February 4, 2020, Ben Swett, SeniorCare Investor - Genesis HealthCare continues to pare down its skilled nursing portfolio, putting the leaner company on surer financial and operational footing. The provider entered into a series of agreements with New Generation Health, LLC to transition operational responsibility for 19 facilities in California, Washington and Nevada.
For six of those facilities, Genesis sold both the real estate and operations, while just transferring the operations of the 13 remaining skilled nursing, behavioral health and assisted living facilities, for a total of $79 million.
Genesis will still retain an indirect 50% interest in the portfolio, but for day-to-day operations, it’s out. The company will still provide administrative and back office services, pursuant to administrative support agreements, as well as therapy services also pursuant to various agreements. Net proceeds from the transaction will be used to repay indebtedness and fund the indirect investment.
Several months ago, Genesis announced several other changes to its capital structure and leased interest in skilled nursing facilities. It first partnered with a private investor to purchase 18 nursing facilities previously leased from Welltower and Second Spring Healthcare Investments. Genesis acquired a 30% equity stake in these 18 facilities, and began leasing them from the joint venture entity, but with a big difference.
Previously, these 18 facilities had annual rent escalators ranging from 2.0% to 2.5%, but with the new lease, the escalators do not begin until year five of the lease. In addition, Genesis obtained a fixed-price purchase option to acquire the real estate of these 18 properties in 2024 at a 10% premium above today’s original acquisition cost.
That is a relatively small premium, and if the company can succeed under the new PDPM reimbursement system for Medicare, we may see the purchase in five years, assuming the capital markets remain stable.
In the second October transaction, Genesis sold eight skilled nursing facilities it owned to various third parties for approximately $89 million. These eight had annual revenues of about $83 million. All of the transactions combined will result in a decline in annual EBITDA of $4.5 million, but the company’s pre-tax loss will improve by $1.9 million.
Steps in the right direction.