Despite losing $58.1 million in the third quarter of 2018, leadership at Genesis Healthcare, Inc. (NYSE: GEN) appeared upbeat during this past earnings season — and last week, they got an early Christmas present that seems to justify their optimism.
Financial services company Stifel upgraded its outlook on the Kennett Square, Pa.-based skilled nursing provider from hold to buy, favorably evaluating the prospects of both the company and the marketplace as a whole.
“We see early signs of stabilization in the core skilled nursing business, improving government reimbursement outlook, synergies garnered from portfolio restructuring; potential margin improvements under new payment model; and upside from operating leverage in 2019,” the St. Louis-based Stifel wrote in its note describing the outlook change.
The issuance of the note contributed to a boost in Genesis’s stock price, which rose 6.71% to $1.59 per share at market close on Friday.
Stifel pointed to Genesis’s departure from 55 unprofitable buildings, which it expects to generate $50 million in expense savings through the second quarter of 2019, as well as completed and in-process rent reductions from certain landlords. The company also plans on focusing on long-term care residents in the coming year, according to Stifel, and remains open to selling off more properties in non-competitive markets in order to pay off debts.
But Stifel also had macro-level optimism about skilled nursing as a whole, pointing to the implementation of the Patient-Driven Payment Model (PDPM) in October 2019 as a reason to potentially invest in Genesis.
“Operators believe they can save 15-25% operating expenses on providing therapy to short-stay rehab patients through reduction in headcount, administrative costs, and servicing Medicare patients with group and concurrent therapy,” the firm noted.
Stifel also predicted that providers can expect a Medicare market basket increase in line with the boost of 2.4% that the industry received in fiscal 2019, which began in October; the announcement for fiscal 2020 will likely come in the spring.
On Genesis’s third-quarter earnings call last month, executives touted the company’s divestiture of 26 facilities through 2018, with CEO George Hager estimating that Genesis was about 80% done with its planned portfolio pruning. Chief financial officer Tom DiVittorio also noted that while occupancy still declined by 30 basis points year over year, it was falling at a slower rate than in the past, predicting that the bottom was near.
“I think you can tell there’s a lot more optimism in our voices,” Hager 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.”
Written by Alex Spanko