Despite $235M Deficit, Genesis Cut Loss in Half in ’18, Plans More Real Estate Pickups

Genesis HealthCare (NYSE: GEN) struggled overall in 2018, but managed to cut its net loss in half from the year before — and executives described the previous 12 months as a “pivotal year” for the beleaguered skilled nursing provider.

For the fourth quarter of 2018, Genesis reported a net loss of $68.95 million, or 67 cents per share, compared with a net loss of $89.24 million, or 92 cents a share, in the year-ago period.

The Kennett Square, Pa.-based provider’s improvement for the year was even more striking: Genesis reported a net less of $235.23 million for fiscal 2018, compared with a net loss of $578.98 million in 2017.

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“We made great strides in strengthening many aspects of our business,” CEO and director George Hager said Monday on the operator’s fourth-quarter and 2018 year-end conference call. “And I’m encouraged by what I see with respect to improving business fundamentals. In 2019, we will continue to execute on transactions that will return us to our original strategic model that emphasizes strong local-market density and meaningful acute-care and payer relationships.”

Occupancy optimism; rehab revenue drops

Genesis saw some struggles in terms of revenue; the operator reported fourth-quarter revenue of $1.19 billion, a drop of 10.7%, or $141.9 million, from 2017. About $28.4 million was attributed to accounting changes that took effect on January 1, 2018, and the revenue decline from 2017 to 2018 would have been $118.2 million if the changes had been applied to the quarter ending in December 2017, senior vice president and chief financial officer Tom DiVittorio said on the call.

“Of that roughly $118 million decline in revenue, $100 million is attributed to the impact of divestitures net of acquisition, and $27 million is attributed to lower revenue in our rehab services segment following the cancellation of low-margin therapy contracts,” DiVittorio said on the call. “These revenue declines were offset by approximately $9 million or 85 basis points of top-line growth in our inpatient services segment.”

The fourth quarter also saw a 3% decline in skilled patient admissions, compared with the year-ago period, driven by a 6.2% decline in Medicare admissions. That was offset by an increase of 50 basis points in managed Medicare admissions, and it marked the lowest rate of year-over-year decline in skilled patient admissions in seven consecutive quarters, DiVittorio said on the call.

The operator did see occupancy as a notable bright spot for the quarter, and executives were optimistic that the trend would continue. Genesis reported a fourth-quarter operating occupancy of 85.6%, an increase of 90 basis points over the year-ago period. About 30 basis points of that represents same-store occupancy growth, while the remainder shows the changing look of the company’s occupancy levels after divesting underperforming facilities, DiVittorio said

The 85.6% operating occupancy was the highest reported since the first quarter of 2016, he added, and the fourth quarter also marked the first time Genesis reported year-over-year same-store occupancy growth, both DiVittorio and Hager noted.

“We remain very encouraged by the improving fundamental drivers of occupancy growth, flattening length of stay, a deceleration in the decline of skilled admissions and reimbursement rate growth that better approximates wage inflation,” DiVittorio said on the call. “We believe the portfolio of assets under our operation today, which is more concentrated in our core markets than any time since 2012, will continue to produce solid and consistent results.”

The call built on Hager’s comments at a recent health care investment conference, in which he claimed both Genesis and the industry have reached an “inflection point” on census after years of declining occupancy numbers.

Prune the portfolio, own the real estate

Genesis had a busy 2018, with its focus primarily on overhauling its portfolio and exiting the markets where it lacked the density and relationships to compete, Hager said on the call. The company left the state of Texas and divested, transferred, or closed the operations of 55 facilities during the year.

The company also acquired eight SNFs and one assisted living facility in New Mexico and Arizona, which Hager said was the company’s first significant acquisition in three years and an addition of density to core markets.

“In 2018, we also entered into a creative transaction that involved the re-tenanting of 12 facilities to a new landlord, resulting in reduced lease escalators and, most importantly, fixed price purchase options to purchase the underlying real estate in the future,” Hager said on the call.

He also noted the partnership Genesis entered with Next Healthcare Capital to purchase 15 SNFs the operator had previously leased from Welltower (NYSE: WELL).

“A key long-term strategic objective for Genesis is to own more of our real estate, which will allow us to minimize the burden of lease escalators, reduce our overall cost of capital, and participate in greater levels in the future of value appreciation of the real estate,” Hager said. “Looking ahead, we will be focused on additional transaction that allows us to participate in the ownership of real estate.”

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