Attached files

file filename
EX-32 - EX-32 - Genesis Healthcare, Inc.gen-20180930xex32.htm
EX-31.2 - EX-31.2 - Genesis Healthcare, Inc.gen-20180930ex312b90304.htm
EX-31.1 - EX-31.1 - Genesis Healthcare, Inc.gen-20180930ex311855a81.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

☒    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2018.

 

OR

 

☐    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to             .

 

Commission file number: 001-33459

 


 

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

Delaware

 

20-3934755

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

101 East State Street

 

 

Kennett Square, Pennsylvania

 

19348

(Address of principal executive offices)

 

(Zip Code)

 

(610) 444-6350

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☒

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 8, 2018, was:

Class A common stock, $0.001 par value – 101,235,935 shares

Class B common stock, $0.001 par value –       744,396 shares

Class C common stock, $0.001 par value – 59,700,801 shares

 

 


 

Genesis Healthcare, Inc.

 

Form 10-Q

Index

 

 

 

    

Page
Number

Part I. 

Financial Information

 

 

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2018 and December 31, 2017

 

3

 

Consolidated Statements of Operations — Three and nine months ended September 30, 2018 and 2017

 

4

 

Consolidated Statements of Comprehensive Loss  — Three and nine months ended September 30, 2018 and 2017

 

5

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2018 and 2017

 

6

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

71

 

 

 

 

Item 4. 

Controls and Procedures

 

72

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

72

 

 

 

 

Item 1A. 

Risk Factors

 

72

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

73

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

73

 

 

 

 

Item 5. 

Other Information

 

73

 

 

 

 

Item 6. 

Exhibits

 

73

 

 

 

 

Signatures 

 

74

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2018

 

2017

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,170

 

$

54,525

 

Restricted cash and equivalents

 

 

48,675

 

 

4,113

 

Restricted investments in marketable securities

 

 

36,780

 

 

33,015

 

Accounts receivable, net of allowances for doubtful accounts of $313,357 at December 31, 2017

 

 

642,993

 

 

724,138

 

Prepaid expenses

 

 

76,720

 

 

74,368

 

Other current assets

 

 

53,173

 

 

49,748

 

Assets held for sale

 

 

9,533

 

 

 —

 

Total current assets

 

 

891,044

 

 

939,907

 

Property and equipment, net of accumulated depreciation of $952,205 and $939,155 at September 30, 2018 and December 31, 2017, respectively

 

 

2,919,584

 

 

3,413,599

 

Restricted cash and equivalents

 

 

56,255

 

 

 —

 

Restricted investments in marketable securities

 

 

101,044

 

 

93,101

 

Other long-term assets

 

 

107,550

 

 

109,060

 

Deferred income taxes

 

 

5,151

 

 

3,580

 

Identifiable intangible assets, net of accumulated amortization of $97,242 and $88,336 at September 30, 2018 and December 31, 2017, respectively

 

 

125,386

 

 

142,976

 

Goodwill

 

 

85,642

 

 

85,642

 

Assets held for sale

 

 

99,718

 

 

 —

 

Total assets

 

$

4,391,374

 

$

4,787,865

 

Liabilities and Stockholders' Deficit:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

116,077

 

$

26,962

 

Capital lease obligations

 

 

2,164

 

 

2,511

 

Financing obligations

 

 

1,947

 

 

1,878

 

Accounts payable

 

 

239,514

 

 

285,637

 

Accrued expenses

 

 

215,384

 

 

233,856

 

Accrued compensation

 

 

165,309

 

 

167,368

 

Self-insurance reserves

 

 

180,459

 

 

180,982

 

Current portion of liabilities held for sale

 

 

2,123

 

 

 —

 

Total current liabilities

 

 

922,977

 

 

899,194

 

Long-term debt

 

 

1,087,948

 

 

1,050,337

 

Capital lease obligations

 

 

950,473

 

 

1,025,355

 

Financing obligations

 

 

2,727,250

 

 

2,929,483

 

Deferred income taxes

 

 

6,465

 

 

7,584

 

Self-insurance reserves

 

 

429,626

 

 

436,560

 

Liabilities held for sale

 

 

105,807

 

 

 —

 

Other long-term liabilities

 

 

99,559

 

 

119,484

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding -  101,126,081 and 97,100,738 at September 30, 2018 and December 31, 2017, respectively)

 

 

101

 

 

97

 

Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at September 30, 2018 and December 31, 2017, respectively)

 

 

 1

 

 

 1

 

Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 59,700,801 and 61,561,393 at September 30, 2018 and December 31, 2017, respectively)

 

 

60

 

 

61

 

Additional paid-in-capital

 

 

267,882

 

 

290,573

 

Accumulated deficit

 

 

(1,540,875)

 

 

(1,374,597)

 

Accumulated other comprehensive loss

 

 

(565)

 

 

(362)

 

Total stockholders’ deficit before noncontrolling interests

 

 

(1,273,396)

 

 

(1,084,227)

 

Noncontrolling interests

 

 

(665,335)

 

 

(595,905)

 

Total stockholders' deficit

 

 

(1,938,731)

 

 

(1,680,132)

 

Total liabilities and stockholders’ deficit

 

$

4,391,374

 

$

4,787,865

 

 

See accompanying notes to unaudited consolidated financial statements.

3


 

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Net revenues

 

$

1,217,271

 

$

1,315,452

 

$

3,790,703

 

$

4,045,860

Salaries, wages and benefits

 

 

680,604

 

 

739,404

 

 

2,122,128

 

 

2,303,300

Other operating expenses

 

 

371,064

 

 

400,086

 

 

1,125,779

 

 

1,162,223

General and administrative costs

 

 

35,482

 

 

41,420

 

 

114,404

 

 

127,657

Lease expense

 

 

32,366

 

 

38,670

 

 

97,548

 

 

113,004

Depreciation and amortization expense

 

 

53,038

 

 

59,390

 

 

168,036

 

 

183,986

Interest expense

 

 

115,695

 

 

124,431

 

 

348,687

 

 

373,473

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

9,785

 

 

2,301

Investment income

 

 

(2,178)

 

 

(1,596)

 

 

(4,856)

 

 

(4,097)

Other (income) loss

 

 

(20,207)

 

 

2,379

 

 

(42,360)

 

 

15,602

Transaction costs

 

 

11,361

 

 

1,056

 

 

26,567

 

 

7,862

Customer receivership and other related charges

 

 

 —

 

 

297

 

 

 —

 

 

35,864

Long-lived asset impairments

 

 

32,390

 

 

163,364

 

 

88,008

 

 

163,364

Goodwill and identifiable intangible asset impairments

 

 

929

 

 

360,046

 

 

2,061

 

 

360,046

Equity in net (income) loss of unconsolidated affiliates

 

 

(152)

 

 

(69)

 

 

106

 

 

(291)

Loss before income tax (benefit) expense

 

 

(93,121)

 

 

(613,426)

 

 

(265,190)

 

 

(798,434)

Income tax (benefit) expense

 

 

(1,220)

 

 

1,596

 

 

(1,759)

 

 

5,683

Loss from continuing operations

 

 

(91,901)

 

 

(615,022)

 

 

(263,431)

 

 

(804,117)

Loss from discontinued operations, net of taxes

 

 

 —

 

 

(2)

 

 

 —

 

 

(70)

Net loss

 

 

(91,901)

 

 

(615,024)

 

 

(263,431)

 

 

(804,187)

Less net loss attributable to noncontrolling interests

 

 

33,773

 

 

241,200

 

 

97,153

 

 

314,446

Net loss attributable to Genesis Healthcare, Inc.

 

$

(58,128)

 

$

(373,824)

 

$

(166,278)

 

$

(489,741)

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding for loss from continuing operations per share

 

 

102,489

 

 

94,940

 

 

100,461

 

 

93,376

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.57)

 

$

(3.94)

 

$

(1.66)

 

$

(5.24)

Loss from discontinued operations, net of taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.57)

 

$

(3.94)

 

$

(1.66)

 

$

(5.24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Net loss

 

$

(91,901)

 

$

(615,024)

 

$

(263,431)

 

$

(804,187)

Net unrealized (loss) gain on marketable securities, net of tax

 

 

(468)

 

 

134

 

 

(1,079)

 

 

160

Comprehensive loss

 

 

(92,369)

 

 

(614,890)

 

 

(264,510)

 

 

(804,027)

Less: comprehensive loss attributable to noncontrolling interests

 

 

33,945

 

 

241,147

 

 

98,029

 

 

314,373

Comprehensive loss attributable to Genesis Healthcare, Inc.

 

$

(58,424)

 

$

(373,743)

 

$

(166,481)

 

$

(489,654)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

2018

    

2017

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(263,431)

 

$

(804,187)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Non-cash interest and leasing arrangements, net

 

 

55,128

 

 

51,049

Other non-cash (gains) charges, net

 

 

(42,360)

 

 

15,602

Share based compensation

 

 

6,732

 

 

7,206

Depreciation and amortization expense

 

 

168,036

 

 

183,986

Provision for losses on accounts receivable

 

 

6,179

 

 

72,700

Equity in net loss (income) of unconsolidated affiliates

 

 

106

 

 

(291)

(Benefit) provision for deferred taxes

 

 

(2,305)

 

 

3,658

Customer receivership and other related charges

 

 

 —

 

 

35,864

Long-lived asset impairments

 

 

88,008

 

 

163,364

Goodwill and identifiable intangible asset impairments

 

 

2,061

 

 

360,046

Loss on early extinguishment of debt

 

 

9,300

 

 

2,301

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

48,667

 

 

(52,572)

Accounts payable and other accrued expenses and other

 

 

(62,055)

 

 

28,632

Net cash provided by operating activities

 

 

14,066

 

 

67,358

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(41,321)

 

 

(48,465)

Purchases of marketable securities

 

 

(63,534)

 

 

(23,201)

Proceeds on maturity or sale of marketable securities

 

 

50,913

 

 

46,210

Sales of assets

 

 

 —

 

 

79,307

Other, net

 

 

(935)

 

 

(484)

Net cash (used in) provided by investing activities

 

 

(54,877)

 

 

53,367

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings under revolving credit facilities

 

 

2,987,000

 

 

478,000

Repayments under revolving credit facilities

 

 

(2,959,875)

 

 

(509,650)

Proceeds from issuance of long-term debt

 

 

563,747

 

 

23,872

Proceeds from tenant improvement draws under lease arrangements

 

 

 —

 

 

6,083

Repayment of long-term debt

 

 

(462,063)

 

 

(109,798)

Debt issuance costs

 

 

(16,678)

 

 

(4,402)

Debt settlement costs

 

 

(485)

 

 

 —

Distributions to noncontrolling interests and stockholders

 

 

(1,373)

 

 

(1,680)

Net cash provided by (used in) financing activities

 

 

110,273

 

 

(117,575)

Net increase in cash, cash equivalents and restricted cash and equivalents

 

 

69,462

 

 

3,150

Cash, cash equivalents and restricted cash and equivalents:

 

 

 

 

 

 

Beginning of period

 

 

58,638

 

 

63,460

End of period

 

$

128,100

 

$

66,610

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

292,545

 

$

325,229

Net taxes paid (refunded)

 

 

3,019

 

 

(1,810)

Non-cash investing and financing activities:

 

 

 

 

 

 

Capital lease obligations, net (write-down) gross-up due to lease activity

 

$

(83,390)

 

$

(14,909)

Assets subject to capital lease obligations, net write-down (gross-up) due to lease activity

 

 

64,456

 

 

14,909

Financing obligations, net (write-down) gross-up due to lease activity

 

 

(177,001)

 

 

18,279

Assets subject to financing obligations, net write-down (gross-up) due to lease activity

 

 

128,256

 

 

(18,279)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

6


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(1)General Information

 

Description of Business

 

Genesis Healthcare, Inc. is a healthcare services company that, through its subsidiaries (collectively, the Company or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business.  The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At September 30, 2018, the Company provides inpatient services through 445 skilled nursing, assisted/senior living and behavioral health centers located in 30 states.  Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of its revenues.

 

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others.  The Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of the Company’s revenues.

 

The Company provides an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of the Company’s revenues.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).  In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

 

The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net loss attributable to Genesis Healthcare, Inc. and net loss attributable to noncontrolling interests in its consolidated statements of operations.

 

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that “most significantly impact” the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's composition of VIEs was not material at September 30, 2018.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the disclosures normally required by U.S. GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 16, 2018.

 

Certain prior year disclosure amounts have been reclassified to conform to current period presentation.  Restricted cash had previously been included in restricted cash and investments in marketable securities.  As a result of recently adopted accounting pronouncements, discussed subsequently, restricted cash is now presented separately on the Company’s consolidated balance sheets. 

7


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The provision for losses on accounts receivable has been combined with other operating expenses and general and administrative costs, on the consolidated statement of operations.  See Note 4 – “Net Revenues and Accounts Receivable.

 

Financial Condition and Liquidity Considerations

 

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements were issued (November 9, 2018). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before November 9, 2019.  Based upon such considerations, management determined that the Company is able to continue as a going concern for 12 months following the date of issuance of these financial statements (November 9, 2018).

 

The Company’s results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers.  In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in 2017. 

 

In response to these issues, the Company entered into a number of agreements, amendments and new financing facilities (the Restructuring Transactions) during the nine months ended September 30, 2018.  See Note 3 – “Significant Transactions and Events – Restructuring Transactions.”  In total, these agreements and amendments are estimated to reduce the Company’s annual cash fixed charges by approximately $62.0 million beginning January 1, 2018.  The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility.  In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement.  Also in connection with the Restructuring Transactions, the Company amended the financial covenants in all of its material loan agreements and all but two of its material master leases.  Financial covenants beginning in 2018 were amended to account for changes in the Company’s capital structure as a result of the Restructuring Transactions and to account for the current business climate.  The Company received waivers from the counterparties to two of its material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants. 

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and all related amendments (ASC 606), which serves to supersede most existing revenue recognition guidance, including guidance specific to the healthcare industry. ASC 606 provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective transition method.  There was no cumulative effect on the opening balance of accumulated deficit as a result of adopting the standard as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 4 – “Net Revenues and Accounts Receivable.

 

8


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value; and requires separate presentation of financial assets and financial liabilities by measurement category.  The Company adopted the new guidance effective January 1, 2018.  The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial condition and results of operations.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which addresses how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The Company adopted the new guidance effective January 1, 2018.  Upon assessment of the cash flow issues subject to amendment, the adoption of  ASU 2016-15 did not have a material impact on the Company’s consolidated statements of cash flows.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The Company adopted the new guidance effective January 1, 2018.  To better accommodate the adoption of  ASU 2016-18, the Company has elected to separately disclose restricted cash on its consolidated balance sheets for all periods presented. The adoption of  ASU 2016-18 did not have a material impact on the Company’s consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combination (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the new guidance effective January 1, 2018.  The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial condition and results of operations.

 

In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.  The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Reform Act.  The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations.  Additionally, this ASU discusses required disclosures that an entity must make with regard to the Tax Reform Act.  This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded.  The Company has adopted this standard as of January 1, 2018 and will continue to evaluate indicators that may give rise to a change in its tax provision as a result of the Tax Reform Act.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

 

9


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company expects to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

 

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.

 

The Company expects that this standard will have a material effect on its financial statements. While the Company will continue to assess all of the effects of adoption, it currently believes the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for real estate operating leases; (2) the derecognition of existing assets and liabilities for certain sale-leaseback transactions (including those arising from build-to-suit lease arrangements for which construction is complete and the Company is leasing the constructed asset) that currently do not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities. The Company does not expect a significant change in its leasing activities between now and adoption.

 

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act (Tax Reform Act) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects."  Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act.  Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update.  ASU 2018-02 is effective for the Company beginning January 1, 2019 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized.  The adoption of ASU 2018-02 will not have a material impact on the Company’s consolidated financial statements.

 

 

 

10


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

(2)   Certain Significant Risks and Uncertainties

 

Revenue Sources

 

The Company receives revenues from Medicare, Medicaid, insurance, private self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services.  The Company’s inpatient services segment derives approximately 79% of its revenue from Medicare and various state Medicaid programs.  The following table depicts the Company’s inpatient services segment revenue by source for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Medicare

 

21

%  

 

22

%  

 

22

%  

 

23

%  

Medicaid

 

58

%  

 

57

%  

 

57

%  

 

56

%  

Insurance

 

12

%  

 

12

%  

 

12

%  

 

12

%  

Private

 

 8

%  

 

 8

%  

 

 8

%  

 

 8

%  

Other

 

 1

%  

 

 1

%  

 

 1

%  

 

 1

%  

Total

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors.  Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies.  Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

 

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business.  The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time.  Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have a continuing adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum will not adversely affect the Company’s business.  There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.  The Company’s financial condition and results of operations are, and will continue to be, affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

 

Laws and regulations governing the Medicare and Medicaid programs, and the Company’s business generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations.  However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from participation in the Medicare and/or Medicaid programs.

 

Concentration of Credit Risk

 

The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk.  These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings,

11


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions. 

 

Management assesses its exposure to loss on accounts at the customer level.  The greatest concentration of risk exists in the Company’s rehabilitation services business where it has over 200 distinct customers, many being chain operators with more than one location.  The four largest customers of the Company’s rehabilitation services business comprise $56.8 million, approximately 52%, of the net outstanding contract receivables in the rehabilitation services business at September 30, 2018.  One customer, which is a related party of the Company, comprises $30.1 million, approximately 28%, of the net outstanding contract receivables in the rehabilitation services business at September 30, 2018.  See Note 16 – “Related Party Transactions.”    An adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on the Company. 

 

The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Part II. Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on March 16, 2018, and in the Company’s Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.

 

Covenant Compliance

 

Should the Company fail to comply with its debt and lease covenants at a future measurement date, it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have an even more significant impact on the Company’s financial position.

 

Although the Company is in compliance, and projects to remain in compliance, with the covenants required by its material debt and lease agreements, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with its covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010 currently being considered in Congress, among others.

 

The Company’s ability to maintain compliance with covenants required by its debt and lease agreements depends in part on management’s ability to increase revenues and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt and lease covenant requirements. 

 

There can be no assurance that the confluence of these and other factors will not impede the Company’s ability to meet covenants required by its debt and lease agreements in the future.

 

(3)   Significant Transactions and Events

 

Restructuring Transactions

 

Overview

 

In the first quarter of 2018, the Company entered into a number of agreements, amendments and new financing facilities, further described below, in an effort to strengthen significantly its capital structure.  In total, the Restructuring Transactions are estimated to reduce the Company’s annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility.

 

12


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior Revolving Credit Facilities, expanding its term loan borrowings, amending its real estate loans with Welltower Inc. (Welltower) while refinancing some of those loan amounts through new real estate loans.  The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.  For further information on these debt refinancings, see Note 8 – “Long-Term Debt.”  Also in connection with the Restructuring Transactions, the Company amended the financial covenants in all of its material loan agreements and all but two of its material master leases.  Financial covenants beginning in 2018 were amended to account for changes in the Company’s capital structure as a result of the Restructuring Transactions and to account for the current business climate. 

 

Welltower Master Lease Amendment

 

On February 21, 2018, the Company entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment).  The Welltower Master Lease Amendment reduces the Company’s annual base rent payment by $35.0 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019.  In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048.  The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023.  If triggered, the incremental rent from the rent reset is capped at $35.0 million.

 

Omnibus Agreement

 

On February 21, 2018, the Company entered into an Omnibus Agreement with Welltower and Omega Healthcare Investors, Inc. (Omega), pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan agreement to, among other things, accommodate a refinancing of the Company’s existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of the Company’s other material debt and lease obligations. 

 

The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower will be written off and (b) the Company may request conversion of not more than $50.0 million of the outstanding balance of the Company’s Welltower Real Estate Loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, the Company agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.

 

In connection with the Omnibus Agreement, the Company agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of the Company’s Class A Common Stock at an exercise price equal to $1.33 per share.  Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions.  The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance. 

 

Lease Transactions and Divestitures

 

Sabra Divestitures

 

On April 1, 2018, the Company divested five skilled nursing facilities.  All five of the skilled nursing facilities, three located in Massachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra).  The five skilled nursing facilities generated annual revenues of $28.5 million and pre-tax net loss of $2.9 million.  On May 4, 2018, Sabra completed the sale and lease termination of one skilled nursing facility in California that had been

13


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

closed in 2017.  The Company recognized a net gain on the write off of certain lease liabilities, offset by exit costs, of $0.7 million on the six skilled nursing facilities.

 

On June 1, 2018, Sabra completed the sale and lease termination of 12 skilled nursing facilities, five located in Florida and seven located in New Hampshire.  As a result of the sale, the Company will receive an annual rent credit of $12.0 million for the remainder of the lease term.  The Company continues to operate these facilities under a new lease with a new landlord, Next Healthcare. See Note 16 – “Related Party Transactions.”  As a result of the sale, the Company recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $7.0 million.

 

On June 29, 2018, Sabra completed the sale and lease termination of eight skilled nursing facilities and one assisted/senior living facility located in seven different states.  As a result of the sale, the Company will receive an annual rent credit of $7.4 million for the remainder of the lease term.  The Company continues to operate these facilities under a lease agreement with a new landlord.  The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million.  As a result of the sale, the Company recognized accelerated depreciation expense of $3.6 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $2.9 million.

 

On September 7, 2018, Sabra completed the sale and lease termination of one skilled nursing facility located in Ohio. The skilled nursing facility generated annual revenues of $3.2 million and pre-tax net loss of $0.8 million.   As a result of the sale, the Company will receive an annual rent credit of $0.6 million.  The costs associated with this sale and lease termination were de minimis.

 

Second Spring Divestitures

 

On June 1, 2018 and on June 13, 2018, Second Spring Healthcare Investments (Second Spring) completed the sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey.  The combined 12 skilled nursing facilities generated annual revenues of $146.2 million and pre-tax net loss of $19.3 million.  As a result of the sale and lease termination, the Company recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million.  The resulting gain of $21.2 million was offset by $6.3 million of exit costs and the Company recognized accelerated depreciation expense of $5.3 million on the property and equipment sold.

 

On August 1, 2018, Second Spring completed the sale and lease termination of one skilled nursing facility located in Pennsylvania.  The skilled nursing facility generated annual revenues of $15.7 million and pre-tax net loss of $1.9 million.  As a result of the sale and lease termination, the Company recognized a financing obligation net asset and a financing obligation write-down of $12.8 million.  In addition, the Company recognized exit costs of $0.8 million and accelerated depreciation expense of $0.8 million on the property and equipment sold.

 

Welltower Divestitures

 

On August 1, 2018, Welltower completed the sale and lease termination of three skilled nursing facilities located in Maryland and Indiana.  The three skilled nursing facilities generated annual revenues of $40.1 million and pre-tax net loss of $4.5 million.  As a result of the sale and lease termination, the Company recognized a capital lease and financing obligation net asset write-down of $31.7 million, a capital lease obligation and financing obligation write-down of $64.2 million.  The resulting gain of $31.7 million was offset by $2.0 million of exit costs.  In addition, the Company recognized accelerated depreciation expense of $6.5 million on the property and equipment sold.

 

14


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Texas Divestitures

 

On August 1, 2018, the Company terminated a lease and exited the operations of one skilled nursing facility in Texas.  The skilled nursing facility generated annual revenues of $8.2 million and pre-tax net loss of $2.0 million.  The Company incurred lease termination costs of $3.5 million and exit costs of $0.3 million in the divestiture of this skilled nursing facility.

 

On October 1, 2018, the Company sold 16 skilled nursing facilities in Texas that are classified as assets held for sale on September 30, 2018.  In advance of the sale, the Company recorded exit costs of $4.8 million associated with the divestiture of these skilled nursing facilities.

 

Other Lease Amendments and Divestitures

 

For the nine months ended September 30, 2018, the Company divested or amended the lease agreements to six other skilled nursing facilities. The lease agreement to one behavioral outpatient clinic expired on June 30, 2018.  As a result of these lease amendments and divestitures, the Company recognized a loss for exit costs and the write off of certain lease assets of $3.5 million.

 

In total for the nine months ended September 30, 2018, the Company recorded a net gain on lease transactions and divestitures of $42.4 million which is included in other (income) loss on the consolidated statements of operations.

 

15


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(4)   Net Revenues and Accounts Receivable

 

Revenue Streams

 

Inpatient Services

 

The Company generates revenues primarily by providing services to patients within its facilities. The Company uses interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care. Many of the Company’s facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management, as well as standard services, such as room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. The Company assesses collectibility on all accounts prior to providing services.

 

Rehabilitation Therapy Services

 

The Company generates revenues by providing rehabilitation therapy services, including speech-language pathology, physical therapy, occupational therapy and respiratory therapy at its skilled nursing facilities and assisted/senior living facilities, as well as facilities of third-party skilled nursing operators and other outpatient settings.  The majority of revenues generated by rehabilitation therapy services rendered are billed to contracted third party providers.

 

Other Services

 

The Company generates revenues by providing an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

 

Revenue Recognition

 

The Company generates revenues, primarily by providing healthcare services to its customers. Revenues are recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration to which the Company expects to be entitled from patients, third-party payers (including government programs and insurers) and others, in exchange for those goods and services. 

 

Performance obligations are determined based on the nature of the services provided.  The majority of the Company’s healthcare services represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance obligation satisfied over time as services are rendered.  The Company also provides certain ancillary services which are not included in the bundle of services, and as such, are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

 

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions.  The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known.  Adjustments arising from a change in the transaction price were not significant for the three and nine months ended September 30, 2018.

 

16


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The Company has elected a practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

 

Adoption of ASC 606

 

The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers.  Under ASC 606, amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues. Prior to adoption of ASC 606, such amounts were classified as provision for losses on accounts receivable.  For the three and nine months ended September 30, 2018, the Company recorded approximately $20.6 million and $67.4 million, respectively, of implicit price concessions as a direct reduction of net revenues that would have been recorded as operating expenses prior to the adoption of ASC 606.  The adoption of ASC 606 is not expected to have a material impact on net income on an ongoing basis. To the extent there are material subsequent events that affect the payor's ability to pay, such amounts are recorded within operating expenses. 

 

At September 30, 2018, the remaining balance of allowance for doubtful accounts previously disclosed on the consolidated balance sheets relating to accounts receivable with service dates of December 31, 2017 and prior is $198.8 million.

 

The Company has reclassified the provision for losses on accounts receivable of $25.2 million and $72.7 million for the three and nine months ended September 30, 2017, respectively, to other operating expenses in the consolidated statements of operations. These reclassifications had no effect on the reported results of operations.

 

Under ASC 606, the Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services have been provided.  Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

 

Under ASC 606, payments that the Company receives from customers in advance of providing services represent contract liabilities.  Such payments primarily relate to private pay patients, which are billed monthly in advance.  The Company had no material contract liabilities or activity as of and for the three and nine months ended September 30, 2018.

 

Disaggregation of Revenues

 

The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.  The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source.  Payments are generally received within 30 to 60 days after billing.  See Note 6 – “Segment Information.”

 

The composition of net revenues by payor type and operating segment for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

216,382

 

$

22,756

 

$

 —

 

$

239,138

 

Medicaid

 

 

613,539

 

 

545

 

 

 —

 

 

614,084

 

Insurance

 

 

125,060

 

 

5,412

 

 

 —

 

 

130,472

 

Private

 

 

85,148

(1)

 

139

 

 

 —

 

 

85,287

 

Third party providers

 

 

 —

 

 

99,851

 

 

17,995

 

 

117,846

 

Other

 

 

14,539

(2)

 

3,461

(2)

 

12,444

(3)

 

30,444

 

Total net revenues

 

$

1,054,668

 

$

132,164

 

$

30,439

 

$

1,217,271

 

17


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017 (4)

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

248,436

 

$

22,761

 

$

 —

 

$

271,197

 

Medicaid

 

 

641,378

 

 

541

 

 

 —

 

 

641,919

 

Insurance

 

 

118,356

 

 

6,032

 

 

 —

 

 

124,388

 

Private

 

 

96,583

(1)

 

143

 

 

 —

 

 

96,726

 

Third party providers

 

 

 —

 

 

118,478

 

 

21,385

 

 

139,863

 

Other

 

 

24,882

(2)

 

3,943

(2)

 

12,534

(3)

 

41,359

 

Total net revenues

 

$

1,129,635

 

$

151,898

 

$

33,919

 

$

1,315,452

 

(1)

Includes Assisted/Senior living revenue of $24.0 million and $24.2 million for the three months ended September 30, 2018 and 2017, respectively.  Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.

(4)

The Company adopted the new revenue standard using the modified retrospective transition method.  As a result, the prior period amounts have not been adjusted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

700,202

 

$

68,861

 

$

 —

 

$

769,063

 

Medicaid

 

 

1,854,706

 

 

1,584

 

 

 —

 

 

1,856,290

 

Insurance

 

 

400,889

 

 

18,020

 

 

 —

 

 

418,909

 

Private

 

 

258,887

(1)

 

391

 

 

 —

 

 

259,278

 

Third party providers

 

 

 —

 

 

319,015

 

 

63,500

 

 

382,515

 

Other

 

 

50,924

(2)

 

13,911

(2)

 

39,813

(3)

 

104,648

 

Total net revenues

 

$

3,265,608

 

$

421,782

.

$

103,313

 

$

3,790,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017 (4)

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

793,641

 

$

70,831

 

$

 —

 

$

864,472

 

Medicaid

 

 

1,912,130

 

 

1,137

 

 

 —

 

 

1,913,267

 

Insurance

 

 

417,619

 

 

18,358

 

 

 —

 

 

435,977

 

Private

 

 

293,455

(1)

 

500

 

 

 —

 

 

293,955

 

Third party providers

 

 

 —

 

 

353,026

 

 

70,051

 

 

423,077

 

Other

 

 

65,300

(2)

 

12,154

(2)

 

37,658

(3)

 

115,112

 

Total net revenues

 

$

3,482,145

 

$

456,006

 

$

107,709

 

$

4,045,860

 

(1)

Includes Assisted/Senior living revenue of $71.2 million and $72.3 million for the nine months ended September 30, 2018 and 2017, respectively.  Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.

(4)

The Company adopted the new revenue standard using the modified retrospective transition method.  As a result, the prior period amounts have not been adjusted.

 

 

(5)Loss Per Share

 

The Company has three classes of common stock.  Classes A and B are identical in economic and voting interests.  Class C has a 1:1 voting ratio with the other two classes, representing the voting interests of the noncontrolling interest of the legacy FC-GEN  Operations Investment, LLC (FC-GEN) owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.

 

18


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common shares.

 

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

  

2018

  

2017

    

2018

    

2017

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(91,901)

 

$

(615,022)

 

$

(263,431)

 

$

(804,117)

Less: Net loss attributable to noncontrolling interests

 

 

(33,773)

 

 

(241,200)

 

 

(97,153)

 

 

(314,446)

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(58,128)

 

$

(373,822)

 

$

(166,278)

 

$

(489,671)

Loss from discontinued operations, net of taxes

 

 

 —

 

 

(2)

 

 

 —

 

 

(70)

Net loss attributable to Genesis Healthcare, Inc.

 

$

(58,128)

 

$

(373,824)

 

$

(166,278)

 

$

(489,741)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding for basic and diluted net loss per share

 

 

102,489

 

 

94,940

 

 

100,461

 

 

93,376

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.57)

 

$

(3.94)

 

$

(1.66)

 

$

(5.24)

Loss from discontinued operations, net of taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.57)

 

$

(3.94)

 

$

(1.66)

 

$

(5.24)

 

The following shares were excluded from the computation of diluted net loss per common share in the three and nine months ended September 30, 2018 and 2017, as their inclusion would have been anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

  

2018

  

2017

  

2018

  

2017

Exchange of noncontrolling interests

 

 

59,711

 

 

61,692

    

    

60,289

 

    

62,108

Employee and director unvested restricted stock units

 

 

266

 

 

40

    

    

691

 

    

988

Convertible note

 

 

 —

 

 

3,000

    

    

 —

 

    

3,000

Stock warrants

 

 

1,500

 

 

 —

    

    

1,359

 

    

 —

 

The combined impact of the assumed conversion to common stock and related tax implications attributable to the noncontrolling interest, the grants under the 2015 Omnibus Equity Incentive Plan, and the stock warrants are anti-dilutive to EPS because the Company is in a net loss position for the three and nine months ended September 30, 2018. As of September 30, 2018, there were 59.7 million units attributable to the noncontrolling interests outstanding.   

19


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(6) Segment Information

 

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services.

 

A summary of the Company’s segmented revenues follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,029,453

 

84.6

%  

$

1,103,554

 

83.8

%  

$

(74,101)

 

(6.7)

%

Assisted/Senior living facilities

 

 

23,974

 

2.0

%  

 

24,185

 

1.8

%  

 

(211)

 

(0.9)

%

Administration of third party facilities

 

 

2,025

 

0.2

%  

 

2,266

 

0.2

%  

 

(241)

 

(10.6)

%

Elimination of administrative services

 

 

(784)

 

(0.1)

%  

 

(370)

 

 —

%  

 

(414)

 

111.9

%

Inpatient services, net

 

 

1,054,668

 

86.7

%  

 

1,129,635

 

85.8

%  

 

(74,967)

 

(6.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

214,421

 

17.6

%  

 

244,471

 

18.6

%  

 

(30,050)

 

(12.3)

%

Elimination intersegment rehabilitation therapy services

 

 

(82,257)

 

(6.8)

%  

 

(92,573)

 

(7.0)

%  

 

10,316

 

(11.1)

%

Third party rehabilitation therapy services

 

 

132,164

 

10.8

%  

 

151,898

 

11.6

%  

 

(19,734)

 

(13.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

46,977

 

3.9

%  

 

42,901

 

3.3

%  

 

4,076

 

9.5

%

Elimination intersegment other services

 

 

(16,538)

 

(1.4)

%  

 

(8,982)

 

(0.7)

%  

 

(7,556)

 

84.1

%

Third party other services

 

 

30,439

 

2.5

%  

 

33,919

 

2.6

%  

 

(3,480)

 

(10.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,217,271

 

100.0

%  

$

1,315,452

 

100.0

%  

$

(98,181)

 

(7.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,190,065

 

84.0

%  

$

3,404,181

 

84.0

%  

$

(214,116)

 

(6.3)

%

Assisted/Senior living facilities

 

 

71,220

 

1.9

%  

 

72,262

 

1.8

%  

 

(1,042)

 

(1.4)

%

Administration of third party facilities

 

 

6,577

 

0.2

%  

 

6,841

 

0.2

%  

 

(264)

 

(3.9)

%

Elimination of administrative services

 

 

(2,254)

 

 —

%  

 

(1,139)

 

 —

%  

 

(1,115)

 

97.9

%

Inpatient services, net

 

 

3,265,608

 

86.1

%  

 

3,482,145

 

86.0

%  

 

(216,537)

 

(6.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

685,672

 

18.1

%  

 

743,605

 

18.4

%  

 

(57,933)

 

(7.8)

%

Elimination intersegment rehabilitation therapy services

 

 

(263,890)

 

(7.0)

%  

 

(287,599)

 

(7.1)

%  

 

23,709

 

(8.2)

%

Third party rehabilitation therapy services

 

 

421,782

 

11.1

%  

 

456,006

 

11.3

%  

 

(34,224)

 

(7.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

146,830

 

3.9

%  

 

133,168

 

3.3

%  

 

13,662

 

10.3

%

Elimination intersegment other services

 

 

(43,517)

 

(1.1)

%  

 

(25,459)

 

(0.6)

%  

 

(18,058)

 

70.9

%

Third party other services

 

 

 103,313

 

2.8

%  

 

107,709

 

2.7

%  

 

(4,396)

 

(4.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

3,790,703

 

100.0

%  

$

4,045,860

 

100.0

%  

$

(255,157)

 

(6.3)

%

 

20


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

A summary of the Company’s unaudited condensed consolidated statement of operations follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

Net revenues

 

$

1,055,452

 

$

214,421

 

$

46,914

 

$

63

 

$

(99,579)

 

$

1,217,271

 

Salaries, wages and benefits

 

 

480,345

 

 

175,098

 

 

25,161

 

 

 —

 

 

 —

 

 

680,604

 

Other operating expenses

 

 

428,398

 

 

12,891

 

 

29,353

 

 

 —

 

 

(99,578)

 

 

371,064

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

35,482

 

 

 —

 

 

35,482

 

Lease expense

 

 

31,732

 

 

 —

 

 

316

 

 

318

 

 

 —

 

 

32,366

 

Depreciation and amortization expense

 

 

46,472

 

 

3,147

 

 

172

 

 

3,247

 

 

 —

 

 

53,038

 

Interest expense

 

 

91,106

 

 

14

 

 

 9

 

 

24,566

 

 

 —

 

 

115,695

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,178)

 

 

 —

 

 

(2,178)

 

Other income

 

 

(20,207)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,207)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

11,361

 

 

 —

 

 

11,361

 

Long-lived asset impairments

 

 

32,390

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

32,390

 

Goodwill and identifiable intangible asset impairments

 

 

929

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

929

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(523)

 

 

371

 

 

(152)

 

(Loss) income before income tax benefit

 

 

(35,713)

 

 

23,271

 

 

(8,097)

 

 

(72,210)

 

 

(372)

 

 

(93,121)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(1,220)

 

 

 —

 

 

(1,220)

 

(Loss) income from continuing operations

 

$

(35,713)

 

$

23,271

 

$

(8,097)

 

$

(70,990)

 

$

(372)

 

$

(91,901)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

1,130,005

 

$

244,471

 

$

42,778

 

$

123

 

$

(101,925)

 

$

1,315,452

 

Salaries, wages and benefits

 

 

507,075

 

 

205,232

 

 

27,097

 

 

 —

 

 

 —

 

 

739,404

 

Other operating expenses

 

 

464,894

 

 

21,429

 

 

15,689

 

 

 —

 

 

(101,926)

 

 

400,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

41,420

 

 

 —

 

 

41,420

 

Lease expense

 

 

37,895

 

 

(14)

 

 

302

 

 

487

 

 

 —

 

 

38,670

 

Depreciation and amortization expense

 

 

51,666

 

 

3,497

 

 

167

 

 

4,060

 

 

 —

 

 

59,390

 

Interest expense

 

 

103,306

 

 

14

 

 

 9

 

 

21,102

 

 

 —

 

 

124,431

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(1,596)

 

 

 —

 

 

(1,596)

 

Other loss

 

 

2,379

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,379

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,056

 

 

 —

 

 

1,056

 

Customer receivership and other related charges

 

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

 —

 

 

297

 

Long-lived asset impairment charges

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(571)

 

 

502

 

 

(69)

 

(Loss) income before income tax expense

 

 

(558,739)

 

 

12,135

 

 

(486)

 

 

(65,835)

 

 

(501)

 

 

(613,426)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,596

 

 

 —

 

 

1,596

 

(Loss) income from continuing operations

 

$

(558,739)

 

$

12,135

 

$

(486)

 

$

(67,431)

 

$

(501)

 

$

(615,022)

 

21


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,267,862

 

$

685,672

 

$

146,714

 

$

116

 

$

(309,661)

 

$

3,790,703

 

Salaries, wages and benefits

 

 

1,477,153

 

 

562,875

 

 

82,100

 

 

 —

 

 

 —

 

 

2,122,128

 

Other operating expenses

 

 

1,323,423

 

 

41,707

 

 

70,310

 

 

 —

 

 

(309,661)

 

 

1,125,779

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

114,404

 

 

 —

 

 

114,404

 

Lease expense

 

 

95,660

 

 

 —

 

 

959

 

 

929

 

 

 —

 

 

97,548

 

Depreciation and amortization expense

 

 

147,552

 

 

9,479

 

 

509

 

 

10,496

 

 

 —

 

 

168,036

 

Interest expense

 

 

277,753

 

 

41

 

 

27

 

 

70,866

 

 

 —

 

 

348,687

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

9,785

 

 

 —

 

 

9,785

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,856)

 

 

 —

 

 

(4,856)

 

Other (income) loss

 

 

(42,438)

 

 

 —

 

 

78

 

 

 —

 

 

 —

 

 

(42,360)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

26,567

 

 

 —

 

 

26,567

 

Long-lived asset impairments

 

 

88,008

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

88,008

 

Goodwill and identifiable intangible asset impairments

 

 

2,061

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,061

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,029)

 

 

1,135

 

 

106

 

(Loss) income before income tax benefit

 

 

(101,310)

 

 

71,570

 

 

(7,269)

 

 

(227,046)

 

 

(1,135)

 

 

(265,190)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(1,759)

 

 

 —

 

 

(1,759)

 

(Loss) income from continuing operations

 

$

(101,310)

 

$

71,570

 

$

(7,269)

 

$

(225,287)

 

$

(1,135)

 

$

(263,431)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,483,284

 

$

743,605

 

$

132,718

 

$

450

 

$

(314,197)

 

$

4,045,860

 

Salaries, wages and benefits

 

 

1,597,007

 

 

619,928

 

 

86,365

 

 

 —

 

 

 —

 

 

2,303,300

 

Other operating expenses

 

 

1,365,896

 

 

65,074

 

 

45,451

 

 

 —

 

 

(314,198)

 

 

1,162,223

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

127,657

 

 

 —

 

 

127,657

 

Lease expense

 

 

110,661

 

 

 —

 

 

897

 

 

1,446

 

 

 —

 

 

113,004

 

Depreciation and amortization expense

 

 

159,483

 

 

11,110

 

 

506

 

 

12,887

 

 

 —

 

 

183,986

 

Interest expense

 

 

309,948

 

 

42

 

 

28

 

 

63,455

 

 

 —

 

 

373,473

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

2,301

 

 

 —

 

 

2,301

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,097)

 

 

 —

 

 

(4,097)

 

Other loss (income)

 

 

15,112

 

 

732

 

 

 —

 

 

(242)

 

 

 —

 

 

15,602

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

7,862

 

 

 —

 

 

7,862

 

Customer receivership and other related charges

 

 

 —

 

 

35,864

 

 

 —

 

 

 —

 

 

 —

 

 

35,864

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,702)

 

 

1,411

 

 

(291)

 

(Loss) income before income tax expense

 

 

(596,352)

 

 

8,974

 

 

(529)

 

 

(209,117)

 

 

(1,410)

 

 

(798,434)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

5,683

 

 

 —

 

 

5,683

 

(Loss) income from continuing operations

 

$

(596,352)

 

$

8,974

 

$

(529)

 

$

(214,800)

 

$

(1,410)

 

$

(804,117)

 

 

 

22


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The following table presents the segment assets as of September 30, 2018 compared to December 31, 2017 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

Inpatient services

 

$

3,865,304

 

$

4,303,370

 

Rehabilitation therapy services

 

 

341,139

 

 

351,711

 

Other services

 

 

42,161

 

 

50,127

 

Corporate and eliminations

 

 

142,770

 

 

82,657

 

Total assets

 

$

4,391,374

 

$

4,787,865

 

 

The following table presents segment goodwill as of September 30, 2018 compared to December 31, 2017 (in thousands):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Inpatient

    

Rehabilitation Therapy Services

    

Other Services

    

Consolidated

Balance at December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

351,470

 

 

73,814

 

 

11,828

 

 

437,112

Accumulated impairment losses

 

 

(351,470)

 

 

 —

 

 

 —

 

 

(351,470)

 

 

$

 —

 

$

73,814

 

$

11,828

 

$

85,642

Balance at September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

351,470

 

 

73,814

 

 

11,828

 

 

437,112

Accumulated impairment losses

 

 

(351,470)

 

 

 —

 

 

 —

 

 

(351,470)

 

 

$

 —

 

$

73,814

 

$

11,828

 

$

85,642

 

 

 

(7)Property and Equipment

 

Property and equipment consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

Land, buildings and improvements

 

$

472,553

 

$

591,022

 

Capital lease land, buildings and improvements

 

 

684,225

 

 

752,657

 

Financing obligation land, buildings and improvements

 

 

2,283,764

 

 

2,525,551

 

Equipment, furniture and fixtures

 

 

420,335

 

 

453,230

 

Construction in progress

 

 

10,912

 

 

30,294

 

Gross property and equipment

 

 

3,871,789

 

 

4,352,754

 

Less: accumulated depreciation

 

 

(952,205)

 

 

(939,155)

 

Net property and equipment

 

$

2,919,584

 

$

3,413,599

 

 

 

 

 

 

At September 30, 2018, the Company classified the property and equipment of 23 skilled nursing facilities as assets held for sale resulting in a total net reduction of property and equipment of $99.7 million, which was primarily classified in the “Land, buildings and improvements” line item.  See Note 15 – “Assets Held for Sale.”

 

In the nine months ended September 30, 2018, the Company amended one of its master lease agreements resulting in a net capital lease asset write-down of $18.2 million.   See Note 3 – “Significant Transactions and Events – Welltower Master Lease Amendment.”    In the nine months ended September 30, 2018, Welltower completed the sale and lease termination of three skilled nursing facilities.  The Company recognized a capital lease and financing obligation net asset write-down of $29.5 million and $2.2 million, respectively.   See Note 3 – “Significant Transactions and Events – Welltower Divestitures.”    

 

In the nine months ended September 30, 2018, the Company divested 13 skilled nursing facilities, which were terminated from their master lease agreement, resulting in a net financing obligation asset write-down of $126.1 million and capital lease asset write-down of $16.8 million.   See Note 3 – “Significant Transactions and Events – Second Spring Divestitures.”    

 

In the nine months ended September 30, 2018, the Company recognized impairment charges of $88.0 million on its property and equipment.  See Note 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”    

 

 

23


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(8)   Long-Term Debt

 

Long-term debt at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

September 30, 2018

 

December 31, 2017

 

Asset based lending facilities, net of debt issuance costs of $12,016 and $0 at September 30, 2018 and December 31, 2017, respectively

 

$

403,110

 

$

 —

 

Revolving credit facilities, net of debt issuance costs of $0 and $10,109 at September 30, 2018 and December 31, 2017, respectively

 

 

 —

 

 

303,091

 

Term loan agreements, net of debt issuance costs of $2,143 and $3,020 and debt premium balance of $10,670 and $0 at September 30, 2018 and December 31, 2017, respectively

 

 

183,043

 

 

120,706

 

Real estate loans, net of debt issuance costs of $5,381 and $3,486 and debt premium balance of $31,408 and $0 at September 30, 2018 and December 31, 2017, respectively

 

 

313,730

 

 

281,039

 

HUD insured loans, net of debt issuance costs of $5,280 and $5,590 and debt premium balance of $868 and $13,590 at September 30, 2018 and December 31, 2017, respectively

 

 

182,656

 

 

263,827

 

Notes payable

 

 

80,794

 

 

68,122

 

Mortgages and other secured debt (recourse)

 

 

13,857

 

 

12,536

 

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $195 and $99 and debt premium balance of $1,544 and $1,618 at September 30, 2018 and December 31, 2017, respectively

 

 

26,835

 

 

27,978

 

 

 

 

1,204,025

 

 

1,077,299

 

Less:  Current installments of long-term debt

 

 

(116,077)

 

 

(26,962)

 

Long-term debt

 

$

1,087,948

 

$

1,050,337

 

 

Asset Based Lending Facilities

 

On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap.  The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities).  The commitments under the delayed draw loan facility will be reduced to $20 million in the year 2020.  Proceeds were used to replace and repay in full the Company’s existing $525 million Revolving Credit Facilities. 

 

The ABL Credit Facilities have a five-year term set to mature on March 6, 2023.  The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced.  The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed.  In accordance with U.S. GAAP, the Company has presented the entire revolving credit facility borrowings balance of $90.1 million in current installments of long-term debt at September 30, 2018.  Despite this classification, the Company expects that it will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.  Cash proceeds of $56.3 million received under the ABL Credit Facilities remain in a restricted account.  This amount is pledged to cash collateralize letters of credit previously issued under the Revolving Credit Facilities. The Company has classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents on the consolidated balance sheets at September 30, 2018.

 

Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%.  Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.

 

In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments.  The commitment fee rate equals 0.5% per annum on the revolving credit facility and 2% on the delayed draw term loan facility. 

24


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The term loan facility and revolving credit facility include a termination fee equal to 2% if the loans are prepaid within the first year, 1% if the loans are prepaid after year one and before year two, and 0.5% thereafter.  The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loans retirement or on the maturity date.

 

The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings.  Financial covenants include a minimum consolidated fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity.

 

Borrowings and interest rates under the ABL Credit Facilities were as follows at September 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

ABL Credit Facilities

 

Commitment

 

 

Borrowings

 

Interest

 

Term loan facility

 

$

325,000

 

 

$

325,000

 

8.40

%

Revolving credit facility (Non-HUD)

 

 

155,000

 

 

 

60,086

 

8.40

%

Revolving credit facility (HUD)

 

 

45,000

 

 

 

30,039

 

8.40

%

Delayed draw facility

 

 

30,000

 

 

 

 —

 

13.40

%

 

 

$

555,000

 

 

$

415,125

 

8.40

%

 

As of September 30, 2018, the Company had a total borrowing base capacity of $456.6 million with outstanding borrowings under the ABL Credit Facilities of $415.1 million, leaving the Company with approximately $41.5 million of available borrowing capacity under the ABL Credit Facilities.

 

Revolving Credit Facilities

 

Prior to March 6, 2018, the Company’s Revolving Credit Facilities, as amended, consisted of a senior secured, asset-based revolving credit facility of up to $525.0 million under two separate tranches:  Tranche A-1 and HUD Tranche and were set to mature on February 2, 2020.  Interest accrued at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin.  The applicable margin was based on the level of commitments for both tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.00% to 3.50%; and (ii) for HUD Tranche ranges from 2.50% to 3.00%.  The applicable margin was based on the level of commitments for both tranches, and in regards to base rate loans (i) for Tranche A-1 ranges from 2.00% to 2.50%  and (ii) for HUD Tranche ranges from 2.00% to 2.50%.

 

Term Loan Agreements

 

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a four-year term loan agreement (the Term Loan Agreement) with an affiliate of Welltower and an affiliate of Omega.  The Term Loan Agreement originally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million, with scheduled annual amortization of 2.5% of the initial principal balance in years one, two and three, and 5.0% in year four.  On March 6, 2018, the Company entered into an amendment to the Term Loans (the Term Loan Amendment) pursuant to which the Company borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan). The Term Loan Agreement continues to have a maturity date of July 29, 2020. The 2018 Term Loan bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind.  The Term Loan Amendment also changes the interest rate applicable to the Term Loans to be equal to 14% per annum, with up to 9% per annum to be paid in kind. As of September 30, 2018, the Term Loans and 2018 Term Loan had an outstanding principal balance of $174.5 million.  Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.

 

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions.  The Term Loan Agreement is also secured by a junior lien on the assets that secure the ABL Credit Facilities on a first priority basis.

25


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants. 

 

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type.  Financial covenants include four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures.  The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined therein, of no more than 9.0 to 1.0 through December 31, 2018 and decreasing by 0.25 annually to 8.5 to 1.0 beginning in 2020.

 

The Term Loan Agreement includes a non-cash debt premium balance of $10.7 million at September 30, 2018.  As the terms under the Term Loan Amendment were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Real Estate Loan Amendments and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually.  The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018.  Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Term Loan Amendment weighted interest rate of 13.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Term Loan Amendment.  See Note 10 – “Financing Obligation.”

 

Real Estate Loans

 

On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of September 30, 2018.  The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023.  The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated.  The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%.  Beginning April 1, 2019, mandatory principal payments commence with the balance of the loans to be repaid at maturity.  Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below).    

 

The Company is subject to multiple real estate loan agreements with Welltower (Welltower Real Estate Loans).  The Welltower Real Estate Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Real Estate Loans.  Each Welltower Real Estate Loan has a maturity date of January 1, 2022 and had a 10.25% interest rate beginning January 1, 2018. 

 

On February 21, 2018, the Company entered into amendments to the Welltower Real Estate Loans (the Real Estate Loan Amendments).  The Real Estate Loan Amendments adjusted the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind.  In connection with the Real Estate Loan Amendments, the Company agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105 million of the Welltower Real Estate Loan obligations.  As of September 30, 2018, the Company secured repayments or commitments totaling approximately $82 million.  As a result, the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest.  At September 30, 2018, the Welltower Real Estate Loans are secured by a mortgage lien on the real property and a second lien on certain receivables of the operators of the 15 remaining facilities subject to the Welltower Real Estate Loans.  In the nine months ended September 30, 2018, the Welltower Real Estate Loans were paid down $69.7 million using proceeds from the MidCap Real Estate Loans.  The Welltower Real Estate Loans have an outstanding principal balance of $214.7 million at September 30, 2018. 

26


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

The Welltower Real Estate Loans include a non-cash debt premium balance of $31.4 million at September 30, 2018.  As the terms under the Real Estate Loan Amendments were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Term Loan Amendment and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually.  The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018.  Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Real Estate Loan Amendments weighted interest rate of 12.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Real Estate Loan Amendments.  See Note 10 – “Financing Obligation.”

 

On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million real estate loan (the Other Real Estate Loan).  On February 22, 2018, the skilled nursing facility subject to the Other Real Estate Loan was refinanced through a loan insured through the U.S. Department of Housing and Urban Development (HUD).  Some of the proceeds from the refinancing were used to pay off fully the Other Real Estate Loan.

 

HUD Insured Loans

 

As of September 30, 2018, the Company has 31 skilled nursing facility loans insured by HUD with a combined aggregate principal balance of $276.2 million, which includes a $13.2 million debt premium on 10 skilled nursing facility loans established in purchase accounting in 2015.  In the nine months ended September 30, 2018, one skilled nursing facility was financed with a HUD insured loan for $10.9 million using some of the proceeds to retire the Other Real Estate Loan. 

 

The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 29 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.5%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required thereafter. Any further HUD insured loans will require additional HUD approval.

 

All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of September 30, 2018, the Company has total escrow reserve funds of $26.0 million with the loan servicer that are reported within prepaid expenses.

 

The HUD loans of nine skilled nursing facilities, balances included in the disclosures noted above, were reclassified as assets held for sale in the consolidated balance sheets at September 30, 2018. These nine skilled nursing facilities had an aggregate principal balance of $88.0 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $9.5 million.  The nine skilled nursing facilities are expected to be sold in the fourth quarter of 2018.  See Note 15 – “Assets Held for Sale.”

 

Notes Payable

 

On January 17, 2018, the Company converted $19.6 million of its trade payables into a note payable.  The note, as amended, will be repaid in equal monthly installments through December 2019 at an annual interest rate of 5.75% and has an outstanding balance of $9.7 million at September 30, 2018.

 

In connection with Welltower’s sale of 64 skilled nursing facilities to Second Spring on November 1, 2016, the Company issued a note totaling $51.2 million to Welltower.  The note accrues cash interest at 3% and paid-in-kind interest at 7%.  Cash

27


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1.  The note matures on October 30, 2020, and has an outstanding accreted balance of $57.9 million at September 30, 2018.

 

In connection with Welltower’s sale of 28 skilled nursing facilities to Cindat Best Years Welltower JV LLC (CBYW) on December 23, 2016, the Company issued two notes totaling $23.7 million to Welltower.  The first note has an initial principal balance of $11.7 million and accrues cash interest at 3% and paid-in-kind interest at 7%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15.  The note matures on December 15, 2021, and has an outstanding accreted principal balance of $13.2 million at September 30, 2018.  The second note had an initial principal balance of $12.0 million and was converted into 3.0 million shares of common stock on November 13, 2017 and cancelled. 

 

Other Debt

 

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets.  The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest rate of 3.4% at September 30, 2018, with maturity dates ranging from 2018 to 2020. 

 

Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures.  The loans consist principally of revenue bonds and secured bank loans.  Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest with a weighted average interest rate of 5.0% at September 30, 2018.  Maturity dates range from 2023 to 2034.  Loans are labeled non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements.  The aggregate principal balance of these loans includes a $1.6 million debt premium on one debt instrument.   The Company’s consolidated current installment of long-term debt decreased $10.9 million due to the reclassification of a non-recourse loan to long term upon the completion of a refinancing in March 2018.

 

Debt Covenants

 

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, minimum liquidity and maximum capital expenditures.  The Credit Facilities include cross-default provisions with each other and certain material lease agreements.  At September 30, 2018, the Company was in compliance with its financial covenants contained in the Credit Facilities.

 

The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt covenant compliance requirements.  Should the Company fail to comply with its debt covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing credit agreements.  To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position. 

 

28


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The maturity of total debt of $1,184.6 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at September 30, 2018 is as follows (in thousands): 

 

 

 

 

 

 

Twelve months ended September 30, 

    

 

 

2019

 

$

116,111

2020

 

 

183,934

2021

 

 

64,490

2022

 

 

234,689

2023

 

 

407,907

Thereafter

 

 

177,419

Total debt maturity

 

$

1,184,550

 

 

 

 

 

 

 

 

(9)   Leases and Lease Commitments

 

The Company leases certain facilities under capital and operating leases.  Future minimum payments for the next five years and thereafter under such leases at September 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

Twelve months ended September 30, 

    

Capital Leases

    

Operating Leases

2019

 

$

86,885

 

$

118,433

2020

 

 

85,745

 

 

117,352

2021

 

 

87,593

 

 

117,154

2022

 

 

89,516

 

 

94,680

2023

 

 

91,508

 

 

81,981

Thereafter

 

 

3,210,719

 

 

364,335

Total future minimum lease payments

 

 

3,651,966

 

$

893,935

Less amount representing interest

 

 

(2,699,329)

 

 

 

Capital lease obligation

 

 

952,637

 

 

 

Less current portion

 

 

(2,164)

 

 

 

Long-term capital lease obligation

 

$

950,473

 

 

 

 

Capital Lease Obligations

 

The capital lease obligations represent the present value of future minimum lease payments under such capital lease and cease to use arrangements bear a weighted average imputed interest rate of 10.0% at September 30, 2018, and mature at dates ranging from 2026 to 2048.

 

Deferred Lease Balances

 

At September 30, 2018 and December 31, 2017, the Company had $25.1 million and $34.9 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $8.8 million and $15.5 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheets.  Favorable and unfavorable lease assets and liabilities arise through the acquisition of operating leases in place that requires those contracts be recorded at their then fair value.  The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets.  A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with its cost above market rates.  These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis.  At September 30, 2018 and December 31, 2017, the Company had $21.6 million and $28.7 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheets.

 

29


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Lease Covenants

Certain lease agreements contain a number of restrictive covenants that, among other things, and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries.  These leases also require the Company to meet defined financial covenants, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage.  These leases include cross-default provisions with each other and the Credit Facilities.     

The Company has master lease agreements with Welltower, Sabra and Omega (collectively, the Master Lease Agreements).  The Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At September 30, 2018, the Company is in compliance with the financial covenants contained in the Master Lease Agreements. 

The Company has a master lease agreement with Second Spring involving 51 of its facilities.  The Company did not meet a financial covenant contained in this master lease agreement at September 30, 2018.  The Company received a waiver for this covenant breach.

The Company has a master lease agreement with CBYW involving 28 of its facilities.  The Company did not meet certain financial covenants contained in this master lease agreement at September 30, 2018.  The Company received a waiver for these covenant breaches. 

At September 30, 2018, the Company did not meet certain financial covenants contained in seven leases related to 45 of its facilities.  The Company is and expects to continue to be current in the timely payment of its obligations under such leases.  These leases do not have cross default provisions, nor do they trigger cross default provisions in any of the Company’s other loan or lease agreements.  The Company will continue to work with the related credit parties to amend such leases and the related financial covenants.  The Company does not believe the breach of such financial covenants at September 30, 2018 will have a material adverse impact on it.  The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.

The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue and control costs.  Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly lease covenant compliance requirements. Should the Company fail to comply with its lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing lease agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.

   

(10)Financing Obligations

 

Financing obligations represent the present value of future minimum lease payments under such lease arrangements and bear a weighted average imputed interest rate of approximately 9.2% at September 30, 2018, and mature at dates ranging from 2021 to 2048.

 

The Welltower Master Lease Amendment includes a non-cash financing obligation discount balance of $49.0 million at September 30, 2018.  As the terms under the Welltower Master Lease Amendment were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Term Loan Amendment and Real Estate Loan Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually.  The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018.  Since the combined effective interest rate of all the Restructuring Transactions

30


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

involving Welltower of approximately 7.5% is higher than the Welltower Master Lease Amendment weighted interest rate of approximately 7.0%, the Company recorded a financing obligation discount, which was offset by a corresponding premium on each of the Welltower Real Estate Loans and Term Loan Amendment, and will amortize over the life of the Welltower Master Lease Amendment.  See Note 8 – “Long-Term Debt – Term Loan Agreements” and “Long-Term Debt  – Real Estate Loans.”

 

Future minimum payments for the next five years and thereafter under leases classified as financing obligations at September 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

Twelve months ended September 30, 

    

 

 

2019

 

$

236,208

2020

 

 

240,868

2021

 

 

245,657

2022

 

 

241,820

2023

 

 

246,329

Thereafter

 

 

6,723,039

Total future minimum lease payments

 

 

7,933,921

Less amount representing interest

 

 

(5,204,724)

Financing obligations

 

$

2,729,197

Less current portion

 

 

(1,947)

Long-term financing obligations

 

$

2,727,250

 

 

 

 

 

(11)Income Taxes

 

The Company effectively owns 63.1% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes.  This is the Company’s only source of taxable income.  FC-GEN is subject to income taxes in several U.S. state and local jurisdictions.  The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 63.1% ownership of FC-GEN.

 

For the three months ended September 30, 2018, the Company recorded income tax benefit of $1.2 million from continuing operations, representing an effective tax rate of 1.3%, compared to income tax expense of $1.6 million from continuing operations, representing an effective tax rate of (0.3)%, for the same period in 2017.

 

For the nine months ended September 30, 2018, the Company recorded income tax benefit of $1.8 million from continuing operations, representing an effective tax rate of 0.7%, compared to income tax expense of $5.7 million from continuing operations, representing an effective tax rate of (0.7)%, for the same period in 2017.

 

The change in the effective tax rate for the three and nine months ended September 30, 2018, is attributable to a reduced projected change in the Company’s hanging credit deferred tax liability compared to the prior period that is the result of the goodwill impairment recorded against the inpatient services business in the third quarter of 2017.

 

The Company continues to assess the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard.  Management had previously determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2018, management has determined that the valuation allowance is still necessary.

 

The Company’s Bermuda captive insurance company is expected to produce a minimal U.S. federal taxable loss in 2018.  The captive is expected to generate positive pre-tax income in future periods to off-set its deferred tax assets.  The 2018 U.S. federal taxable loss cannot be carried back but can be carried forward indefinitely.

 

The Company provides rehabilitation therapy services within the People’s Republic of China and Hong Kong.  At September 30, 2018, these business operations do not comprise a significant portion of the Company’s overall operating results.  Management does not anticipate these operations will generate taxable income in the near term.  The operations currently do not have a material effect on the Company’s effective tax rate.

31


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) on December 23, 2017.  SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Tax Reform Act enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740.  The Company's federal net operating losses that have been incurred prior to January 1, 2018, will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. For net operating losses created after December 31, 2017, the net operating losses will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. The Company has estimated the impact of the Tax Reform Act on state income taxes reflected in its income tax expense for the three and nine months ended September 30, 2018.  Reasonable estimates for the Company’s state and local provision were made based on the Company's analysis of tax reform. These provisional amounts will be adjusted in the year end 2018 financial reporting as additional information is obtained. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service (IRS) will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state and local income tax returns, state and local net operating losses and corresponding valuation allowances.

 

Exchange Rights and Tax Receivable Agreement

 

The owners of FC-GEN have the right to exchange their membership units in FC-GEN,  along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option.  As a result of such exchanges, the Company’s membership interest in FC-GEN would increase and its purchase price would be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets.  Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future.  Any such increase would also decrease gain (or increase loss) on future dispositions of the affected assets.  There were exchanges of 1,860,592 FC-GEN units and Class C shares in the nine months ended September 30, 2018 equating to 1,860,912 Class A shares.  The exchanges during the nine months ended September 30, 2018 resulted in a $9.5 million internal revenue code (IRC) Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.  There were exchanges of 2,248,869 FC-GEN units and Class C shares in the nine months ended September 30, 2017 equating to 2,249,256 Class A shares.  The exchanges during the nine months ended September 30, 2017  resulted in a $14.5 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.

 

The Company has a tax receivable agreement (TRA) with the owners of FC-GEN.  The agreement provides for the payment by the Company to the owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA.  Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.

 

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:

 

·

the timing of exchanges—for instance, the increase in any tax deductions will vary depending on the fair value of the depreciable or amortizable assets of FC-GEN and its subsidiaries at the time of each exchange, which fair value may fluctuate over time;

 

·

the price of shares of Company Class A common stock at the time of the exchange—the increase in any tax deductions, and the tax basis increase in other assets of FC-GEN and its subsidiaries is directly proportional to the price of shares of Company Class A common stock at the time of the exchange;

 

32


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

·

the amount and timing of the Company’s income—the Company is required to pay 90% of the deemed benefits as and when deemed realized. If FC-GEN does not have taxable income, the Company is generally not required (absent a change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit will have been actually realized.  However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in payments under the TRA; and

 

·

future tax rates of jurisdictions in which the Company has tax liability.

 

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA.  In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

 

Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises.  Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine.  Although FC-GEN does not expect the IRS to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future payments.  As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.

 

The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.

 

In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.

 

(12)Commitments and Contingencies

 

Loss Reserves For Certain Self-Insured Programs

 

General and Professional Liability and Workers’ Compensation

 

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of 12 months and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

 

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured general and professional liability and workers’ compensation obligations recorded as liabilities in the Company’s

33


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

 

The Company utilizes third-party administrators (TPAs) to process claims and to provide it with the data utilized in its assessments of reserve adequacy. The TPAs are under the oversight of the Company’s in-house risk management and legal functions. These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

 

The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates. The discount rate for the current policy year is 2.66%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $7.8 million and $6.7 million as of September 30, 2018 and December 31, 2017, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

 

For the three months ended September 30, 2018 and 2017, the provision for general and professional liability risk totaled $25.0 million and $33.8 million, respectively.  For the nine months ended September 30, 2018 and 2017, the provision for general and professional liability risk totaled $79.2 million and $102.2 million, respectively.  The reserves for general and professional liability were $436.2 million and $442.9 million as of September 30, 2018 and December 31, 2017, respectively.

 

For the three months ended September 30, 2018 and 2017, the provision for workers’ compensation risk totaled $15.0 million and $13.9 million, respectively.  For the nine months ended September 30, 2018 and 2017, the provision for workers’ compensation risk totaled $41.4 million and $42.7 million, respectively.  The reserves for workers’ compensation risks were $173.9 million and $174.6 million as of September 30, 2018 and December 31, 2017, respectively.

 

Health Insurance

 

The Company offers employees an option to participate in self-insured health plans.  Health insurance claims are paid as they are submitted to the plans’ administrators.  The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid.  This accrual for incurred but not yet reported claims was $16.9 million and $17.5 million as of September 30, 2018 and December 31, 2017, respectively.  The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets.  Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

 

Legal Proceedings

 

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment of materiality may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

 

34


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

 

(13)Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and equivalents,  investments in marketable securities, accounts receivable, accounts payable and current and long-term debt.

 

The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance.  The Company is not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

 

Recurring Fair Value Measures 

 

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date).  The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below.  An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

 

 

 

 

 

Level 1 —

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 —

 

Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.

 

Level 3 —

 

Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

 

35


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

    

 

 

    

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

September 30, 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2018

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

23,170

 

$

23,170

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

104,930

 

 

104,930

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

137,824

 

 

137,824

 

 

 —

 

 

 —

 

Total

 

$

265,924

 

$

265,924

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

    

 

 

    

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

December 31,

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2017

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

54,525

 

$

54,525

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

4,113

 

 

4,113

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

126,116

 

 

126,116

 

 

 —

 

 

 —

 

Total

 

$

184,754

 

$

184,754

 

$

 —

 

$

 —

 

 

The Company places its cash and cash equivalents, restricted cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument.  The Company has not experienced any significant losses on such investments.

 

Debt Instruments 

 

The table below shows the carrying amounts and estimated fair values of the Company’s primary long-term debt instruments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Asset based lending facilities

 

$

403,110

 

$

403,110

 

$

 —

 

$

 —

 

Revolving credit facilities

 

 

 —

 

 

 —

 

 

303,091

 

 

303,091

 

Term loan agreements

 

 

183,043

 

 

183,043

 

 

120,706

 

 

120,706

 

Real estate loans

 

 

313,730

 

 

313,730

 

 

281,039

 

 

281,039

 

HUD insured loans

 

 

182,656

 

 

181,837

 

 

263,827

 

 

250,768

 

Notes payable

 

 

80,794

 

 

80,794

 

 

68,122

 

 

68,122

 

Mortgages and other secured debt (recourse)

 

 

13,857

 

 

13,857

 

 

12,536

 

 

12,536

 

Mortgages and other secured debt (non-recourse)

 

 

26,835

 

 

26,835

 

 

27,978

 

 

27,978

 

 

 

$

1,204,025

 

$

1,203,206

 

$

1,077,299

 

$

1,064,240

 

 

The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented.  The Company believes this approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements. 

 

Non-Recurring Fair Value Measures 

 

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test.

36


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

The following tables presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

    

    

 

    

Impairment Charges -

 

 

Carrying Value

 

Nine months ended

 

    

September 30, 2018

    

September 30, 2018

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

2,919,584

 

$

88,008

Goodwill

 

 

85,642

 

 

 —

Intangible assets, net

 

 

125,386

 

 

2,061

 

 

 

 

 

 

 

 

    

 

    

    

Impairment Charges -

 

 

Carrying Value

 

Nine months ended

 

 

December 31, 2017

 

September 30, 2017

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

3,413,599

 

$

163,364

Goodwill

 

 

85,642

 

 

351,470

Intangible assets, net

 

 

142,976

 

 

8,576

 

The fair value of tangible and intangible assets is determined using a discounted cash flow approach, which is a significant unobservable input (Level 3).  The Company estimates the fair value using the income approach (which is a discounted cash flow technique).  These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates.  The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

 

Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and working capital management.  The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially affect the present value of future cash flows. 

 

The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows.

 

The Company believes the estimates and assumptions used in the valuation methods are reasonable.

 

 

 

 

 

(14)Asset Impairment Charges

 

Long-Lived Assets with a Definite Useful Life

 

In each quarter, the Company’s long-lived assets with a definite useful life are tested for impairment at the lowest levels for which there are identifiable cash flows.  The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets.  The cash flow period was based on the remaining useful lives of the primary asset in each long-lived asset group, principally a building in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment.  During the three months ended September 30, 2018 and 2017, the Company recognized impairment charges in the inpatient segment totaling $32.4 million and $163.4 million, respectively.   During the nine months ended September 30, 2018 and 2017, the Company recognized impairment charges in the inpatient segment totaling $88.0 million and $163.4 million, respectively. 

 

37


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Identifiable Intangible Assets with a Definite Useful Life

 

Management Contracts

 

The management contract asset was derived through the organization of facilities under an upper payment limit supplemental payment program in Texas that provided supplemental Medicaid payments with federal matching funds for skilled nursing facilities that were affiliated with county-owned hospital districts. Under this program, the Company acted as the manager of the facilities and shared in the supplemental payments with the county hospitals. With the expiration of the program, the remaining unamortized asset associated with the management contract was written off.  For the three and nine months ended September 30, 2017, the Company recognized $7.3 million in impairment charges on identifiable intangible assets associated with management contracts.  This charge is presented in goodwill and identifiable intangible impairments on the consolidated statements of operations.

 

Favorable Leases

 

Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement.  Favorable lease contracts are amortized on a straight-line basis over the lease terms. These favorable lease contracts are measured for impairment using estimated future net undiscounted cash flows expected to be generated from the use of the leased assets compared to the carrying amount of the favorable lease.  The cash flow period was based on the remaining useful lives of the asset, which for favorable lease assets is the lease term.  During the three and nine months ended September 30, 2018, the Company recognized impairment charges on its favorable lease intangible assets with a definite useful life of $0.9 million and $2.1 million, respectively.  There were no impairment charges recognized in the three and nine months ended September 30, 2017.  This charge is presented in goodwill and identifiable intangible asset impairments on the consolidated statements of operations.

 

 

(15)Assets Held for Sale

 

In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets.  These assets are evaluated to determine whether they qualify as assets held for sale or discontinued operations.  The assets and liabilities of a disposal group classified as held for sale shall be presented separately in the asset and liability sections, respectively, of the statement of financial position in the period in which they are identified only.  Assets held for sale that qualify as discontinued operations are removed from the results of continuing operations.  The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the consolidated statements of operations.

 

In the first quarter of 2018, the Company identified a disposal group of 23 skilled nursing facilities operated by the Company in the state of Texas that qualified as assets held for sale.  The Company entered into a purchase and sale agreement to sell the facilities for $120.0 million.  A $20.0 million asset impairment charge was recognized in the nine months ended September 30, 2018 in the statements of operations to reflect a decrease in the sale price of the disposal group.  See Note 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.” The transaction will mark an exit from the inpatient business in Texas.  Thirteen of the facilities are subject to Welltower Real Estate Loans, nine of the facilities are subject to HUD-insured loans and one facility is leased and accounted for as a financing obligation.  The disposal group does not meet the criteria as a discontinued operation.  The sales were completed in the fourth quarter of 2018.  See Note 17 – “Subsequent Events – Texas Divestitures.” 

 

 

 

38


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The following table sets forth the major classes of assets and liabilities included as part of the disposal group (in thousands):

 

 

 

 

 

 

    

September 30, 2018

Current assets:

    

 

 

Prepaid expenses

 

$

9,533

Long-term assets:

 

 

 

Property and equipment, net of accumulated depreciation of $26,145

 

 

99,718

Total assets

 

$

109,251

Current liabilities:

 

 

 

Current installments of long-term debt

 

$

2,123

Long-term liabilities:

 

 

 

Long-term debt

 

 

86,137

Financing obligations

 

 

19,670

Total liabilities

 

$

107,930

 

 

(16)Related Party Transactions

 

The Company provides rehabilitation services to certain facilities owned and operated by a customer in which certain members of the Company’s board of directors beneficially own an ownership interest.  These services resulted in net revenues of $30.6 million and $96.2 million in the three and nine months ended September 30, 2018, respectively, as compared to net revenues of $35.1 million and $109.1 million in the three and nine months ended September 30, 2017, respectively.  The services resulted in net accounts receivable balances of $30.1 million and $32.0 million at September 30, 2018 and December 31, 2017, respectively.  In the three months ended September 30, 2018, $58.9 million in gross accounts receivable was converted to a note receivable.  A $55.0 million reserve recorded in 2017 was posted against the notes receivable.  The Company deemed this reserve prudent given the delays in collection on account of this related party customer.  The reserve represents the judgment of management, and does not indicate a forgiveness of any amount of the outstanding accounts receivable owed by this related party customer.  The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available.

 

Effective May 1, 2016, the Company completed the sale of its hospice and home health operations to FC Compassus LLC for $72.0 million in cash and a $12.0 million interest-bearing note.  Certain members of the Company’s board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. The combined note and accrued interest balance of $18.1 million remains outstanding at September 30, 2018.  On May 1, 2016, the Company entered into preferred provider and affiliation agreements with FC Compassus LLC.  Fees for these services amounted to $3.4 million and $10.0 million in the three and nine months ended September 30, 2018, respectively, compared to $3.2 million and $8.9 million in the three and nine months ended September 30, 2017, respectively.

 

Certain subsidiaries of the Company have entered into a lease and a purchase option of twelve centers in New Hampshire and Florida from twelve separate limited liability companies affiliated with Next Healthcare (the Next Landlord Entities). The lease is effective June 1, 2018 and the annualized rent paid will initially be $13.0 million. The purchase option will become exercisable in the fifth lease year. Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling less than 2.5% in the aggregate.  See Note 3 – “Significant Transactions and Events – Lease Transactions and Divestitures.

 

39


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(17)   Subsequent Events

 

Texas Divestitures

 

The Company divested 16 and seven Texas skilled nursing facilities on October 1, 2018 and November 1, 2018, respectively.  The 23 skilled nursing facilities are presented as assets held for sale at September 30, 2018.  See Note 15 – “Assets Held for Sale.”  The skilled nursing facilities generated annual revenues of $184.5 million and pre-tax net loss of $3.5 million.

 

Other Divestitures

 

On November 1, 2018, the Company divested two leased skilled nursing facilities located in Idaho, two leased skilled nursing facilities located in Montana and one owned assisted living facility located in New Mexico.  The facilities generated annual revenues of $30.1 million and pre-tax net income of $2.9 million.

 

New Mexico and Arizona Acquisitions

 

On November 1, 2018, the Company acquired the operations of eight skilled nursing facilities and one assisted living facility in New Mexico and Arizona.  The nine new facilities have approximately 1,000 beds and generate approximate annual net revenue of $60 million.  The facilities are leased from Omega. The Company expects no material impact to pre-tax net income in the next 12 months.

 

 

 

40


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented and should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q. As used in this MD&A, the words “we,” “our,” “us” and the “Company,” and similar terms, refer collectively to Genesis Healthcare, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. This MD&A should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in the our Annual Report (defined below).

   

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than  statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans” or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 16, 2018 (the Annual Report), as well as others that are discussed in this Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

 

Business Overview

 

Genesis is a healthcare services company that through its subsidiaries owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business.  We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services.  At September 30, 2018, we provided inpatient services through 445 skilled nursing, senior/assisted living and behavioral health centers located in 30 states.  Revenues of our owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of our revenues.

 

We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of our revenues.

 

We provide an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of our revenues.

 

41


 

Recent Transactions and Events

 

Restructuring Transactions

 

Overview

 

During the nine months ended September 30, 2018, we entered into a number of agreements, amendments and new financing facilities, further described below (the Restructuring Transactions), in an effort to strengthen significantly our capital structure.  In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.

 

In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement.  Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases.  Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate.  We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants. 

 

The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.

 

Asset Based Lending Facilities

 

On March 6, 2018, we entered into a new asset based lending facility agreement with MidCap.  The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities).  

 

The ABL Credit Facilities have a five-year term and proceeds were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020.  The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced.  The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed.  In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of $90.1 million in current installments of long-term debt at September 30, 2018.  Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023. 

 

Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%.  Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.

 

The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings.

 

Term Loan Amendment

 

On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower Inc. (Welltower) and Omega Healthcare Investors, Inc. (Omega) (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan). 

 

42


 

The 2018 Term Loan will mature July 29, 2020 and bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind.  The Term Loan Amendment also changes the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind. 

 

Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.

 

Welltower Master Lease Amendment

 

On February 21, 2018, we entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment).  The Welltower Master Lease Amendment reduces our annual base rent payment by $35.0 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019.  In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048.  The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023.  If triggered, the incremental rent from the rent reset is capped at $35.0 million.

 

Omnibus Agreement

 

On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan to, among other things, accommodate a refinancing of our existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our other material debt and lease obligations.  See Term Loan Amendment above.

 

The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower will be written off and (b) we may request conversion of not more than $50.0 million of the outstanding balance of our Welltower real estate loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.

 

In connection with the Omnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of our Class A Common Stock at an exercise price equal to $1.33 per share.  Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions.  The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.

   

Welltower Real Estate Loans Amendment

 

On February 21, 2018, we entered into an amendment (the Real Estate Loan Amendments) to the Welltower real estate loan (Welltower Real Estate Loans) agreements.  The Real Estate Loan Amendments adjust the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind.  Previously, these loans carried a 10.25% paid in cash interest rate.

 

In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans.  In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount.  As of September 30, 2018, we secured repayments or commitments totaling approximately $82 million.

43


 

 

MidCap Real Estate Loans

 

On March 30, 2018, we entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of September 30, 2018.  The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023.  The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated.  The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%.  Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity.  Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.    

 

Lease Transactions and Divestitures

 

Sabra Divestitures

 

On April 1, 2018, we divested five skilled nursing facilities.  All five of the skilled nursing facilities, three located in Massachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra).  The five skilled nursing facilities generated annual revenues of $28.5 million and pre-tax net loss of $2.9 million.  On May 4, 2018, Sabra completed the sale and lease termination of one skilled nursing facility in California that had been closed in 2017.  We recognized a net gain on the write off of certain lease liabilities, offset by exit costs, of $0.7 million on the six skilled nursing facilities.

 

On June 1, 2018, Sabra completed the sale and lease termination of 12 skilled nursing facilities located in Florida and New Hampshire.  As a result of the sale, we will receive an annual rent credit of $12.0 million for the remainder of the lease term.  We continue to operate these facilities under a new lease with a new landlord, Next Healthcare. See Note 16 – “Related Party Transactions.”  As a result of the sale, we recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $7.0 million.

 

On June 29, 2018, Sabra completed the sale and lease termination of eight skilled nursing facilities and one assisted/senior living facility located in seven different states.  As a result of the sale, we will receive an annual rent credit of $7.4 million for the remainder of the lease term.  We continue to operate these facilities under a lease agreement with a new landlord.  The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million  As a result of the sale, we recognized accelerated depreciation expense of $3.6 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $2.9 million.

 

On September 7, 2018, Sabra completed the sale and lease termination of one skilled nursing facility located in Ohio. The skilled nursing facility generated annual revenues of $3.2 million and pre-tax net loss of $0.8 million.   As a result of the sale, we will receive an annual rent credit of $0.6 million.  The costs associated with this sale and lease termination were de minimis.

 

Second Spring Divestitures

 

On June 1, 2018 and on June 13, 2018, Second Spring Healthcare Investments (Second Spring) completed the sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey.  The combined 12 skilled nursing facilities generated annual revenues of $146.2 million and pre-tax net loss of $19.3 million.  As a result of the sale and lease termination, the Company recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million.  The resulting gain of $21.2 million was offset by $6.3 million of exit costs.  In addition, we recognized accelerated depreciation expense of $5.3 million on the property and equipment sold.

 

On August 1, 2018, Second Spring completed the sale and lease termination of one skilled nursing facility located in Pennsylvania.  The skilled nursing facility generated annual revenues of $15.7 million and pre-tax net loss of $1.9 million.  As a result of the sale and lease termination, we recognized a financing obligation net asset and a financing obligation write-down of

44


 

$12.8 million.  In addition, we recognized exit costs of $0.8 million and accelerated depreciation expense of $0.8 million on the property and equipment sold.

 

Welltower Divestitures

 

On August 1, 2018, Welltower completed the sale and lease termination of three skilled nursing facilities located in Maryland and Indiana.  The three skilled nursing facilities generated annual revenues of $40.1 million and pre-tax net loss of $4.5 million.  As a result of the sale and lease termination, we recognized a capital lease and financing obligation net asset write-down of $31.7 million and a capital lease obligation and financing obligation write-down of $64.2 million.  The resulting gain of $31.7 million was offset by $2.0 million of exit costs.  In addition, we recognized accelerated depreciation expense of $6.5 million on the property and equipment sold.

 

Texas Divestitures

 

On August 1, 2018, we terminated a lease and exited the operations of one skilled nursing facility in Texas.  The skilled nursing facility generated annual revenues of $8.2 million and pre-tax net loss of $2.0 million.  We incurred lease termination costs of $3.5 million and exit costs of $0.3 million in the divestiture of this skilled nursing facility.

 

On October 1, 2018, we sold 16 skilled nursing facilities in Texas that are classified as assets held for sale on September 30, 2018.  In advance of the sale, we recorded exit costs of $4.8 million associated with the divestiture of these skilled nursing facilities.

 

Other Lease Amendments and Divestitures

 

For the nine months ended September 30, 2018, we divested or amended the lease agreements to six other skilled nursing facilities. The lease agreement to one behavioral outpatient clinic expired on June 30, 2018.  As a result of these lease amendments and divestitures, we recognized a loss for exit costs and the write off of certain lease assets of $3.5 million.

 

In total for the nine months ended September 30, 2018, we recorded a net gain on lease transactions and divestitures of $42.4 million which is included in other (income) loss on the consolidated statements of operations.

 

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

 

Centers for Medicare and Medicaid Services (CMS) Final Rules

 

On July 31, 2018, CMS released final payment and quality measure rules for skilled nursing facilities prospective payment services (SNF PPS) Medicare Part A fee for services. The final rules address three specific issue areas, discussed below, related to the fiscal year 2019 requirements. Additionally, the rule introduced changes in the payment and case-mix methodology for Part A skilled nursing services, which will be implemented at the beginning of fiscal year 2020 (October 1, 2019).

 

Skilled Nursing Facility Medicare Part A Payment Rates

 

The final rules established a market basket increase of 2.4% as mandated under the Bipartisan Budget Act of 2018 effective October 1, 2018. Reimbursement for fiscal year 2019 will be based on the current payment methodology using the Resource Utilization Group, Version IV (RUG-IV) model with no significant changes in the patient classification system.

 

Skilled Nursing Facility Quality Measures Reporting Program (SNF QRP):

 

Current performance measures mandated for the SNF QRP for fiscal year 2019 were established in the final SNF PPS rules adopted on August 4, 2017 (FY 2018 SNF PPS Rules). The final rules summarize these requirements, finalize adoption of a new measure removal factor for previously adopted SNF QRP measures, review the quality measures currently adopted for the fiscal year 2020 SNF QRP and finalize the intention to specify new measures to be adopted no later than October 1, 2019 for the fiscal year 2020 SNF QRP.  The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing facilities affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals. Under the SNF QRP, a skilled nursing facility’s annual

45


 

market basket percentage is reduced by two percentage points if the skilled nursing facility does not submit quality measure data in accordance with thresholds set by the Improving Medicare Post-Acute Care Transformation Act of 2014. Final fiscal year 2019 SNF PPS rules (FY 2019 SNF PPS Rules) specified that skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance.  

 

Skilled Nursing Facility Value-Based Purchasing Program (SNF-VBP Program)

 

The Protecting Access to Medicare Act of 2014, enacted on April 1, 2014, authorized a SNF-VBP Program that requires CMS to adopt a SNF-VBP Program payment adjustment for skilled nursing facilities effective October 1, 2018.  The FY 2018 SNF PPS Rules provide detailed instructions for the SNF-VBP Program.  The FY 2018 SNF PPS Rules adopted the Skilled Nursing Facility Readmission Measure as the skilled nursing facility 30-day all-cause readmission measure for the SNF-VBP Program.  The FY 2019 SNF PPS Rules reiterate these instructions and affirm that effective October 1, 2018, skilled nursing facilities now experience a 2.0% withhold to fund the incentive payment pool. Simultaneously, based upon performance, skilled nursing facilities have an opportunity to have their reimbursement rates adjusted for incentive payments based on their performance under the SNF-VBP Program.  Of the 2.0% withhold under the SNF-VBP Program, we expect to retain 1.3% based on performance. 

 

All skilled nursing facilities receive two scores, one for achievement and the other for improvement of their hospital readmission measure over the designated reporting period. All skilled nursing facilities are ranked from high to low based on the higher of the two scores. The highest ranked facilities will receive the highest payments, and the lowest ranked facilities will receive payments that are less than what they otherwise would have received without the SNF-VBP Program.

 

The FY 2019 SNF PPS Rules also account for social risk factors in the SNF-VBP Program and finalizes the numerical values for the skilled nursing facility 30-day all-cause readmission measure for the fiscal year 2021 SNF-VBP Program, based on the fiscal year 2017 baseline period, finalizes scoring policy for skilled nursing facilities without sufficient baseline period data, finalizes SNF-VBP Program scoring adjustment for low-volume skilled nursing facilities and establishes an extraordinary circumstances exception policy for the SNF-VBP Program.

 

New Patient-Driven Payment Model (PDPM)

 

This final rule replaces the existing case-mix classification methodology, RUG-IV model, with a revised case-mix methodology called the Patient-Driven Payment Model (PDPM) beginning on October 1, 2019. CMS finalized the PDPM to replace the current Medicare Part A fee for service skilled nursing facility payment model, RUG IV. PDPM is a per diem payment, comprised of the sum of six payment components. Payments taper for physical therapy and occupational therapy beginning on day 21 and then every seven days of the Medicare stay. Payments taper for non-therapy ancillary services beginning on day four of the Medicare stay. There are two required minimum data set (MDS) assessments, the admission assessment and discharge assessment. There is one optional MDS assessment, the interim payment assessment. Under PDPM, physical therapists, occupational therapists and speech-language pathologists can deliver up to 25 percent of a patient’s treatment time using concurrent or group therapy modalities combined.

 

PDPM is expected to better account for patient characteristics by relating payment to patients' conditions and clinical needs rather than on volume-based services. The PDPM is required to be budget neutral relative to the current RUG-IV model such that aggregate Medicare outlays to skilled nursing facilities are not intended to change. The new model is designed to more accurately reflect resource utilization without incentivizing inappropriate care delivery.

 

Decisions Regarding Skilled Nursing Facility Payment

 

In addition to setting the payment rules for skilled nursing facility services using the SNF-VBP Program, CMS annually adjusts its payment rules for other acute and post-acute service providers including hospitals and home health agencies using a similar SNF-VBP Program. It is important to understand the Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services.  Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial

46


 

reductions in our revenue and operating margins.

 

Requirements of Participation

 

On October 4, 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.

 

Changes finalized in this rule include:

·

Strengthening the rights of long-term care facility residents.

·

Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse.

·

Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents.

·

Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences.

·

Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services.

·

Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use.

 

The regulations became effective on November 28, 2016. CMS is implementing the regulations using a phased approach. The phases are as follows:

 

·

Phase 1: The regulations included in Phase 1 were implemented by November 28, 2016.

·

Phase 2: The regulations included in Phase 2 were implemented by November 28, 2017.

·

Phase 3: The regulations included in Phase 3 must be implemented by November 28, 2019.

 

Some regulatory sections are divided among more than one phase, and some of the more extensive new requirements have been placed in later phases to allow facilities time to successfully prepare to achieve compliance.

 

The total costs associated with implementing the new regulations have been absorbed into our general operating costs.  Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations.  We have substantially complied with the regulations imposed through the Phase 1 and Phase 2 implementation.

 

Key Performance and Valuation Measures

 

In order to assess our financial performance between periods, we evaluate certain key performance and valuation measures for each of our operating segments separately for the periods presented.  Results and statistics may not be comparable period-over-period due to the impact of acquisitions and dispositions, or the impact of new and lost therapy contracts. 

 

The following is a glossary of terms for some of our key performance and valuation measures and non-GAAP measures:

 

“Actual Patient Days” is defined as the number of residents occupying a bed (or units in the case of an assisted/senior living center) for one qualifying day in that period.

 

“Adjusted EBITDA” is defined as EBITDA adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental performance measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

47


 

 

“Adjusted EBITDAR” is defined as EBITDAR adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental valuation measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

 

“Available Patient Days” is defined as the number of available beds (or units in the case of an assisted/senior living center) multiplied by the number of days in that period.

 

“Average Daily Census” or “ADC” is the number of residents occupying a bed (or units in the case of an assisted/senior living center) over a period of time, divided by the number of calendar days in that period.

 

 “EBITDA” is defined as EBITDAR less lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

 

“EBITDAR” is defined as net income or loss attributable to Genesis Healthcare, Inc. before net income or loss of non-controlling interests, net income or loss from discontinued operations, depreciation and amortization expense, interest expense and lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

 

“Insurance” refers collectively to commercial insurance and managed care payor sources, including Medicare Advantage beneficiaries, but does not include managed care payors serving Medicaid residents, which are included in the Medicaid category.

 

“Occupancy Percentage” is measured as the percentage of Actual Patient Days relative to the Available Patient Days.

 

“Skilled Mix” refers collectively to Medicare and Insurance payor sources.

 

“Therapist Efficiency” is computed by dividing billable labor minutes related to patient care by total labor minutes for the period.

 

Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

    

2018

    

2017

Financial Results (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,217,271

 

$

1,315,452

 

 

$

3,790,703

 

$

4,045,860

EBITDA

 

 

75,612

 

 

(429,605)

 

 

 

251,533

 

 

(240,975)

Adjusted EBITDAR

 

 

145,886

 

 

147,788

 

 

 

459,829

 

 

488,829

Adjusted EBITDA

 

 

113,520

 

 

109,118

 

 

 

362,281

 

 

375,825

Net loss attributable to Genesis Healthcare, Inc.

 

 

(58,128)

 

 

(373,824)

 

 

 

(166,278)

 

 

(489,741)

 

48


 

INPATIENT SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

    

2018

    

2017

    

Occupancy Statistics - Inpatient

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available licensed beds in service at end of period

 

 

51,634

 

 

55,005

 

 

 

51,634

 

 

55,005

 

Available operating beds in service at end of period

 

 

49,553

 

 

52,907

 

 

 

49,553

 

 

52,907

 

Available patient days based on licensed beds

 

 

4,750,328

 

 

5,058,848

 

 

 

14,096,082

 

 

15,018,709

 

Available patient days based on operating beds

 

 

4,555,745

 

 

4,872,838

 

 

 

13,522,878

 

 

14,479,602

 

Actual patient days

 

 

3,838,454

 

 

4,123,001

 

 

 

11,424,759

 

 

12,323,181

 

Occupancy percentage - licensed beds

 

 

80.8

%

 

81.5

%

 

 

81.0

%  

 

82.1

%  

Occupancy percentage - operating beds

 

 

84.3

%

 

84.6

%

 

 

84.5

%  

 

85.1

%  

Skilled mix

 

 

17.9

%

 

18.7

%

 

 

19.1

%  

 

19.7

%  

Average daily census

 

 

41,722

 

 

44,815

 

 

 

41,849

 

 

45,140

 

Revenue per patient day (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare Part A

 

$

522

 

$

524

 

 

$

525

 

$

527

 

Insurance

 

 

456

 

 

457

 

 

 

458

 

 

456

 

Private and other

 

 

337

 

 

328

 

 

 

336

 

 

325

 

Medicaid

 

 

223

 

 

219

 

 

 

223

 

 

218

 

Medicaid (net of provider taxes)

 

 

204

 

 

199

 

 

 

204

 

 

199

 

Weighted average (net of provider taxes)

 

$

270

 

$

269

 

 

$

274

 

$

272

 

Patient days by payor (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

378,968

 

 

439,240

 

 

 

1,203,234

 

 

1,398,286

 

Insurance

 

 

273,200

 

 

293,315

 

 

 

854,666

 

 

917,343

 

Total skilled mix days

 

 

652,168

 

 

732,555

 

 

 

2,057,900

 

 

2,315,629

 

Private and other

 

 

222,890

 

 

257,835

 

 

 

670,908

 

 

779,228

 

Medicaid

 

 

2,758,817

 

 

2,924,845

 

 

 

8,098,284

 

 

8,616,866

 

Total Days

 

 

3,633,875

 

 

3,915,235

 

 

 

10,827,092

 

 

11,711,723

 

Patient days as a percentage of total patient days (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

10.4

%

 

11.2

%

 

 

11.1

%  

 

11.9

%  

Insurance

 

 

7.5

%

 

7.5

%

 

 

8.0

%  

 

7.8

%  

Skilled mix

 

 

17.9

%

 

18.7

%

 

 

19.1

%  

 

19.7

%  

Private and other

 

 

6.1

%

 

6.6

%

 

 

6.2

%  

 

6.7

%  

Medicaid

 

 

76.0

%

 

74.7

%

 

 

74.7

%  

 

73.6

%  

Total

 

 

100.0

%

 

100.0

%

 

 

100.0

%  

 

100.0

%  

Facilities at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

337

 

 

362

 

 

 

337

 

 

362

 

Owned

 

 

44

 

 

44

 

 

 

44

 

 

44

 

Joint Venture

 

 

 5

 

 

 5

 

 

 

 5

 

 

 5

 

Managed *

 

 

33

 

 

35

 

 

 

33

 

 

35

 

Total skilled nursing facilities

 

 

419

 

 

446

 

 

 

419

 

 

446

 

Total licensed beds

 

 

51,543

 

 

54,935

 

 

 

51,543

 

 

54,935

 

Assisted/Senior living facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

19

 

 

19

 

 

 

19

 

 

19

 

Owned

 

 

 4

 

 

 4

 

 

 

 4

 

 

 4

 

Joint Venture

 

 

 1

 

 

 1

 

 

 

 1

 

 

 1

 

Managed

 

 

 2

 

 

 2

 

 

 

 2

 

 

 2

 

Total assisted/senior living facilities

 

 

26

 

 

26

 

 

 

26

 

 

26

 

Total licensed beds

 

 

2,209

 

 

2,208

 

 

 

2,209

 

 

2,208

 

Total facilities

 

 

445

 

 

472

 

 

 

445

 

 

472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Jointly Owned and Managed— (Unconsolidated)

 

 

15

 

 

15

 

 

 

15

 

 

15

 

 

49


 

REHABILITATION THERAPY SEGMENT**:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

    

2018

    

2017

    

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-operated

 

 

37

%  

 

37

%

 

 

37

%  

 

37

%  

Non-affiliated

 

 

63

%  

 

63

%

 

 

63

%  

 

63

%  

Sites of service (at end of period)

 

 

1,327

 

 

1,525

 

 

 

1,327

 

 

1,525

 

Revenue per site

 

$

152,273

 

$

152,956

 

 

$

476,010

 

$

460,360

 

Therapist efficiency %

 

 

68

%  

 

66

%

 

 

68

%  

 

68

%  


* Includes 20 facilities located in Texas for which the real estate is owned by Genesis

** Excludes respiratory therapy services.

 

Reasons for Non-GAAP Financial Disclosure

 

The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). A Non-GAAP Financial Measure is a numerical measure of a registrant’s historical or future financial performance, financial position and cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. We have provided reconciliations of the Non-GAAP Financial Measures to the most directly comparable GAAP financial measures.

 

We believe the presentation of Non-GAAP Financial Measures provides useful information to investors regarding our results of operations because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these Non-GAAP Financial Measures:

 

allow investors to evaluate our performance from management’s perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;

 

facilitate comparisons with prior periods and reflect the principal basis on which management monitors financial performance;

 

facilitate comparisons with the performance of others in the post-acute industry;

 

provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our company; and

 

allow investors to view our financial performance and condition in the same manner as our significant landlords and lenders require us to report financial information to them in connection with determining our compliance with financial covenants.

 

We use Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss) attributable to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the value of our business and the performance of our operating businesses, as well as the employees responsible for operating such businesses. Non-GAAP Financial Measures are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, we are better able to evaluate value and the operating performance of the

50


 

business unit and the employees responsible for business unit performance. Consequently, we use these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore the extent to which they may or may not be eligible for incentive compensation awards.

 

We also use Non-GAAP Financial Measures in our annual budget process. We believe these Non-GAAP Financial Measures facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. The presentation of these Non-GAAP Financial Measures is consistent with our past practice and we believe these measures further enable investors and analysts to compare current non-GAAP measures with non-GAAP measures presented in prior periods.

 

Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business.  These costs include our lease expense (only in the case of  Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses on early extinguishment of debt, transaction costs, long-lived asset impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributable to noncontrolling interests.  Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net loss attributable to Genesis Healthcare, Inc. as an important measure of our financial performance because it provides the most complete measure of our performance.

 

Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies.  Non-GAAP Financial Measures do not represent net income (loss), as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.

 

We use the following Non-GAAP Financial Measures that we believe are useful to investors as key valuation and operating performance measures:

 

EBITDA

 

We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (interest expense) and our asset base (depreciation and amortization expense) from our operating results.  In addition, financial covenants in our debt agreements use EBITDA as a measure of compliance.

 

Adjustments to EBITDA

 

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with GAAP net loss attributable to Genesis Healthcare, Inc., and EBITDA, is beneficial to an investor’s complete understanding of our operating performance. In addition, such adjustments are substantially similar to the adjustments to EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

 

We adjust EBITDA for the following items:

 

·

(Gain) loss on early extinguishment of debt. We recognize gains or losses on the early extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees.  We exclude the effect of losses or gains recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.

 

51


 

·

Other (income) loss.  We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets.  We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.

 

·

Transaction costs. In connection with our restructuring, acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs.  We exclude restructuring, acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses.

 

·

Customer receivership and other related charges. We excluded the non-cash costs of a $35.9 million charge recorded in the nine months ended September 30, 2017 related to customer receivership proceedings and the related respective write-down of unpaid accounts receivable.  We believe these charges were caused by the challenging operating environment, particularly for highly levered customers of our rehabilitation therapy business.  Accordingly, we believe these costs do not accurately reflect the underlying performance of our operating businesses.

 

·

Long-lived asset impairments.  We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing performance of our operating businesses.  Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is also excluded from EBITDA.

 

·

Goodwill and identifiable intangible asset impairments.  We exclude non-cash goodwill and identifiable intangible asset impairment charges because we believe including them does not reflect the ongoing operating performance of our operating businesses. 

 

·

Severance and restructuring.  We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment.  We believe these costs do not reflect the underlying performance of our operating businesses.  We do not exclude severance costs that are not associated with such restructuring activities.

 

·

(Income) losses of newly acquired, constructed or divested businesses.  The acquisition and construction of new businesses is an element of our growth strategy.  Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition.  Newly constructed or developed businesses also generate losses while in their start-up phase.  We view these losses as both temporary and an expected component of our long-term investment in the new venture.  We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business.  The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA.  The divestiture of underperforming or non-strategic facilities is also an element of our business strategy.  We eliminate the results of divested facilities beginning in the quarter in which they become divested.  We view the income or losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating business.

 

·

Stock-based compensation.  We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying performance of our operating businesses.

 

·

Other Items.  From time to time we incur costs or realize gains that we do not believe reflect the underlying performance of our operating businesses.  In the current reporting period, we incurred the following expenses that we believe are non-recurring in nature and do not reflect the ongoing operating performance of our operating businesses.

 

(1)

Regulatory defense and related costs – We exclude the costs of investigating and defending the inherited legal matters associated with prior transactions.  We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.

(2)

Other non-recurring costs - In the three and nine months ended September 30, 2018, we excluded $8.5 million of costs attributable to the write down of receivables in our non-core physician services business and

52


 

the impairment of unrealized incentives associated with a government program rewarding the meaningful use of technology in delivery of healthcare.  This incentive was estimated to be earned and recognized between 2015 and 2016 within our physician services line of business.  In the three and nine months ended September 30, 2017, we excluded $3.5 million of costs primarily incurred in connection with the removal of a non-cash actuarially developed discount related to the settlement of workers’ compensation claims for policy years 2012 and prior. We do not believe the excluded costs reflect the underlying performance of our operating businesses.

 

Adjusted EBITDAR

 

We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions or divestitures.  Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry.  In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of compliance.

 

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.  See the reconciliation of net loss attributable to Genesis Healthcare, Inc. included herein.

 

The following table provides a reconciliation of the non-GAAP performance measurement EBITDA and Adjusted EBITDA from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(58,128)

 

$

(373,824)

 

 

$

(166,278)

 

$

(489,741)

Adjustments to compute EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

 —

 

 

 2

 

 

 

 —

 

 

70

Net loss attributable to noncontrolling interests

 

 

(33,773)

 

 

(241,200)

 

 

 

(97,153)

 

 

(314,446)

Depreciation and amortization expense

 

 

53,038

 

 

59,390

 

 

 

168,036

 

 

183,986

Interest expense

 

 

115,695

 

 

124,431

 

 

 

348,687

 

 

373,473

Income tax (benefit) expense

 

 

(1,220)

 

 

1,596

 

 

 

(1,759)

 

 

5,683

EBITDA

 

$

75,612

 

$

(429,605)

 

 

 

251,533

 

 

(240,975)

Adjustments to compute Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 

9,785

 

 

2,301

Other (income) loss

 

 

(20,207)

 

 

2,379

 

 

 

(42,360)

 

 

15,602

Transaction costs

 

 

11,361

 

 

1,056

 

 

 

26,567

 

 

7,862

Customer receivership and other related charges

 

 

 —

 

 

297

 

 

 

 —

 

 

35,864

Long-lived asset impairments

 

 

32,390

 

 

163,364

 

 

 

88,008

 

 

163,364

Goodwill and identifiable intangible asset impairments

 

 

929

 

 

360,046

 

 

 

2,061

 

 

360,046

Severance and restructuring

 

 

1,023

 

 

256

 

 

 

7,357

 

 

4,950

Losses of newly acquired, constructed, or divested businesses

 

 

1,385

 

 

5,320

 

 

 

3,560

 

 

15,589

Stock-based compensation

 

 

2,176

 

 

2,440

 

 

 

6,732

 

 

7,206

Regulatory defense related costs (1)

 

 

463

 

 

41

 

 

 

603

 

 

492

Other non-recurring costs (2)

 

 

8,388

 

 

3,524

 

 

 

8,435

 

 

3,524

Adjusted EBITDA

 

$

113,520

 

$

109,118

 

 

$

362,281

 

$

375,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional lease payments not included in GAAP lease expense

 

$

73,614

 

$

85,396

 

 

$

226,110

 

$

258,724

Total cash lease payments made pursuant to operating leases, capital leases and financing obligations

 

 

105,980

 

 

124,066

 

 

 

323,658

 

 

371,728

 

53


 

The following table provides a reconciliation of the non-GAAP valuation measurement Adjusted EBITDAR from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(58,128)

 

$

(373,824)

 

 

$

(166,278)

 

$

(489,741)

Adjustments to compute Adjusted EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

 —

 

 

 2

 

 

 

 —

 

 

70

Net loss attributable to noncontrolling interests

 

 

(33,773)

 

 

(241,200)

 

 

 

(97,153)

 

 

(314,446)

Depreciation and amortization expense

 

 

53,038

 

 

59,390

 

 

 

168,036

 

 

183,986

Interest expense

 

 

115,695

 

 

124,431

 

 

 

348,687

 

 

373,473

Income tax (benefit) expense

 

 

(1,220)

 

 

1,596

 

 

 

(1,759)

 

 

5,683

Lease expense

 

 

32,366

 

 

38,670

 

 

 

97,548

 

 

113,004

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 

9,785

 

 

2,301

Other (income) loss

 

 

(20,207)

 

 

2,379

 

 

 

(42,360)

 

 

15,602

Transaction costs

 

 

11,361

 

 

1,056

 

 

 

26,567

 

 

7,862

Customer receivership and other related charges

 

 

 —

 

 

297

 

 

 

 —

 

 

35,864

Long-lived asset impairments

 

 

32,390

 

 

163,364

 

 

 

88,008

 

 

163,364

Goodwill and identifiable intangible asset impairments

 

 

929

 

 

360,046

 

 

 

2,061

 

 

360,046

Severance and restructuring

 

 

1,023

 

 

256

 

 

 

7,357

 

 

4,950

Losses of newly acquired, constructed, or divested businesses

 

 

1,385

 

 

5,320

 

 

 

3,560

 

 

15,589

Stock-based compensation

 

 

2,176

 

 

2,440

 

 

 

6,732

 

 

7,206

Regulatory defense related costs (1)

 

 

463

 

 

41

 

 

 

603

 

 

492

Other non-recurring costs (2)

 

 

8,388

 

 

3,524

 

 

 

8,435

 

 

3,524

Adjusted EBITDAR

 

$

145,886

 

$

147,788

 

 

$

459,829

 

$

488,829

 

Results of Operations

 

Same-store Presentation

   

We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare.  We are also focused on “right-sizing” our operations to fit that new environment and to divest underperforming and non-strategic assets, many of which were consolidated as part of larger acquisitions in recent years to achieve the net overall growth strategy. 

 

We define our same-store inpatient operations as those skilled nursing and assisted living centers which have been operated by us, in a steady-state, for each comparable period in this Results of Operations discussion.  We exclude from that definition those skilled nursing and assisted living facilities recently acquired that were not operated by us for the entire period, as well as those that were divested prior to or during the most recent period presented.  In cases where we are developing new skilled nursing or assisted living centers, those operations are excluded from our “same-store” inpatient operations until the revenue driven by operating patient census is stable in the comparable periods. 

 

Since the nature of our rehabilitation therapy services operations experiences high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of that business, a same-store presentation based solely on the contract or gym count does not provide an accurate depiction of the business.  Accordingly, we do not reference same-store figures in this MD&A with regard to that business. 

 

The volume of services delivered in our other services businesses can also be affected by strategic transactional activity.  To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion. 

 

In May 2014, the FASB issued ASU No. 2014-09, (Revenue from Contracts with Customers) and all related amendments (ASC 606).  The requirements of ASC 606 were effective for us beginning January 1, 2018 and were applied using the modified retrospective transition method.  Because prior year periods were not restated through this methodology, the new presentation could affect the direct, same-store comparability of revenue and operating expense, however, there is no impact to comparability of

54


 

EBITDA for all periods presented.  See Note 4 – “Net Revenues and Accounts Receivable.”  The impact of the adoption of ASC 606 will be noted in these Results of Operations where comparability issues exist.

 

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

 

A summary of our unaudited results of operations for the three months ended September 30, 2018 as compared with the same period in 2017 follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,029,453

 

84.6

%  

$

1,103,554

 

83.8

%  

$

(74,101)

 

(6.7)

%

Assisted/Senior living facilities

 

 

23,974

 

2.0

%  

 

24,185

 

1.8

%  

 

(211)

 

(0.9)

%

Administration of third party facilities

 

 

2,025

 

0.2

%  

 

2,266

 

0.2

%  

 

(241)

 

(10.6)

%

Elimination of administrative services

 

 

(784)

 

(0.1)

%  

 

(370)

 

 —

%  

 

(414)

 

111.9

%

Inpatient services, net

 

 

1,054,668

 

86.7

%  

 

1,129,635

 

85.8

%  

 

(74,967)

 

(6.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

214,421

 

17.6

%  

 

244,471

 

18.6

%  

 

(30,050)

 

(12.3)

%

Elimination intersegment rehabilitation therapy services

 

 

(82,257)

 

(6.8)

%  

 

(92,573)

 

(7.0)

%  

 

10,316

 

(11.1)

%

Third party rehabilitation therapy services

 

 

132,164

 

10.8

%  

 

151,898

 

11.6

%  

 

(19,734)

 

(13.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

46,977

 

3.9

%  

 

42,901

 

3.3

%  

 

4,076

 

9.5

%

Elimination intersegment other services

 

 

(16,538)

 

(1.4)

%  

 

(8,982)

 

(0.7)

%  

 

(7,556)

 

84.1

%

Third party other services

 

 

30,439

 

2.5

%  

 

33,919

 

2.6

%  

 

(3,480)

 

(10.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,217,271

 

100.0

%  

$

1,315,452

 

100.0

%  

$

(98,181)

 

(7.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

101,865

 

9.7

%  

$

(403,767)

 

(35.7)

%  

$

505,632

 

(125.2)

%

Rehabilitation therapy services

 

 

26,432

 

12.3

%  

 

15,646

 

6.4

%  

 

10,786

 

68.9

%

Other services

 

 

(7,916)

 

(16.9)

%  

 

(310)

 

(0.7)

%  

 

(7,606)

 

2,453.5

%

Corporate and eliminations

 

 

(44,769)

 

 —

%  

 

(41,174)

 

 —

%  

 

(3,595)

 

8.7

%

EBITDA

 

$

75,612

 

6.2

%  

$

(429,605)

 

(32.7)

%  

$

505,217

 

(117.6)

%

 

 

55


 

A summary of our unaudited condensed consolidating statement of operations follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

Net revenues

 

$

1,055,452

 

$

214,421

 

$

46,914

 

$

63

 

$

(99,579)

 

$

1,217,271

 

Salaries, wages and benefits

 

 

480,345

 

 

175,098

 

 

25,161

 

 

 —

 

 

 —

 

 

680,604

 

Other operating expenses

 

 

428,398

 

 

12,891

 

 

29,353

 

 

 —

 

 

(99,578)

 

 

371,064

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

35,482

 

 

 —

 

 

35,482

 

Lease expense

 

 

31,732

 

 

 —

 

 

316

 

 

318

 

 

 —

 

 

32,366

 

Depreciation and amortization expense

 

 

46,472

 

 

3,147

 

 

172

 

 

3,247

 

 

 —

 

 

53,038

 

Interest expense

 

 

91,106

 

 

14

 

 

 9

 

 

24,566

 

 

 —

 

 

115,695

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,178)

 

 

 —

 

 

(2,178)

 

Other income

 

 

(20,207)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,207)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

11,361

 

 

 —

 

 

11,361

 

Long-lived asset impairments

 

 

32,390

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

32,390

 

Goodwill and identifiable intangible asset impairments

 

 

929

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

929

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(523)

 

 

371

 

 

(152)

 

(Loss) income before income tax benefit

 

 

(35,713)

 

 

23,271

 

 

(8,097)

 

 

(72,210)

 

 

(372)

 

 

(93,121)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(1,220)

 

 

 —

 

 

(1,220)

 

(Loss) income from continuing operations

 

$

(35,713)

 

$

23,271

 

$

(8,097)

 

$

(70,990)

 

$

(372)

 

$

(91,901)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

1,130,005

 

$

244,471

 

$

42,778

 

$

123

 

$

(101,925)

 

$

1,315,452

 

Salaries, wages and benefits

 

 

507,075

 

 

205,232

 

 

27,097

 

 

 —

 

 

 —

 

 

739,404

 

Other operating expenses

 

 

464,894

 

 

21,429

 

 

15,689

 

 

 —

 

 

(101,926)

 

 

400,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

41,420

 

 

 —

 

 

41,420

 

Lease expense

 

 

37,895

 

 

(14)

 

 

302

 

 

487

 

 

 —

 

 

38,670

 

Depreciation and amortization expense

 

 

51,666

 

 

3,497

 

 

167

 

 

4,060

 

 

 —

 

 

59,390

 

Interest expense

 

 

103,306

 

 

14

 

 

 9

 

 

21,102

 

 

 —

 

 

124,431

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(1,596)

 

 

 —

 

 

(1,596)

 

Other loss

 

 

2,379

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,379

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,056

 

 

 —

 

 

1,056

 

Customer receivership and other related charges

 

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

 —

 

 

297

 

Long-lived asset impairment charges

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(571)

 

 

502

 

 

(69)

 

(Loss) income before income tax expense

 

 

(558,739)

 

 

12,135

 

 

(486)

 

 

(65,835)

 

 

(501)

 

 

(613,426)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,596

 

 

 —

 

 

1,596

 

(Loss) income from continuing operations

 

$

(558,739)

 

$

12,135

 

$

(486)

 

$

(67,431)

 

$

(501)

 

$

(615,022)

 

 

 

Net Revenues

 

Net revenues for the three months ended September 30, 2018 decreased by $98.2 million, or 7.5%, as compared with the three months ended September 30, 2017.   

 

Inpatient Services – Revenue decreased $75.0 million, or 6.6%, in the three months ended September 30, 2018 as compared with the same period in 2017. On a same-store basis, excluding 30 divested underperforming facilities and the development of two additional facilities on comparability, and the $16.6 million revenue reduction for the adoption of ASC 606, inpatient services revenue increased $3.3 million, or 0.3%.  This same-store increase is due to increased payment rates, partially offset by a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities.  We attribute the decline in occupancy and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.  While this paradigm persists in 2018, we are seeing the census decline moderate through the nine months ended September 30, 2018.

 

56


 

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day. 

 

Rehabilitation Therapy Services – Revenue decreased $19.7 million, or 13.0% comparing the three months ended September 30, 2018 with the same period in 2017.  Of that decrease, $25.2 million is due to lost contract business, offset by $11.1 million attributed to new contracts.  The adoption of ASC 606 resulted in a reduction of revenue of $3.0 million.  The remaining decrease of $2.6 million is principally due to reduced volume of services provided to existing customers, and partially offset with higher rates to existing contract customers and increased Medicare Part B rates.

 

Other Services – Revenue decreased $3.5 million, or 10.3% in the three months ended September 30, 2018 as compared with the same period in 2017. Our other services revenue is comprised mainly of our physician services and staffing services businesses.   Revenue in our physician services business was relatively flat period over period, however, our staffing services business saw some contraction in certain areas of its operations.  The reduced staffing volumes in those regional areas are not expected to persist.

 

EBITDA

 

EBITDA for the three months ended September 30, 2018 increased by $505.2 million, or 117.6%, as compared with the three months ended September 30, 2017.  Excluding the impact of (gain) loss on extinguishment of debt, other (income) loss, transaction costs, customer receivership and other related charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA increased $2.5 million, or 2.6% when compared with the same period in 2017.  The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented. The contributing factors for this net increase are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDA increased by $505.6 million, or 125.2% for the three months ended September 30, 2018 as compared with the same period in 2017.  Excluding the impact of other (income) loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $5.2 million, or 4.3% when compared with the same period in 2017.  On a same store basis, the inpatient EBITDA as adjusted decreased $3.4 million.  Of that same-store decline, our self-insurance programs resulted in an increase of $0.7 million EBITDA as adjusted in the three months ended September 30, 2018 as compared with the same period in 2017.  While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures particularly in our general and professional liability claims experience.  We believe this is due to the combination of tort reforms in key states that have had historically high rates of claims volume and severity as well as a recognition by the plaintiffs’ firms that this industry cannot sustain the level of claims historically brought by them.  Same-store staffing costs, net of nursing agency and other purchased services, increased $8.2 million.  Nursing wage inflation increased 1.3% in the three months ended September 30, 2018 as compared with the same period in 2017.  On a same-store basis, lease expense for the three months ended September 30, 2018 as compared with the same period in 2017 decreased $6.0 million.  This reduction is principally due to the benefit of one-quarter of the Sabra rent reduction, offset by the non-cash straight-line adjustments to those operating leases.  See “Restructuring Transactions – Sabra Master Leases” in this MD&A.  The remaining $1.9 million decrease in EBITDA, as adjusted, of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues,” and accelerating nursing wage inflation previously discussed. 

 

Rehabilitation Therapy Services – EBITDA increased by $10.8 million, or 68.9%, for the three months ended September 30, 2018 as compared with the same period in 2017.  Excluding the impact of other loss and customer receivership and other related charges and long-lived asset impairments, EBITDA as adjusted increased $8.6 million, or 48.3% when compared with the same period in 2017.  New therapy contracts and net pricing increases exceeded lost contracts by $0.5 million.  Startup losses of our operations in China for the three months ended September 30, 2018 decreased $1.8 million as compared with the same period in 2017.  The remaining increase of EBITDA as adjusted of $6.3 million is principally attributed to overhead cost reductions, favorable average costs of labor and rate increases, and therapist efficiency which improved to 67.5% in the three months ended September 30, 2018 compared with 66.3% in the comparable period in the prior year, partially offset by higher average costs of labor.

 

Currently, we operate through affiliates in China a total of 12 locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in five hospital

57


 

joint ventures and three nursing homes.  Startup and development costs of these Chinese ventures are expected to exceed revenues for the remainder of fiscal 2018. 

 

Other Services — EBITDA decreased $7.6 million, or 2453.5%, for the three months ended September 30, 2018 as compared with the same period in 2017. This decrease was principally driven by charges taken in the three months ended September 30, 2018 to write down the realizable fair value of accounts receivables in our physician services business.  Of these charges, $4.8 million pertains to information technology incentives recognized in 2015 and 2016, but recently deemed uncollectible, and $3.7 million for reserves on challenging accounts likely uncollectible upon transitioning our third party billing vendor.  Absent these charges, the other services EBITDA was relatively flat for the three months ended September 30, 2018 as compared with the same period in 2017. 

 

Corporate and Eliminations — EBITDA decreased $3.6 million, or 8.7%, for the three months ended September 30, 2018 as compared with the same period in 2017.  EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that, in our chief operating decision maker’s view, are outside of the scope of our reportable segments.  These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $10.3 million of the net decrease in EBITDA.  Corporate overhead costs decreased $5.9 million, or 14.3%, in the three months ended September 30, 2018 as compared with the same period in 2017. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $0.8 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments. 

 

Other (income) loss — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets.  Other (income) loss for the three months ended September 30, 2018 principally represents non-cash gains on leases exited or modified in the period.  Other loss recognized for the three months ended September 30, 2017 was a net $2.4 million, attributable primarily to non-cash exit costs of leases exited in that period. 

 

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the three months ended September 30, 2018 and 2017 were $11.4 million and $1.1 million, respectively.

 

Long-lived asset impairments — In the three months ended September 30, 2018 we recognized impairments of property and equipment of $32.4 million.  For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”  

 

Goodwill and identifiable intangible asset impairments — In the three months ended September 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $0.9 million.  For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges - Identifiable Intangible Assets with a Definite Useful Life.”  

 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the three months ended September 30, 2018 as compared with the same period in 2017. 

 

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets.  Depreciation and amortization expense decreased $6.4 million in the three months ended

58


 

September 30, 2018 as compared with the same period in 2017.  On a same-store basis, depreciation and amortization decreased $10.9 million in the three months ended September 30, 2018 as compared with the same period in 2017.  The three months ended September 30, 2017 included $2.2 million of amortization expense related to intangible management contracts of third party operations in Texas.  Those contracts became impaired during third quarter 2017 when the Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the three months ended September 30, 2018.  The remaining decrease of $8.7 million is principally due to  the classification of assets held for sale, which did not depreciate in the current period, the impact of reduced carrying values of recently impaired assets, and partially offset by the impact of recent lease amendments in the inpatient services segment.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations.  Interest expense decreased $8.7 million in the three months ended September 30, 2018 as compared with the same period 2017.  On a same store basis, interest expense is down $4.8 million in the three months ended September 30, 2018 as compared with the same period in 2017.  That decrease is principally attributed to the net impact of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for as a financing obligation, and resulted in a lower effective interest rate.  That reduction in financing lease interest is partially offset by the increased cost of our revolving credit facilities.  See “Restructuring Transactions” in this MD&A. 

 

Income tax expense — For the three months ended September 30, 2018, we recorded an income tax benefit of $1.2 million from continuing operations representing an effective tax rate of 1.3% compared to an income tax expense of $1.6 million from continuing operations, representing an effective tax rate of (0.3)% for the same period in 2017.  There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2018, we have determined that the valuation allowance is still necessary.

 

Net Loss Attributable to Genesis Healthcare, Inc.

 

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the three months ended September 30, 2018 as compared with the same period in 2017.  

 

Net loss attributable to noncontrolling interests — On February 2, 2015, FC-GEN combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares.  Since the combination, there have been conversions of 4.7 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 36.8%.  For the three months ended September 30, 2018 and 2017, a loss of $34.3 million and $241.8 million, respectively, has been attributed to the Class C common stock. 

 

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both.  We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs.  For the three months ended September 30, 2018 and 2017, income of $0.5 million and $0.6 million, respectively, has been attributed to these unaffiliated third parties.

59


 

 

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

 

A summary of our unaudited results of operations for the nine months ended September 30, 2018 as compared with the same period in 2017 follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,190,065

 

84.0

%  

$

3,404,181

 

84.0

%  

$

(214,116)

 

(6.3)

%

Assisted/Senior living facilities

 

 

71,220

 

1.9

%  

 

72,262

 

1.8

%  

 

(1,042)

 

(1.4)

%

Administration of third party facilities

 

 

6,577

 

0.2

%  

 

6,841

 

0.2

%  

 

(264)

 

(3.9)

%

Elimination of administrative services

 

 

(2,254)

 

 —

%  

 

(1,139)

 

 —

%  

 

(1,115)

 

97.9

%

Inpatient services, net

 

 

3,265,608

 

86.1

%  

 

3,482,145

 

86.0

%  

 

(216,537)

 

(6.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

685,672

 

18.1

%  

 

743,605

 

18.4

%  

 

(57,933)

 

(7.8)

%

Elimination intersegment rehabilitation therapy services

 

 

(263,890)

 

(7.0)

%  

 

(287,599)

 

(7.1)

%  

 

23,709

 

(8.2)

%

Third party rehabilitation therapy services

 

 

421,782

 

11.1

%  

 

456,006

 

11.3

%  

 

(34,224)

 

(7.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

146,830

 

3.9

%  

 

133,168

 

3.3

%  

 

13,662

 

10.3

%

Elimination intersegment other services

 

 

(43,517)

 

(1.1)

%  

 

(25,459)

 

(0.6)

%  

 

(18,058)

 

70.9

%

Third party other services

 

 

 103,313

 

2.8

%  

 

107,709

 

2.7

%  

 

(4,396)

 

(4.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

3,790,703

 

100.0

%  

$

4,045,860

 

100.0

%  

$

(255,157)

 

(6.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2018

 

2017

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

323,995

 

9.9

%  

$

(126,921)

 

(3.6)

%  

$

450,916

 

(355.3)

%

Rehabilitation therapy services

 

 

81,090

 

11.8

%  

 

20,126

 

2.7

%  

 

60,964

 

302.9

%

Other services

 

 

(6,733)

 

(4.6)

%  

 

 5

 

0.0

%  

 

(6,738)

 

(134,760.0)

%

Corporate and eliminations

 

 

(146,819)

 

 —

%  

 

(134,185)

 

 —

%  

 

(12,634)

 

9.4

%

EBITDA

 

$

251,533

 

6.6

%  

$

(240,975)

 

(6.0)

%  

$

492,508

 

(204.4)

%

 

 

60


 

A summary of our unaudited condensed consolidating statement of operations follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,267,862

 

$

685,672

 

$

146,714

 

$

116

 

$

(309,661)

 

$

3,790,703

 

Salaries, wages and benefits

 

 

1,477,153

 

 

562,875

 

 

82,100

 

 

 —

 

 

 —

 

 

2,122,128

 

Other operating expenses

 

 

1,323,423

 

 

41,707

 

 

70,310

 

 

 —

 

 

(309,661)

 

 

1,125,779

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

114,404

 

 

 —

 

 

114,404

 

Lease expense

 

 

95,660

 

 

 —

 

 

959

 

 

929

 

 

 —

 

 

97,548

 

Depreciation and amortization expense

 

 

147,552

 

 

9,479

 

 

509

 

 

10,496

 

 

 —

 

 

168,036

 

Interest expense

 

 

277,753

 

 

41

 

 

27

 

 

70,866

 

 

 —

 

 

348,687

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

9,785

 

 

 —

 

 

9,785

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,856)

 

 

 —

 

 

(4,856)

 

Other (income) loss

 

 

(42,438)

 

 

 —

 

 

78

 

 

 —

 

 

 —

 

 

(42,360)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

26,567

 

 

 —

 

 

26,567

 

Long-lived asset impairments

 

 

88,008

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

88,008

 

Goodwill and identifiable intangible asset impairments

 

 

2,061

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,061

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,029)

 

 

1,135

 

 

106

 

(Loss) income before income tax benefit

 

 

(101,310)

 

 

71,570

 

 

(7,269)

 

 

(227,046)

 

 

(1,135)

 

 

(265,190)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(1,759)

 

 

 —

 

 

(1,759)

 

(Loss) income from continuing operations

 

$

(101,310)

 

$

71,570

 

$

(7,269)

 

$

(225,287)

 

$

(1,135)

 

$

(263,431)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,483,284

 

$

743,605

 

$

132,718

 

$

450

 

$

(314,197)

 

$

4,045,860

 

Salaries, wages and benefits

 

 

1,597,007

 

 

619,928

 

 

86,365

 

 

 —

 

 

 —

 

 

2,303,300

 

Other operating expenses

 

 

1,365,896

 

 

65,074

 

 

45,451

 

 

 —

 

 

(314,198)

 

 

1,162,223

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

127,657

 

 

 —

 

 

127,657

 

Lease expense

 

 

110,661

 

 

 —

 

 

897

 

 

1,446

 

 

 —

 

 

113,004

 

Depreciation and amortization expense

 

 

159,483

 

 

11,110

 

 

506

 

 

12,887

 

 

 —

 

 

183,986

 

Interest expense

 

 

309,948

 

 

42

 

 

28

 

 

63,455

 

 

 —

 

 

373,473

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

2,301

 

 

 —

 

 

2,301

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,097)

 

 

 —

 

 

(4,097)

 

Other loss (income)

 

 

15,112

 

 

732

 

 

 —

 

 

(242)

 

 

 —

 

 

15,602

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

7,862

 

 

 —

 

 

7,862

 

Customer receivership and other related charges

 

 

 —

 

 

35,864

 

 

 —

 

 

 —

 

 

 —

 

 

35,864

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,702)

 

 

1,411

 

 

(291)

 

(Loss) income before income tax expense

 

 

(596,352)

 

 

8,974

 

 

(529)

 

 

(209,117)

 

 

(1,410)

 

 

(798,434)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

5,683

 

 

 —

 

 

5,683

 

(Loss) income from continuing operations

 

$

(596,352)

 

$

8,974

 

$

(529)

 

$

(214,800)

 

$

(1,410)

 

$

(804,117)

 

 

Net Revenues

 

Net revenues for the nine months ended September 30, 2018 decreased by $255.2 million, or 6.3%, as compared with the nine months ended September 30, 2017.   

 

Inpatient Services – Revenue decreased $216.5 million, or 6.2%, in the nine months ended September 30, 2018 as compared with the same period in 2017. On a same-store basis, excluding 49 divested underperforming facilities and the development of two additional facilities on comparability, and the $57.8 million revenue reduction for the adoption of ASC 606, inpatient services revenue declined $21.2 million, or 0.7%.  This same-store decrease is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates.  We attribute the decline in occupancy and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing

61


 

referrals to home health or other community based care settings.  While this paradigm persists in 2018, we are seeing the census decline moderate through the nine months ended September 30, 2018. 

 

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day. 

 

Rehabilitation Therapy Services – Revenue decreased $34.2 million, or 7.5% comparing the nine months ended September 30, 2018 with the same period in 2017.  Of that decrease, $74.1 million is due to lost contract business, offset by $50.7 million attributed to new contracts.  The adoption of ASC 606 resulted in a reduction of revenue of $9.2 million.  The remaining decrease of $1.6 million is principally due to reduced volume of services provided to existing customers, and partially offset with higher rates to existing contract customers and increased Medicare Part B rates.    

 

Other Services – Revenue decreased $4.4 million, or 4.1% in the nine months ended September 30, 2018 as compared with the same period in 2017. Our other services revenue is comprised mainly of our physician services and staffing services businesses.  Some regional contraction in our staffing services accounted for $6.6 million of that decrease, partially offset by increased service volumes in our physician service business.  The reduced staffing volumes in those regional areas are not expected to persist.

 

 

EBITDA

 

EBITDA for the nine months ended September 30, 2018 increased by $492.5 million, or 204.4%, as compared with the nine months ended September 30, 2017.  Excluding the impact of (gain) loss on early extinguishment of debt, other (income) loss, transaction costs, customer receivership and other related charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $8.5 million, or 2.5% when compared with the same period in 2017.  The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDA increased by $450.9 million, or 355.3% for the nine months ended September 30, 2018 as compared with the same period in 2017.  Excluding the impact of other loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $38.1 million, or 9.3% when compared with the same period in 2017.  On a same store basis, the inpatient EBITDA as adjusted decreased $32.0 million.  Of that same-store decline, our self-insurance programs resulted in an increase of $22.5 million EBITDA as adjusted in the nine months ended September 30, 2018 as compared with the same period in 2017.  While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures particularly in our general and professional liability claims experience.  We believe this is due to the combination of tort reforms in key states that have had historically high rates of claims volume and severity as well as a recognition by the plaintiffs’ firms that this industry cannot sustain the level of claims historically brought by them.  Reductions in salaries, wages and benefits, beyond those related to self-insured workers compensation and health benefits, are principally attributed to the transition from in-house to fully outsourced dietary support functions in the second fiscal quarter of 2017. That transition resulted in a shift of a commensurate amount of cost to purchased services expense in other operating expenses.  Same-store staffing costs, net of nursing agency and other purchased services, increased $29.9 million.  Nursing wage inflation increased 2.8% in the nine months ended September 30, 2018 as compared with the same period in 2017.  On a same-store basis, lease expense for the nine months ended September 30, 2018 as compared with the same period in 2017 decreased $11.1 million.  This reduction is principally due to the benefit of three quarters of the Sabra rent reduction, offset by the non-cash straight-line adjustments to those operating leases.  See “Restructuring Transactions – Sabra Master Leases” in this MD&A.  The remaining $35.7 million decrease in EBITDA, as adjusted, of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues.”  Nursing wage inflation was relatively flat comparing the nine months ended September 30, 2018 as compared with the same period in 2017. 

 

Rehabilitation Therapy Services – EBITDA increased by $61.0 million, or 302.9%, for the nine months ended September 30, 2018 as compared with the same period in 2017.  Excluding the impact of customer receivership and other related charges, EBITDA as adjusted increased $22.5 million, or 38.4% when compared with the same period in 2017.  Lost therapy contract revenue

62


 

exceeded new therapy contracts and service fees by $1.9 million.  Startup losses of our operations in China for the nine months ended September 30, 2018 decreased $5.0 million as compared with the same period in 2017.  The remaining increase of EBITDA as adjusted of $19.4 million is principally attributed to overhead cost reductions, rate increases, and therapist efficiency which improved to 67.8% in the nine months ended September 30, 2018 compared with 67.5% in the comparable period in the prior year, partially offset by contraction of services to existing customers referenced above in “Net Revenues” and higher average costs of labor.  

 

Currently, we operate through affiliates in China a total of 12 locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in five hospital joint ventures and three nursing homes.  Startup and development costs of these Chinese ventures are expected to exceed revenues for the remainder of fiscal 2018. 

 

Other Services — EBITDA decreased $6.7 million for the nine months ended September 30, 2018 as compared with the same period in 2017. This decrease was principally driven by charges taken in the nine months ended September 30, 2018 to write down the realizable fair value of accounts receivables in our physician services business.  Of these charges, $4.8 million pertains to information technology incentives recognized in 2015 and 2016, but recently deemed uncollectible, and $3.7 million for reserves on challenging accounts likely uncollectible upon transitioning our third party billing vendor.  Absent these charges, the other services EBITDA increased $1.8 million for the nine months ended September 30, 2018 as compared with the same period in 2017, principally related to increased productivity in our physician services business.

 

Corporate and Eliminations — EBITDA decreased $12.6 million, or 9.4%, for the nine months ended September 30, 2018 as compared with the same period in 2017.  EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments.  These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $26.6 million of the net decrease in EBITDA.  Corporate overhead costs decreased $13.3 million, or 10.4%, in the nine months ended September 30, 2018 as compared with the same period in 2017. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $0.5 million is primarily the result of a reduction in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

 

(Gain) loss on early extinguishment of debt – On March 6, 2018, we entered into a new asset based lending facility agreement, qualifying as an extinguishment of the previous revolving credit facility, and resulting in the write-off of $9.8 million of deferred financing fees related to the previous revolving credit facility.  See Note 3 – “Significant Transactions and Events – Restructuring Transactions” and Note 8 – “Long-term Debt.”  

   

Other (income) loss — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets.  Other income, net, of $42.4 million for the nine months ended September 30, 2018 principally represents non-cash gains on leases exited or modified in the period.  Other loss recognized for the nine months ended September 30, 2017 of $15.6 million, is principally attributable to the non-cash exit costs of leases exited in that period.

 

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the nine months ended September 30, 2018 and 2017 were $26.6 million and $7.9 million, respectively.

 

Long-lived asset impairments — In the nine months ended September 30, 2018 we recognized impairments of property and equipment of $88.0 million.  For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”  

 

Goodwill and identifiable intangible asset impairments — In the nine months ended September 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $2.1 million.  For more information about the conditions of the

63


 

business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges - Identifiable Intangible Assets with a Definite Useful Life.”  

 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the nine months ended September 30, 2018 as compared with the same period in 2017. 

 

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets.  Depreciation and amortization expense decreased $16.0 million in the nine months ended September 30, 2018 as compared with the same period in 2017.  On a same-store basis, depreciation and amortization decreased $24.9 million in the nine months ended September 30, 2018 as compared with the same period in 2017.  The nine months ended September 30, 2017 included $6.6 million of amortization expense related to intangible management contracts of third party operations in Texas.  Those contracts became impaired during third quarter 2017 when the Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the nine months ended September 30, 2018.  Depreciation and amortization expense in the nine months ended September 30, 2018 decreased by $11.7 million for the combined impact of impairments of property and equipment and reassessed useful lives of certain long-lived assets.  The remaining decrease of $6.6 million is principally due to the classification of assets held for sale, which did not depreciate in the current period.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations.  Interest expense decreased $24.8 million in the nine months ended September 30, 2018 as compared with the same period 2017.  On a same store basis, interest expense is down $20.5 million in the nine months ended September 30, 2018 as compared with the same period in 2017.  That decrease is principally attributed to the net impact of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for as a financing obligation, and resulted in a lower effective interest rate.  See “Restructuring Transactions” in this MD&A. 

 

Income tax expense — For the nine months ended September 30, 2018, we recorded an income tax benefit of $1.8 million from continuing operations representing an effective tax rate of 0.7% compared to an income tax expense of $5.7 million from continuing operations, representing an effective tax rate of (0.7)% for the same period in 2017.  There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2018, we have determined that the valuation allowance is still necessary.

 

Net Loss Attributable to Genesis Healthcare, Inc.

 

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the nine months ended September 30, 2018 as compared with the same period in 2017.  

 

Net loss attributable to noncontrolling interests — On February 2, 2015, FC-GEN combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares.  Since the combination, there have been conversions of 4.7 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 36.8%.  For the nine months ended September 30, 2018 and 2017, a loss of $98.7 million and $316.1 million, respectively, has been attributed to the Class C common stock. 

64


 

 

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both.  We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs.  For the nine months ended September 30, 2018 and 2017, income of $1.5 million and $1.6 million, respectively, has been attributed to these unaffiliated third parties.

 

Liquidity and Capital Resources

 

Cash Flow and Liquidity

 

The following table presents selected data from our consolidated statements of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

 

2018

    

2017

 

Net cash provided by operating activities

 

 

$

14,066

 

$

67,358

 

Net cash (used in) provided by investing activities

 

 

 

(54,877)

 

 

53,367

 

Net cash provided by (used in) financing activities

 

 

 

110,273

 

 

(117,575)

 

Net increase in cash, cash equivalents and restricted cash and equivalents

 

 

 

69,462

 

 

3,150

 

Beginning of period

 

 

 

58,638

 

 

63,460

 

End of period

 

 

$

128,100

 

$

66,610

 

 

Net cash provided by operating activities in the nine months ended September 30, 2018 decreased $53.3 million compared with the same period in 2017.  The nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 reflect an increase of cash used of $90.7 million due to the Restructuring Transactions executed in the first quarter of 2018, as well as the acceleration of payments for self-insurance programs, resulted in significant paydown of trade payables that had accumulated through December 31, 2017.  The nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 are highlighted by an increase in cash provided of $101.2 million for the collection of outstanding accounts receivable.

 

Net cash used in investing activities in the nine months ended September 30, 2018 was $54.9 million compared to net cash provided by investing activities of $53.4 million in the nine months ended September 30, 2017.  There were no asset sales in the nine months ended September 30, 2018 compared to $79.3 million of asset sales in the same period in 2017.  Routine capital expenditures for the nine months ended September 30, 2018 decreased by $7.1 million as compared with the same period in the prior year.  The remaining incremental use of cash in the nine months ended September 30, 2018 as compared to the same period in the prior year of $36.1 million was due primarily to purchases exceeding sales and maturities of marketable securities.

 

Net cash provided by financing activities in the nine months ended September 30, 2018 was $110.3 million compared to net cash used in financing activities of $117.6 million in the nine months ended September 30, 2017.  The net increase in cash provided by financing activities of $227.8 million is principally attributed to debt borrowings exceeding debt repayments in the nine months ended September 30, 2018 as compared to the same period in 2017.  In the nine months ended September 30, 2018, we had proceeds from the issuance of debt of $563.7 million, which includes $438.0 million from the ABL Credit Facilities, $73.0 million from the MidCap Real Estate Loans, $40.0 million from the 2018 Term Loan and $10.9 million from the refinancing of a bridge loan with a HUD insured loan.  In the nine months ended September 30, 2017, we used $23.9 million in proceeds from HUD insured financing on three skilled nursing facilities to repay Welltower Real Estate Loans.  Repayment of long-term debt in the nine months ended September 30, 2018 was $462.1 million compared to $109.8 million in the same period of the prior year.  The increase in cash used was due primarily to $363.2 million in the retirement of our prior Revolving Credit Facilities, $69.8 million in the paydown of Welltower Real Estate Loans and $9.9 million in the payoff of a bridge loan with the proceeds from a HUD-insured refinancing.  In the nine months ended September 30, 2017, we used $72.1 million of the proceeds from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa and the aforementioned $23.9 million in HUD proceeds to repay indebtedness.  The remaining increase in cash used to repay long-term debt of $5.4 million relates to an increase in routine debt payments. In the nine months ended September 30, 2018, we had net borrowings under the revolving credit facilities of $27.1 million as compared with $31.7 million of net repayments under the revolving credit facilities in the same period in 2017.  In the nine months ended

65


 

September 30, 2018, we paid debt issuance costs of $16.7 million, which includes $13.6 million in fees for the ABL Credit Facilities and $2.9 million in fees for the MidCap Real Estate Loans, compared to $4.4 million in debt issuance costs paid in the same period in 2017.  In the nine months ended September 30, 2017, we received $6.1 million in tenant improvement allowances from landlords. The remaining increase in net cash used in financing activities of $0.1 million is due primarily to debt settlement costs in the nine months ended September 30, 2018. 

 

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our ABL Credit Facilities.

 

The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment.  Maintaining adequate liquidity is a function of our results of operations, restricted and unrestricted cash and cash equivalents and our available borrowing capacity.

 

At September 30, 2018, we had total liquidity of $109.5 million consisting of cash on hand of $68.0 million and available borrowings under our ABL Credit Facilities of $41.5 million. During the nine months ended September 30, 2018, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities. 

 

Restructuring Transactions

 

Overview

 

During the nine months ended September 30, 2018, we entered into a number of agreements, amendments and new financing facilities further described below in an effort to strengthen significantly our capital structure.  In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.

 

In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior Revolving Credit Facilities and eliminating its forbearance agreement.  Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases.  Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate.  We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants. 

 

Asset Based Lending Facilities

 

On March 6, 2018, we entered into a new asset based lending facility agreement with MidCap.  The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility. 

 

The ABL Credit Facilities have a five-year term and proceeds were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020.  The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced.  The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed.  In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of $90.1 million in current installments of long-term debt at September 30, 2018.  Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.

 

Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%.  Borrowings under the delayed draw component bear

66


 

interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.

 

The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings.

 

Term Loan Amendment

 

On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower and Omega (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan). 

 

The 2018 Term Loan will mature July 29, 2020 and bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind.  The Term Loan Amendment also changes the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind. 

 

Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.

 

Welltower Master Lease Amendment

 

On February 21, 2018, we entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment).  The Welltower Master Lease Amendment reduces our annual base rent payment by $35 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019.  In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048.  The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023.  If triggered, the incremental rent from the rent reset is capped at $35 million.

 

Omnibus Agreement

 

On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40 million in new term loans and amend the current term loan to, among other things, accommodate a refinancing of our existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our other material debt and lease obligations. See Term Loan Amendment above.

 

The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50 million of outstanding indebtedness owed to Welltower will be written off and (b) we may request conversion of not more than $50 million of the outstanding balance of our Welltower real estate loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.

 

In connection with the Omnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of our Class A Common Stock at an exercise price equal to $1.33 per share.  Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions.  The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance. 

 

67


 

Welltower Real Estate Loans Amendment

 

On February 21, 2018, we entered into an amendment (the Real Estate Loan Amendments) to the Welltower real estate loan (Welltower Real Estate Loans) agreements.  The Real Estate Loan Amendments adjust the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind.  Previously, these loans carried a 10.25% cash pay interest rate that increased by 0.25% annually on January 1.

 

In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans.  In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2.0 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount.  As of September 30, 2018, we secured repayments or commitments totaling approximately $82 million.

 

MidCap Real Estate Loans

 

On March 30, 2018, we entered into the MidCap Real Estate Loans which have combined available proceeds of $75.0 million, $73.0 million of which was drawn as of September 30, 2018.  The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023.  The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated.  The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%.  Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity.  Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.    

 

Sabra Master Leases

In 2017, we entered into a definitive agreement with Sabra resulting in permanent and unconditional annual cash rent savings of $19 million, which became effective January 1, 2018.  Sabra continues to pursue and we continue to support Sabra’s previously announced sale of our leased assets.  At the closing of such sales, we expect to enter into lease agreements with new landlords for a majority of the assets currently leased with Sabra.  For the nine months ended September 30, 2018, we have terminated the Sabra lease agreement of 20 skilled nursing facilities and one assisted/senior living facility but continue to operate these facilities under new lease arrangements with different landlords.  For the nine months ended September 30, 2018, we have terminated the Sabra lease agreement associated with seven divested skilled nursing facilities.

 

Other Financing Activities

 

HUD Insured Refinancings

 

During the nine months ended September 30, 2018, we completed one mortgage refinancing through HUD totaling $10.9 million and retired fully a real estate loan of $9.9 million.

 

Divestiture of Non-Strategic Facilities

 

Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 52 skilled nursing facilities, one assisted living facility and one behavioral outpatient clinic in 12 states through November 1, 2018, including:

 

·

The closure of one skilled nursing facility located in Massachusetts on February 28, 2018 that was subject to a master lease agreement with Welltower.  A loss was recognized totaling $0.3 million.

·

The sale of five skilled nursing facilities located in Massachusetts and Kentucky on April 1, 2018 that were subject to a master lease agreement with Sabra.  A gain was recognized totaling $0.3 million.

·

The lease expiration of one skilled nursing facility located in California on June 1, 2018.  A loss was recognized totaling $0.9 million.

68


 

·

The sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey on June 1, 2018 and June 13, 2018, respectively.  These skilled nursing facilities were subject to a master lease agreement with Second Spring Healthcare Investments (Second Spring).  A gain was recognized totaling $14.9 million.

·

The lease expiration of one behavioral outpatient clinic located in California on July 1, 2018.  A loss was recognized totaling $0.2 million.

·

The sale and lease termination of three skilled nursing facilities located in Indiana and Maryland on August 1, 2018 that were subject to a master lease agreement with Welltower.  A gain was recognized totaling $29.8 million.

·

The sale and lease termination of one skilled nursing facility located in Pennsylvania on August 1, 2018 that was subject to a master lease agreement with Second Spring.  A loss was recognized totaling $0.8 million.

·

The sale and lease termination of one skilled nursing facility located in Texas on August 1, 2018.  A loss was recognized totaling $3.8 million.

·

The sale and lease termination of one skilled nursing facility located in Ohio on September 7, 2018.  No gain or loss was recognized.

·

The sale of 15 owned skilled nursing facilities and lease termination of one skilled nursing facility located in Texas on October 1, 2018.  A loss was recognized totaling $4.8 million.

·

The sale of seven owned skilled nursing facilities located in Texas on November 1, 2018.

·

The sale and lease termination of two skilled nursing facilities in Idaho on November 1, 2018.

·

The sale and lease termination of two skilled nursing facilities in Montana on November 1, 2018.

·

The sale of one owned assisted living facility in Nevada on November 1, 2018.

 

 Financial Covenants

 

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures.  At September 30, 2018, we were in compliance with all of the financial covenants contained in the Credit Facilities. 

 

We have master lease agreements with Welltower, Sabra and Omega (collectively, the Master Lease Agreements).  Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At September 30, 2018, we were in compliance with the covenants contained in the Master Lease Agreements. 

 

We have a master lease agreement with Second Spring involving 51 of our facilities.  We did not meet a financial covenant contained in this master lease agreement at September 30, 2018.  We received a waiver for this covenant breach.

 

We have a master lease agreement with Cindat Best Years Welltower JV LLC involving 28 of our facilities.  We did not meet certain financial covenants contained in this master lease agreement at September 30, 2018.  We received a waiver for this covenant breach. 

 

At September 30, 2018, we did not meet certain financial covenants contained in seven leases related to 45 of our facilities, which are not included in the Restructuring Transactions.  We are and expect to continue to be current in the timely payment of our obligations under such leases.  These leases do not have cross default provisions, nor do they trigger cross default provisions in any of our other loan or lease agreements.  We will continue to work with the related credit parties to amend such leases and the related financial covenants.  We do not believe the breach of such financial covenants has a material adverse impact on us at September 30, 2018.

 

Our ability to maintain compliance with our covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with our quarterly covenant compliance requirements.  Should we fail to comply with our covenants at a future measurement date, we would, absent necessary and timely waivers and/or amendments, be in default under certain of our

69


 

existing credit agreements.  To the extent any cross-default provisions may apply, the default would have an even more significant impact on our financial position. 

 

Concentration of Credit Risk

 

We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations, as we, resulting in a concentration of risk.  These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions. 

 

Management assesses its exposure to loss on accounts receivable at the customer level.  The greatest concentration of risk exists in our rehabilitation services business where we have over 200 distinct customers, many being chain operators with more than one location.  The four largest customers of our rehabilitation services business comprise $56.8 million, approximately 52%, of the net outstanding contract receivables in the rehabilitation services business at September 30, 2018.  One customer, which is a related party of ours, comprises $30.1 million, approximately 28%, of the net outstanding contract receivables in the rehabilitation services business at September 30, 2018.  An adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on us.

 

Financial Condition and Liquidity Considerations

 

The accompanying consolidated financial statements have been prepared on the basis we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 9, 2018). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 9, 2019.  Based upon such considerations, management determined that we are able to continue as a going concern for 12 months following the date of issuance of these financial statements (November 9, 2018).

 

Our results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers.  In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in 2017. 

 

In response to these issues, we entered into a number of agreements, amendments and new financing facilities described under Restructuring Transactions above.  In total, these agreements and amendments are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018.  The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.  In connection with the Restructuring Transactions, we entered into the ABL Credit Facilities agreement, replacing our prior Revolving Credit Facilities.  Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases.  Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate.  We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants. 

 

70


 

Risk and Uncertainties

 

Should we fail to comply with our debt and lease covenants at a future measurement date, we could, absent necessary and timely waivers and/or amendments, be in default under certain of our existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have an even more significant impact on our financial position.

 

Although we are in compliance and project to be in compliance with our material debt and lease covenants, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with our covenants. Such uncertainty includes, changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010 currently being considered in Congress, among others.

 

There can be no assurance that the confluence of these and other factors will not impede our ability to meet our debt and lease covenants in the future.

 

Contractual Obligations

 

The following table sets forth our contractual obligations, including principal and interest, but excluding non-cash amortization of discounts or premiums and debt issuance costs established on these instruments, as of September 30, 2018 (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More than

 

 

    

Total

    

1 Yr.

    

2-3 Yrs.

    

4-5 Yrs.

    

5 Yrs.

 

Asset based lending facilities

 

$

539,998

 

$

117,799

 

$

55,423

 

$

366,776

 

$

 —

 

Term loan agreements

 

 

219,467

 

 

9,056

 

 

210,411

 

 

 —

 

 

 —

 

Real estate loans

 

 

405,347

 

 

23,890

 

 

50,747

 

 

330,710

 

 

 —

 

HUD insured loans

 

 

297,372

 

 

9,930

 

 

19,860

 

 

19,860

 

 

247,722

 

Notes payable

 

 

103,313

 

 

10,287

 

 

76,164

 

 

16,862

 

 

 —

 

Mortgages and other secured debt (recourse)

 

 

13,978

 

 

12,836

 

 

1,142

 

 

 —

 

 

 —

 

Mortgages and other secured debt (non-recourse)

 

 

23,397

 

 

2,453

 

 

4,932

 

 

4,265

 

 

11,747

 

Financing obligations

 

 

7,933,920

 

 

236,208

 

 

486,526

 

 

488,149

 

 

6,723,038

 

Capital lease obligations

 

 

3,651,967

 

 

86,885

 

 

173,338

 

 

181,024

 

 

3,210,720

 

Operating lease obligations

 

 

893,935

 

 

118,433

 

 

234,506

 

 

176,661

 

 

364,335

 

 

 

$

14,082,695

 

$

627,777

 

$

1,313,049

 

$

1,584,307

 

$

10,557,562

 

 

 

 

 

 

   

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.

 

Interest Rate Exposure—Interest Rate Risk Management

 

Our ABL Credit Facilities and MidCap Real Estate Loans expose us to variability in interest payments due to changes in interest rates.  As of September 30, 2018, there is no derivative financial instrument in place to limit that exposure.

 

A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $5.1 million increase in our annual interest expense. 

 

Our investments in marketable securities as of September 30, 2018 consisted of investment grade government and corporate debt securities and money market funds that have maturities of five years or less. These investments expose us to investment income risk, which is affected by changes in the general level of U.S. and international interest rates and securities markets risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Interest rates are near historic lows, with a risk of interest rates increasing before

71


 

our current investments mature.  While we have the ability and intent to hold our investments to maturity today, rising interest rates could impact our ability to liquidate our investments for a profit and could adversely affect the cost of replacing those investments at the time of maturity with investment of similar return and risk profile.  Despite the complex nature of exposure to the securities markets, given the low risk profile, we do not believe a 1% increase in interest rates alone would have a material impact on our net investment income returns.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

 

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

 

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were effective at that reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 12  “Commitments and Contingencies—Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

 

Item 1A.  Risk Factors

 

There have been no material changes or additions to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on March 16, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

72


 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item  5. Other Information

 

None.

 

Item 6. Exhibits

 

(a)Exhibits.

 

 

 

 

Number

 

Description

 

 

 

 

 

 

31.1 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32* 

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

________________

 

 

*

Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended

 

 

73


 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

GENESIS HEALTHCARE, INC.

 

 

 

Date:

November 9, 2018

By

/S/    GEORGE V. HAGER, JR.

 

 

 

George V. Hager, Jr.

 

 

 

Chief Executive Officer

 

 

 

 

Date:

November 9, 2018

By

/S/    THOMAS DIVITTORIO

 

 

 

Thomas DiVittorio

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Authorized Signatory)

 

 

74