With a third consecutive quarter of occupancy growth and margin expansion, Genesis Healthcare wants to increase its real estate ownership even further, company leaders said Thursday morning.
The company reported $1.15 billion in revenue for the second quarter of 2019, with a net loss of $4.8 million. While the Pennsylvania-based post-acute giant has shed 136 properties since 2016, executives told investors on an earnings call that “favorable trends” are encouraging the company to grow its density in certain markets.
Stable census and improved reimbursement environments are also factors leading Genesis to put together “creative transactions” that the company plans to announce later this year.
“Increased real estate ownership will lessen the burden of lease escalators, allow us to participate in future real estate appreciation and reduce our overall cost of capital,” said Chief Executive Officer George Hager Jr. “It is our goal to own or obtain fixed-price purchase options on at least 30% of our portfolio by the end of 2020.”
Through June 30 of this year, Genesis had exited 19 facilities nationwide, reducing the company’s lease payments by $4.3 milion. Hager said he expected the company will close or sell more underperforming facilities and markets by the end of this year.
Since the start of 2016, Hager said the company has completely exited Kansas, Missouri, Iowa, Nebraska, Texas and Ohio.
The Ohio divestiture was completed in the second quarter, with the exit of 11 leased facilities and one owned assisted living facility that reduced annual cash lease payments by $1.9 million and netted $73.5 million in revenue.
Exiting those facilities, which came under the Genesis umbrella with the 2012 acquisition of Sun Healthcare, fits in with the company’s focus on market density, Hager said. The company did not have a strong presence in any of Ohio’s major cities.
“It’s a pretty crowded state, and there are a lot of strong operators,” he said. “We thought it was best to recycle our capital and reduce our leverage.”
Bullish on Medicaid, PDPM
Going forward, Genesis will likely be more bullish on states where it already has a strong presence. Hager noted that while his company’s occupancy gains were fairly widespread, they were strongest in some of the company’s western markets and weakest in New England.
Hager also pointed to an “intentional” pursuit of Medicaid residents in its inpatient facilities, despite an industry-wide effort to attract more Medicare residents through short-stay specialties. Reimbursement system-wide also beat the company’s 2.9% average wage increase.
The company also is expecting a net boost from the transition to the Patient-Driven Payment Model, results of which should start to emerge by year’s end. Hager said projections show group and concurrent therapy allowances under PDPM may cut skilled nursing costs by 10% to 12% annually.
“The upside opportunity is so big we just don’t see any real situation where it has a negative effect, even in the transition period,” said Tom DiVittorio, Genesis’ senior vice president and chief financial officer.