Genesis Healthcare, Inc. (GEN) the largest nursing home provider in the U.S., released its earnings report last week. The report, and the earnings call, provided some interesting insight into the impact of the COVID-19 pandemic on the nursing home industry.
A variety of financial media outlets reported that Genesis was “battered,” “brought to its knees” and “staring down bankruptcy.” Keeping with the theme of constant negative news that the nursing homes (and senior care industry, in general) are facing in the media. These drastic headlines caught our and our investors’ attention. However, after reading the earnings report and listening to the earnings call, a very different picture emerged – one that is much more cautiously optimistic and in-line with what we are seeing among the senior living communities we have financed.
The real loss – As George Hager, the President of Genesis, explained on the earnings call, COVID-19 dealt a heavy blow to Genesis. However, as Hager points out, the company’s nursing homes, concentrated in the northeast, are already showing signs of recovery. While the company estimated that it had experienced pandemic-related operating losses in Q2 of $213 million, along with an 11% drop in occupancy, what the press did not report was that Genesis also received $228 million in government assistance (not included in earnings) through rate increases, grants, Paycheck Protection Program and other financial assistance. Genesis also reported that some of their hardest hit communities are now COVID-19-free and are seeing improved occupancy rates.
Tom DiVittorio, Senior Vice President and Chief Financial Officer of Genesis directed attention to the fact that nearly 90% of the $145 million of COVID-19-specific additional costs incurred in Q2 were labor-related. DiVittorio further reported that: “These cost levels have come down since their peak in the month of May, as we systematically reduced reliance on expensive agency labor and thoughtfully ratcheted back enhanced pay programs and practices that were absolutely essential during the peak of the outbreaks.”
Tracking the COVID-19 Impact
Is Genesis “facing down bankruptcy?” The “bankruptcy” reference was included in a number of stories and a reference to bankruptcy was included in the earnings report, but a little further reading provides context. As Genesis’ CFO highlighted during the earnings call, under Sarbanes Oxley, Genesis was required to do an analysis of whether they would be able to meet all their financial obligations if (1) they received no further government funding and (2) they made no expense reductions. Of course, the answer to that question was that under those circumstances, they would be in financial trouble and face bankruptcy. It was this last statement that made the headlines in much of the financial media. On its earnings call, the company shares that this analysis needs to be put into context since (1) there are already additional funds earmarked for nursing homes in the previously passed CARES Act, and provisions for additional funding exists in each of the House and Senate bills being considered; (2) Genesis is taking actions to control expenses; and (3) and Genesis expects to continue its plan to divest of unprofitable assets.
We find that the Genesis experience is similar to many of our investment partners’ encounters in the senior care realm. The industry was hit hard, but has shown great determination in fending off the blow and adjusting their business. Changes to Medicare rules and government assistance measures have helped offset some of the loss, but such help will continue to be necessary until senior housing providers can rebuild occupancy. Occupancy in nursing homes is climbing as hospitals return to stability. Some in the senior- housing world are witnessing a boost in interest as seniors who suffered through the pandemic in isolation at home are seeking a more supportive alternative. While the industry is not out of the woods just yet, it is best not to take COVID-19 headlines at face value.