Genesis Inks $79M Deal to Cede Control of 19 Facilities — While Still Providing Back-End Support, Therapy

Genesis HealthCare (NYSE: GEN) on Tuesday announced a set of deals that will see the skilled nursing giant transfer control of 19 facilities in the West to a regional operator — while also still serving as a provider of back-office support and ancillary services.

Under the terms of the $79 million transaction, the Los Angeles-based New Generation Health, LLC purchased the operations and real estate associated with six skilled nursing facilities.

New Generation also assumed full operational responsibility for 13 more properties — seven SNFs, five behavioral health centers, and one assisted living community — in California, Nevada, and Washington state.

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But Kennett Square, Pa.-based Genesis will still maintain an indirect 50% stake in the latter group of 13 buildings. In addition, the operator will provide an entire host of administrative services — including payroll, financial reporting, human resources, and revenue cycle management — to the entire 19-building portfolio through administrative support agreements with New Generation. Genesis will also continue to offer therapy at the properties, according to the company.

The transactions were effective as of February 1.

Genesis CEO George Hager framed the move as a way to marry the benefits of being a local operator such as New Generation, and the strengths of provider with the nationwide clout of his own company.

“The high-level strategic thinking is: combine the benefits of true local, established operators, with the scale, the purchasing power, the systems, the technology, and the ancillary platform of a large-scale operator in Genesis,” Hager told SNN.

The roots of the partnership began to grow last April, when Genesis and New Generation started working together under an administrative support contract.

In particular, Genesis needed help with five Los Angeles County properties that Hager described as “having real operational difficulty.” New Generation worked to boost census and operational performance across the portfolio, according to both Hager and New Generation CEO Aaron Robin.

“We were tasked with identifying opportunities, reevaluating leadership — both on the regional and local level — and executing on the imperative initiative that would drive both employee satisfaction and quality clinical outcomes with our Genesis partners,” Robin told SNN.

For Robin, the full takeover of the portfolio by New Generation — a firm formed within the last year — represents something of a homecoming. With more than 20 years of experience in the Southern California health care space, Robin had previously been involved with the same buildings his company acquired from Genesis.

“We feel like we’re back home,” he said. “We’re able to bring a knowledge of the local community, but we have a knowledge of the buildings.”

New Generation’s plans for the facilities include increased clinical capabilities — such as in-house dialysis and ventilator care — and a focus on employee satisfaction and engagement, Robin said.

“The community desperately needs it,” he said of specialty care in the Nevada market. “We’re going to pilot it; we’re going to champion it.”

The move marks the next step in Genesis’s ongoing plan to overhaul its sprawling portfolio of about 400 skilled nursing facilities and senior living communities in 26 states. To date, that project has mostly been focused on expanding the provider’s real estate holdings, including an October deal that saw Genesis land a 30% stake in 18 of its skilled nursing facilities through a joint venture, and the $204 million acquisition of 15 SNFs from Welltower Inc. (NYSE: WELL) in conjunction with Next Healthcare Capital this time last year.

In conjunction with those deals, Genesis has also explored the strategic disposition of properties, such as the $89 million sale of eight properties last October and the operational exit of seven more facilities announced alongside the Next Healthcare Capital deal.

But when Genesis turned its attention to its West Coast buildings, company leadership determined that a different strategy was necessary — primarily because the financial and clinical performance of those facilities had lagged behind its traditional stronghold east of the Mississippi.

“To be perfectly blunt, I don’t think we really ever achieved a level of success in the West that we did in the East,” Hager said.

Genesis’s plan to mix local-market knowledge with a national administrative backbone strongly resembles the strategy that The Ensign Group (Nasdaq: ENSG) has ridden to rapid expansion and countless quarters of positive earnings results over the last few years. The San Juan Capistrano, Calif.-based skilled nursing provider prides itself on being a loose collection of autonomous regional entities — each led by an administrator with a direct stake in the facilities’ success — held together by a central business-services center.

“Think about it as a franchise model, almost,” Ensign CEO Barry Port told SNN last December. “They adapt their own best practices based on their local health care market, and they grow and expand as smaller functional units and affiliates — they’re not tied to any puppet strings here.”

Though Tuesday’s transaction doesn’t cover the entirety of Genesis’s footprint in California, Nevada, and Washington, the company plans to expand its arrangement with New Generation to eventually include more than 30 properties, according to Hager.

West of the Mississippi, Genesis also still operates facilities in Arizona, New Mexico, and Colorado — properties that, at least for now, the company has no interest in converting to a similar back-end arrangement. But Hager wouldn’t rule out potentially replicating the New Generation model in certain East Coast markets, emphasizing that any decision would be made on a market-by-market basis.

For now, Hager said the early returns in the West have been positive, and the CEO was upbeat about the potential for real improvement through the new structure.

“We’re hopeful that the combination of those two skill sets will yield a better outcome than we were able to achieve by ourselves in those three states,” he said.

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