Genesis Plans Major Restructuring, Blames Historic SNF ‘Down Cycle’

Citing a declining census, rising nurse wages, and decreasing reimbursements, Genesis Healthcare (NYSE: GEN) this week announced a major restructuring of its leases with top landlords.

The Kennett Square, Pennsylvania-based skilled nursing and post-acute care provider said it reached non-binding agreements with real estate investment trusts (REITs) Welltower, Inc. (NYSE: HCN) and Sabra Health Care REIT (Nasdaq: SBRA), which plan to sell Genesis-operated properties to new owners. In turn, the provider will enter into leases with the new owners at reduced rates, Genesis said.

Both REITs had previously announced plans to amend their relationships with the skilled nursing provider, with Welltower touting a deal in the making on its quarterly earnings call Tuesday, and Sabra asserting its desire to sell off its entire Genesis-operated portfolio, an effort it dubbed the “Genesis Exodus,” back in September.

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Speaking to investors and analysts on Genesis’ third-quarter earnings call Thursday morning, CEO George Hager blamed the company’s rent struggles on the macro-level pressures facing all providers in the skilled nursing space.

“Clearly, this has been the most protracted and complex down cycle in our history,” Hager said of the industry. “More recently, as these pressures have continued to mount, we have begun to see operators of all sizes forced into receivership or other formal restructuring proceedings. That is why I cannot emphasize enough how appreciative I am of the longstanding collaborative partnerships with both Welltower and Sabra.”

The deals, which Hager said will be completed by the middle of 2018, will bring an expected $80 million to $100 million of permanent annual reduced fixed-charge coverages to Genesis. Assuming a midpoint number of $90 million, Hager said, the company projects boosting its fixed-charge coverage ratio from 1.1 to 1.3 on a pro-forma basis.

Talks of bankruptcy incorrect

In the wake of Genesis releasing its earnings information late Wednesday, the Philadelphia Inquirer reported that Genesis “warns of possible bankruptcy” in its associated filings.

But the company has no interest in a court-supervised bankruptcy process, Hager told Skilled Nursing News in a follow-up interview after the earnings call.

“There’s no incentive; I don’t think there’s anything to be gained by going through a formal restructuring,” Hager said. “They’re very expensive, and they’re very uncertain.”

The Inquirer report cited language in Genesis’s 10-Q form that stated the company wouldn’t have sufficient cash flow to meet its obligations under its current structure. That disclosure, according to Hager, was merely a Securities and Exchange Commission-compliant passage designed to lay out possible risks.

“The language that [the paper] picked up was language that is included in the risk factors section of any SEC document, so any SEC registration has to lay out the risk factors,” Hager said. “And you might understand that from the legal perspective, there’s no benefit to not put your worst-case ramifications of those risk factors in your SEC filings.”

“There’s nothing to be gained by that,” he continued. “So, by their nature, SEC filings and the risk factors section are ultra-conservative.”

Industry pressures take their toll

Genesis reported a U.S. GAAP net loss of $373.8 million in the third quarter of 2017, up significantly from a $20.5 million loss in the same quarter last year. Hager and CFO Tom DiVittorio placed the blame squarely on declines in census, lower reimbursements from Medicare and Medicaid, and increasing nurse wages.

The company spent 3.7% more on nurse labor, including overtime, than at the same time last year, though DiVittorio said some of that increase was “self-imposed” in order to attract and retain better talent. The company believes the upfront investment in wage hikes will save Genesis more over time by reducing the need for costlier nurse agency services, DiVittorio said.

Hager also pointed to increasing use of managed Medicare plans as a source of strain, noting that participants in that program have 20% shorter stays and are billed at a 10% lower rate than traditional Medicare.

“The key to this industry is census and skilled mix, and I think we’re very close to the bottom at this point,” Hager said, adding that Genesis hopes to benefit from the traditional first-quarter seasonal boost in early 2018.

Still, Hager remained upbeat about his company’s prospects going forward, citing the sheer necessity of skilled nursing services in the overall care marketplace.

“Despite the current headwinds and uncertainties, I remain very optimistic about the long-range growth potential of our skilled nursing and contract therapy businesses,” he said. “The service we provide is, and will continue to be, an essential component of the health care delivery system.”

Genesis stock closed Thursday’s trading at $0.95 per share, up $0.07 or 7.9%.

Written by Alex Spanko

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