Genesis Plots More Real Estate Buys in Wake of 15-SNF Welltower Deal

Major landlords have taken steps in recent years to reduce their exposure to Genesis HealthCare (NYSE: GEN) and skilled nursing properties more broadly — and now a leading national provider is looking to return the favor.

The Kennett Square, Pa.-based Genesis is actively searching out more real estate acquisition opportunities after pulling off a 15-building, $204 million joint venture transaction to take back ownership from real estate investment trust (REIT) Welltower Inc. (NYSE: WELL) in February.

“The problems date back five years or more, but these REITs and other real estate owners have appreciated the fact that there needs to be some level of restructuring of those traditional relationships,” Genesis CEO George Hager said Friday morning during his company’s first-quarter earnings call. “There is an interest to sell, which is a good thing.”

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In comments to investors and analysts, Hager reiterated a refrain he adopted earlier this year, when he declared the standard REIT-SNF partnership “a failure” due to unsustainable annual escalators. That effect has spread to some of Genesis’s smaller and medium-sized landlords, Hager said Friday, adding that he considers the ongoing SNF pruning among owners of all sizes to be a positive for his business.

“Those structures that were originally set at good solid coverages, ultimately with some of the Medicare cuts back in 2011 and 2012, resulted in lower fixed-charge coverage — and with fixed escalators in a downward trending business, created financial difficulty in the industry,” Hager said.

The CEO described the Welltower deal, in which Genesis took a 46% stake in a joint venture with Next Healthcare Capital, as one the company plans to replicate moving forward. Because per-bed prices remain so high in certain key markets — including Genesis’s core Mid-Atlantic footprint — and low-cost financing remains plentiful through the Department of Housing and Urban Development (HUD), linking up with joint-venture partners to control the real estate makes sense in the long term, Hager said.

“What this transaction also represents is an ability to internally generate equity off of our own balance sheet and off of the strong underlying per-bed values in many of our core markets,” he said.

Hager also indicated that the company intends to exercise its purchase option in year seven of its lease arrangement with the Next-led JV, reducing its fixed costs associated with the 15 properties by $8 million, or 46%.

Genesis’s real estate push also comes amid pruning of its own, with the company divesting or closing 10 buildings during the first quarter. The operator also sold off five buildings in California after the end of the quarter, with three more set for sale over the coming months. That eight-building portfolio will generate about $89 million on the market, a figure that Genesis plans to use for debt payments.

The first three months of 2019 saw more incremental improvement for the skilled nursing operator, which lost $15.3 million over that span — compared to $68.5 million in the first quarter of 2018. The company cited increasing occupancy as a reason for optimism, even though most of the 50-basis-point gain came from long-stay Medicaid residents, and not more profitable short-stay Medicare patients.

That said, Hager framed the long-term pickups as a positive given overall occupancy struggles throughout the industry.

“There’s a lot of capacity here, and that opportunity to enjoy the incremental margin from filling that open bed — whether it be a long-term care or a short-stay patient — has still a very strong positive impact on the performance of the company,” he said.

Genesis officials also predicted gains in Medicaid funding over the coming year, with chief financial officer Tom DiVittorio pegging the increase at more than 2%.

As more and more states grapple with chronic Medicaid underfunding, causing waves of closures from Wisconsin to Massachusetts, lawmakers may no longer be able to ignore the problems, Hager argued.

“You’re seeing increasing pressure at the state capitols to try to move toward more responsible funding for this industry,” he said.”

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