Genesis HealthCare Inc. (NYSE: GEN) on Monday announced the purchase of 15 skilled nursing facilities the operator had previously leased from Welltower Inc. (NYSE: WELL), as well as the provider’s planned departure from seven additional facilities.
The Kennett Square, Pa.-based skilled nursing giant bought the 15 buildings in a minority partnership with Next Healthcare Capital, a private investment firm based in New York City. Genesis now has a 46% ownership stake in the facilities, with Next controlling the remaining 54%; the operator also has the option to buy out Next at a 10% premium over the original purchase price starting in 2026.
Genesis positioned the play as something of a cost-saving measure, citing the 2% annual escalators baked into its master lease with real estate investment trust (REIT) Welltower. Under a new lease agreement with Next, the provider’s rent will not go up for five years.
“This is a great example of the creative things we can accomplish with our partners,” Genesis CEO George Hager said in a statement announcing the deal. “For Genesis, the transaction is accretive to earnings and provides us with the opportunity to participate in any upside accretion in the value of the real estate with a mechanism to purchase the real estate in the future.”
Next has investments in more than 35 states, according to its website, with a specific focus on markets that have Certificate of Need laws — restrictions on the total number of nursing home beds in a given state or market.
Welltower also sold seven Genesis-operated buildings to an undisclosed third party, with Genesis poised to hand off operations to a new provider. The exit from those facilities will reduce the operator’s rent burdens by $3.2 million per year, though its annual EBITDAR will take a $2.5 million hit; the seven properties had generated $73 million in annual revenues for Genesis. The company claims an EBITDAR accretion of about $700,000 in the first year of the new arrangement.
A spokesperson for Genesis declined to disclose the total sale price, as well as the identity of the new owners and operators of the seven divested facilities; the spokesperson did note that the 22 facilities involved are spread across six states.
HJ Sims, a Fairfield, Conn.-based investment bank, announced Monday that it had provided $27 million in mezzanine financing for Next, though that did not represent the full price of the deal.
A representative from Welltower did not respond to a request for comment as of press time.
The move marks another step in an extended restructuring at Genesis, which late last month saw landlord Sabra Health Care REIT (Nasdaq: SBRA) complete its long-planned effort to sell off nearly all of its Genesis-operated buildings. Dubbed the “Genesis Exodus” by Sabra CEO Rick Matros, the process came to a close with the planned sale of three properties for $33.2 million, though the REIT will continue to own eight Genesis properties going forward.
Genesis shed 26 facilities through the third quarter of 2018, executives said on the company’s third-quarter earnings call back in November, with Hager estimating that the company was about 80% done with its planned slate of divestitures. The remaining 20% would likely come from markets in the West and other areas where Genesis didn’t have the density or clout with local partners to compete, Hager said at the time.
Despite repeated quarters of losses, both Hager and the market at large appear at least cautiously optimistic about the provider’s future: Financial services company Stifel in December upgraded its outlook on Genesis from hold to buy, citing the company’s restructuring efforts and the potential beneficial effects of the new Patient-Driven Payment Model (PDPM).
“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,” Stifel noted in its analysis.
Genesis stock rose slightly on the news of the transaction, closing Monday’s trading at $1.60 per share for a gain of $0.04 or 2.56%. Shares of Welltower jumped $0.84 to $77.15, an increase of 1.1%.