When Kindred Healthcare (NYSE: KND) finalized a blockbuster deal to sell its SNF portfolio for $700 million in cash at the start of the holiday weekend, the post-acute giant may have been making a long-term bet with significant upfront costs.
Much of the $210 million that Kindred expects to net from the deal will come from cash benefits associated with net operating losses and reduced working capital requirements through 2018, according to a Monday report from financial services firm UBS.
“While management had expected to use proceeds of $100 million to $300 million to repay debt, the terms of the transaction suggest that this will only happen as net operating losses and working capital benefits are realized over time,” UBS wrote in its report, adding that the actual cash value to Kindred will likely amount to about $150 million.
That’s a far cry from the announced $700 million sticker price, which Kindred will receive from buyer BM Eagle Holdings, a joint venture headed by affiliates of the New York City-based private alternative asset management firm BlueMountain.
As part of the same transaction, Kindred will pay $700 million to Ventas (NYSE: VTR), the Chicago-based real estate investment trust (REIT) that owns a portion of the SNFs involved in the sale; Kindred had previously leased those buildings from Ventas.
“Given the current cash rent of approximately $50 million, the sale price of the transaction between Ventas and KND implies approximately 7% cash yield,” UBS noted, which it deems favorable to the REIT. “However, KND sees the SNF exit as a long-term strategic move that will be beneficial for the overall company.”
UBS pegged the total value of the SNF business involved in the transaction at $840 million, adding together the $700 million price tag, the $60 million value of the facilities retained in the sale, and $80 million in working capital. That works out to about a 6.5 EBITDAR multiple, according to UBS’s calculations.
The financial services company termed the deal “a cash drain up front,” noting the time that it will take Kindred to see the benefits as well as the transaction costs that the Louisville, Ky.-based health care operator will incur.
Kindred announced this week that it could end up paying $315 million to $350 million to close the deal, including $30 million to $40 million each in transaction fees and severance costs, as well as $255 million to $270 million in lease termination charges, according to an amended 8-K filing.
“The Company continues to review whether an impairment charge will be required in connection with this transaction, due to the potential loss of contracts in its RehabCare operating segment, which currently provides services to the skilled nursing facilities,” Kindred wrote in its 8-K/A.
Todd Flowers, Kindred’s senior vice president of corporate finance and treasury, told Skilled Nursing News that the additional $225 million to $270 million in lease termination charges were included in the estimated $700 million payout to Ventas, not on top of it. He also countered UBS’s claim that the deal represented a significant upfront outlay for Kindred, pointing out that the additional working capital gained through the transaction will pay for the transaction fees and severance costs.
“There’s not really a big upfront out-of-pocket from a cashflow standpoint,” Flowers said. “We’re not making a gamble on it.”
Flowers also gave insight into Kindred’s decision to retain a small portion of its skilled nursing portfolio, which will include a newer facility in Las Vegas — “a market that’s strategically important to us,” Flowers said — and sub-acute units housed at existing Kindred hospitals.
“They help us with patient throughput,” he said. “Those sub-acute units in those hospitals serve a good purpose.”
As part of the deal, Kindred sold 89 SNFs and seven assisted living centers to BlueMountain; of those, 36 were Ventas properties, and Flowers said the $700 million price tag reflected the REIT’s willingness to delay payment until the deals close, as well as Kindred’s desire to offload the SNFs in one batch to a single buyer.
“We thought it that it was the best way to approach the transaction,” Flowers said.
Kindred stock closed at $11.45 on Wednesday, down $0.25 or 2.14%. UBS assigned a “neutral” rating to the company’s stock in its report, giving a 12-month price target of $10.50 per share.
Written by Alex Spanko