Credit Suisse has downgraded its outlook for nursing home heavyweight Genesis HealthCare (NYSE: GEN), citing low occupancy, a looming debt burden, and continued uncertainty around future government support.
Analysts bumped the Kennett Square, Pa.-based chain’s stock from “neutral” to “underperform” in a research note published late last week.
In particular, Credit Suisse expressed concerns about depressed occupancy, the primary driver of any skilled nursing facility’s revenues: Genesis’s buildings were 76.5% full as of the third quarter of 2020, far below the mid-80s figure that would ensure at least break-even cash flow, according to the analysts.
“Although most SNF patients have received their first vaccine and are expected to be fully vaccinated in the first quarter, every indication is that occupancy will rebound slowly,” Credit Suisse observed. “Some care that historically was provided in nursing homes has shifted to home health, and the timing of reversal in this trend is highly uncertain.”
The departure of former CEO George Hager at the beginning of 2021 casts more doubt on the operator’s plans, Credit Suisse asserted.
“Additionally, GEN’s long-time CEO George Hager retired in early January, suggesting, in our view, there is no quick fix to the current situation,” the analysts wrote.
Hager had previously indicated that the company needed significantly more federal support in order to survive, despite already receiving $300 million in grants and $157 million in Medicare payment advances; Genesis saw profits decline by $350 million during the first three quarters of 2020, and the operator must start to repay those advances in April, Credit Suisse observed.
“GEN’s debt / lease load was high entering the pandemic, and, as of 3Q20, GEN was burning about $75 million of cash per quarter,” the analysts wrote. “GEN ended 3Q20 with about $281 million in liquidity.”
The operator’s long-term debt equation also raised alarm bells for the investment services firm, with $883 million due in 2022.
“Virtually all of GEN’s 2022 maturities are debt with its REIT partners,” Credit Suisse noted. “These REITs have a long relationship with the company and have worked with Genesis in the past to grant waivers or to adjust financial terms when necessary. While we believe that REIT partners will continue to work with the company, this relief, at some point, may potentially require impairment of GEN shares.”
The provider is not alone in its COVID-related strains, with nursing home occupancy at record lows in markets across the country and coronavirus-related expenses still high. But Genesis in particular has been under the microscope after publicly disclosing serious doubts about its future as a going concern in August 2020.
Multiple real estate investment trusts (REITs) converted Genesis to cash reporting, with associated rent-write downs, after that disclosure, and some type of restructuring is likely to shake up the operator in the future.
“Even if the Company receives additional funding support from government sources and/or is able to execute successfully all of its these plans and initiatives, given the current challenging environment the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued, which could force the Company to seek reorganization under the U.S. Bankruptcy Code,” Genesis warned last summer.
“We sense that REITs may have lost their patience with GEN and may not provide the same level of support they did in 2018 when they cut rents and provided debt financing,” BMO noted. “We see REITs now more likely to sell or transition assets to new operators, which will likely cause modest levels of dilution. Positively, once and if GEN is resolved, we think REITs would benefit from not having GEN-related negative headlines in the press.”
Genesis shares fell by about a nickel in Monday’s trading, closing at $0.67 for a dip of 7%.