Kindred Healthcare Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Kindred Healthcare, Inc. (KND)
by: SA Transcripts

Kindred Healthcare (NYSE:KND)

Q3 2013 Earnings Call

November 06, 2013 10:00 am ET

Executives

Charles Edward Jones - Chairman and Principal

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

Benjamin A. Breier - President and Chief Operating Officer

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

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Jack Meehan - Barclays Capital, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Joanna Gajuk - BofA Merrill Lynch, Research Division

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

Operator

Good day, everyone, and welcome to this Kindred Healthcare Third Quarter 2013 Conference Call. Today's call 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, sir.

Charles Edward Jones

Good morning. Welcome to the Kindred Healthcare third quarter conference call. This is Eddie Jones from Corporate Communications.

Before the company's presentation, I would like to read a 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 and 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 third 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 its 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. You can also access the related presentation materials that will be discussed during the call today through the company's website.

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. As many of you are aware, in 2011, we set forth a strategic plan to aggressively reposition Kindred Healthcare, in the context of healthcare reform, the growing demand for integrated post-acute care at a local level, our Integrated Care Markets, and the clear preference by consumers and payors for more patient-centered, home-based care models. Our strategic assessment also embraced the value proposition that comes from intensive rehabilitation services and interdisciplinary care management to improve patient care transitions and quality and lower cost by reducing inpatient stays and unnecessary rehospitalizations.

From an internal perspective, we also saw the decade-long earnings leakage that came from a very cumbersome lease-intensive capital structure, in a difficult reimbursement and operating environment for traditional custodial skilled nursing care and made a difficult decision to substantially exit that model of skilled nursing care. Today, we are pleased to report on the progress we have made on our strategic plan and make the case for you of a path to significantly greater value creation for our patients, teammates and shareholders, as we enter the growth phase of our strategic plan and look to 2014 and beyond.

As you saw from our third quarter earnings release, we've been extremely busy accelerating our strategic plan to reposition Kindred around its core integrated care market strategy, and I am pleased to tell you this morning that we are well on our way to success on a number of fronts. In particular, during the first phase of our repositioning plan, we have now essentially exited or disposed of 136 nonstrategic, and in some cases unprofitable facilities, generally outside of our Integrated Care Markets. During this period, we also managed to increase our 2013 free cash flow guidance to $120 million from $90 million, and we also announced our estimated 2014 earnings and free cash flow guidance, including a full year of cash dividends at $110 million.

Clearly, we are well-positioned to execute on the second phase of the repositioning plan, the growth phase. While the redeployment of capital will take time, as well as rightsizing our overhead, we are already seeing success on this on a number of fronts with this week's announcement of the senior care -- Senior Home Care acquisition that will expand our Care Management and Home Health business in the important states of Florida and Louisiana, and the acquisition of 9 previously leased nursing centers, that will further improve our overall capital structure.

While Ben will discuss with you some of the operating challenges and opportunities we have from the third quarter going into the fourth quarter, I am confident that we are paving the way towards a more market-focused and profitable Nursing Center business, as well as our new Care Management division that will help position our entire enterprise for future growth. As you can see from the earnings release, we have reflected our disposition activities as discontinued operations and have restated all of our historical financial results for our continuing business. While our reposition activities have been initially dilutive, we have provided ourselves with a clear path to higher levels of earnings in the future and a higher growth rate.

So if you will now turn to the first slide of our presentation, we'd like to recap our strategic plan for those of you not familiar with it on the call. So let me begin. We already had 6 points of the strategic plan that we and our board came together on, as I said, back in 2011. And we continue to strive operationally for continuous quality improvement and clinical outcomes, as well as advancing the proposition of employee engagement and satisfaction that is key to our value proposition to patients. We are obviously working to overcome very difficult macro volume trends, and we often see that seasonally in the third quarter, as we reported on yesterday, and also what's been a very difficult reimbursement environment for the last few years. Project Apollo, the cost containment initiatives we've spoken to you about before, continue to track ahead of plan, and we have the expectation of another $36 million of additional savings targeted in 2014.

In 2013, we completed the operational transition of the Ventas 54 facilities, and we now expect to complete the transition of the 59 facilities scheduled -- originally scheduled to terminate in '15 and '14 and close our Mt. Carmel facility either late this year or early next year. Equally importantly, we've continued to acquire real estate as Rich will talk about, this year acquiring almost $120 million of real estate and eliminating $13 million of rents and escalators. And significantly, and a source of funding the recent acquisition activities we've talked about, we've realized in excess of $240 million of proceeds from our divestiture activities.

Those proceeds have gone to strengthen our IRF business and RehabCare with the TherEX acquisition, recently announced Senior Home Care acquisition in Florida and Louisiana that Ben will talk with you about, as well as the opportunities we have to advance our Care Management capabilities and our integrated care market strategy.

We also, in terms of improving the capital structure, initiated a dividend of $0.12 per share in Q3, certainly have the hope to grow that in 2014. And importantly, restructured our financing and our senior debt and through the course of the first 3 months paid down $264 million of revolver capacity, obviously before the acquisitions. So -- and lastly, when one looks at the divestiture activities, over $700 million of lease obligations have been reduced through the Ventas transactions, capitalizing those rents at 6x.

Ben, why don't we talk a little bit about the core operations and where we see our opportunities going forward?

Benjamin A. Breier

Thank you, Paul, and good morning, everyone. I wanted to spend a few moments talking about some of the components in our core operations, and I'll start with the premise that, as many of you will recall, we entered into 2013 facing what amounts to $130 million of reimbursement cuts and some significant organizational changes, obviously along the way of the divestitures that we've talked about. Through it all, that's a reminder to investors that on a year-to-date basis, we really are performing just about right at plan in terms of the plan that we laid out at the start of the year.

As I walk through a little bit of our segment data, let me just talk briefly about each of our businesses and how they're performing. To start with, our Hospital division, and generally despite some of the softness in volumes in the third quarter, we are generally very pleased with how the Hospital division is performing. Investors may recall back earlier in the year, when we had a very, very strong first quarter in the Hospital division. We had guided investors that our expectation was that we'd see some seasonal weakness in the third quarter and that's in fact what has happened, and we now expect to see that volume return as we head into the fourth quarter and into the winter months of the year.

We have managed the division in really a meaningful way from an operating expense perspective, only a 1% increase in our operating expense, PPDs. The managers in that division have done a phenomenal job of staying very focused on cost and on execution. And rates and revenue per patient day have held up relatively well along the way as well. Also our inpatient rehab facilities are performing at a very high level, and generally we feel like we've got some pretty good momentum moving into the latter part of this year and into 2014.

In RehabCare, I think the story there really has been just an incredibly phenomenal performance. Pat Henry and her team, despite enormous reimbursement and regulatory headwinds around NPPR and around the manual review process for Part B therapy services, Pat and her team have been able to keep her therapists focused on productivity and on trying to make sure that they're treating the patients the right way. We have been able to recruit and retain therapists, really, we think at sort of historical levels for us here at rehab care, and the business continues to operate effectively both in the SRS side of the world, where we have added net contracts throughout the course of the year. And on the HRS side, where our organic growth rates, particularly in the IRFs we manage, has continued to outpace the market in that regard.

On the nursing center side, obviously, it's been a very difficult and very noisy first 3 quarters of the year. But what I would say coming out of all of the divestitures and all of the changes that we have made in the nursing centers, we remain very optimistic and very excited about really being able to get back to our core operations, to being the -- be able to execute on the operations side of the world and on the growth side of the world in the now 108 facilities that we will maintain on an ongoing basis. We are excited about continuing to invest in our new transitional care centers in our hospital base subacute units, and we have a renewed focus we think in this business on getting back, as I said, to execution growth.

And then finally, and I'll talk a little bit more later about our Care Management Division, just incredibly excited about the work we're doing, both in the context of Kindred at Home and our HomeCare and Hospice business, but also in our ongoing strategic growth of our physician business and in the way that we are now starting to coordinate care across our portfolio that's ultimately going to lead us to new and innovative payment methodologies and models, which we think is so important for the future.

Paul?

Paul J. Diaz

So the next few slides, we've just sort of summarized for everyone to make it easier to look at all of the different pieces of the repositioning strategy, the Ventas strategy, the combination of the '13 and the '15 transactions. Again, a very good relationship with Ventas, a very good working relationship with Ventas. And one too that I think now both companies are liberated to talk about how we might be able to grow together. But for us, the strategic benefit of divesting 114 non-strategic, again, more custodial type skilled nursing facilities with over $1 billion of revenues and able to pivot now to the kind of subacute short stay facilities on hospital campuses in newer properties is quite exciting for us.

The Signature and Vibra transactions summarized on Page 6, as I mentioned, provide us a great deal of improvement in the capital structure given the proceeds from those transactions and the tax effectiveness of those transactions, but more importantly, the capital to invest in addition to the strong free cash flows that we're generating in Home Health, Hospice, inpatient rehab, subacute rehab services and Care Management, which will position us to participate in more managed care and risk-taking models in the future.

On Page 7, we really tried to summarize these transactions and give you some historical perspective. Again, these are the transactions that have been moved into discontinued ops or will move into discontinued ops, the Mt. Carmel facility. And we've adjusted this also for the rehab part of the business. What I would point you to is $327 million of proceeds from these transactions and how that freezes up for reinvestment, but also the earnings trajectory of these facilities. These facilities produce 36 million -- $0.36 of earnings in 2012 and are tracking to produce $0.15 of earnings today. So a great deal of the underperformance that we've been seeing in the company generally is attributable to some of these assets that we are now -- has moved to discontinued operations and will not operate. And so it really clears the way for us to a core business, with much better growth characteristics going forward and should get everyone confidence in the growth that we expect to see in our core operations in '14 and '15, having this behind us.

Specifically, in the Nursing Center division, on Slide 8, you'll see this crosswalk, if you will, from 2012 to the discontinued ops that have occurred. The Mt. Carmel that we, again, hope to move to discontinued ops here shortly and the benefit of the HCPI real estate purchase. Again, all of this puts us in a position to have the type of 21st century nursing home business and invest in the future of that business in the way that Ben spoke to and a platform of earnings stability from which we can grow that business and integrate it into our other service lines.

On Page 9, I'll just spend a second on this and you all can make your own judgments, but this is fundamentally a different company going into 2014 and 2015 than it's been in the 12 years that I've been here. Obviously, you can see the significant reduction in our skilled nursing in this custodial Medicaid-dominated skilled nursing that has been a source of earnings leakage for the company around the leases and the reimbursement issues. But I would also point you to the substantial growth in Home Health to 7%. We certainly hope to grow that to 10% by '15, and the growth in our profitable and successful rehab business. Again, 2 services that our consumers and payors want. We continue to grow our asset ownership, which allows us to have more financial and operational flexibility. And lastly, the significant reduction in capitalized lease structure -- capitalized lease expenses that you see in the bottom pie chart. That is particularly significant when you think about over the last decade the earnings leakage around rents and the compounded effect of escalators, and now the majority of that is behind us and our shareholders and teammates will be able to participate more in the growth, if you will, of our go-forward enterprise.

So as we enter the second stage of our strategic plan on Page 10, I won't go through the details because we -- you've seen the prior week's announcements, but we're pleased that in very risk-adjusted deployments of capital in our Integrated Care Markets, consistent with our strategy, the Senior Home Care deal, the TherEX rehab deal, as well as the rehab deal with HCP, all of which together we think, are substantially high earnings, good capital redeployments of our sale proceeds.

So I want to turn it back to Ben to talk a little bit of an update on where we are on RehabCare, which, as he mentioned, is -- has continued to be a growth engine for us and the prospects for future growth of our Care Management division and Kindred at Home.

Benjamin A. Breier

Thank you, Paul. To start with on RehabCare, as we've now talked about, we completed the acquisition of TherEX and that has been a nice addition to the HRS part of our business, the business -- the hospital rehab service business that we feel very strongly about going forward. I mentioned earlier in my comments about the net new contract growth in RehabCare. Our sales pipeline and our ability to continue to grow that business remains very strong, and we are seeing continued ability to grow market share across the country on that side of the world.

On the Kindred at Home business, inside of our Care Management component, let me spend a couple of minutes on Slides 11 and 12 just talking about Kindred at Home specifically, and then on Slide 13, I will talk a little bit more about Care Management, as it relates to the strategy that we are unfolding here around Continued Care and our Integrated Care Markets. We now, as we finish the completion of the acquisition of Senior Care in Florida, have one of the largest and broadest national footprints from a HomeCare and Hospice operation of any company in the country. And one of the things that investors know from Kindred and that we've been very good at over our history is, is that we often spend sometimes significant amounts of capital and investment upfront to make sure that we are standardizing systems across the country, so that we can bring to bear some of the scaling capabilities that we think we have done in many of the other industries that we've served.

And so we're very excited to report to investors that we have finalized the clinical implementation of Homecare Homebase across now all of our portfolio. That has been a difficult and sometimes painful process to roll that out. At some times it has created the need for additional and incremental expense and lack of some focus operationally in the business over the last couple of quarters. But that is now done and complete and sort of moving forward.

So if you look at Page 12, you can get a sense from our 2 slides, both that what we expect to see will be significant revenue growth. Again, both organically, driven off of our integrated care, Continue the Care strategy, which we have proven out now over the last year has been very successful in allowing us to have patients flow from one side of service at Kindred to another, as part of their ability to continue the care with us. And secondly, that you can see that from an operating income perspective, we will return back to a level of margin creation both in our core business and in the acquired business that should move this division up in a very nice way.

We are dealing a little bit with some of the changes in hospice regulations, but we're generally working our way through that in our hospice business. And we feel, I think, really excited and very good about the future of Kindred at Home and what it can mean to our integrated market strategy.

And if you flip to Page 13, I'll just spend a couple of minutes talking about our Care Management division and our care capabilities in terms of what we're doing. We have done, notwithstanding all of the changes that are happening in our core business, the divestiture of assets, we have done enormous amounts of work in terms of moving our strategy forward to develop new integrated care payment models in the integrated care markets we serve. And so when you look at this map, you can -- this chart, you can get a sense of what I think are the 4 things that I would hope investors will take away from our Care Management strategy: one, that we are dedicating resources to manage patients across Kindred settings and ultimately get those patients home; that, two, we are advancing in a very meaningful way, physician leadership as a key component of the care transition strategy that we have; three, that we are executing very efficiently on our IT strategy, particularly around something that we call Kindred's Health Information Exchange, which essentially is going to be our ability to transfer and transition patient summary data from one setting at Kindred to another so that we can follow up patients throughout the continuum. And for investors all of this leads up to what we think is our ability to ultimately go out and pilot and try all kinds of new, innovative payment models, whether it's the bundled payment project that we're working on in Cleveland, whether it's thinking about taking and managing risk, whether it's thinking about doing population management, et cetera, we are going to be and are now today uniquely qualified and positioned to enter into these new payment structures and methodologies.

And quickly, if you look at Page 14, just a graphical example, if you will, of now the 5 key Integrated Care Markets that we have rolled out a substantive part of these initiatives. Everything from central intake to Care Management, to single-line management, to our health information exchange, functioning with patients moving across and our ability now to enter into new payment models.

Rich?

Richard A. Lechleiter

Thanks, Ben. Just a couple of things to wrap up. One, we've given you a lot to think about in the context of this very busy quarter and very busy release, But I'll make a few summary comments to kind of -- to cut through it all. One, the repositioning has dramatically redefined our continuing ops. And we've provided you with a lot of information to look at that essentially pictures what the continuing enterprise looks like and takes out of it, if you will, the 136 facilities that we're exiting. So that's a key point of change. But I would tell you, having completed the disposition phase in our financial statements, we're now at an inflection point to begin to grow. And if you look at our balance sheet and look at our liquidity, and we've highlighted both of those in the release, we are in a great position to fund a lot of capital around the growth initiatives that Ben and Paul have talked about. In fact, in 2014, we are going to show significant EPS growth on that same base of assets year-over-year. And finally, as we deploy more capital in '14 and '15 in the Integrated Care Markets, we're in a great position to create higher earnings for the company and overall higher margins going forward.

Just a couple of wrap-up things. Paul talked about bringing real estate on balance sheet and eliminating substantial rents. And I think through all of these transactions, we've got a new income statement. We have a new balance sheet, but we also have an adjusted leverage inside this organization that's at 4.7x if you capitalize the leases, at a multiple of 6. That's actually a better capitalization for this company at September than we've had in the last 2 years. So while we've shed $1.3 billion of revenue, our capitalization is actually in better shape.

We've also restructured our senior credit facilities this summer and in the spring to do 2 things. One, to lower pricing. But two, to loosen up some covenants, to basically move several of the covenants in our senior debt to the equivalent that's in our unsecured debt. And finally, we extended the tenure of our revolving credit facility to 2018. So to fund our growth, work through the repositioning, provide the capital we need to show you a different company in 2014 and '15, we don't have any refinancing issues in this company until 2018.

There's a couple of crosswalks that I think are pretty transparent on '16 and '17. This is an attempt, in a simplistic way, to walk you through the midpoint of the '13 rebased guidance at $0.83 to the midpoint of the '14 guidance at $1.15. And essentially there's 3 key parts. One is the organic growth, net of the regulatory headwinds, and we've broken that out separately, is around $0.28 a share in growth. So there is a robust level of growth inside the organization. I'll reflect back on Ben and Paul's comments around some of the strategies we've evoked to do that. Number two, there's this issue around the Ventas rents going forward for the facilities we want to keep. Most of the additional rent we'll book in '14 is noncash, so we broke those component pieces out. Nevertheless, there's a $0.15 drag, if you will, based on the convention we need to use for accounting purposes to account for the additional rents on the buildings we want to use going forward. And more importantly, the redeployment is broken out in 2 pieces. One, the deals we just announced this week, whether that be the Senior Home Care deal or the HCP transaction, or the redeployment of our free cash flow in 2014, which we think is around $110 million on a midyear convention. That should yield $0.05 to $0.10 a share in earnings growth next year. So that -- this, I think, is helpful for you to think about in terms of the qualitative aspects of our guidance, and how we get from here to there.

More simply, on 17 is our cash flow guidance, which I think is really the driver of all our activities during the repositioning. And essentially, if you take routine -- excuse me, cash flow from operations less a lower routine CapEx next year, you're going to get to that $155 million of adjusted cash flows. Ladies and gentlemen, that is a higher figure than we're estimating for this fiscal year. So we're showing growth in adjusted cash flows year-over-year, as well as earnings. Then you can see simply the layering of a full year of dividends and, finally, the development activity or the de novo facility development that's already under construction. Again, $110 million net free liquidity in the company in 2014. In my view, very impressive.

And finally, there's a slide, on 18, that kind of profiles the improving business outlook for the company particularly the mix of revenues. You'll note from the release that the RehabCare division is now reporting higher revenues than the recast skilled nursing business. That is a major shift in the profile of this organization. I've talked about the free cash flow profile and the leverage profile and, ladies and gentlemen, again, I think our balance sheet and our liquidity are very well-positioned in terms of the go-forward growth phase of the repositioning.

Paul?

Paul J. Diaz

Thank you, Rich. I think this slide's important to close on, and then we'll turn it over to your questions. As Rich commented on, it demonstrates, as we are going into '14 and more importantly '15, a substantially repositioned company in terms of its business mix. We'll leave it to you to do the sum of the parts valuation of Kindred in '14 and '15 versus Kindred in '10 and '11, a substantially better earnings profile, margin profile and less capital intensity. And again, on a sum of the parts basis, I think you can get to a much higher level of confidence in the earnings and in valuation.

Similarly, albeit on a lower EBITDAR base, if you -- if one looks at adjusted cash flow from operations and the free cash flow after the dividend and considers free cash flow yield at any reasonable multiple of EBITDAR reduced by our reduced total adjusted debt, you get to a much higher valuation than what we are currently trading. So from a number of different vantage points, we'd ask you to revisit Kindred in terms of where we're going, how you might think about our valuation today and our growth prospects going forward, a lot of which were a direct result of this strategic plan and advancing the strategic plan over the next few years.

So with that, we'll turn to Page 19 and our commitment to both our shareholders and all of our constituents to continue to deliver on our mission. And as you can see here, working very hard to deliver on our promise to shareholders, as well as patients, and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

I'm here with Jack as well. First question, I guess, just on patient criteria, broadly speaking, I guess, the first question would be, any thoughts or perspectives on timing? Do you think this is going to be part of the sort of regulatory update that we get next spring? Or do you think there's a potential for some updates from CMS and the third-party report to come earlier? And then, I guess, specific to Kindred, have you guys thought about some sort of scenario analysis or something that we could sink our teeth into around what the potential ramifications of particular changes would be?

Paul J. Diaz

Well, let me have you think about it in the following ways, and yes, we are giving this a great deal of thought. And even in the context of this year's budget, beginning to think about the first phase of what LTAC criteria might look like. So the context for that is as follows. We still believe that the Nelson-Roberts bill, which the American Hospital Association and Federation and the industry broadly for-profits and nonprofits, solves to policymakers' desire broadly to better define the role of LTACs, to do that as a precursor to broader post-acute reforms and we're going to be sharing some of our post-acute reform ideas that we shared with Congress this summer here shortly. So I'll have something for you to chew on there. But with respect to LTACs, for years, the industry and certainly the providers, have welcomed the idea of better defining the role of long-term acute care hospitals, what we call our Transitional Care Hospitals, that serve important role of getting the most medically complex patients out of short-term acute care hospitals and beginning a recovery for them to return to their lives and family. We believe that Nelson-Roberts, the legislative ideas and framework and/or variations thereof, are potentially still something policy makers may be interested here over the next few months in the context of the doc fix and other Medicare legislation, particularly because the industry continues to believe that the bill is good policy and will score budget savings at a time where pay-fors are something that people want to do even if it's another 1-year doc fix. Notwithstanding that, we've continued to work with CMS, exchange ideas with CMS and other policy makers about variations of Nelson-Roberts or other constructs and frameworks within which criteria could be advanced. And so what I would suggest is that it is a part -- the second part of our repositioning will also be the repositioning of our long-term acute care hospital business. And that will happen in '14. I think CMS has a goal to put out another study here over the next couple of months. And I think is working to advance, in the spring, more detail about their thoughts about criteria. And we welcome the opportunity to work with them and other policy makers on that. What from an operational standpoint we give a lot of thought to is how do we continue to care for the most medically complex patients, the highest acuity patients, which Kindred continues to do. If you look at our APACHE scores, if you look at our Case Mix Index. And we will continue to serve those patients. We also think about those patients that are still acute care patients and not subacute patients, and we know this population better than anybody in America, who may, as criteria advances, may not be at the highest form of reimbursement, but may be paid at an IPPS equivalent rate or some rate in between an inpatient rehab, subacute patient and sort of a high-end LTAC patient. And how might we care for those patients within the core -- our LTACs today. And then think about a third level of patient who is further along in their recovery that would substantially benefit from more rehab intensive environment along with medical services on their journey home. This is the idea of a continuing care hospital that was described in the ACA. This is, in fact, the operating model we've been advancing at Kindred Healthcare for the last 5 years. And so I think the confusion is, in the marketplace, is that 20%, 30% of the LTAC patients under criteria just go away, as opposed to potentially cared for at a lower rate and potentially at a lower cost, or if they're well enough to be in a subacute level. And so we think that that's the process by which LTACs evolve, and we can repurpose our LTACs and continue to provide a clinical and financial model that makes sense. But there's a notion that LTAC patients just sort of disappear and go into no-man's-land is not, in our mind, realistically an outcome. So -- I'm sorry, so, it's complicated, but I will say that Ben and Steve Monaghan and the team are, as we speak, thinking about how we better segregate patients, manage patient acuity to cost and prepare for what I will believe will be a 2 or 3 year phase-in for criteria, whether it's legislative or regulatory. And we will manage through that.

Joshua R. Raskin - Barclays Capital, Research Division

Yes, I think that's the important point, Paul, is that your acuity is higher and that these patients have to go somewhere. So I think that would be helpful for us to get some form of -- even if it's Nelson-Roberts -- to get some sort of scenario analysis of what potentially the impact would be. I think Jack had a follow-up.

Jack Meehan - Barclays Capital, Research Division

Yes, I just have 2 on my end. So could you walk us through phase 2 in the commentary around aggressively pursuing acquisition ops? What are your expectations around the timing for these deals? And are these deals that you're actively working on now?

Paul J. Diaz

Well, I think most of the deals you've seen announced. We have a placeholder of $0.05 to $0.10 for additional transactions, sort of assuming a midyear convention. That is consistent with what we've done for the last 6 or 7 years, quite frankly, deploying $50 million to $100 million of capital every year and primarily out of operating cash flows. So, most of this is still being funded by the proceeds of our divestiture activity that we laid out in the slides today. And that could be a combination of additional real estate purchases, smaller ones like the Bridgewater TCC acquisition and the Tampa hospital that we did earlier in the year, continued bolt-on acquisitions of Home Health, not probably to the size that we -- with the Senior Home Care, but we have a very good pipeline of Home Health, IRF, subacute and real estate opportunities that we think that we will be able to execute over the course of the year. So most of the '14 guidance is not predicated on that $0.05 or $0.10. It's predicated on the transactions we've already announced, the Apollo savings that we are working on and, quite frankly, improvement in our Nursing Center business and some stabilization in our Homecare business, which, as Ben talked about, we've had some growing pains there as we've moved to the Homecare Homebase system and integrated a lot of acquisitions.

Jack Meehan - Barclays Capital, Research Division

And then, just the last one for me, with Senior Home Care, have you thought about the opportunity to grow referrals in the markets where you currently have overlap? And then, what sort of revenue growth do you think you can drive there?

Benjamin A. Breier

Well, we have a well-established presence in the state of Florida. We have 10 transitional care facilities that are all around the state. We have a hospital in the Louisiana market and we also have multiple RehabCare, acute rehab unit relationships. So we are really excited about the level of engagement that we have in those markets with both our own buildings and with lots and lots of different payors, physicians and hospital groups that we've had years and years of relationships to build. This has been something that we've talked about a lot in this market that our customers have asked us to try and move forward with. And so we're excited about that. We have been able to prove, Jack, I think, over the last couple of years, as we've acquired Homecare businesses, that our organic growth rates in terms of what we've been able to discharge out of our facilities has been pretty good. We've worked hard at finding ways to continue the care. I think we've got something like 8% growth rate in our organic growth rate just in the Homecare business in general. We'll see as we dig into the Florida business and Louisiana business what we ultimately think revenue growth will be. But historically we've done a pretty good job of capturing as much of that business as we can.

Paul J. Diaz

Let me suggest to you, Jack, too that as we think about Florida, Texas, California, where we have a large presence in many of the Integrated Care Markets and as we think about the top 30 MSAs in the country, including Houston and L.A., et cetera, we have a growing emerging network of integrated care services. We also have deep and long-standing relationships with hospital systems and other post-acute providers, the signature skilled nursing facility organization based here in Louisville that we have a deep relationship with, and we do some rehab services with and has a large skilled nursing platform and others, we're excited about participating in the emerging accountable care organization systems being developed and doing virtual partnerships in Houston, in Florida, in Southern California with operators that together we can solve to the needs of these post-acute patients even if we don't necessarily have all of the assets. Just a great opportunity, as Ben said, to continue the care not only on an in-house basis but sort of on a virtual basis with our relationships through RehabCare and other sort of decade-long operational relationships.

Operator

And we'll go next to A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

First of all, just to maybe -- in your press release, you have this nice table that gives you the reconciliation of earnings guidance for 2013 to 2014, and it shows the operating income restated for all the changes for 2013 and then compares that with what you're forecasting for 2014. And if I just take the midpoint on those, it looks like there's an assumption that the EBITDAR margin's going to improve from '13 to '14 from about 13.5% to about 14.4%, just under 100 basis points. I guess, we don't have the divisional assumptions and all there, but can you maybe give us a little flavor for where that margin improvement's coming from on an apples-to-apples basis as we look ahead to next year?

Benjamin A. Breier

A.J., this is Ben. I would say, just broadly and generally, without getting into specifics, the 2 areas you ought to look at for margin improvement next year. One obviously on the Home Health side, in our Care Management Division, with the addition of Senior Care and with some of the changes that we've talked about previously around our systems integrations, we expect to see pretty good margin improvement in that division. Secondly, I think you should look at our Nursing Center business, and I think that it's been a historically difficult year here in our Nursing Center business around all of the transitions that are happening and our ability now to get back to execute in those core 108 facilities that both Paul and I have talked about. I think that you'll see pretty good margin improvement in that division as well. So those 2 things combined are what are making up, generally, the margin improvement in the organization going forward.

Paul J. Diaz

And, A.J., the only other thing that we, again, try to articulate to investors, this repositioning plan extends into next year the closing of the Mt. Carmel facility, ultimately working with Ventas to find good operators for the other 59 facilities, which also means that the rightsizing of our overhead and the other Apollo savings will take us through the course of the year. So we have continued to say consistently over the last 6 months that this repositioning plan is a '13-'14 repositioning plan. Think back when we spun off our Pharmacy business. It took us 18 months to rightsize the overhead. And so '14 will be a year, and it won't all happen in the first quarter, where we will be rightsizing the overhead and redeploying the capital proceeds and the management talent. So it's all about going into '15 with the company and margins focused on future growth that's less capital intensive around our routine CapEx and more flow-through to pay dividends and grow the company in the future.

Albert J. Rice - UBS Investment Bank, Research Division

Okay, yes, that's helpful. When I look at the walk forward on the cash flows, you've got this $105 million for a routine capital spending. I just want to make sure, is that sort of what you think the go forward number is with the retained portfolio or are there any unusual moving parts in there? And then, I guess, as an aside, because some of these assets that you got in discontinued hang on for a while, is there sort of discontinued CapEx that you have to maintain that we should also think about for the cash flow number for at least next year if not beyond?

Richard A. Lechleiter

Yes, good question, A.J. Actually, we've assumed, for purposes of cash flow, that the Ventas 59 are with us for a substantial part of the year, for 9 months essentially, as far as capital goes. So as you transition to '15, routine CapEx drops well below $100 million on the go-forward enterprise after the exit, the actual exit, from those 59 facilities. So that is -- this is not what I would consider a floor for the routine CapEx.

Benjamin A. Breier

Just one comment that I would add, the $105 million also includes pretty significant investment in some of our IT infrastructure and investments that we're making as part of the health information exchange. But I just want to comment on Richard's point around the $105 million, including the 59 Ventas facilities. We are very committed into next year to make sure that we are putting routine capital to work in those 59 buildings and to make sure that as we transition those facilities over to another operator, that we transition those in a way that we would expect someone else to do. So that's why that those dollars are included in our account.

Paul J. Diaz

Last comment, A.J. Our guidance range, which, obviously, is fairly large at the 105 to 125, lots of moving parts. We have a lot of ways to get there in terms of growth and margin improvement and core operations. And you saw the strong performance we had in the first half of the year. We had a weak seasonally third quarter, and we will bounce back in the fourth quarter as we always have. But this slide, we have a very high confidence level, notwithstanding the guidance range. There are a number of different ways that we feel very confident in the $260 million of operating cash flows, the cash flow from operations after the routine CapEx. Look at the last couple of years how we've delivered on that line item without shortcutting IT or any of the facilities and, quite frankly, starting to reinvest again a little bit in the 108 facilities for growth purposes. So the $110 million of free cash flow number, we have a very, very high confidence level in after paying the $26 million of dividend.

Albert J. Rice - UBS Investment Bank, Research Division

Okay, all right. I'm going to slip one more in, if I could. You've got $20 million -- or $0.20, rather, on the EPS buildup, headwind from regulatory at '14. Can you just remind us first of all, what that number was coming into 2013? I'm assuming it was quite a bit higher, but I just wonder how much less...

Paul J. Diaz

Yes, I haven't adjusted -- I haven't adjusted that for discontinued ops and all of that, but remember, and it's important context for this year, and this goes back to '11 with the 11% cut in the nursing homes, and then the budget neutrality adjustments in the hospital that we're going into our second year, the rehab cuts, I mean, and sequestration, which annualized is $60 million, $65 million. I mean, it has been a tsunami of stuff. We think we are in the seventh, eighth inning of having these reimbursement pressures behind us. I think people in Washington are starting to just exhaust themselves of the budget-driven health-care policy. But this $20 million, think about it in the context of the $130 million of cuts that we went into '13; $50 million on sequestration, $30 million on the rehab side, NPPR, et cetera, et cetera, and a year on another 1.25% of budget neutrality adjustment. Those are roughly the numbers of the headwinds. This is the runout of that, and it's summarized in Footnote C there. So we're happy to talk with you about it some more. But we wanted to make sure that everyone understood. This guidance and the midpoint here is not a lay-up. We still have another $0.20 of headwinds in addition to the $0.15 of straight-lining impact going into the year. So -- but we put our best foot forward here, and we feel we're going to get to it.

Operator

We'll take our next question from Chris Rigg with Susquehanna International Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just wanted to -- when you guys think about the Home Healthcare business longer term, obviously, there's a lot of change going on there in the Medicare side, what do you think is the sustainable margin for the business, assuming there's no additional change, but based on what's on the table right now?

Benjamin A. Breier

Chris, it's Ben. I think that when you factor in all of the changes around Medicare and reimbursement, the shift towards Medicare Advantage, probably 5% to 7%, probably what we think going forward.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

And that's an operating or EBIT margin?

Paul J. Diaz

That's an EBIT margin.

Benjamin A. Breier

That's an EBIT margin.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just more broadly in the M&A environment, I mean, you've talked about in the past given these changes that there's been a disconnect between seller expeditions and what you guys are willing to pay. Has that bid-ask spread narrowed quite a bit in the last few months? Or would you still say it's quite wide?

Paul J. Diaz

Well, we'll see. I mean, I think, again, we have really put a premium on high-quality, clinically high-quality financial integrity. I mean, the industry -- there are a lot of good players in the industry and there are a lot of players who have not developed the systems and processes around their clinical operations, their compliance programs. And so I would say it's an exhaustive diligence process for us, and we really feel like with Professional in California, in the IntegraCare group in Texas and now the senior Homecare group in Florida that we have the best among the best and that we will all be on this Homecare Homebase platform that gives our clinicians tools to be more productive and lower cost per visit that ensures the financial revenue cycle integrity and ensures the compliance programs. And I'm not sure of any of the other large HomeCare Hospice operations out there will be able to say that they are on one platform. I could be proved wrong on that. But we think that we will be on the best platform and with a scalable model to do tuck-in acquisitions going forward that add a lot of value. And as Ben suggested, we see just enormous opportunities to continue to care at and amongst our network of friends and families. By the way, this includes assisted living facilities, where you have a 20% or 30% utilization rate of Homecare services in assisted living, and we continue to grow our relationships there with a number of substantial partners, other skilled nursing facility operators, as well as the inpatient discharges that benefit from Homecare. So -- and rehab within Homecare and the synergies between RehabCare and Kindred at Home. So, we're definitely in the growth phase and bringing that team together with Jon Rousseau and others. But we have great promise for that Care Management business and Kindred at Home, particularly as we think about '15 and '16. We think it will be a growth engine for the company and help the core operations in the other divisions.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay, and then just one last question here on -- you just instituted the dividend 2 quarters ago, second quarter, and obviously the cash flow for next year still looks robust. Can you give us, first, a sense for what sort of the strategy is at the company? Will you evaluate that dividend annually or earlier than that? And also, how about share repurchases? Is that something in the cards as well?

Paul J. Diaz

Yes, I mean, look, I think we always think about things as we said in our last point of our strategic plan is how do we improve the capital structure. Buying real estate when we're borrowing at 4.5 and taking out 8% or 9% money without escalators is always a really good place, we think, to deploy capital. We need to kind of assimilate the acquisitions in Home Health and continue to grow our Care Management business. So we're going to digest some of that, put some tuck-in acquisitions there and we like the hospice space as well and we'd like to do a little bit more. We certainly are committed to growing the dividend, probably something that we'll revisit after Q2 of next year. But share repurchases, as compared to some of the other capital allocation things are less interesting to our board, but something we will continue to look at in the menu of ways to deploy capital for shareholders in the most cost-effective way.

Operator

And we'll go next to Kevin Fischbeck with Bank of America Merrill Lynch.

Joanna Gajuk - BofA Merrill Lynch, Research Division

This is actually Joanna Gajuk in for Kevin today. I just want to maybe come back a little bit to the core performance there, and can you maybe give us a little more color about the same-store sort of volume performance at -- in each segment, specifically, the hospitals and nursing homes and also the rehab business as well and Home Health?

Benjamin A. Breier

Sure, Joanna. This is Ben again. I'll walk you through some of our segments and give you a little bit of color. The hospital divisions, obviously, we were on a same-store basis down about 6% volume-wise. Primarily reflecting 2 specific markets that we had some softness in, Houston and Las Vegas, particularly. We have obviously a very large presence in the Houston market, and I think both macro trends and others have affected what's happening down at South Texas in the summer. We're already starting to see that creep back a little bit here in the fourth quarter. Generally, the portfolio, the hospital portfolio from a volume perspective performed pretty well, on a national basis, with the exception of those 2 markets. So we're working very hard to turn those. On the Nursing Center side, admissions were generally flattish down, I think, what, a little under 1%. Patient days were down a little bit. Lengths of stay have sort of stabilized in that business Rates have stabilized a little bit in that business. It's really a continuation of the story we've had in the past. We've got to keep having more admissions in order to grow patient days to outpace some of the length of stay pressures that we've been under. But generally we've been in a pretty good place in that regard. On the Homecare side, we showed, I think, substantive organic growth, both on the revenue side and on the admissions side. We're very pleased with the way we've grown that business. And last, in RehabCare, as I've mentioned now a couple of times, net new contract growth, pretty significant on the SRS side. Actually, I think, we've gotten up to the high-water mark for the year and I think on a year-over-year comparison in terms of our total contracts there, we lost a few outpatient and subacute contracts in our HRS business, but generally our organic growth there has been very, very good. The operating margins in that business have been very good as well. So a mixed story, no doubt, in the third quarter, both from a macro perspective and from an internal -- all of the things that have been happening organizationally. But we feel pretty good about getting back on track here, as we typically do, as we move out of the seasonally weak third quarter into the better winter months.

Joanna Gajuk - BofA Merrill Lynch, Research Division

So your commentary there suggests that you feel like Q4 should be a little bit better, I think, for some of these businesses?

Benjamin A. Breier

Q4 will be better, yes.

Joanna Gajuk - BofA Merrill Lynch, Research Division

All right. And then, I guess, a broader sort of -- broader-picture question. I guess, you're talking a lot about the company positioning to be able to provide integrated care services. So can you also give us your view and also an update on your participation in maybe some of the bundling programs there and demonstrations and how you feel about that progressing?

Benjamin A. Breier

Sure, broadly speaking, we think that the world at some point will move from volume to value, and we are preparing our operations to be able to deliver on that. Now, as all of us have talked about a number of times, and we've talked to investors, the trick is to change the tires on the car while you're driving down the street, while you're in a fee-for-service world heading towards value. And so to that end, we have taken 4 or 5 different examples in these integrated markets we serve and we are trying -- actively trying new pilot ideas around innovative payment methodologies. I mentioned in one market, we had applied for and been granted a CMS post-acute bundle. That is getting ready to start on January 1. There are some guardrails around risk sharing in regards to what we were doing with the CMS bundle, but we're very excited in terms of moving forward with that product. In 2 other markets, we are engaged with payors on the idea of taking some level of risk around the population that we serve, hopefully with some guardrails on that as well, but we're getting close to extending relationships there. And with some of the biggest players in the country, we are doing some risk sharing- and gains sharing-type ideas that we think will lead us into more of a full risk population management perspective. And last, I think up in the Northeast, in the city that has a lot of health care and a lot of robust reform, we're engaged with multiple health systems in that market on doing some really innovative payment methodologies as well. So in 2014, you will see us actively participating and involved in somewhere, I would say, between 3 to 5 risk-bearing payment models that we think will lead us to doing even more in '15 and beyond.

Operator

And we'll go next to Rob Mains with Stifel.

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

The HCP opportunity, was that -- that was not a purchase option. That was a negotiated purchase of the assets?

Paul J. Diaz

Yes, I mean, there were some purchase options in there, but it was not -- it was a negotiated transaction.

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

Do you have any upcoming purchase options on assets -- you don't have to be specific, just sort of generally, whether there's anything else that you might be able to exercise options on until next year?

Paul J. Diaz

Yes, we continue to look at purchase options. I would say we don't have anything else big. But every year, I mean, if you look at the 100 -- almost $120 million of real estate that we took in this year, it was probably $60 million, $70 million, $80 million last year and probably a similar amount the year before. So, we continue to look at that, and we would certainly hope to -- again, of the $75 million to $125 million of capital that we would hope to deploy next year, if we can buy in $70 million, $80 million of additional real estate next year, that would be great, but nothing specific to talk about yet.

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

Okay, and then I had a follow-up on the nursing centers. We've been focusing on the medically complex short-stay patients. How do you see, in the networks that you're envisioning, the role for the custodial long-stay resident, both in nursing centers and in those assisted living facilities that you have, where do they fit in? Or is that kind of a different service site in your mind?

Paul J. Diaz

Well, look, I think, as I mentioned in my preliminary remarks, we did a lot of soul-searching here over the last couple of years going into the RehabCare acquisition, going in, in the context of health-care reform and more patient-centered integrated care. And we asked ourselves, Kindred Healthcare has to be a company that solves to the challenges and opportunities of the growing senior population of boomers who are very independent, who have means and, quite frankly, are less dependent or want to be less dependent on government programs. And so we look at -- we overlay that the significant growth in Medicare Advantage, and we have to be a solution to them. We look at the growing, emerging discussion on managing the duals and we have to be a solution for that population. So, as we think about our future, we want to be the company that solves to the problems and the desires of seniors who are aging, decision makers like you and me with elderly parents who want to have a high quality of life and wellness for that, and we think assisted living and rehab and Home Health and short stay, private pay -- private rooms, subacutes, like the TCCs that we're building, are what the customer wants. So there's going to be an important role for LTACs. Many of those patients will complete their recovery in an IRF or a subacute level, but increasingly patients and medical technology will allow us to send, and continue to care for more patients, home and home could be an assisted living facility. We acquired this physician group in Cleveland, because they're just doing incredible things of doing patient-centered care in independent living and Homecare environments and our ability to do Homecare and rehab there is something we're very excited about. So, again, as Rich said, we're completing or will complete in 2014 the first part of our strategic plan and repositioning, but as we look to '15, '16 and '17, assisted living, rehab, Home Health, Care Management are all part of what we think is our future and potentially post-acute bundling and more risk-based models, as Ben was just talking about.

Operator

And it appears there are no further questions.

Paul J. Diaz

Well, great. Thank you all very much. We know we threw a lot at you last night. We hope the slides in the presentation today helped, some of which were intended for reference and for further Q&A later. So Rich and I and Ben are happy to make ourselves available over the next few weeks, as you parcel through this, but, again, we're getting -- we're quite excited about completing this first phase of our strategic plan.

There's still a lot of work to do, but we're pretty excited about the company moving into '15 and '16 in the context, again, of the macro things happening around us in terms of health-care reform and integrated care. So we appreciate your time in the phone today. And we thank all of our operators and caregivers on the line today for all their incredible work through all of this change and the ambiguity around this change. And now, we -- we kind of know where we're going. So thank you all very much.

Operator

This does conclude today's conference. We thank you for your participation.

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