A lot of people have been nervous about the skilled nursing sector recently, given the deteriorating finances at HCR ManorCare and other companies. However, that has not seemed to impact acquisition prices in the market, at least for the better facilities and facilities in general in attractive markets.
Genesis Healthcare is another company that has had a tough time negotiating through the Medicare Advantage reimbursement changes and declining industry occupancy in general. The company’s earnings announcement from earlier this week came without a typical “pre-notice” of the release date, and the conference call with analysts was a rather early 8:30 am ET, which may have also caught some investors off guard. But what really caught investors off guard was that management pulled earnings guidance for the remainder of the year. They just think the sector has too much volatility at this time to provide accurate guidance, citing uncertainty around the relationship between Medicaid rate growth and labor inflation, among other issues. Since Medicaid represents 73.6% of their patient days, they should be concerned. We appreciate their honesty.
The second quarter wasn’t a “bad” quarter, all things considered, but the company’s skilled patient mix was down from a year ago, as was occupancy in general. One other big problem is the $35.6 million in receivables owed to Genesis by a large contract therapy client which went into receivership last month, which we assume is Fortis Management Group, although the company was not named. They have decided to be conservative and write-off the $35.6 million, but some may be collected later on. It was certainly not what the highly leveraged company needed at this point.
What was odd was that all this news had no impact on the stock price, and usually pulling the guidance would send shares plunging. The stock was already near its 52-week low of $1.41 per share, so perhaps there was just not much room to go lower. The following day, however, shares slid a few cents to a new low of $1.35 per share. Maybe it took some time to digest the implications. One analyst referred to the current low price as basically an option on a future uptick in the industry’s future. What Genesis needs is to continue its divestitures and hope that the REITs that are selling Genesis assets can get the sales done with investors who will take lower lease rates. Breathing room is what management needs right now.
