Saturday, August 12, 2017

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)

3 comments:

  1. Mark my words, there will be some outsourcing, and not from the branches. It's so close I can almost taste it. It's taken longer than I thought, but it's coming. And I am in a perfect position to watch it happen.

    ReplyDelete
  2. Kindred at Home is selling off its Medicaid division in OK. Decades of successful Medicaid business that once thrived in OK could not find the same success under Kentiva. With the Medicaid Community Care division providing dual eligible referrals to the Medicare Home Health division, it's only a matter of time before the Medicare branches feel the pain of reduced referrals. As a previous leader at Kentiva, I chose not to accept the rope that was offered. Looks like the remaining leaders have ample rope for themselves.

    ReplyDelete
  3. Ben Briar and Paul Diaz make over 25 Mil the last few years for running the company into the ground...and then cash in on the sale.
    That is their reward for divesting assets and grossly operationally mismanaging the company.
    Those two should be ashamed of themselves and embarrassed to be seen in public. They are one small step above Madoff.

    ReplyDelete