Genesis Sees SNF Upside Ahead, Despite Q3 Losses

Improving skilled nursing and occupancy trends, as well as a healthy dose of cost control, made the third quarter a strong one for Genesis Healthcare (NYSE: GEN) in spite of a net loss, executives said on the company’s third-quarter earnings call.

“I think you can tell there’s a lot more optimism in our voices,” Genesis CEO George V. Hager, Jr. said on the call. “The data is pointing in the right direction for the first time in a long time, and we’re looking forward to finishing 2018 strong with a lot of positive outlook going forward in 2019.”

The Kennett Square, Pa.-based operator reported a net loss of $58.1 million in the third quarter, compared with a loss of $373.8 million in the year-ago period.


Cost savings, portfolio optimization

Genesis executives particularly noted efforts by the company to reduce cost of service and overhead structure in both its SNFs and its rehabilitation businesses. Genesis has executed on $50 million in annual cost reductions that will be fully realized on a run-rate basis by the first half of 2019, chief financial officer Tom DiVittorio said on the call. Only $4 million of those reductions were realized in the third quarter of 2018, he noted.

While wage rate increases still outpace rate increases from payers, Genesis is starting to see the payoffs from efforts it made last year to preserve and improve retention.


On the portfolio front, Genesis divested, exited or closed the operations of seven facilities in the third quarter, for a total of 26 facilities exited since the start of 2018.

“There are still some markets, particularly out in the West that we are critically evaluating,” Hager said. “But I would say we are 80% through with what we want to accomplish on the portfolio management side of things. But still a little bit more to go in the West and in some markets where we just don’t have the density or the relationships to compete.”

Genesis also picked up eight skilled nursing facilities and one assisted living facility in New Mexico and Arizona, a move that executives characterized as a one-off deal that happened to be in a strong market for Genesis.

“We looked at structuring this to minimize any financial downside, and we see some real upside,” Hager said. “For a whole host of reasons these facilities are not operating optimally as we take them over, which occurred effective Nov. 1.”

Occupancy starting to stabilize, but still dropping

Though occupancy rates are still declining overall, the rate at which they are doing so is improving, Hager said. Though occupancy year-over-year declined 30 basis points in the third quarter, the rate of decline is narrowing, and third-quarter occupancy “grew 20 basis points sequentially from the previous quarter, bucking historical seasonal trends,” he said.

Improving occupancy trends and stronger reimbursement rates led to a same-store revenue decline of about 50 basis points in the quarter, which was one of the lowest rates of decline in many years, DiVittorio noted on the call.

Yet the 17.9% skilled days mix in the third quarter represented a decline of 80 basis points from the prior -year quarter. In that category, Medicare mix declined 80 basis points from the prior year quarter, while the insurance category — largely managed Medicare days — was flat, DiVittorio said.

In addition, the quarter saw a 4.2% decline in skilled patient admissions, compared with the year-ago period, driven by an 8.6% decline in Medicare admissions, he said. That was offset by a 1.2% increase in managed Medicare admissions.

Operating occupancy, at 84.3%, declined 30 basis points from the year-ago period, though DiVittorio observed that the decline is lower than declines for the same time frame in previous years.

“We are cautiously optimistic that the bottom of the protracted occupancy challenge may have finally been reached,” he said on the call.

A combination of factors has led that point, Hager said in response to an analyst question during the call. Bed supply has been declining and there has been some marginal improvement in demand as the 85+ demographics start to shift in favor of skilled nursing care. Genesis improving its focus through exiting certain markets has also helped, he added, and industry fundamentals are improving.

“I also think that this industry, which historically has been focused on only the short-stay population, truly understands the value and the need of providing services to the long-term care population,” Hager said. “And we have been focused on specialties like dementia care that are more focused on attracting the long-term care patient.”

Written by Maggie Flynn

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