Kindred’s recent press release stated that Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) has signed a definitive agreement with BM Eagle Holdings, LLC, a joint venture led by affiliates of BlueMountain Capital Management, LLC (“BlueMountain”), under which it will sell the Company’s skilled nursing facility business for $700 million in cash. The sale includes 89 nursing centers with 11,308 licensed beds and seven assisted living facilities with 380 licensed beds, which collectively have approximately 11,500 employees in 18 states.
As previously disclosed, 36 of the skilled nursing facilities (the “Ventas Properties”) are currently leased from Ventas, Inc. (“Ventas”) (NYSE:VTR), and Kindred has an option to acquire the real estate of the Ventas Properties for aggregate consideration of $700 million. As Kindred closes on the sale of the Ventas Properties to BlueMountain, Kindred will pay to Ventas the allocable portion of the $700 million purchase price for the Ventas Properties and Ventas will convey the real estate for the applicable Ventas Property to BlueMountain or its designee.
Kindred expects to realize net value of approximately $210 million, subject to post-closing adjustments, and after the $700 million payment to Ventas, estimated transaction costs of approximately $35 million and estimated severance costs of approximately $35 million.
Discontinued Operations Accounting Commentary
The Company anticipates that substantially all of its skilled nursing facility business, and the contribution margin from applicable RehabCare contracts servicing the Company’s skilled nursing facility business, will move to discontinued operations when reporting second quarter results in August, at which time the Company intends to provide updated guidance and adjust prior periods to reflect the anticipated sale. The Company estimates this accounting change will reduce second quarter reported core earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) from continuing operations by approximately $35 million(2)(3) and have a roughly breakeven(2) impact on second quarter core diluted earnings per share.
The Company notes these amounts assume that no RehabCare contracts servicing the Company’s skilled nursing facility business are retained. Discontinued operations accounting rules do not allow the associated contribution margins from these contracts to be reported as continuing operations unless contracts for those facilities are signed with the new operators. The Company historically has retained approximately half of such contracts in similar divestitures and anticipates similar contract retention levels for this transaction. The Company expects this will result in approximately $10 million(2) of incremental annual core EBITDAR performance (approximately $2.5 million(2) per quarter) in continuing operations upon execution of contracts with new operators.
The Company further notes that, due to the requirements of discontinued operations accounting, these figures do not include the benefit of approximately $20 million to $25 million of additional annual cost reductions (approximately $5 million to $6 million per quarter) enabled by this transaction that the Company expects to achieve, and are included as part of the $70 million to $80 million of anticipated cost reductions indicated above.
About Kindred Healthcare
Kindred Healthcare, Inc., a top-90 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $7.2 billion(4). At March 31, 2017, Kindred through its subsidiaries had approximately 100,100 employees providing healthcare services in 2,624 locations in 46 states, including 82 long-term acute care hospitals, 19 inpatient rehabilitation hospitals, 91 nursing centers, 19 sub-acute units, 619 Kindred at Home home health, hospice and non-medical home care sites of service, 101 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,693 non-affiliated sites of service.