Emergency court action scheduled Friday in Genesis bankruptcy

News that Genesis HealthCare filed for bankruptcy and plans to sell to an investor sent ripples through the skilled nursing investment world Thursday, provoking questions about how its entrance into Chapter 11 would affect real estate and other partners.

Hundreds of pages of filings in the US Bankruptcy Court for the Northern District of Texas also revealed just how close the company — once the largest single nursing home operator in the US — came to collapsing during the pandemic.

Hired restructuring officials will share more details on the company’s effort to right-size and its potential path forward during a hearing on several emergency motions scheduled for Friday morning.

Genesis is down to 175 facilities from a high of more than 500 in 2016, but its plans to emerge from bankruptcy stronger would see it siphon off even more operations and sell remaining assets to an affiliate of ReGen Health. The private equity firm has already buoyed Genesis with two, $50 million investments.

That hasn’t been enough to stave off debt, including some $8 million a month in legal liabilities, some related to properties it no longer owns; massive tax bills; and a recent loan taken to maintain operations when Change Health Care’s payment systems failed during a massive breach. 

“Despite the Company’s successful operational turnaround over the past several years, ReGen’s capital infusions … proved insufficient to overcome this overhang,” Louis E. Robichaux IV, co-chief restructuring officer for Genesis, wrote in a declaration posted by the court Thursday. “Replete with corporate guarantees, cross-collateralization, and an insurmountable quantum of legacy liabilities dating back decades, it became clear that, without a more holistic solution, the Company would be unable to continue delivering high quality care and appropriately invest in its facilities and equipment.”

‘Meaningful value’ remains

The bankruptcy filing follows months of speculation about Genesis, after the company missed $4.2 million in rent payments to Omega Healthcare Investors this spring. The proposed bankruptcy terms, which include $30 million in new financing from current lenders, would keep doors open, allow employees to keep their jobs and continue vendor contracts.

Early Thursday, Omega said it had contributed 26.7%, or $8 million, to Genesis’ new debtor-in-possession financing, which will let the company and its 298 affiliates operate and pay its bills during a reorganization.

Jonathan Hughes, an analyst with Raymond James, said that such moves are “common practice in operator restructurings.” In a report shared with McKnight’s after market close Thursday, he and colleagues noted that Omega had outperformed two direct peers by about 160 basis points “as the Genesis news was seemingly priced-in.”

Omega itself acknowledged that Genesis had paid all of its July rent, and that the operator would be expected to continue doing so as a loan term. It called bankruptcy a “necessary and important step in creating an entity that is operationally solvent and sustainable, with enhanced liquidity and a strengthened balance sheet.”

“We continue to believe that there is meaningful value in our portfolio of Genesis assets,” Omega told its investors. “We believe the current cash flow generated by our Genesis portfolio is sustainable and will support our contractual rent, while also retaining sufficient cash within the business to provide for strong clinical care. At the same time, we believe there is sufficient collateral behind our $121 million in term loans.”

LTC Properties leases six skilled nursing facilities with 782 beds to Genesis. It, too, said Genesis had paid its rents for July. The company’s master lease matures on April 30, 2026, but Genesis last month indicated it would exercise a five-year extension option.

Genesis holdings are still largely concentrated in the mid-Atlantic, with a reported 42 facilities in Pennsylvania and New Jersey. Robichaux told the court low reimbursement rates there have plagued the company for years.

“Pre-dating COVID and continuing today, the Company struggles with insufficient state Medicaid reimbursement rates which are well-known in the industry to fall short in covering reasonable operating costs,” Robichaux wrote. “In particular, insufficient reimbursement rates in the Commonwealth of Pennsylvania and the State of New Jersey have been a notable contributor to the Debtors’ financial struggles.”

In addition to low reimbursements, the company’s high bed count also results in significant tax burden. Genesis estimated it either owes or will owe $87 million on taxes and fees within the first 39 days of the Chapter 11 case. The company has asked for permission to pay those taxes during the process.

That’s one of several emergency motions to be included in Friday’s hearing. 

Decline of an empire

Headquartered in Kennett Square, PA, Genesis was founded in 1985 with nine facilities. At its growth peak, it owned or operated 60,000 licensed beds in more than 30 states.

But the years since have been filled with financial and operational challenges. It last filed for Chapter 11 protection in 2000, was acquired, went private, and struggled through several high-profile leadership changes. 

“In an effort to stay competitive, the Company shifted from its growth trajectory in 2017 and began divesting certain of its unprofitable facilities, decreasing its portfolio from approximately 500 to fewer than 400 facilities by the beginning of 2020,” Robichaux wrote. “Unfortunately, just as the Company’s portfolio rationalization process was gaining traction, the COVID-19 pandemic struck. … The Company faced a rapid and substantial liquidity shortfall and engaged advisors to prepare for a chapter 11 filing.”

At that time, 90% of its facilities were leased from 13 landlords, resulting in negative cash flows  after rent and capital expenditures totalling $119.2 million and $166.3 million in 2021 and 2022.

“The Company,” Robichaux wrote, “was able to narrowly avoid a bankruptcy filing in March of 2021.”

That’s when ReGen stepped in with its first cash infusion and the company restructured its master lease with its then-largest landlord, Welltower. 

Genesis also replaced much of its existing management with a new team focused on an operational turnaround, including improved revenue cycle management; reduce exposure to legal and workers’ compensation claims going forward; improving skilled mix; driving occupancy and census; employing necessary reductions in force to streamline and focus support to the market level; and strengthening the employer brand to drive referrals and recruitment.

“We have much to be proud of for the tremendous progress we have made as an organization over the last several years as we have implemented a forward-looking, enterprise-wide shift from centralized to market-based operations,” Executive chairman David Harrington said in a press release late Wednesday night. “Our ongoing work has confirmed that, to maintain our momentum, we must address our legacy debt structure. The goal of this filing is to emerge a stronger, healthier company poised to exceed our goals for clinical and operational excellence.”

Plans for ‘brisk’ sale

Now, ReGen and its Pinta Capital Partners affiliate stand to make an even bigger move as potential buyers for the whole company. Harrington cofounded Pinta with Joel Landau, owner of the Allure Group.

After investing $100 million over two years, ReGen’s notes — if converted to equity — would provide rights to approximately 93% of the voting shares of Genesis, court documents revealed.

Although it has a bid from ReGen’s affiliate, Genesis told the court it is beginning a “comprehensive” marketing process and intends to solicit “higher or otherwise better offers to purchase the Debtors’ assets.” 

It also said a successful restructuring is dependent on a “brisk and efficient Chapter 11 process” and that a “robust sale process is necessary and appropriate.”

Still, there will be more reshuffling. Genesis continues its previous efforts “to identify low-performing facilities and divest operations while, at the same time, retaining key lease portfolios and facilities that drive long-term success.”

On Friday, representatives plan to give Chief Judge Stacey Jernigan an overview of unexpired leases it plans to reject and facilities it potentially plans to divest.

Transitions wouldn’t necessarily be bad news for real estate partners, Hughes predicted.

“We believe Genesis will likely affirm their lease with [Omega] due to the strong EBITDAR coverage. And if any sales or transitions are necessary, we believe replacement operators would likely assume full rent payments — if not slightly higher — due to the strong EBITDAR coverage,” he wrote, referring to a common earnings metric. “While frustrating, we are quick to remind investors — and ourselves — that SNF and seniors housing operator issues and transitions are normal, occur in both good times and bad, and are a reality of operating in a low-margin business.”

Still, the bankruptcy did draw some criticism given the involvement of interconnected parties and private investors.

Eileen O’Grady, director of programs at the Private Equity Stakeholders Project, a watchdog organization, raised concerns about what is the latest in a string of bankruptcies by private equity-owned nursing home chains.

“Too often, private equity firms have relied on unwieldy and arcane legal and financial structures to obscure mismanagement and harmful profiteering,” she told McKnight’s. “The fact that the company’s prepackaged reorganization plan involves selling itself to affiliates of its private equity sponsor is deeply troubling and merits close scrutiny.”