Genesis Healthcare Close to Bottom?

As a result of divesting a few dozen of its skilled nursing facilities, as well as negotiating rent reductions on others, Genesis Healthcare posted a decent second quarter. At least, decent for them given the past performance. It ended the quarter with 385 SNFs and 23 ALFs, but with 88% of them still leased. While we applaud management for shrinking the size of the company, we still believe they have a long way to go to really get a handle on what is going on locally. With the existing leases, they may not get there.

Investors liked the results, pushing the share price up by 10% over two days, with most of that coming the day of the earnings announcement. Management is positive about the 2.4% Medicare rate increase for the next fiscal year, the flattening of their lengths of stay, and the implementation of the Patient-Driven Payment Model (PDPM) which will be effective October 1, 2019. In addition, the company’s cost-cutting initiatives have been working to stabilize cash flow. However, we have always been wary of cost cutting in the skilled nursing business because it always seems to backfire given that historically, SNFs have been the most cost-controlled sector in all of seniors housing and care.

The company is not out of the woods yet, nor is the skilled sector itself. Based on licensed beds, Genesis’ occupancy dropped by 90 basis points year over year to 80.7%, but declined by a lower 50 basis points based on operating beds to 84.1%. Although it often gets ignored, the company’s Medicaid per diem actually was up 3% over the past year, and with Medicaid representing 75% of the company’s patient days, that kind of increase helps. But maybe not enough to deal with wage growth in this tight labor market.

One key factor going forward will be the company’s rent, which decreased by 14.6% year over year to $106.7 million in the second quarter. Obviously, revenues are going down as well, as facilities are divested, but quarterly rent could get down to $90 million by sometime in 2019, hopefully even lower. The company still has two battles to win: improving a capital structure that has handcuffed them, and improving its operations. Even winning one of them will be big for shareholders.



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