Bucking Industry Trends, Genesis Sees $25 Million Opportunity in Long-Term Residents

Genesis HealthCare (NYSE: GEN) has seen stabilizing occupancy and length of stay in recent quarters, positive trends that its leaders on Wednesday attributed to an unlikely source: long-term care residents covered under Medicaid.

“We’re very happy to bring on patients that need our services that have long-term care needs, and we think that that’s the real opportunity over the next couple of years here in continuing to grow that occupancy,” chief financial officer Tom DiVittorio said during a presentation at the RBC Capital Markets Global Healthcare Conference in New York City.

DiVittorio acknowledged that the traditional bogeymen in the skilled nursing space — including Medicare Advantage plans driving down lengths of stay and acute-care partners demanding lower episodic costs — had been challenges for the company over the last five years. But he also described those efforts as “low-hanging fruit” that saw their peak intensity during the early years of value-based care, with those pressures moderating amid generally higher long-term care census at Genesis’s more than 400 SNFs.

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“In years past, when we were really challenged on the top line, that challenge was there, but the long-term care census wasn’t growing really at all,” DiVittorio said. “So there was nothing to counterbalance it.”

The winds began to change toward the end of 2018, when census declines leveled off and the overall population of long-term care residents started shifting. Between 2016 and 2020, DiVittorio said, the general U.S. population is projected to add a total of about 325,000 people aged 85 and older — a figure that’s back-loaded toward this year and next.

Assuming a yearlong stay, a single extra Medicaid resident at all of Genesis’s properties would bring an incremental EBITDA increase of $25 million, he said, with the company assuming growth of about two residents per facility given the current demographic trends.

“That’s not insignificant,” DiVittorio said.

DiVittorio’s optimism may seem out of place given the recent Medicaid headlines in the skilled nursing space. In certain states, such as Massachusetts and Wisconsin, persistently low reimbursement rates for long-term care services have driven waves of SNF closures and brought the viability of Medicaid beds into question.

But because of the Kennett Square, Pa.-based Genesis’s size, DiVittorio argued, local-level pressures don’t have as much of an impact: In fact, the company anticipates a 2% increase in across-the-board Medicaid reimbursements over the coming year, fueled in part by a new bed tax plan in New Mexico currently awaiting approval from the Centers for Medicare & Medicaid Services (CMS).

“We feel a lot better about that level of reimbursement rate growth than what we were seeing, let’s say, early 2018, certainly in 2017,” DiVittorio said.

More creative deals coming

DiVittorio and Genesis CEO George Hager also used the platform at RBC to tout the company’s recent $204 million transaction with Next Healthcare Capital. Under the terms of the deal, Genesis formed a 46%-54% joint venture with Next, a private investment firm, to buy back the real estate associated with 15 of its SNFs from real estate investment trust (REIT) Welltower Inc. (NYSE: WELL.).

Hager characterized the deal as a blueprint for future skilled nursing real estate transactions: With the major REITs generally trimming their SNF assets, he said, skilled nursing operators have a major opportunity to seek creative partnerships without giving up the underlying value of their buildings.

“You will see more transactions like the Next transaction,” Hager said, pegging the goal balance between leased and owned properties at 50-50, down from the current approximate 90-10 split. “There is money looking to invest in the real estate with us, and I think you have a much better alignment of interests between the real estate owner and the operator.”

That money is increasingly coming from private equity and family offices, including from religiously affiliated investors in Orthodox Jewish communities, Hager said — and, in his view, these forms of capital allow for more flexibility than the previous REIT-SNF partnerships that had dominated the space.

Echoing comments he made earlier this year about the “failure” of the relationship between REITs and their SNF tenants, Hager on Wednesday blamed lease escalators for the industry’s woes over the last few years — particularly as operators struggled with declining census and margins.

“The lines began to cross, and that’s why you’ve seen so much distress in the industry,” Hager said. “The fixed, escalating lease is not the right financing or capitalization model for this industry.”

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