Skilled Nursing Facilities Q4 Earnings Preview (SKH, SUNH, KND)

RBC Capital Markets said in its skilled nursing facilities Q4 earnings preview that pre-announced upsides for the quarter and better-than-expected 2011 guidance combined with Kindred Healthcare Inc.'s (KND) fourth quarter results on the RehabCare Group (RHB) deal announcement, suggest a bright outlook in the near term under Resource Utilization Group, Version Four (RUG-IV).

Kindred Healthcare's fourth quarter results were better than expected with EPS ahead of guidance and consensus. Results reflected improving top-line growth, as all three divisions posted increased revenue, and continued impressive labor cost controls, as company-wide EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization and Rent/Restructuring costs) margin increased for the first time in five quarters, said Frank Morgan, an analyst at RBC Capital Markets

Morgan said pricing growth in Kindred Healthcare's SNF division was an impressive 5.6 percent and reflected implementation of RUGs-IV on October 1, which also drove expansion in EBITDARM (Earnings Before Interest, Taxes, Depreciation, Amortization, Rent and Management fees) margin for the first time in seven quarters.

Morgan expects Skilled Healthcare Group (SKH) to meet fourth quarter estimates after management raised fiscal 2010 guidance in early January, due partly to the positive impact on its Medicare SNF business from RUGs-IV implementation in October and acuity-related increases.

Morgan said Skilled Healthcare's management has also noted better-than-expected contribution from the home health and hospice program acquisitions last May, which are forecasted to grow further and are resulting in improvement in Skilled Healthcare's own legacy core hospice assets.

Morgan expects Sun Healthcare Group (SUNH) to meet or exceed estimates for fourth quarter after management reaffirmed fiscal 2010 EBITDAR at the high end of its previous range in early January; note that EPS could be a bit 'noisy' due to changes in the rent and interest expense and share count following the Sabra Health Care REIT spin-off.

Sun Healthcare's management previously suggested that occupancy had bottomed, and we believe RUGs-IV should benefit census as a result of encouraging longer stay patient admissions. We hope for an update on the growth strategy following the Sabra spin-off and more color on the rehab therapy reimbursement changes, opportunities in hospice, and the Medicaid rate environment, said Morgan.

Themes Common to the Skilled Nursing Sector in Q4 of 2010

-- Implementation of RUGs-IV beginning October 1 expected to be beneficial to acuity and unit revenue growth, as evidenced by Kindred Healthcare's 15.1 percent Medicare rate growth and 110 basis points increase in division margin during fourth quarter.

-- Continued softness in volumes at acute care hospitals could impact Medicare admissions.

-- Medicaid rates expected to remain flat; expect some discussion on individual states where providers operate.

-- Expect some discussion on therapy reimbursement changes regarding concurrent therapy and the MPPR (Multiple Procedure Payment Reduction) rate cut.