Kindred Healthcare Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Kindred Healthcare, (KND)

Kindred Healthcare (NYSE:KND)

Q2 2013 Earnings Call

August 06, 2013 11:00 am ET

Executives

Charles Edward Jones - Chairman and Principal

Paul J. Diaz - Chief Executive Officer, Director and Member of Strategic Development Committee

Richard A. Lechleiter - Chief Financial Officer and Executive Vice President

Benjamin A. Breier - President and Chief Operating Officer

Analysts

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Brandon Fazio - UBS Investment Bank, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Jack Meehan - Barclays Capital, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, everyone, and welcome to this Kindred Healthcare Second Quarter 2013 Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Eddie Jones with Corporate Communications. Please go ahead.

Charles Edward Jones

Good morning. Welcome to the Kindred Healthcare Second Quarter Conference Call. This is Eddie Jones from Corporate Communications. Before the company's presentation, I would like to read the cautionary statement.

This conference call includes forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involves a number of risks and uncertainties. Such forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company and its management are unable to predict or control, that may cause the company's actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements.

The company cautions participants that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking information. The company refers you to its reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K, the company's other reports filed periodically with the SEC and its press release regarding the second quarter operating results for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements.

Many of these factors are beyond the control of the company, and it's management. The company cautions investors that any forward-looking statements made by the company are not guarantees of future performance. The information being provided today is as of this date only and the company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Certain references to operating income or EBITDAR, as well as other non-GAAP disclosures, have been reconciled to the company's consolidated operating results and are available on the company's website, www.kindredhealthcare.com.

It is now my pleasure to introduce the participants in today's call: Paul Diaz, Chief Executive Officer; Rich Lechleiter, Executive Vice President and Chief Financial Officer; and Ben Breier, President and Chief Operating Officer. Mr. Diaz will begin the call.

Paul J. Diaz

Thank you, Eddie, and good morning, everyone. Last night, we announced a very solid quarter with our core diluted EPS of $0.32 per share. These results are particularly impressive given the significant reimbursement pressures brought on by the federal sequestration cuts and soft volumes in our 2 largest divisions. I want to thank Ben and all of our operators and our caregivers who turned in another great quarter, delivering on our promise of quality and service for our patients, while also delivering on operating efficiencies that should continue to positively impact our financial results over the balance of the year.

While Rich and Ben will comment on the specifics, we're very pleased with our overall results as we continue to work to improve the quality of services and clinical outcomes for our patients, succeed in our core operations and position the company for future growth. In addition, we are continuing to see the benefits of the Ventas Nursing Center transition to our core operations. Disposition of these 54 nursing centers lifted our earnings from continuing operations by $0.11 per diluted share in the first half of 2013. The second quarter also provided tangible evidence that our asset repositioning strategy and related capital redeployment activities are accelerating.

Yesterday, we were also pleased to announce that our board has initiated a payment of a quarterly cash dividend to shareholders of $0.12 per share. We're excited to introduce yet another step of our plan to increase shareholder value and believe that this move is well aligned with our strong cash flows, improving liquidity and financial strength.

Before commenting further on our results and our opportunities going forward, I'd like Rich to recap our results and for Ben to provide some operational color as well. Rich?

Richard A. Lechleiter

Thanks, Paul. Good morning, everybody. As Paul indicated, $0.32 a share on the core in the quarter, a very strong showing for us. And while it's down from last year's adjusted $0.39, that's more than completely attributable to the sequestration cuts that began on April 1, which reduced revenues by over $13 million in the quarter. As Paul indicated, the reclassification of all 54 Ventas skilled nursing facilities to discontinued operations lifted EPS in the quarter by $0.06, in the first half by $0.11.

Items of note. The hospital margins were down slightly year-over-year. I think that's a very good result, considering the sequestration cut, while soft volumes were offset by marginal growth in our operating cost per patient day. In RehabCare, which also went through another round of reimbursement cuts this quarter, we still reported 7% growth in operating income year-over-year, a very good result.

Acquisitions and organic growth in our Home Health business continue, with revenues up 82%, operating income up over 40% and we continue to make some critical investments in infrastructure and standardization as we piece together and integrate these acquisitions. Finally, the Nursing Center results didn't change a whole lot from Q1, continued to drag a bit as we have volume issues here and we continue to kind of fight through the downsizing of this business in the context of the Ventas changes.

Cost controls across the enterprise were excellent. If you look at our core EBITDAR, our total operating expenses in the entire enterprise actually declined slightly from a year ago in the second quarter, a very good result. On a divisional basis, in the Hospital division, operating cost per patient day were up only 0.06% from one year ago, while Nursing Center cost per patient day were up 3% versus the second quarter last year. Overhead as a percent of revenues was flat from a year ago. The one-time items are primarily -- consist of the -- a charge or an impairment charge for the upcoming sale of 17 nonstrategic assets to Vibra Healthcare.

On the liquidity front, an outstanding result in Q2. If you look at our operating cash flows, less routine CapEx, that excess is $37 million. That's up almost 50% from a year ago. If you look at the year-to-date numbers, it's even more impressive. We have $39 million of excess versus essentially a breakeven a year ago. So the operating cash flows enterprise continued to perform very well. Accounts receivable days stand at 65 at the end of the quarter, pretty much on plan.

In terms of capital resources, we've talked about our $90 million of free cash flow. That includes the expected $13 million of dividend payments we're going to make in '13. So essentially, we've raised our cash flow guidance to absorb or fund that. Our credit availability under the revolver exceeds $400 million at June 30. We closed last week on the sale of 7 skilled nursing facilities for $47 million in cash, and we're working on the Vibra Healthcare transaction, which would net another $180 million of cash. Finally, the guidance was maintained at $1.10 to $1.30. And as I mentioned, we essentially raised our cash flow guidance for the full year.

Finally, one closing note about the repositioning. The efforts to reposition the company and its business by 2015 are very complex and extensive. And while we have a clearer path to a better Kindred, the disposition of these noncore businesses and the unpredictable timing of the capital redeployment will likely produce some choppiness in our earnings over the next 12 to 18 months. Nevertheless, the key theme within Kindred is that we have the capital resources, whether that be operating cash flows, availability of credit or proceeds from asset sales to successfully implement this strategy and create shareholder value. Ben?

Benjamin A. Breier

Thanks, Rich. I want to make a few comments about each of our operating divisions in the context of a challenging, but successful quarter. I'd also like to discuss our key opportunities over the balance of the year.

First, I'm pleased with our overall results and I want to thank our team across the enterprise for their dedication and hard work in making this happen. In light of generally soft volumes in the quarter, it's very gratifying to see such hard-earned success in our organization. As Rich indicated, our Hospital division results were solid, particularly in light of the Medicare sequestration cuts that took effect on April 1. With continued success in cost management and even more focus on improving our efficiencies, our core year-over-year operating margin was steady at 20.7%.

In our RehabCare division, our team did another remarkable job this quarter in a business really that has dealt with a number of reimbursement and regulatory changes over the past 2 years. Medicare sequestration cuts, Part B therapy caps and the effective MPPR all have had an impact on this business in 2013. Maintaining a high level of service and support to our customers while also supporting our therapists in the field, this division reported solid growth of 7% in core operating income in the second quarter of this year compared to the same period 2012.

Our Home Health and Hospice business, Kindred at Home, continues to evolve into a now growing and thriving business within Kindred, reporting revenue growth of 84% and operating income growth of 42%. And as I mentioned last quarter, our management team continues to invest in a more systematic and standardized approach in both care management and/or administrative practices as we integrate a number of acquisitions we completed over the last couple of years. As expected, operating margins picked up in the second quarter from the levels reported in the first quarter of this year.

As Rich commented earlier, our Nursing Center division struggled in the quarter as we managed through a difficult volume and reimbursement environment and certainly, as well as a challenging transition of the 54 Ventas leased nursing centers that we didn't renew. While this has been a very difficult and in many ways, distracting process, we have very focused group of operators in this business, and we expect to see operating improvements in the second half of the year. We will also continue to push growth in this division as we now have 5 new transitional care centers under development and we also have, along with our 16 hospital-based sub-acute units, we plan to double that number over the next couple of years.

Looking forward, the third quarter is always our most challenging as we deal with the typical seasonality issues, but I remain encouraged about what we can accomplish in the second half of the year. While the significant changes in reimbursement I spoke to earlier are factored into our guidance and our operating plans, we continue to see opportunities to grow as we execute on our sales and marketing plans and improve care management and patient satisfaction over the next several quarters. Paul?

Paul J. Diaz

Thanks, Ben. Let me make a few remarks before we open it up for questions. First, we continue to focus on our core operations by executing on our plans to improve the quality, care and clinical outcomes for our patients and improve employee satisfaction and engagement throughout our organization. Our second quarter results provide a solid base line to grow the company and pursue our integrated care market and Continue the Care initiatives.

As we've discussed on previous calls, our strategic plan is to build our capabilities to provide a full continuum of post-acute services in selected integrated care markets throughout the country. We're more convinced than ever that this is the right strategy as an increasing number of hospitals, physician groups, employers, health systems and managed care payers are coming together to form accountable care organizations and other integrated care networks to manage an episode of patient care from hospital to home.

We're also working with many of these systems in our integrated care markets to help manage care transitions and deliver higher quality and more cost-effective care. A very important part of this strategy, as Ben talked about, is the continued growth at Kindred at Home and the selected development of new transitional care hospitals and transitional care nursing centers in our integrated care markets. As we continue to explore our ongoing pipeline of development opportunities, we will look to deploy our unused borrowing capacity, proceeds from asset sales and free cash flow to support this growth plan and better Continue the Care for our patients in the transition home to a full recovery.

A strategic repositioning of our business mix and capital structure is taking shape and is producing results that are consistent with our expectations. Last week, we completed the sale of 7 nonstrategic nursing centers for $47 million. In addition, we expect to close on the sale of 17 nonstrategic facilities outside of our integrated care markets to Vibra Healthcare for approximately $180 million net of tax.

Finally, our ongoing review of other operating assets continues and will result in further dispositions going forward. In particular, our ongoing review and analysis of the 2015 Ventas renewals will further shape our asset repositioning plans going into 2014.

And finally, we are very pleased to announce the first cash dividend paid to shareholders in the company's history. This cash dividend reflects the strength of our operating cash flows, our confidence in our business outlook and our commitment to growing shareholder value. The quality and strength of our balance sheet, along with our proven track record of generating strong operating cash flows, provides us with the financial flexibility to return capital to shareholders in the form of a dividend, while also continuing our strategic development activities in our key integrated care markets.

That concludes our formal remarks, and Rich and Ben and I will be glad to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Kevin Fischbeck from Bank of America Merrill Lynch.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I just wanted to circle back to some of the comments that Rich made about how to think about modeling over the next 12 to 18 months. Because, I guess, when I look at this year's numbers, year-over-year, it looks like EPS is going to be down something like 20%, even though you're getting probably like a $0.20 lift from exiting some of the Ventas assets. And when I think about the next 12 months, you're going to divest a few assets that are actually accretive to earnings. And when I think about the reimbursements environment between 2013 and 2014, 2014 will only have one quarter in [indiscernible] of sequestration, but that would be a headwind year-over-year. I guess you won't have the same -- some of the rehab cuts won't be as bad next year as they are this year. But is there a chance that we're looking at kind of down earnings as the starting point for next year before we think about capital deployment? Is that the right way to think about it or am I being too pessimistic with that?

Richard A. Lechleiter

Well, I'll start, and I'm sure Paul and Ben want to speak to it as well. Kevin, I think a couple of things. First, if you look at '13 and you look at the upcoming sales that we have, there's going to be some dilution associated with that. In fact, we put in the release some of the numbers related to those deals for last year's -- you can kind of play around with the impact on that for a full year. But remember, for accounting purposes, when we go backwards and pick the stuff out of continuing operations, it's dilutive because we can't retro the interest savings, we can't retro the overhead savings backwards, if you will, from an accounting perspective. So the accounting answer, when you go backwards, always looks worse. The question is, I guess, two-fold. One, how much savings do you have in the short term on interest? Two, how much overhead will we reduce going forward? And three, how and when will we deploy or redeploy the capital from these sales? That's not going to turn on a dime and we're not -- we're being very careful about that as we invest. So there may be some bumps in the road as we go through the reinvestment process and that you're talking $225 million worth of investment. That's significant. But the -- I think the view of the company and the board is that post Ventas '15, post the sale of these assets and looking at a business that is investing more in Home Health hospice and rehab, we have a very different looking company, while it may be smaller, will actually yield higher levels of free cash flow.

Paul J. Diaz

So Kevin, Paul. Just to echo -- maybe be a little clearer, in terms of my simple view of this, while we are suggesting that reported earnings may be volatile because of the ins and outs of all of the activities, the core operating cash flows, the free cash flows, we believe that we will maintain a very consistent level both as we did in '12, as we expect to do in '13 and as we expect to do in '14. And I'll go on to say that while we're not giving guidance for '14, we certainly expect to deliver on at least an equal amount of earnings and if not more earnings year-over-year, net all the pluses and minuses that you listed. So we're not going into our budget process or anything else, expecting that we will be coming to you for the '14 earnings that are lower than our '13 earnings.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay, that's very helpful. And then I guess, going to the dividend in the quarter, I mean, I think it's been very well received. How do you think about payout ratios and what the right mix of returning capital to shareholders is versus redeploying the money back into the business?

Paul J. Diaz

Well, I think that we're trying to take a balanced approach. We continue to selectively build, as Ben described, transitional care centers in our integrated care markets, selectively build inpatient rehab hospitals and transitional care hospitals where we have both LTAC services and sub-acute services, and we have a nice pipeline there, but continue to be very thoughtful and careful about that. And as we've talked about over the last year, we've been a little bit more selective as we've seen that. You're seeing very judicious views around our routine CapEx as well, which is benefiting our free cash flow. And we thought it was very important, and our board thought it was very important, to demonstrate to our shareholders the power of our free cash flow as we are going through this repositioning and the consistency of that. And if you look back over the last 5 years, you'll see very a consistent picture in terms of our operating cash flows and free cash flows, a little bit more volatility on the EPS because of our capital structure share count and leases, which you're well familiar with. And so the way I look at it is, we'll do $240 million roughly of operating cash flow and the dividend is about 10% of that. If you look at now, as Rich talked about, over $100 million of net free cash flow, we're returning approximately 25% of that, neither of which get -- inhibit our ability to grow in Kindred at Home or elsewhere, given the asset proceeds from the repositioning or the significant amount of borrowing capacity that we have under our credit facilities. So we are very pleased that not only are we able to do this for our shareholders through a time of change and volatility, but absolutely can finance our future growth in multiple ways.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay, that's helpful. And maybe last question, as you think about the cash you used to like to have at year end, that's going to be a big part of your market cap. I mean, do you think and look at that and say, "This is all going to be deployed as far as building out the Kindred at Home and some other business lines"? Or do you think that you could be returning some of that capital to shareholders as well?

Paul J. Diaz

I think our board and the management team are committed to a balanced approach. We think that the dividend, which we intend to grow over time, is a very good number in terms of having our shareholders participate in the near term and the value creation here. We think that paying down debt in the short run, which as Rich pointed out, we can't retrospectively get credit for, is a good thing to do as we're working through some of these transitions. And we will be opportunistic in terms of M&A as we have been in the past and we're pretty good at it. We're pretty good at acquisitions and integrations. We've demonstrated that in Kindred at Home. We've demonstrated that with RehabCare and LTAC acquisitions over the years. So there's a little disconnect between buyers and sellers right now in terms of valuations, and we've been pretty good buyers and pretty good integrators of businesses and we'll maintain that discipline as we think about redeployment.

Operator

Our next question comes from A.J. Rice from UBS.

Brandon Fazio - UBS Investment Bank, Research Division

It's actually Brandon Fazio for A.J. Just a couple of questions. First, on the therapist productivity and turnover rates on the quarter, little upticks are actually pretty good on a year-over-year basis, just any thoughts there on what you're seeing going forward, how sustainable some of the turnover rates are going forward?

Richard A. Lechleiter

We're generally pleased with where the turnover rates are. I think I mentioned after the end of first quarter when we saw this historically low number that I would not have been surprised to see a tick up a little in Q2, which it did. We've actually started to see it flatten again, and I feel confident that we're going to be able to maintain pretty high levels of -- or low levels of turnover, high levels of retention in the business for the rest of the year.

Brandon Fazio - UBS Investment Bank, Research Division

Okay. And then just also on -- well, you're talking on Kevin's question regarding the use of the proceeds, if you don't see anything from an acquisition standpoint as you try to deploy some of these -- divesture proceeds, is the special dividend something that the board has considered before, it's pretty decent amount of money to invest out there?

Paul J. Diaz

So yes, sorry if I wasn't clear. No, I don't think a special dividend is something that we're considering. I think we'll pay down the revolver, continue to look for M&A opportunity where they make sense. Next year, we'll look at our bonds and other opportunities in terms of the capital structure. You'll note that we continue to acquire real estate. So we've done 2 transactions this year in terms of buying in real estate and converting rents to interest expense and that's lowering our rent cost, so -- and we're buying the real estate at very attractive cap rates, 9 or 10 cap rates, so effectively borrowing at 4% in getting rid of 8% or 9% cost of financing in terms of real estate leases that don't have escalators and that we can pay down over time. So we think a better use of capital in the near term is paying down our most expensive, less flexible debt, which is our lease debt, looking for selective acquisition and development opportunities in our integrated care markets. And we're very excited about the dividend and growing the dividend, the recurring dividend over time, but no special dividend in the offering.

Operator

And we'll now move to Joshua Raskin from Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

It's Josh and Jack here. First question on the dividend and I don't want to harp on this, but just was there anything that spurred the timing, anything the change in the business or anything you're seeing that said, "Okay, now is the time that" -- I mean, in terms of stability of cash flow, et cetera, for anything in the environment where we should be thinking about alternative uses may not be coming to fruition in the short term?

Paul J. Diaz

So I mean, I think that we continue to see things come together. We saw the final rules for most of our businesses. No surprises there. We had, as Rich talked about, a very strong first half of the year. We wanted to work through sequestration. We wanted to make sure that the savings that Ben has led through Project Apollo were realized. So this has been a very difficult cumulative impact of regulatory and payment changes, but I think the second quarter evidences, sort of the new normal for us, if you will, from which we're going to grow and again, for many years, very strong sustainable levels of operating cash flow. And so we've got a high degree of confidence in our -- both our business outlook and that. And I guess, at the margins, the rebasing and Home Health and other things, people are going to be processing that over the next several quarters and so -- as are we. And so maybe some slight slowdown in M&A activity there until, again, buyers and sellers get on the right side of valuations. So that's probably the only asterisk that I would put on the redeployment.

Joshua R. Raskin - Barclays Capital, Research Division

Got you, got you. And quick question on the nursing centers. You guys mentioned the pressure there and obviously, we've seen some of the changes that you guys have highlighted, but any impact for managed care and Medicare, Medicare Advantage plan growth relative to traditional fee-for-service or more aggressive techniques that they're using? You guys see any of that?

Richard A. Lechleiter

Well, I mean, yes. I mean, I think the nursing centers are actually benefiting from the Medicare Advantage side of the world. I think that as the M&A plans continue to take a higher acuity patient and continue to want to manage lengths of stay aggressively, they're looking at facilities like our Transitional Care Centers as a place where those patients should be cared for. And so we are seeing -- in fact, I think if you look at our volume, I think that was the one area from a patient A perspective where our volume is actually up on a quarter-over-quarter basis within the M&A side of the world. We're also seeing pretty strong rates in the Nursing Center side of the world, where our revenue PPDs are growing there as well. So I think the Medicare Advantage plans are as they usually do. They look to find value and good places for their members to utilize care and it seems that Transitional Care Centers are a good place for them to be.

Jack Meehan - Barclays Capital, Research Division

This is Jack. Just last question from us. Wanted to ask about the final Medicare rule for LTACs. Do you have any update, thoughts on patient criteria? And then what do you have embedded in guidance for implementation, the 25% rule for the fourth quarter?

Paul J. Diaz

Well, we don't comment specifically on the impact of the 25% rule, other than we think we can manage through that and we've obviously thought about that in the context of the guidance. I'm not sure there's anything to add in terms of specifics there. We have a subset of hospitals that we will manage through. As we've said, it's not a big issue for us in that for over a decade, we've really focused on multiple referral sources, physicians, payers, as well as multiple hospital systems. With respect to criteria, the American Hospital Association, the Federation of American Hospitals, we select Vibra, the rest of our colleagues in the LTAC business continue to believe that the AHA, the Nelson-Roberts Bill, advances policy, better defines the role of LTACs, will score budget savings and it is a good way to bridge LTACs to longer-term, post-acute reforms. We also recognize that we've got important partners at CMS and continue a good dialogue with them about criteria. And as they talked about in their final rule, there'll be some discussions this fall in context of some more research they're doing. And I think next spring, in the absence of legislative criteria, they'll be putting forth more ideas about how to better define the role of LTACs. And we and our colleagues will be very engaged in that process and working to make sure that we've got very patient-centered criteria developed, whether it's through legislation or through a collaborative process with CMS.

Operator

Our next question comes from Chris Rigg from Susquehanna Financial Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Close enough. Just wanted to come back to the Nursing Center division when you think about sort of the performance there. I mean, is there something besides sort of the exiting in leases and et cetera, along those sort of financial engineering lines that there is room for sort of core improvement that would be worth highlighting?

Benjamin A. Breier

Chris, this is Ben. Look, we're pretty good about not making excuses around here and so that's not what this is. I think it is very important for investors to understand the noise that we've experienced in this business in the first half of this year. The divestiture of the 54 Ventas facilities was a very difficult process for our operators, buildings that we've run for a long time, and it took a little bit of the wind out of our sails of some of our folks, I think, as we've moved to that process. We have had a good plan in place. I think we have reengaged our operators. We've got a great group of folks out there who are adamant about delivering on their quality goals. But I think that as you think about the back half of the year and you think about some of the changes that we've been able to push through in the first half of the year in this business, we feel pretty good about having an expectation that we're going to see improved performance in this portfolio in the back half of the year around all kinds of things, around volume and expense management and all sorts of things that we do in these facilities.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just a follow up on a couple of the questions earlier about the excess capital you guys will have towards the end of the year. I mean, is there -- philosophically, are you guys open to larger scale M&A versus sort of the 1s and 2s we've seen kind of recently in the Home Health division?

Paul J. Diaz

I think as we have shown over the last decade, we're very good at diligence, at trying to buy smart, in a win-win for folks on the other side and I've got a great track record of integrating large-scale acquisition opportunities. And Chris, we will be opportunistic. We will be aggressive when we see those stars aligned where we think valuation, financing, cultures and teams match up and where we think we can bring value to an acquisition opportunity within the context of our Integrated Care Markets and within the context of the enterprise capabilities that we have in our back office, in our IT shop and those kinds of things. So sorry, short answer is absolutely.

Operator

Our next question comes from Gary Lieberman from Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Maybe you could provide a little bit more detail about some of the challenges that are associated with exiting the Ventas properties? Is it managing HR or is it other stuff that sort of presents the greatest challenge?

Benjamin A. Breier

Yes, it's a combination of things. It's a combination of staff retention and keeping your management team focused. It's a combination of making sure that you're driving volumes and admissions in a robust way with a group of folks that is in the building with somewhat of an uncertain future. It is making sure that we maintain our place in the communities in a positive way as we think about exiting those communities. So it's a lot of those things that go into trying to have a group stay together because they're loyal to their building and to their residents and to their communities, even though the change is very difficult on them emotionally.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

So do you see it getting any easier, I guess, as you go through future divestitures? Or is there really no way to sort of gain in the economies as you go through time and again?

Benjamin A. Breier

Well, I think anytime -- and we're pretty good about this around here. Anytime we go through a challenging process, we typically learn a lot from it and we typically improve upon it the second time. And I think that, that will be the case certainly going forward with any additional divestitures that we do. A lot of the things that we did around retention and around making sure that our employees stayed engaged worked pretty well, but I think that there are some other things that we can do better and that we will apply to the next round of this. So while it's certainly going to be tough emotionally, because these are buildings that we have given a lot of years of our life to, all of us, we'll do it in an even a more efficient way than we did this first round.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. And then, I'm sorry?

Paul J. Diaz

Gary, let me just add because the question has come up a couple of times. The heart is what we get paid for, that's our job. We do a lot of performance improvement and 360s around processes. So we are very committed to repositioning the company even though it has been hard, in some ways, as hard as anything we've done around here in 12 years that I've been here. And the context is also, if you look at all our peers, every one in the skilled nursing facility business is having a really hard time. I mean, there isn't anyone who is not struggling with length of stay, the impact of sequestration and 5 years of essentially no growth in Medicaid rates. It is the length of stay and Medicaid rate compression as against cost that have really compressed margins in the Nursing Center business across everybody. And so that kind of keeps getting lost in some ways. But go back to 2008 to today, look at Medicaid rates, look at the underlying cost pressures that have been managed better than health care inflation and look at length of stay across all payer types, you'll see that it's been very difficult. And where we see opportunity and where we see success is in 21st century Transitional Care Centers, the new ones that we're building, the hospital-based sub-acute units that we are developing that Ben talked about and quite frankly, where we expect to see future growth within our Integrated Care Markets in that Nursing Center division. But there's an evolution going on here, particularly the challenge around older, predominantly Medicaid facilities where the margins continue to be compressed.

Operator

Our next question comes from Gary Taylor from Citi.

Gary P. Taylor - Citigroup Inc, Research Division

Just a few questions. So I just want to go through on the facilities that are being sold this year. I know some of the Nursing Centers closed at the end of July and you've got the remainder to close, and you gave some of the facility-level EBITDA and rent data, is there any reason to believe below the EBITDA line just in terms of depreciation at 5% or 6% of revenue that, that's particularly any different? I guess, we're just trying to get to EPS impact. You've already said, assumed we paid down the revolver, so we can do the interest piece. But depreciation on these assets being sold roughly $20 million, is that in the ballpark?

Richard A. Lechleiter

I think it's less than that. I think it's somewhere between $12 million and $15 million, Gary.

Gary P. Taylor - Citigroup Inc, Research Division

Okay. And on the tax treatment of these sold assets, so you're talking I think $227 million of net proceeds after tax, is there a higher tax base and no material tax component to this or the gross proceeds are actually higher than the $227 million?

Richard A. Lechleiter

Yes, primarily the basis in these assets is higher and really result in a very small tax payment on a combined basis. So I think $225 million, we think, will be the net after-tax proceeds from both of those deals.

Paul J. Diaz

Gary, one of the interesting things about -- we, over the last 7, 8, 10 years, we've built a lot of facilities out of the ground. And we're essentially monetizing that value creation, Sacramento, Richmond, Charleston. These are very, very high-quality, high-performing assets outside our Integrated Care Markets that we built out of the ground, stabilized. So the reason you a high basis and the reason we are getting such a high valuation for them is because essentially, we're unlocking the value of our development team and our operators' work to get these assets to maturity.

Gary P. Taylor - Citigroup Inc, Research Division

On the 2015 renewals that you mentioned at the Investor Day, you've mentioned again in this release, opportunistically, I guess, obviously, one part of the opportunity is freeing up the capital to redeploy into your key markets into different service lines. But I guess you haven't talked very specifically about opportunity in terms of EBITDA or earnings accretion. So first, I guess, the question is, can you talk generally about the profitability profile of this next batch of renewals? Are they generally positive EBITDA contribution at this point?

Paul J. Diaz

I think it's a little premature, Gary, to talk about the specifics. I mean, I think what is clear from the information we provided is that our older nursing centers in those portfolios are underperforming for the reasons that I just articulated, cumulative impact of Medicaid rate cuts, length of stay decline, et cetera. These assets are grouped hospitals and nursing centers by bundles, so you'll have different performance in each of those bundles. We will go into this process, again, with collaborative discussions with Ventas as we have in the past, with the focus on our Integrated Care Markets in mind, with the future earnings prospects of the building's foremost in our mind. LTM is really not how we look at this. We really look at these bundles on what we think the future earnings prospects are. We look at it all the way down to pretax because of the CapEx requirements, the working capital requirements of these facilities. And so -- and we look at each bundle as if we're doing an acquisition. Would we release a bundle if someone brought us this asset off the street? And I think that's the discipline we're going to try to maintain when we go into this process in the fall with Ventas and continue our discussions. And again, it's a very constructive working relationship. There's a lot of trust and there's a lot of respect, and we'll kind of see where the process takes us this time.

Gary P. Taylor - Citigroup Inc, Research Division

Well, then I guess, it's just a really sizable amount of revenue, it appears, for renewals, so it would be quite material to what the company looks like with and without that. So anyway, as soon as you can share -- as much as you can share, it will be helpful. My last comment or question, as we've been following just the CMS proposed rule, final rule on LTAC, the discussion of the patient criteria, the discussion of the data from their various contractors that they've outsourced this to, I guess, I have some concern that you've got contractors suggesting that some appropriate patient criteria could really exclude a meaningful portion of the current LTAC patient population from LTAC reimbursement and might more appropriately be paid on a IPPS schedule, et cetera. And I guess my concern is, it just -- it sure reads like maybe this is the culmination of a 10-year anti-LTAC bias by MedPAC that's now finally perhaps going to be promulgated in a proposed regulation next spring, so -- and potentially, materially impact LTAC revenue and profitability. So is there a reason -- is there an obvious reason why thinking along those lines is too negative, or is this really -- we need to wait and see what's proposed before you can really respond to that?

Paul J. Diaz

No, no, I can respond to that. I mean, if you look at John Blum's comments publicly at a hearing not too long ago, if you look at MedPAC's data and slides that they presented that -- for a subset of patients, LTACs created tremendous amount of value, both clinically and financially, that MedPAC has called for criteria, and I think we're all frustrated that criteria has not been advanced. Now what criteria looks like reasonable people can disagree. But in all our interactions, in all the public comments from CMS and particularly from senior officials at CMS, the role of LTACs, the importance of LTACs is not in question and similarly at MedPAC. What we all agree is that defining LTACs as a 25-day length of stay is no way to run a railroad, that we ought to have more patient-specific and facility criteria. And that means, by definition, that the most medically complex patients should be in LTACs. And those patients that are not at that level of medical instability that can be cared for in a sub-acute environment like our sub-acute environment can and should be cared for there. And they -- the fact -- the data point that I will point you to today is that the Medicare Advantage and the managed care payers use our LTACs, as you can see in our numbers, and have the right to choose and do their own criteria and use our LTACs for that narrow subset of patients in a very cost-effective way. And so I would point you to our commercial LTAC business for a rational buyer of LTAC services and point you to both the MedPAC data and the comments that John Blum and others have made that, yes, we all agree there ought to be patient criteria, we all understand it will be probably be narrower and really focused into the higher-acuity patients. But the idea that was floated that we're just going to roll LTACs back into the hospital payment system, I don't really think has a lot of support broadly anywhere.

Gary P. Taylor - Citigroup Inc, Research Division

Well, I mean, I understand your comment on the commercial, but I think roughly 2/3 or 60% of the LTAC days or Medicare days, if I'm not mistaken, so I guess the issue that seems to be raised is, is there a lower acuity Medicare patient population that's being treated in LTAC today that might not be eligible for the same level of reimbursement once the criteria are...

Paul J. Diaz

So again, one further data point. So the answer is, if you look at the RTI study that was published a couple of years ago, the answer is, there is not skilled nursing substitution happening in LTACs. That's the RTI study that was published by CMS. So if they're not skilled nursing-appropriate and they're high acuity, then where are they appropriately going to be cared for? So I'm just giving you multiple data points, Gary, about that. We agree that criteria will rightfully mean that we're going to be focusing on only the most medically complex patients should be in LTACs. And we have worked very hard at Kindred and we believe, many of our colleagues, to make sure that, that's who we're caring for, and that those patients that can be cared for in a lower acuity environment are being cared for in our step-down, hospital-based, sub-acute units in our Transitional Care Centers. And part of the problem is, we continue to think about patients at 25 days as opposed to what is the medical condition that gives rise to the care setting, and that's what we've got to take this conversation.

Operator

And we'll now go to Rob Mains from Stifel.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions on rehab. Some of your peers have grumbled about MPPR and the kind of hard Part B caps. I'm going to surmise from the margin improvement from the first quarter, the second to that was not kind of an insurmountable problem for you?

Richard A. Lechleiter

Well, you can surmise that we worked our way through it, but it was a legitimately real -- and it is and continues be, Rob, a legitimately real barrier that we have to keep going over. I mean, I think we had talked, I think, earlier in the year about the impact of all of these being somewhere in the $30 million to $35 million range on this business. And I would say, based on our second quarter experience, it will be every bit of as much as that. Now our therapists and Pat Henry and her team have been incredible in their ability to continue to drive productivity and talk to our customers about pricing and be more efficient in the way that we're doing things, which has allowed us to continue to just perform, I think, exceptionally well in the business. But just because the results are good, it should not minimize the barrier that's up there from some of these regulatory changes. They are significant.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I appreciate all the answers to questions on skilled nursing, just have one other one. You circled back on the answer about Medicare Advantage and some of the opportunities you see there. The pushback that I think the industry is seeing when they get involved with Medicare Advantage is you get nickeled and dimed on rate, you get nickeled and dimed on length of stay and you don't get the volumes to make up for it. So it seems that your experience with expanding Medicare Advantage has been more positive. Can you kind of speak to that?

Richard A. Lechleiter

Well, look, Rob, I mean, this is the life we have chosen. I mean, when you're dealing with various payers that are managing utilization in a very aggressive way, you have to be robust in your ability to talk about your own value proposition, you have to be very solid within your own contracting portfolio to make sure you're getting paid for the things you need to get paid for. And when the patients and residents are in your facilities, you've got to manage their care appropriately. So this is not something new to us. I certainly don't minimize the complexity of what it takes for our folks to operate in this environment. But this is, as I said earlier, this is the life we have chosen.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Given Kindred's strategy, when you're talking to the payers, are you presenting your nursing centers, or is your contracting about -- with the nursing centers standalone or is it part of the whole integrated care approach?

Richard A. Lechleiter

More and more, we're trying to have robust discussions about the integrated care approach. But I would say that it is still in the early stages as really -- while we're prepared to have an integrated discussion, a lot of the big payers and again, some of that depends regionally, but a lot of the big payers are still siloed in the way they think about post-acute care, whether it'd be LTAC or IRF or SNF or HomeCare, so you're still having individual discussions. Now we can have individual discussions on a national basis, which we're able to do because of our size and scale, but it's still in the very early stages of having commercial discussions about integrated care markets, although we are doing that in 5 of our pilot markets today.

Operator

And there are no further questions. I'll turn the conference back over to our presenters for any additional or closing remarks.

Paul J. Diaz

Great. Thank you, all, very much. It's been a great, robust discussion on many different fronts, obviously a lot going on at Kindred Healthcare. We really appreciate everyone's support being on the call today. We will keep trying to knock the pins down one quarter at a time, and we're very excited about kind of where we are midyear at around $0.81 and our dividend and our execution. And again, the extraordinary challenge that sequestration has been and the rehab rules that Ben had talked about. And we're very excited about our future growth and our opportunities to redeploy capital in the future in our Integrated Care Markets. But again, thank you for your patience. In what we know as a complex story, we'll keep trying to make it simpler for you. Thank you.

Operator

This concludes today's presentation. Thank you for your participation.

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