founded to operate skilled nursing homes.  Breier and company ditched Kindred's original mission because profit margins shrank.  They sold the division at a time of low valuations and highlight deal losses (which generate tax breaks that improve cash flow in the future).

The stock market did not buy their bragging about the deal.   Kindred's stock went down 30%.  It dropped from $11.70 to $8.20, a decline of $3.50 per share. 

"Kindred at Home, the nation's largest home health, hospice and community care platform, delivered a solid quarter with revenues up 3.2% over prior year. With $109 million of core EBITDAR, the second quarter represents a record earnings quarter for Kindred at Home. The near 17% core EBITDAR margin for the quarter reflects a 230 basis point margin improvement over the first quarter of 2017 as we got back on track after the integration challenges we overcame late last year.

Our Hospice business delivered a solid quarter as well. Hospice core EBITDAR was up 4.6% compared to last year on roughly flat revenues as we delivered significantly improved margins. Our Hospice teammates did an outstanding job managing costs against flat same-store census. Labor costs per patient day were down 1.8% from the first quarter of 2017, a continued improvement in this measure."

Hospice admissions declined 4.5% from second quarter 2016.  Admissions dropped 5% for hospices Kindred did not sell or close. 

Gentiva executives could never figure out why hospice did not conform to home health's hard sales model.  Their OneGentiva initiative had sales people doing both, home health and hospice.  Kindred's call centers operate under the same philosophy. 

"Importantly, the growth prospects for Hospice, in our view, have not changed. We believe the volume contraction in the quarter was a slight and temporary bump in the overall steady-growth Hospice trend line. We attribute this temporary volume softness to the restructuring activities among the ranks of our clinical liaisons in Kindred at Home. These restructuring activities, which we completed in the quarter, were related to the separation of the Hospice sales force from the Home Health sales force, given the inherent specialization of those 2 lines of business. With this process largely complete, our clinical liaisons remain poised to capture our share of the hospice industry tailwinds."

Like Gentiva before it Kindred believes the solution lies on the sales side.  Our hospice census goes up when we have good nurses, chaplains, social workers, nurse aides and bereavement staff.  Census rises when they feel valued and supported by our branch manager and the company.   

Kindred benefits have been a kick in the teeth for our employees.  Kindred's health insurance eliminated the doctor co-pay benefit, so any visit outside the mandated annual wellness visit is the employee's responsibility.  The pharmacy benefit has employees not using insurance at all, claiming to have no coverage to get affordable medication.  Gentiva reduced the paid time off accrual before the Kindred buyout but rumors suggest further cuts could be coming.

Kindred has taken a how little can we provide stance on employee benefits almost on every front.   Gentiva showed the value of employer provided benefits on our paycheck.  Kindred ditched it. 

People feel valued when they have a voice.  It didn't take long for Kindred at Home President David Causby to eliminate the employee survey.  While our site took the survey in 2016 we never heard anything back from our efforts.  When asked why the results were not shared our branch manager said the company de-emphasized it, i.e. executives don't care what we think.  We pretty much knew that but thought someone would have the decency to share results from a survey management asked us to take.  Our feedback meant nothing.

Hospice employees can expect more of the same.  Increased management attention is never good in Kindred. 

"For the most part, I would say that in Kindred at Home, in our Home Health and Hospice business particularly, we think we're very much back on track in that business. And I think we'd like to see, obviously, more top line growth, and I expect that we will see it, having come off of some of the integration challenges we talked about last year at the end of 2016 and now a little bit of a rejigger on our sales force, which is mostly complete. Obviously, we're very pleased with what the results look like, and we know that we can manage costs when we have to in a volume environment that can be tough. But I think that for all of us, as health care provider or service investors, we got to keep our eye on volumes and think about how do we feel about volumes going forward. And there'll be peaks and valleys with that. I think one of the things that we're doing really well, A.J., is that we continue to attract growth on the managed care and commercial side of our business. And there's no question that if you just look around at how the payers across the country are performing this quarter, they're knocking it out on all cylinders, and the more that we can continue to generate referral sources from them and be a part of their solution, I think, the better off our enterprise will be. So that, I think, in broad strokes, is kind of how we built into 2018.

We're going to keep trying to grow organically. We're going to ke,ep trying to drive efficiency and productivity and keep managing cost per visit down the way we have, and we're going to keep trying to be the best home health and hospice operators that we can be in the country."

It's hard to believe executives want us to be the best hospice given they stopped many distinctive services our site once offered.  Working for Kindred has been a walk back in time for efficiency and productivity.  Before Kindred our hospice was far and away the best in our community.  People lined up to work at our site.  That's no longer the case.

"We, quite frankly, like to look for undervalued assets that we can -- maybe even be dilutive in the short term that we can help grow, and so we're always looking for those kinds of opportunities. We continue to look at the hospice and the community care side of the world. But I don't know that it changes anything really about how we were thinking about home health in terms of M&A. We've been in pretty good shape with what our platform looks like for a while and just want to continue to run our business efficiently."

We prefer Kindred executives be occupied by big deals.  Any time executives showed up at our site they made things worse.  I pray they stay away.

"I'd like to start my comments, as I usually do, by expanding -- extending my deep appreciation, on behalf of our entire leadership team, to our more than 100,000 teammates across the country. Each day, our partners at Kindred work incredibly hard to improve the lives of the more than 1 million patients we care for annually. The excellent care delivery and clinical outcomes we generate are the direct result of their efforts."

When Kindred bought Gentiva the combined company had more than  109,000 teammates.  There are 9,000 less of us.  For those remaining do you feel respected and rewarded for working incredibly hard to improve the lives of your patients?   I hesitate to speak for everyone at our hospice but the majority don't feel Kindred is a good, caring employer.

We love the work, our patients, our coworkers and set aside Kindred's bad management.  We rise above to serve.  Hospice truly is a calling, something you wouldn't sense from this quarterly earnings call.

Hospice length of stay went up from 91 to 94 days.  For the quarter company wide hospice census fell 1.9%.

These are not numbers to us.  They are people, families, and friends dealing with harder aspects of life, it's ending.  There is only one way.  That's through, not around.  It's hard to hear some things.  One can be richer (non-monetary), wiser and more peaceful from the simple act of listening and honoring one person.

Kindred executives want to give hospice more attention.  That's historically been a very bad thing at our hospice.  Every time they chose to go around, not through. Management misdiagnosis leads to mistreatment, which carries additional complications.  From that we suffer.