Regional has increasingly become the name of the game in skilled nursing, but Genesis HealthCare (NYSE: GEN) expressed confidence in its scale during a presentation at the Barclays Global Healthcare Conference on Thursday.
“There’s been a lot of discussion in the markets around the benefits of scale or the benefits of operating as a small local operator,” CEO George Hager said in the presentation. “I think our scale will offer benefits.”
The largest skilled nursing facility and post-acute operating company in the country has seen its share of troubles. In November, the Kennett Square, Pa.-based Genesis revealed a restructuring plan with landlords Welltower, Inc. (NYSE: HCN) and Sabra Health Care REIT (Nasdaq: SBRA). In the same month, it received a delisting warning from the New York Stock Exchange (NYSE), though it was able to meet the exchange’s continuing listing standard earlier this month.
To add insult to injury, Sabra CEO Rick Matros said in a recent earnings call that the company’s “current business model does not work” and that operators with 400 or 450 locations are not viable — and never were.
But Hager pushed back against this idea. The company’s size allows it strong leverage with national payors such as UnitedHealth and Aetna, which is useful as managed care plans make ever-greater inroads among the Medicare and population, Hager noted.
The company’s more than 450 facilities, with more than 425 physicians and nurse practitioners, will be also assets in the changing health care landscape, particularly as value-based payment becomes more prominent, he argued.
“The winners in skilled nursing — and I would argue the winners in all of health care — will be providers with the greatest clinical skill and the greatest ability to achieve consistent positive outcomes for the patients that we serve at the lowest cost,” he said. “We do, and our scale allows the ability to hire and retain the highest level of clinical leadership in this country.”
Restructuring under way
With the help of Welltower, Genesis recently secured a $555 million credit facility with MidCap Financial, a wholly owned subsidiary of alternative asset manager Apollo, and the company has negotiated “significant concessions” in its existing lease agreements, Hager said.
These included $54 million in permanent annual cash rent reductions, for an 11% decrease in 2017 yearly cash rents. Genesis also renegotiated several major credit facilities, resulting in $8 million annual cash interest reductions, Hager said. Welltower’s rent escalators also were reduced from 2.9% to 2% starting Jan. 1, 2019.
But Hager doesn’t expect much to change from last year, including facility census.
“The outlook for ’18 I would say is similar to ’17 from a fundamental business perspective,” he said.
Optimizing the portfolio, however, is a goal — with a particular focus on developing regional clout and density. In the Mid-Atlantic and Northeastern states, Genesis has enough properties for true market density and dominant market positions, Hager said, which provides leverage when working with payors and referral partners. As a result, the company is looking to prune certain markets where it cannot effectively compete and add to its core markets.
“I think local market density is critical to success,” Hager said. “You can see as we move out west and to some degree in the south, we do not have the same level of market density… the right level of market density to really achieve, be effective and be competitive.”
Though there’s debate about the “silver tsunami,” demographically driven demand should bring benefits for the company starting in 2019, Hager predicted. And though reimbursement rates have been a sore point for many SNFs, state and federal systems will start to move to “more responsible funding,” he added.
But it won’t all be smooth sailing for SNFs and post-acute care.
“I would say there is a significant regulatory barrier and a financial feasibility barrier,” he said in a question-and-answer session after the presentation. “You will continue to see, as we have for the last decade, the number of beds shrinking in this industry. And I would argue with the financial distress, shrinking at accelerated levels.”
Genesis is set to report its fourth-quarter 2017 earnings results before markets open Friday morning.
Written by Maggie Flynn