After recently declaring it would exit from the skilled nursing business entirely, the nation’s largest home health care provider is proving it still is one of the strongest players in the space.
Despite missing analysts estimates in its fourth quarter and end-of-year earnings, investors still seemed to be pleased with Kindred Healthcare (NYSE: KND) and its plans to sell off its skilled nursing nursing assets after an earnings call Tuesday.
For the fourth quarter of 2016, Kindred reported consolidated revenues of $1.75 billion, representing a 2% increase year over year. For the full year, revenues reached $7.2 billion, a 2.3% increase from 2015. At the end of 2016, Kindred sold or entered into agreements to sell 15 of its long-term acute care (LTAC) facilities, in addition to announcing its decision to sell off its skilled nursing portfolio.
Looking ahead, its home health, hospice and community-based care business, Kindred at Home, will become about half of the company’s earnings once its skilled nursing assets are sold. As the company moves forward with this plan and shows continued resilience and growth in its other businesses, it appears investors could be on board.
The stock rose more than 14.5% by end of day Tuesday, hovering around $9 per share. The stock had dropped to roughly a third of its 52-week high in November, following the news it would depart from the skilled nursing industry.
Mixed Picture in Home Health
For the fourth quarter, Kindred at Home recorded revenues that increased 4.3% from the same period the year prior. Home health increased 2.6% while hospice saw revenues climb 5.1%. Despite higher revenue, earnings were dinged by labor costs and integration issues.
“Fourth quarter earnings were disappointing and missed consensus,” Chad Vanacore, analyst at Sitfel, told Home Health Care News. “Home health, which should have been the strongest performer, had surprisingly weak margins on labor cost inflation.”
However, Kindred’s own leadership was circumspect about home health performance. While the industry has seen some impact from wage pressures and a growing labor shortage on the horizon, Kindred at Home appeared to remain stable, with “controllable” labor issues, according to Stephen Farber, executive vice president and chief financial officer.
Specifically, Farber cited issues with recruiting nurses on the hospital side of its business, but said the company only experienced pressures on the home health side as a result of integrating electronic medical record systems and pay practices.
“It’s a tale of two cities,” Farber said of the company’s labor pressures. “[There is] labor pressure on the nursing side of hospitals. On the Kindred at Home side, we expect that to mitigate on its own as we move through that integration.”
The regulatory environment also remains a challenge, and the company is preparing for the Pre-Claim Review Demonstration (PCRD) to begin in Florida, where it has a significant presence.
As much of the industry has put pressure on Washington, D.C. and new administrative leaders at federal agencies, Kindred is one more provider hoping to see a pause before PCRD is implemented in Florida on April 1. Secretary of the Department of Health and Human Services (HHS) Tom Price advocated against the demonstration while he was still a U.S. Representative from Georgia last year, even authoring a bill to put a one-year moratorium on the program.
“On April 1, subject to some potential changes coming out of Sec. Price’s office before—which we are still hopeful we will get—PCRD goes into effect in Florida,” Farber said Tuesday on the earnings call. “I think in its current state, PCRD is a flawed policy. In Illinois, it turned out to be a fairly tough regulation to follow. It added unproductive time for people who would be better served…. taking care of patient needs versus filling out paperwork.”
The impact of the regulatory environment may also play a role in Kindred at Home’s growth strategy going forward, as executives mentioned little to get excited about in terms of opportunities to acquire or expand in 2017 and 2018.
“Kindred lacks the capital and balance sheet flexibility to be aggressive on the acquisition front,” Vanacore said. “Perhaps after disposition of the skilled nursing business it could look to small home health acquisitions. Home health is a large, fragmented market. I think it will take time to consolidate meaningfully.”
However, the issues revealed in the end-of-year results are likely to be mitigated.
“I think they are still generally bullish on the [home health] industry,” Frank Morgan, managing director of healthcare services equity research at RBC Capital Markets, told Home Health Care News. “The biggest issue in the fourth quarter was nursing productivity—finishing up an IT conversion and some inefficiencies with those EMR conversions. It was a quarter where you weren’t at optimal efficiency and productivity.”
Two-Year Outlook
With a major chunk of its business on the hook to be sold, Kindred executives provided a two-year outlook in its quarterly and end-of-year earnings release, with the general sentiment being very conservative. As noted by one analyst on the call, the outlook for 2017 and 2018 lacked any “aggressive” growth.
Executives stated they anticipate announcing some movement on the sale of its skilled nursing assets soon, but did not disclose how a sale would be structured—if Kindred would sell all assets or once or sell off smaller portions of the skilled nursing portfolio at a time.
The company also announced it would end its practice of distributing a quarterly cash dividend, which has an estimated cost of $42 million. Despite issuing a cash dividend to investors, the practice has not been reflected in Kindred’ stock price, according to Breier. The announcement signals a serious focus by executives to deleverage the company and tighten up service lines, according to Morgan.
The picture should become even clearer once the skilled nursing assets are off the books, which could happen soon.
“[Executives] seem to be fairly confident [Kindred] will exit that business before the end of the year,” Morgan said. “They might even have some announcements in the next few weeks or even a month from now. There is a drag removed by exiting that business. The focus is on other businesses, which are generally doing better.”
Written by Amy Baxter
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