Attached files

file filename
EX-10.3 - EX-10.3 - Genesis Healthcare, Inc.gen-20160930ex1035bc559.htm
EX-32 - EX-32 - Genesis Healthcare, Inc.gen-20160930xex32.htm
EX-31.2 - EX-31.2 - Genesis Healthcare, Inc.gen-20160930ex3122b8ad6.htm
EX-31.1 - EX-31.1 - Genesis Healthcare, Inc.gen-20160930ex31147ffc7.htm
EX-10.8 - EX-10.8 - Genesis Healthcare, Inc.gen-20160930ex1080112a8.htm
EX-10.7 - EX-10.7 - Genesis Healthcare, Inc.gen-20160930ex1072c9e78.htm
EX-10.6 - EX-10.6 - Genesis Healthcare, Inc.gen-20160930ex1069398dd.htm
EX-10.5 - EX-10.5 - Genesis Healthcare, Inc.gen-20160930ex105c318bc.htm
EX-10.4 - EX-10.4 - Genesis Healthcare, Inc.gen-20160930ex104b9237d.htm
EX-10.2 - EX-10.2 - Genesis Healthcare, Inc.gen-20160930ex102f602c7.htm
EX-10.1 - EX-10.1 - Genesis Healthcare, Inc.gen-20160930ex101216e9f.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, 2016.

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒  No ☐

 

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

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

(do not check if smaller reporting company)

 

 

 

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 3, 2016, was:

Class A common stock, $0.001 par value – 74,970,770 shares

 

Class B common stock, $0.001 par value – 15,511,603 shares

 

Class C common stock, $0.001 par value – 64,049,380 shares

 

 


 

Genesis Healthcare, Inc.

 

Form 10-Q

Index

 

 

   

    

Page
Number

Part I. 

Financial Information

 

 

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2016 and December 31, 2015

 

 

Consolidated Statements of Operations — Three and nine months ended September 30, 2016 and 2015

 

 

Consolidated Statements of Comprehensive Loss  — Three and nine months ended September 30, 2016 and 2015

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2016 and 2015

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

Item 2. 

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

 

34 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

64 

 

 

 

 

Item 4. 

Controls and Procedures

 

64 

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

65 

 

 

 

 

Item 1A. 

Risk Factors

 

65 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65 

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

65 

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

65 

 

 

 

 

Item 5. 

Other Information

 

66 

 

 

 

 

Item 6. 

Exhibits

 

66 

 

 

 

 

Signatures 

 

67 

 

 

 

 

Exhibit Index 

 

68 

 

 

 

 

 


 

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, 

 

 

 

2016

 

2015

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,840

 

$

61,543

 

Restricted cash and investments in marketable securities

 

 

41,252

 

 

52,917

 

Accounts receivable, net of allowances for doubtful accounts of $219,149 and $189,739 at September 30, 2016 and December 31, 2015, respectively

 

 

826,221

 

 

789,387

 

Prepaid expenses

 

 

63,873

 

 

58,622

 

Other current assets

 

 

63,480

 

 

49,024

 

Total current assets

 

 

1,048,666

 

 

1,011,493

 

Property and equipment, net of accumulated depreciation of $781,414 and $638,768 at September 30, 2016 and December 31, 2015, respectively

 

 

3,944,620

 

 

4,085,247

 

Restricted cash and investments in marketable securities

 

 

122,753

 

 

145,210

 

Other long-term assets

 

 

134,935

 

 

130,869

 

Deferred income taxes

 

 

5,721

 

 

7,144

 

Identifiable intangible assets, net of accumulated amortization of $87,033 and $66,570 at September 30, 2016 and December 31, 2015, respectively

 

 

185,779

 

 

209,967

 

Goodwill

 

 

444,113

 

 

470,019

 

Total assets

 

$

5,886,587

 

$

6,059,949

 

Liabilities and Stockholders' Deficit:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

30,758

 

$

12,477

 

Capital lease obligations

 

 

1,852

 

 

1,842

 

Financing obligations

 

 

1,566

 

 

989

 

Accounts payable

 

 

223,961

 

 

233,801

 

Accrued expenses

 

 

205,096

 

 

197,741

 

Accrued compensation

 

 

185,916

 

 

185,054

 

Self-insurance reserves

 

 

162,149

 

 

166,761

 

Total current liabilities

 

 

811,298

 

 

798,665

 

Long-term debt

 

 

1,155,456

 

 

1,186,159

 

Capital lease obligations

 

 

1,013,611

 

 

1,053,816

 

Financing obligations

 

 

3,104,537

 

 

3,064,077

 

Deferred income taxes

 

 

19,397

 

 

14,939

 

Self-insurance reserves

 

 

448,749

 

 

428,569

 

Other long-term liabilities

 

 

105,070

 

 

133,111

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 74,679,822 at September 30, 2016 and 73,593,732 at December 31, 2015)

 

 

74

 

 

74

 

Class B common stock, (par  $0.001, 20,000,000 shares authorized, issued and outstanding - 15,511,603 at September 30, 2016 and December 31, 2015)

 

 

16

 

 

16

 

Class C common stock, (par  $0.001, 150,000,000 shares authorized, issued and outstanding - 64,249,380 at September 30, 2016 and 64,449,380 at December 31, 2015)

 

 

64

 

 

64

 

Additional paid-in-capital

 

 

302,747

 

 

295,359

 

Accumulated deficit

 

 

(818,072)

 

 

(731,602)

 

Accumulated other comprehensive income (loss)

 

 

81

 

 

(218)

 

Total stockholders’ deficit before noncontrolling interests

 

 

(515,090)

 

 

(436,307)

 

Noncontrolling interests

 

 

(256,441)

 

 

(183,080)

 

Total stockholders' deficit

 

 

(771,531)

 

 

(619,387)

 

Total liabilities and stockholders’ deficit

 

$

5,886,587

 

$

6,059,949

 

 

 

 

 

 

 

 

 

 

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, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net revenues

 

$

1,418,994

 

$

1,416,027

 

$

4,329,570

 

$

4,178,503

 

Salaries, wages and benefits

 

 

834,414

 

 

833,635

 

 

2,534,824

 

 

2,445,294

 

Other operating expenses

 

 

350,828

 

 

332,919

 

 

1,062,086

 

 

993,719

 

General and administrative costs

 

 

46,545

 

 

45,889

 

 

139,999

 

 

130,902

 

Provision for losses on accounts receivable

 

 

25,602

 

 

23,346

 

 

81,776

 

 

68,855

 

Lease expense

 

 

35,512

 

 

37,655

 

 

109,796

 

 

113,033

 

Depreciation and amortization expense

 

 

61,104

 

 

62,505

 

 

190,822

 

 

176,043

 

Interest expense

 

 

131,812

 

 

128,538

 

 

400,853

 

 

376,236

 

Loss (gain) on early extinguishment of debt

 

 

15,363

 

 

(3,104)

 

 

15,830

 

 

130

 

Investment income

 

 

(934)

 

 

(353)

 

 

(2,073)

 

 

(1,200)

 

Other (income) loss

 

 

(5,173)

 

 

38

 

 

(48,084)

 

 

(7,522)

 

Transaction costs

 

 

3,057

 

 

3,306

 

 

9,804

 

 

92,016

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

30,000

 

 

15,192

 

 

31,500

 

Equity in net income of unconsolidated affiliates

 

 

(893)

 

 

(640)

 

 

(2,153)

 

 

(1,153)

 

Loss before income tax benefit

 

 

(78,243)

 

 

(77,707)

 

 

(179,102)

 

 

(239,350)

 

Income tax benefit

 

 

(25,888)

 

 

(16,726)

 

 

(19,738)

 

 

(26,793)

 

Loss from continuing operations

 

 

(52,355)

 

 

(60,981)

 

 

(159,364)

 

 

(212,557)

 

(Loss) income from discontinued operations, net of taxes

 

 

(24)

 

 

39

 

 

(1)

 

 

(1,571)

 

Net loss

 

 

(52,379)

 

 

(60,942)

 

 

(159,365)

 

 

(214,128)

 

Less net loss attributable to noncontrolling interests

 

 

31,921

 

 

31,990

 

 

72,895

 

 

53,424

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(20,458)

 

$

(28,952)

 

$

(86,470)

 

$

(160,704)

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

90,226

 

 

89,213

 

 

89,617

 

 

84,615

 

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.23)

 

$

(0.32)

 

$

(0.96)

 

$

(1.88)

 

(Loss) income from discontinued operations, net of taxes

 

 

(0.00)

 

 

0.00

 

 

(0.00)

 

 

(0.02)

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.23)

 

$

(0.32)

 

$

(0.96)

 

$

(1.90)

 

 

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, 

 

    

2016

    

2015

    

2016

    

2015

 

Net loss

 

$

(52,379)

 

$

(60,942)

 

$

(159,365)

 

$

(214,128)

 

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

 

 

(298)

 

 

15

 

 

730

 

 

48

 

Comprehensive loss

 

 

(52,677)

 

 

(60,927)

 

 

(158,635)

 

 

(214,080)

 

Less: comprehensive loss attributable to noncontrolling interests

 

 

31,921

 

 

31,984

 

 

72,464

 

 

53,342

 

Comprehensive loss attributable to Genesis Healthcare, Inc.

 

$

(20,756)

 

$

(28,943)

 

$

(86,171)

 

$

(160,738)

 

 

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, 

 

 

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(159,365)

 

$

(214,128)

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Non-cash interest and leasing arrangements, net

 

 

70,228

 

 

69,525

 

Other non-cash charges and gains, net

 

 

(48,084)

 

 

(7,346)

 

Share based compensation

 

 

6,759

 

 

27,852

 

Depreciation and amortization

 

 

190,822

 

 

176,187

 

Provision for losses on accounts receivable

 

 

81,776

 

 

68,829

 

Equity in net income of unconsolidated affiliates

 

 

(2,153)

 

 

(1,153)

 

Benefit for deferred taxes

 

 

(21,957)

 

 

(36,714)

 

Loss (gain) on early extinguishment of debt

 

 

12,714

 

 

(3,104)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(136,383)

 

 

(102,226)

 

Accounts payable and other accrued expenses and other

 

 

40,945

 

 

17,329

 

Net cash provided by (used in) operating activities

 

 

35,302

 

 

(4,949)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(70,790)

 

 

(65,493)

 

Purchases of marketable securities

 

 

(38,845)

 

 

(27,519)

 

Proceeds on maturity or sale of marketable securities

 

 

53,014

 

 

19,703

 

Net change in restricted cash and equivalents

 

 

20,984

 

 

(12,303)

 

Sale of investment in joint venture

 

 

1,010

 

 

26,358

 

Purchases of inpatient assets, net of cash acquired

 

 

(108,299)

 

 

(11,598)

 

Sales of assets

 

 

149,398

 

 

1,263

 

Restricted deposits

 

 

(8,096)

 

 

 —

 

Investments in joint venture

 

 

(536)

 

 

 —

 

Other, net

 

 

3,122

 

 

1,656

 

Net cash provided by (used in) investing activities

 

 

962

 

 

(67,933)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

662,000

 

 

589,500

 

Repayments under revolving credit facility

 

 

(611,000)

 

 

(529,000)

 

Proceeds from issuance of long-term debt

 

 

354,137

 

 

361,101

 

Proceeds from tenant improvement draws under lease arrangements

 

 

1,157

 

 

2,033

 

Repayment of long-term debt

 

 

(436,923)

 

 

(351,420)

 

Debt issuance costs

 

 

(12,441)

 

 

(17,776)

 

Distributions to noncontrolling interests and stockholders

 

 

(897)

 

 

(9,433)

 

Net cash (used in) provided by financing activities

 

 

(43,967)

 

 

45,005

 

Net decrease in cash and cash equivalents

 

 

(7,703)

 

 

(27,877)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

61,543

 

 

87,548

 

End of period

 

$

53,840

 

$

59,671

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

333,509

 

$

308,029

 

Net taxes (refunded) paid

 

 

(9,777)

 

 

18,983

 

Non-cash financing activities:

 

 

 

 

 

 

 

Capital leases

 

$

(49,622)

 

$

56,766

 

Financing obligations

 

 

28,933

 

 

27,500

 

Assumption of long-term debt

 

 

 —

 

 

436,887

 

 

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) 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. The Company provides inpatient services through 507 skilled nursing, assisted/senior living and behavioral health centers located in 34 states.  Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 85% 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.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 12% 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 (income) 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 variable interest entities was not material at September 30, 2016.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X 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, 2015 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 14, 2016.

 

7


 

Table of Contents

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

 

Certain prior year amounts have been reclassified to conform to current period presentation, the effect of which was not material. Upon adoption of new accounting guidance, debt issuance costs have been presented as a direct deduction from long-term debt rather than as an other long-term asset in all periods presented.

 

The Company’s financial position at September 30, 2016 includes the impact of certain significant transactions and events, as disclosed within Note 3 – “Significant Transactions and Events.”

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed 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 adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. The Company is still evaluating the effect, if any, ASU 2014-09 will have on the Company’s consolidated financial condition and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (ASU 2014-15), requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances.  ASU 2014-15 is effective for annual and interim periods ending after December 31, 2016.  The Company is still evaluating the effect, if any, ASU 2014-15 will have on its consolidated financial condition and results of operations.

 

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 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company is still evaluating the effect, if any, ASU 2016-01 will have on its consolidated financial condition and results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition. The adoption of ASU 2016-02 is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and does not expect the adoption of this standard to have an impact on liquidity.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to

8


 

Table of Contents

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

 

their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.  The Company is still evaluating the effect, if any, ASU 2016-09 will have on its 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 new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.  The Company is still evaluating the effect, if any, that ASU 2016-15 will have on its consolidated statements of cash flows.

 

(2)   Certain Significant Risks and Uncertainties

 

Revenue Sources

 

The Company receives revenues from Medicare, Medicaid, private insurance, 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, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

2016

    

2015

 

 

2016

    

2015

 

Medicare

24

%  

26

%  

 

25

%  

26

%  

Medicaid

55

%  

53

%  

 

54

%  

53

%  

Insurance

11

%  

11

%  

 

11

%  

11

%  

Private and other

10

%  

10

%  

 

10

%  

10

%  

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 an 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

9


 

Table of Contents

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

 

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.  The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on March 14, 2016 and in the Company’s Quarterly Reports on Form 10-Q.

 

(3)   Significant Transactions and Events

 

The Combination with Skilled

 

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled), entered into a Purchase and Contribution Agreement with FC-GEN Operations Investment, LLC (FC-GEN) pursuant to which the businesses and operations of FC-GEN and Skilled were combined (the Combination). On February 2, 2015, the Combination was completed.

 

Pro forma information

 

The acquired business contributed net revenues of $608.0 million and net loss of $17.9 million to the Company for the period from February 1, 2015 to September 30, 2015. The unaudited pro forma net effect of the Combination assuming the acquisition occurred as of January 1, 2015 is as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

Pro forma

 

 

 

nine months ended

 

 

 

September 30, 2015

 

    

Revenues

$

4,249,791

 

 

Loss attributable to Genesis Healthcare, Inc.

 

(57,813)

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

Basic

$

(0.65)

 

 

Diluted

$

(0.66)

 

 

 

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Combination for the periods presented. The unaudited results of operations include transaction and financing costs totaling $88.8 million incurred by both the Company and Skilled in connection with the Combination. These costs have been eliminated from the results of operations for the nine months ended September 30, 2015 for purposes of the pro forma financial presentation.

 

Sale of Kansas ALFs

 

On January 1, 2016, the Company sold 18 Kansas assisted/senior living facilities acquired in the Combination for $67.0 million. Of the proceeds received, $54.2 million were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

10


 

Table of Contents

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

 

Sale of Hospice and Home Health

 

In March 2016, the Company signed an agreement with FC Compassus LLC, a nationwide network of community-based hospice and palliative care programs, to sell its hospice and home health operations for $84 million. Effective May 1, 2016, the Company completed the sale and received $72 million in cash and a $12 million short-term note.  The sale resulted in a gain of $44.0 million and a derecognition of goodwill and identifiable intangible assets of $30.8 million.  The cash proceeds were used to pay down partially the Company’s Term Loan Facility.  See Note 7 – “Long-Term Debt – Term Loan Facility.” Through the asset purchase agreement, the Company retained certain liabilities.  See Note 11 – “Commitments and Contingencies – Legal Proceedings - Creekside Hospice Litigation.”  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.

 

HUD Insured Loans

 

During the three and nine months ended September 30, 2016, the Company closed on the HUD insured financings of three and 21 skilled nursing facilities for $14.2 million and $143.2 million, respectively.  The total proceeds from the financings were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Acquisition from Revera

 

On September 1, 2016, the Company acquired five skilled nursing facilities from Revera Assisted Living, Inc. (Revera) for a purchase price of $39.4 million.  The Company had previously acquired the real property of 15 of Revera’s skilled nursing facilities on December 1, 2015 and entered into leases for four additional skilled nursing facilities while awaiting change of ownership approval for the remaining five skilled nursing facilities located in the State of Vermont.  During the period from December 1, 2015 through August 31, 2016, the Company managed the operations of the remaining five skilled nursing facilities in the State of Vermont.  The acquisition was financed through a real estate bridge loan for $37.0 million.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

(4)Earnings (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 approximate 42% noncontrolling interest of the legacy 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.

 

11


 

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 loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any.

 

The computations of basic and diluted EPS are consistent with any potentially dilutive adjustments to the numerator or denominator being anti-dilutive and therefore excluded from the dilutive calculation. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

  

2016

  

2015

  

2016

  

2015

  

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(52,355)

 

$

(60,981)

 

$

(159,364)

 

$

(212,557)

 

Less: Net loss attributable to noncontrolling interests

 

 

(31,921)

 

 

(31,990)

 

 

(72,895)

 

 

(53,424)

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(20,434)

 

$

(28,991)

 

$

(86,469)

 

$

(159,133)

 

(Loss) income from discontinued operations, net of taxes

 

 

(24)

 

 

39

 

 

(1)

 

 

(1,571)

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(20,458)

 

$

(28,952)

 

$

(86,470)

 

$

(160,704)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

90,226

 

 

89,213

 

 

89,617

 

 

84,615

 

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.23)

 

$

(0.32)

 

$

(0.96)

 

$

(1.88)

 

(Loss) income from discontinued operations, net of taxes

 

 

(0.00)

 

 

0.00

 

 

(0.00)

 

 

(0.02)

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.23)

 

$

(0.32)

 

$

(0.96)

 

$

(1.90)

 

 

The following were excluded from net loss attributable to Genesis Healthcare, Inc. and the weighted-average diluted shares computation for the three and nine months ended September 30, 2016 and 2015, as their inclusion would have been anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

 

2016

  

2015

 

2016

  

2015

 

 

 

Net loss

 

 

 

Net loss

 

 

 

Net loss

 

 

 

Net loss

 

 

 

 

 

attributable to

 

 

 

attributable to

 

 

 

attributable to

 

 

 

attributable to

 

 

 

 

 

Genesis

 

Antidilutive

 

Genesis

 

Antidilutive

 

Genesis

 

Antidilutive

 

Genesis

 

Antidilutive

 

 

    

Healthcare, Inc.

 

shares

 

Healthcare, Inc.

 

shares

 

Healthcare, Inc.

    

shares

    

Healthcare, Inc.

    

shares

 

Exchange of restricted stock units of noncontrolling interests

 

$

(26,959)

 

64,391

 

$

(20,639)

 

64,461

    

$

(58,465)

 

64,437

 

$

(31,945)

 

56,906

 

Employee and director unvested restricted stock units

 

 

 —

 

 —

 

 

 —

 

323

 

 

 —

 

 —

 

 

 —

 

149

 

 

 

Because the Company is in a net loss position for the three and nine months ended September 30, 2016, the combined impact of the assumed conversion of the approximate 42% noncontrolling interest to common stock and the related tax implications are anti-dilutive to EPS.  As of September 30, 2016, there were 64,249,380 units attributed to the noncontrolling interests outstanding.  In addition to the outstanding units attributed to the noncontrolling interests, the conversion of all of those units will result in the issuance of an incremental 11,187 shares of Class A common stock.  In the nine months ended September 30, 2016, 984,849 shares vested and  849,233 were issued with respect to the June 3, 2015 grant. On June 8, 2016, 4,339,932 restricted stock awards were granted to employees and 360,000 restricted stock

12


 

Table of Contents

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

 

awards to non-employee directors.  On August 5, 2016, an additional 503,834 restricted stock awards were granted to employees.  Because the Company is in a net loss position for the three and nine months ended September 30, 2016, the combined impact of the grants under the 2015 Omnibus Equity Incentive Plan to common stock and the related tax implications are anti-dilutive to EPS. 

13


 

Table of Contents

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

 

(5)Segment Information

 

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments see Note 1 – “General Information – Description of Business.”

 

A summary of the Company’s segmented revenues follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,192,498

 

84.0

%  

$

1,155,123

 

81.5

%  

$

37,375

 

3.2

%

Assisted/Senior living facilities

 

 

29,423

 

2.1

%  

 

36,635

 

2.6

%  

 

(7,212)

 

(19.7)

%

Administration of third party facilities

 

 

2,659

 

0.2

%  

 

2,225

 

0.2

%  

 

434

 

19.5

%

Elimination of administrative services

 

 

(340)

 

 —

%  

 

(421)

 

 —

%  

 

81

 

(19.2)

%

Inpatient services, net

 

 

1,224,240

 

86.3

%  

 

1,193,562

 

84.3

%  

 

30,678

 

2.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

261,543

 

18.4

%  

 

281,151

 

19.9

%  

 

(19,608)

 

(7.0)

%

Elimination intersegment rehabilitation therapy services

 

 

(101,156)

 

(7.1)

%  

 

(107,112)

 

(7.6)

%  

 

5,956

 

(5.6)

%

Third party rehabilitation therapy services

 

 

160,387

 

11.3

%  

 

174,039

 

12.3

%  

 

(13,652)

 

(7.8)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

40,376

 

2.8

%  

 

58,804

 

4.1

%  

 

(18,428)

 

(31.3)

%

Elimination intersegment other services

 

 

(6,009)

 

(0.4)

%  

 

(10,378)

 

(0.7)

%  

 

4,369

 

(42.1)

%

Third party other services

 

 

34,367

 

2.4

%  

 

48,426

 

3.4

%  

 

(14,059)

 

(29.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,418,994

 

100.0

%  

$

1,416,027

 

100.0

%  

$

2,967

 

0.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,595,258

 

82.9

%  

$

3,424,788

 

81.9

%  

$

170,470

 

5.0

%

Assisted/Senior living facilities

 

 

90,772

 

2.1

%  

 

106,497

 

2.5

%  

 

(15,725)

 

(14.8)

%

Administration of third party facilities

 

 

8,608

 

0.2

%  

 

7,724

 

0.2

%  

 

884

 

11.4

%

Elimination of administrative services

 

 

(1,077)

 

 —

%  

 

(1,445)

 

 —

%  

 

368

 

(25.5)

%

Inpatient services, net

 

 

3,693,561

 

85.2

%  

 

3,537,564

 

84.6

%  

 

155,997

 

4.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

821,704

 

19.1

%  

 

818,335

 

19.6

%  

 

3,369

 

0.4

%

Elimination intersegment rehabilitation therapy services

 

 

(311,060)

 

(7.2)

%  

 

(323,020)

 

(7.7)

%  

 

11,960

 

(3.7)

%

Third party rehabilitation therapy services

 

 

510,644

 

11.9

%  

 

495,315

 

11.9

%  

 

15,329

 

3.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

142,336

 

3.3

%  

 

172,759

 

4.1

%  

 

(30,423)

 

(17.6)

%

Elimination intersegment other services

 

 

(16,971)

 

(0.4)

%  

 

(27,135)

 

(0.6)

%  

 

10,164

 

(37.5)

%

Third party other services

 

 

125,365

 

2.9

%  

 

145,624

 

3.5

%  

 

(20,259)

 

(13.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,329,570

 

100.0

%  

$

4,178,503

 

100.0

%  

$

151,067

 

3.6

%

14


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,224,580

 

$

261,543

 

$

40,226

 

$

150

 

$

(107,505)

 

$

1,418,994

 

Salaries, wages and benefits

 

 

586,654

 

 

219,864

 

 

27,896

 

 

 —

 

 

 —

 

 

834,414

 

Other operating expenses

 

 

428,820

 

 

18,903

 

 

10,610

 

 

 —

 

 

(107,505)

 

 

350,828

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

46,545

 

 

 —

 

 

46,545

 

Provision for losses on accounts receivable

 

 

21,088

 

 

4,722

 

 

(161)

 

 

(47)

 

 

 —

 

 

25,602

 

Lease expense

 

 

34,745

 

 

24

 

 

269

 

 

474

 

 

 —

 

 

35,512

 

Depreciation and amortization expense

 

 

53,313

 

 

2,943

 

 

163

 

 

4,685

 

 

 —

 

 

61,104

 

Interest expense

 

 

109,339

 

 

14

 

 

10

 

 

22,449

 

 

 —

 

 

131,812

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,363

 

 

 —

 

 

15,363

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(934)

 

 

 —

 

 

(934)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(5,173)

 

 

 —

 

 

(5,173)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,057

 

 

 —

 

 

3,057

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

715

 

 

(893)

 

(Loss) income before income tax benefit

 

 

(9,379)

 

 

15,073

 

 

1,439

 

 

(84,661)

 

 

(715)

 

 

(78,243)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(25,888)

 

 

 —

 

 

(25,888)

 

(Loss) income from continuing operations

 

$

(9,379)

 

$

15,073

 

$

1,439

 

$

(58,773)

 

$

(715)

 

$

(52,355)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2015

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,193,983

 

$

281,151

 

$

58,501

 

$

303

 

$

(117,911)

 

$

1,416,027

 

Salaries, wages and benefits

 

 

568,888

 

 

229,021

 

 

35,726

 

 

 —

 

 

 —

 

 

833,635

 

Other operating expenses

 

 

413,055

 

 

19,513

 

 

18,261

 

 

 —

 

 

(117,910)

 

 

332,919

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

45,889

 

 

 —

 

 

45,889

 

Provision for losses on accounts receivable

 

 

18,514

 

 

5,120

 

 

341

 

 

(629)

 

 

 —

 

 

23,346

 

Lease expense

 

 

36,577

 

 

28

 

 

589

 

 

461

 

 

 —

 

 

37,655

 

Depreciation and amortization expense

 

 

53,384

 

 

3,904

 

 

349

 

 

4,868

 

 

 —

 

 

62,505

 

Interest expense

 

 

106,433

 

 

14

 

 

11

 

 

22,123

 

 

(43)

 

 

128,538

 

Gain on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(3,104)

 

 

 —

 

 

(3,104)

 

Investment (income) loss

 

 

 —

 

 

 —

 

 

 —

 

 

(396)

 

 

43

 

 

(353)

 

Other loss

 

 

 —

 

 

 —

 

 

 —

 

 

38

 

 

 —

 

 

38

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,306

 

 

 —

 

 

3,306

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

30,000

 

 

 —

 

 

30,000

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,071)

 

 

431

 

 

(640)

 

(Loss) income before income tax benefit

 

 

(2,868)

 

 

23,551

 

 

3,224

 

 

(101,182)

 

 

(432)

 

 

(77,707)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(16,726)

 

 

 —

 

 

(16,726)

 

(Loss) income from continuing operations

 

$

(2,868)

 

$

23,551

 

$

3,224

 

$

(84,456)

 

$

(432)

 

$

(60,981)

 

 

15


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

3,694,638

 

$

821,704

 

$

141,970

 

$

366

 

$

(329,108)

 

$

4,329,570

 

Salaries, wages and benefits

 

 

1,748,232

 

 

689,833

 

 

96,759

 

 

 —

 

 

 —

 

 

2,534,824

 

Other operating expenses

 

 

1,296,069

 

 

58,927

 

 

36,198

 

 

 —

 

 

(329,108)

 

 

1,062,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

139,999

 

 

 —

 

 

139,999

 

Provision for losses on accounts receivable

 

 

68,757

 

 

12,165

 

 

993

 

 

(139)

 

 

 —

 

 

81,776

 

Lease expense

 

 

107,047

 

 

71

 

 

1,209

 

 

1,469

 

 

 —

 

 

109,796

 

Depreciation and amortization expense

 

 

167,208

 

 

9,137

 

 

805

 

 

13,672

 

 

 —

 

 

190,822

 

Interest expense

 

 

328,385

 

 

43

 

 

30

 

 

72,395

 

 

 —

 

 

400,853

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,830

 

 

 —

 

 

15,830

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,073)

 

 

 —

 

 

(2,073)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(48,084)

 

 

 —

 

 

(48,084)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

9,804

 

 

 —

 

 

9,804

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

15,192

 

 

 —

 

 

15,192

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(3,894)

 

 

1,741

 

 

(2,153)

 

(Loss) income before income tax benefit

 

 

(21,060)

 

 

51,528

 

 

5,976

 

 

(213,805)

 

 

(1,741)

 

 

(179,102)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(19,738)

 

 

 —

 

 

(19,738)

 

(Loss) income from continuing operations

 

$

(21,060)

 

$

51,528

 

$

5,976

 

$

(194,067)

 

$

(1,741)

 

$

(159,364)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2015

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

3,539,009

 

$

818,335

 

$

171,175

 

$

1,584

 

$

(351,600)

 

$

4,178,503

 

Salaries, wages and benefits

 

 

1,674,262

 

 

664,600

 

 

106,432

 

 

 —

 

 

 —

 

 

2,445,294

 

Other operating expenses

 

 

1,240,551

 

 

54,507

 

 

50,260

 

 

 —

 

 

(351,599)

 

 

993,719

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

130,902

 

 

 —

 

 

130,902

 

Provision for losses on accounts receivable

 

 

54,858

 

 

13,053

 

 

1,659

 

 

(715)

 

 

 —

 

 

68,855

 

Lease expense

 

 

109,843

 

 

83

 

 

1,795

 

 

1,312

 

 

 —

 

 

113,033

 

Depreciation and amortization expense

 

 

152,641

 

 

9,803

 

 

909

 

 

12,690

 

 

 —

 

 

176,043

 

Interest expense

 

 

315,902

 

 

16

 

 

31

 

 

60,577

 

 

(290)

 

 

376,236

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

130

 

 

 —

 

 

130

 

Investment (income) loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,490)

 

 

290

 

 

(1,200)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(7,522)

 

 

 —

 

 

(7,522)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

92,016

 

 

 —

 

 

92,016

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

31,500

 

 

 —

 

 

31,500

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(2,528)

 

 

1,375

 

 

(1,153)

 

(Loss) income before income tax benefit

 

 

(9,048)

 

 

76,273

 

 

10,089

 

 

(315,288)

 

 

(1,376)

 

 

(239,350)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(26,793)

 

 

 —

 

 

(26,793)

 

(Loss) income from continuing operations

 

$

(9,048)

 

$

76,273

 

$

10,089

 

$

(288,495)

 

$

(1,376)

 

$

(212,557)

 

 

16


 

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, 2016 compared to December 31, 2015 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

Inpatient services

 

$

5,306,047

 

$

5,437,518

 

Rehabilitation services

 

 

456,032

 

 

442,969

 

Other services

 

 

67,318

 

 

91,775

 

Corporate and eliminations

 

 

57,190

 

 

87,687

 

Total assets

 

$

5,886,587

 

$

6,059,949

 

 

The following table presents segment goodwill as of September 30, 2016 compared to December 31, 2015 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

Inpatient services

 

$

358,471

 

$

357,649

 

Rehabilitation services

 

 

73,814

 

 

73,098

 

Other services

 

 

11,828

 

 

39,272

 

Total goodwill

 

$

444,113

 

$

470,019

 

 

With the sale of the Company’s hospice and home health operations effective May 1, 2016, the Company derecognized goodwill of $27.4 million.  See Note 3 – “Significant Transactions and Events – Sale of Hospice and Home Health.”

 

 

(6)Property and Equipment

 

Property and equipment consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

Land, buildings and improvements

 

$

748,119

 

$

714,766

 

Capital lease land, buildings and improvements

 

 

842,899

 

 

903,977

 

Financing obligation land, buildings and improvements

 

 

2,643,997

 

 

2,644,307

 

Equipment, furniture and fixtures

 

 

450,689

 

 

436,300

 

Construction in progress

 

 

40,330

 

 

24,665

 

Gross property and equipment

 

 

4,726,034

 

 

4,724,015

 

Less: accumulated depreciation

 

 

(781,414)

 

 

(638,768)

 

Net property and equipment

 

$

3,944,620

 

$

4,085,247

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

Table of Contents

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

 

(7)   Long-Term Debt

 

Long-term debt at September 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Revolving credit facilities, net of debt issuance costs of $10,205 at September 30, 2016 and $10,254 at December 31, 2015

 

$

403,795

 

$

352,746

 

Term loan facility, net of original issue discount of $7,475 and net of debt issuance costs of $10,129 at December 31, 2015

 

 

 —

 

 

210,842

 

New term loans, net of debt issuance costs of $3,696 at September 30, 2016

 

 

116,480

 

 

 —

 

Real estate bridge loans, net of debt issuance costs of $5,106 at September 30, 2016 and $9,567 at December 31, 2015

 

 

380,587

 

 

484,533

 

HUD insured loans, net of debt issuance costs of $6,288 at September 30, 2016 and $1,395 at December 31, 2015

 

 

242,474

 

 

106,250

 

Mortgages and other secured debt (recourse)

 

 

13,412

 

 

13,934

 

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $143 at September 30, 2016 and $176 at December 31, 2015

 

 

29,466

 

 

30,331

 

 

 

 

1,186,214

 

 

1,198,636

 

Less:  Current installments of long-term debt

 

 

(30,758)

 

 

(12,477)

 

Long-term debt

 

$

1,155,456

 

$

1,186,159

 

 

Revolving Credit Facilities

 

The Company’s revolving credit facilities (the Revolving Credit Facilities) consist of a senior secured, asset-based revolving credit facility of up to $550 million under three separate tranches:  Tranche A-1, Tranche A-2 and FILO Tranche.  Interest accrues 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 is based on the level of commitments for all three tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.25% to 2.75%; (ii) for Tranche A-2 ranges from 3.00% to 2.50%; and (iii) for FILO Tranche is 5.00%.  The Revolving Credit Facilities mature on February 2, 2020, provided that if the Skilled Real Estate Bridge Loan (defined below) or the Revera Real Estate Bridge Loan (defined below) is not refinanced with longer term debt or their terms not extended prior to their extension option maturities of February 23, 2018 and February 27, 2019, respectively, the Revolving Credit Facilities will mature 90 days prior to such maturity date, as applicable (November 25, 2017 and November 29, 2018, respectively).  Borrowing levels under the Revolving Credit Facilities are limited to a borrowing base that is computed based upon the level of the Company’s eligible accounts receivable, as defined therein.  In addition to paying interest on the outstanding principal borrowed under the Revolving Credit Facilities, the Company is required to pay a commitment fee to the lenders for any unutilized commitments.  The commitment fee rate ranges from 0.375% per annum to 0.50% depending upon the level of unused commitment.

 

Borrowings and interest rates under the three tranches were as follows at September 30, 2016:

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

Average

 

Revolving credit facility

 

Borrowings

 

Interest

 

FILO tranche

 

$

25,000

 

6.65

%

Tranche A-1

 

 

339,000

 

5.04

%

Tranche A-2

 

 

50,000

 

4.02

%

 

 

$

414,000

 

5.01

%

 

As of September 30, 2016, the Company had a total borrowing base capacity of $533.3 million with outstanding borrowings under the Revolving Credit Facilities of $414.0 million and $67.0 million of drawn letters of credit securing

18


 

Table of Contents

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

 

insurance and lease obligations, leaving the Company with approximately $52.3 million of available borrowing capacity under the Revolving Credit Facilities.

 

On July 29, 2016, the Company entered into an amendment (the ABL Amendment) to its Revolving Credit Facilities. Among other things, the ABL Amendment (i) modifies financial covenants effective June 30, 2016 to provide additional flexibility to the Company; (ii) permits the Company to enter into certain other transactions; and (iii) increases the interest rate margin applicable to the revolving loans under the ABL Credit Agreement (the New Applicable Margin). The New Applicable Margin for LIBOR loans increased (i) for Tranche A-1 loans, from a range of 2.75% to 3.25% to a range of 3.00% to 3.50%, (ii) for Tranche A-2 loans, from a range of 2.50% to 3.00% to a range of 3.00% to 3.50% and (iii) for FILO Tranche, from 5.00% to 6.00%.  The New Applicable Margin for 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) loans increased (i) for Tranche A-1 loans, from a range of 1.75% to 2.25% to a range of 2.00% to 2.50%, (ii) for Tranche A-2 loans, from a range of 1.50% to 2.00% to a range of 2.00% to 2.50% and (iii) for FILO Tranche, from 4.00% to 5.00%. 

 

The amended Revolving Credit Facilities contain financial, affirmative and negative covenants, and events of default effective as of June 30, 2016 that are substantially identical to those of the New Term Loan Agreement (as defined below), but also contain a minimum liquidity covenant and a springing minimum fixed charge coverage covenant tied to the minimum liquidity requirement.  The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined, of no more than 6.0 to 1.0 through March of 2017 and stepping down over the course of the loan to 4.0 to 1.0 beginning in 2020.

 

Term Loan Facility and New Term Loan Agreement

 

The five-year term loan facility (Term Loan Facility) was secured by a first priority lien on the membership interests in the Company and on substantially all of the Company’s and its subsidiaries’ assets other than collateral held on a first priority basis by the Revolving Credit Facilities lender.  Borrowings under the Term Loan Facility bore interest at a rate per annum equal to the applicable margin plus, at the Company’s option, either (x) LIBOR or (y) a base rate determined by reference to the highest of (i) the lender defined prime rate, (ii) the federal funds rate effective plus one half of one percent and (iii) LIBOR described in subclause (x) plus 1.0%.  LIBOR based loans were subject to an interest rate floor of 1.5% and base rate loans were subject to a floor of 2.5%.  The Term Loan Facility was set to mature on the earliest of (i) December 4, 2017 and (ii) 90 days prior to the maturity of the Skilled Real Estate Bridge Loan, including extensions.  On July 29, 2016, the Company paid the outstanding balance of $153.4 million under the Term Loan Facility.  In addition, the Company paid an early termination fee of approximately $3.1 million. The Term Loan Facility and all guarantees and liens related thereto were terminated upon such payments.

 

On July 29, 2016, the Company and certain of its affiliates, including FC-GEN Operations Investment, LLC (the Borrower) entered into a four-year term loan agreement (the New Term Loan Agreement) with an affiliate of Welltower Inc. (Welltower) and an affiliate of Omega Healthcare Investors, Inc. (Omega).  The New Term Loan Agreement provides for term loans (the New 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.  Borrowings under the New Term Loan Agreement bear interest at a rate equal to a base rate (subject to a floor of 1.00%) or an ABR rate (subject to a floor of 2.0%), plus in each case a specified applicable margin.   The initial applicable margin for base rate loans is 13.0% per annum and the initial applicable margin for ABR rate loans is 12.0% per annum.  At the Company’s election, with respect to either base rate or ABR rate loans, up to 2.0% of the interest may be paid either in cash or paid-in-kind.  The proceeds of the New Term Loan, along with cash on hand, were used to repay all outstanding term loans and other obligations under the Term Loan Facility.  As of September 30, 2016, the New Term Loans had an outstanding principal balance of $120.2 million.

 

19


 

Table of Contents

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

 

The New 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 New Term Loan Agreement is also secured by a junior lien on the assets that secure the Revolving Credit Facilities, as amended, on a first priority basis.

 

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.  In addition, Welltower currently provides funding, pursuant to two bridge loans, to certain affiliates of the Company.  The Company also issued a note to Welltower as part of the November 1, 2016 transaction, in which Welltower sold the real estate of 64 facilities that the Company leased from Welltower.  The Company will continue to operate these facilities under a new master lease agreement.  See Note 14 – “Subsequent Events – New Master Leases.”

 

The New 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 6.0 to 1.0 through March of 2017 and stepping down over the course of the loan to 4.0 to 1.0 beginning in 2020.

 

Real Estate Bridge Loans

 

In connection with the Combination on February 2, 2015, the Company entered into a $360.0 million real estate bridge loan (the Skilled Real Estate Bridge Loan), which is secured by a mortgage lien on the real property of 67 facilities and a second lien on certain receivables of the operators of such facilities.  The Skilled Real Estate Bridge Loan is subject to a 24-month term with two extension options of 90 days each followed by one extension option of 180 days.  The loan accrues interest at a rate equal to LIBOR, plus 6.75%, plus an additional margin that ranges up to 7.50% based on the aggregate number of days the Skilled Real Estate Bridge Loan is outstanding.  The interest rate is also subject to a LIBOR interest rate floor of 0.5%.  The Skilled Real Estate Bridge Loan bore interest of 12.78% at September 30, 2016.  The Skilled Real Estate Bridge Loan is 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 Skilled Real Estate Bridge Loan.  The proceeds of the Skilled Real Estate Bridge Loan were used to repay Skilled’s first lien senior secured term loan, repay Skilled’s mortgage loans and asset based revolving credit facility with MidCap Financial with excess proceeds used to fund direct costs of the Combination with the Company.  The Skilled Real Estate Bridge Loan has an outstanding principal balance of $160.7 million at September 30, 2016.

 

In connection with the acquisition of the real property of 15 skilled nursing facilities on December 1, 2015 from Revera, the Company entered into a $134.1 million real estate bridge loan (the Revera Real Estate Bridge Loan and, together with the Skilled Real Estate Bridge Loan, the Welltower Real Estate Bridge Loans), which is secured by a mortgage lien on the real property of 15 facilities.  On September 1, 2016, the Company acquired another five skilled nursing facilities from Revera drawing on the remaining available commitment of the Revera Real Estate Bridge Loan of $37.0 million.  The Revera Real Estate Bridge Loan is subject to a 24-month term, reset effective September 1, 2016, with two extension options of 90 days each and accrues interest at a rate equal to LIBOR, plus 6.75%, plus an additional margin that ranges up to 7.00% based on the aggregate number of days the Revera Real Estate Bridge Loan is outstanding, plus 0.25% multiplied by the result of dividing the number of percentage points by which the loan-to-value ratio, defined as the ratio, expressed as a percentage, of (i) the outstanding principal balance to (ii) the total appraised value of the facilities as of the closing date, exceeds 75% by five.  The interest rate is also subject to a LIBOR interest rate floor of 0.5%.  The Revera Real Estate Bridge Loan bore interest of 9.53% at September 30, 2016.  The Revera Real Estate Bridge Loan is 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

20


 

Table of Contents

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

 

facilities such net proceeds are required to be used to repay the outstanding principal balance of the Revera Real Estate Bridge Loan.  The proceeds of the Revera Real Estate Bridge Loan were used to finance the acquisition of the real property of 20 Revera facilities.  The Revera Real Estate Bridge Loan has an outstanding principal balance of $171.1 million at September 30, 2016. 

 

On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million real estate bridge loan.  On May 23, 2016, the Company acquired the real property of five skilled nursing facilities it operated under a leasing arrangement and entered into a $44.0 million real estate bridge loan (collectively, the Other Real Estate Bridge Loans).  Each of the Other Real Estate Bridge Loans has a term of three years and accrues interest at a rate equal to LIBOR plus a margin of 4.00%. The Other Real Estate Bridge Loans bore interest of 4.53% at September 30, 2016. The Other Real Estate Bridge Loans are subject to payments primarily of interest only, with some principal payments in the second and third years, 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 pay down the outstanding principal balance of the Other Real Estate Bridge Loans.  The Other Real Estate Bridge Loans have an outstanding principal balance of $53.9 million at September 30, 2016.

 

HUD Insured Loans

 

As of September 30, 2016, the Company has 32 skilled nursing facility loans insured by the U.S. Department of Housing and Urban Development (HUD). The HUD insured loans have an original amortization term of 30 to 35 years. As of September 30, 2016 the Company has HUD insured loans with a combined aggregate principal balance of $248.8 million, which includes a $14.2 million debt premium on 10 skilled nursing facility loans established in purchase accounting in connection with the Combination.

 

These loans have an average remaining term of 32 years with fixed interest rates ranging from 3.1% to 4.6% and a weighted average interest rate of 3.7%. 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, 2016, the Company has total escrow reserve funds of $16.3 million with the loan servicer that are reported within prepaid expenses.

 

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 ranging from 2.3% to 6.0% at September 30, 2016, 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 ranging from 2.5% to 22.2%  with a weighted average interest rate of 4.2%, at September 30, 2016.  Maturity dates range from 2018 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.

 

21


 

Table of Contents

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

 

Debt Covenants

 

The Revolving Credit Facilities, the New Term Loan Agreement and the Welltower Real Estate Bridge Loans (collectively, the Credit Facilities) each contain a number of restrictive covenants that, among other things, impose operating and financial restrictions on the Company and its subsidiaries.  The Credit Facilities also require the Company to meet defined financial covenants, including interest coverage ratio, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, all as defined in the applicable agreements.  The Credit Facilities also contain other customary covenants and events of default and cross default.  As of September 30, 2016, the Company is in compliance with all 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.  Should the Company fail to comply with its debt covenants at a future measurement date, it could, 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 could have an even more significant impact on the Company’s financial position. 

 

As of September 30, 2016, considering the combination of scheduled debt maturities or accelerated maturity features in other debt agreements, the Company has $386.2 million in debt obligations due in the next two years. The liquidity and financial condition of the Company will be adversely impacted in the event these obligations cannot be extended or refinanced prior to their scheduled or accelerated maturity dates. 

 

The maturity of total debt of $1,186.2 million at September 30, 2016 is as follows (in thousands): 

 

 

 

 

 

 

Twelve months ended September 30, 

 

 

 

2017

 

$

30,758

2018

 

 

355,429

2019

 

 

58,144

2020

 

 

502,599

2021

 

 

5,778

Thereafter

 

 

233,506

Total debt maturity

 

$

1,186,214

 

 

22


 

Table of Contents

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

 

(8)   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, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Twelve months ended September 30, 

    

Capital Leases

    

Operating Leases

 

2017

 

$

93,236

 

$

137,412

 

2018

 

 

90,466

 

 

136,294

 

2019

 

 

92,445

 

 

133,335

 

2020

 

 

94,742

 

 

133,523

 

2021

 

 

96,895

 

 

128,347

 

Thereafter

 

 

3,213,393

 

 

323,583

 

Total future minimum lease payments

 

 

3,681,177

 

$

992,494

 

Less amount representing interest

 

 

(2,665,714)

 

 

 

 

Capital lease obligation

 

 

1,015,463

 

 

 

 

Less current portion

 

 

(1,852)

 

 

 

 

Long-term capital lease obligation

 

$

1,013,611

 

 

 

 

 

Capital Lease Obligations

 

The capital lease obligations represent the present value of minimum lease payments under such capital lease and cease use arrangements and bear imputed interest at rates ranging from 3.5% to 12.8% at September 30, 2016, and mature at dates ranging from 2016 to 2047.

 

Deferred Lease Balances

 

At September 30, 2016 and December 31, 2015, the Company had $48.4 million and $54.7 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $30.3 million and $35.5 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheet.  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, 2016 and December 31, 2015, the Company had $30.5 million and $27.3 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheet.

 

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. 

 

On July 29, 2016, the Company entered into amendments to its master lease agreements with Welltower, Sabra Health Care REIT, Inc. (Sabra) and Omega (collectively, the Master Lease Amendments).  Among other things, the Master Lease Amendments modified financial covenants effective as of June 30, 2016 to provide the Company with additional flexibility. 

 

23


 

Table of Contents

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

 

The Master Lease Amendments each contain a number of financial, affirmative and negative covenants.  As of September 30, 2016, the Company is in compliance with all covenants contained in the Master Lease Amendments.

 

At September 30, 2016, the Company did not meet certain financial covenants contained in four leases related to 30 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, 2016 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 could, 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 could have an even more significant impact on the Company’s financial position.

 

(9)Financing Obligation

 

Future minimum payments for the next five years and thereafter under leases classified as financing obligations at September 30, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

Twelve months ended September 30, 

    

    

 

 

2017

 

$

280,656

 

2018

 

 

288,684

 

2019

 

 

296,946

 

2020

 

 

305,444

 

2021

 

 

314,173

 

Thereafter

 

 

9,644,782

 

Total future minimum lease payments

 

 

11,130,685

 

Less amount representing interest

 

 

(8,024,582)

 

Financing obligations

 

$

3,106,103

 

Less current portion

 

 

(1,566)

 

Long-term financing obligations

 

$

3,104,537

 

 

 

 

(10)Income Taxes

 

The Company effectively owns 58% 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 58% ownership of FC-GEN.

 

For the three months ended September 30, 2016, the Company recorded an income tax benefit of $25.9 million from continuing operations, representing an effective tax rate of 33.1%, compared to an income tax benefit of $16.7 million from continuing operations, representing an effective tax rate of 21.5%, for the same period in 2015.

 

24


 

Table of Contents

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

 

For the nine months ended September 30, 2016, the Company recorded an income tax benefit of $19.7 million from continuing operations, representing an effective tax rate of 11.0%, compared to an income tax benefit of $26.8 million from continuing operations, representing an effective tax rate of 11.2%, for the same period in 2015.

 

The increase in the effective tax rate for the three months ended September 30, 2016, is attributable to a $28.2 million release of a FIN48 reserve for the expiration of the statute of limitations regarding the Sun IRC 382 realized built-in-gain net operating loss carryforward.  There is also a full valuation allowance against the Company’s deferred tax assets, excluding the reversal of deferred tax liabilities related to indefinite-lived assets, and the Company’s deferred tax asset on its Bermuda captive insurance company’s discounted unpaid loss reserve.  On December 31, 2015, in assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, management 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, 2016, management has determined that the valuation allowance is still necessary.  The Company’s Bermuda captive insurance company is expected to generate positive U.S. federal taxable income in 2016, with no net operating loss to offset its taxable income.  The captive also does not have any tax credits to offset its U.S. federal income tax.

 

Beginning with the fourth quarter of 2014, the Company initiated rehabilitation therapy services within the People’s Republic of China.  In the quarter ended March 31, 2016, the Company initiated rehabilitation therapy services within Hong Kong.  At September 30, 2016, these business operations remain in their respective startup stage.  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.

 

Exchange Rights and Tax Receivable Agreement

 

Following the Combination, the owners of FC-GEN will have the right to exchange their membership interests in FC-GEN 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 will increase and its purchase price will 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 have been 200,034 exchanges in the three and nine months ended September 30, 2016.

 

Concurrent with the Combination, the Company entered into 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;

 

25


 

Table of Contents

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

 

·

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;

 

·

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 Internal Revenue Service (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.

 

(11)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 twelve 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

26


 

Table of Contents

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

 

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 workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more often 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 of claim payment patterns using a discount rate of approximately 1% for each policy period presented. The discount rate for the current policy year is 0.96%. 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 $8.4 million and $8.6 million as of September 30, 2016 and December 31, 2015, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

 

For the three months ended September 30, 2016 and 2015, the provision for general and professional liability risk totaled $34.1 million and $28.6 million, respectively.  For the nine months ended September 30, 2016 and 2015, the provision for general and professional liability risk totaled $104.3 million and $100.2 million, respectively.  The reserves for general and professional liability were $391.2 million and $371.6 million as of September 30, 2016 and December 31, 2015, respectively.

 

For the three months ended September 30, 2016 and 2015, the provision for workers’ compensation risk totaled $20.2 million and $18.8 million, respectively.  For the nine months ended September 30, 2016 and 2015, the provision for workers’ compensation risk totaled $42.2 million and $50.6 million, respectively.  The reserves for workers’ compensation risks were $219.7 million and $223.7 million as of September 30, 2016 and December 31, 2015, 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.  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.

 

27


 

Table of Contents

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

 

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, with the exception of the specific matters noted below, 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.

 

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.

 

Agreement in Principle on Financial Terms of a Settlement

 

In July 2016, the Company and the U.S. Department of Justice (the DOJ) reached an agreement in principle on the financial terms of a settlement regarding four matters arising out of the activities of Skilled or Sun Healthcare prior to their operations becoming part of the Company’s operations (collectively, the Successor Matters).  The four matters are: the Creekside Hospice Litigation, the Therapy Matters Investigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter (each as defined below).  The Company has agreed to the settlement in principle in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

Based on the agreement in principle and in anticipation of the execution of final agreements and payment of a settlement amount of $52.7 million (the Settlement Amount), the Company recorded an additional loss contingency expense in the amount of $13.6 million in the second quarter of 2016, to increase its previously estimated and recorded liability.  The Company expects to remit the Settlement Amount to the government over a period of five (5) years, once the agreement has been fully documented. 

 

The agreement in principle is subject to negotiation, completion and execution of appropriate implementing agreements, including a settlement agreement or agreements, which are expected to be finalized in the fourth quarter of 2016, and the final approval of the respective parties.  There can be no assurance that the Company will enter into a final settlement agreement with the DOJ.  At this time, management believes that the ultimate outcome of the Successor Matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.

 

Creekside Hospice Litigation

 

On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the DOJ informed Skilled that its Civil Division was investigating Skilled, as well as its then subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations (the Creekside Hospice Litigation). Those laws could have included the federal False Claims Act (FCA) and the Nevada False Claims Act (NFCA). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs.

28


 

Table of Contents

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

 

 

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intended to take over the actions. The DOJ filed its complaint in intervention on November 25, 2014, against Creekside, Skilled Healthcare Group, Inc., and Skilled Healthcare, LLC, asserting, among other things, that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 (prior to the Combination) did not meet Medicare requirements for reimbursement and were in violation of the civil False Claims Act.   

 

Therapy Matters Investigation

 

In February 2015, representatives of the DOJ informed the Company that they were investigating the provision of therapy services at certain Skilled facilities from 2005 through 2013 (prior to the Combination) and may pursue legal action against the Company and certain of its subsidiaries including Hallmark Rehabilitation GP, LLC for alleged violations of the federal and state healthcare fraud and abuse laws and regulations related to such services (the Therapy Matters Investigation). Those laws could have included the FCA and similar state laws.  

 

Staffing Matters Investigation

 

In February 2015, representatives of the DOJ informed the Company that it intended to pursue legal action against the Company and certain of its subsidiaries related to staffing and certain quality of care allegations at certain Skilled facilities that occurred prior to the Combination, related to the issues adjudicated against the Company and those subsidiaries in a previously disclosed class action lawsuit that Skilled settled in 2010 (the Staffing Matters Investigation). Those laws could have included the FCA and similar state laws.

 

SunDance Part B Therapy Matter

 

A subsidiary of Sun Healthcare, SunDance Rehabilitation Corp. (SunDance), operates an outpatient agency licensed to provide Medicare Part B therapy services at assisted/senior living facilities in Georgia and is a party to a qui tam proceeding that was filed by a private party relator under the FCA.  No SunDance agencies outside of Georgia are part of the qui tam proceeding. The Civil Division of the United States Attorney's Office for the District of Georgia has filed a notice of intervention in this matter in March 2016 and asserts that certain SunDance claims for therapy services did not meet Medicare requirements for reimbursement.

 

(12)Fair Value of Financial Instruments

 

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

 

The Company’s financial instruments, other than its trade 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.  Certain of the Company’s financial instruments contain an off-balance-sheet risk.

 

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.

29


 

Table of Contents

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

 

 

 

 

 

 

 

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).

 

The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, 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:

 

2016

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

53,840

 

$

53,840

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

12,714

 

 

12,714

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

151,291

 

 

151,291

 

 

 —

 

 

 —

 

Total

 

$

217,845

 

$

217,845

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

2015

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

61,543

 

$

61,543

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

34,370

 

 

34,370

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

163,757

 

 

163,757

 

 

 —

 

 

 —

 

Total

 

$

259,670

 

$

259,670

 

$

 —

 

$

 —

 

 

The Company places its 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Revolving credit facilities

 

$

403,795

 

$

403,795

 

$

352,746

 

$

352,746

 

Term loan facility

 

 

 —

 

 

 —

 

 

210,842

 

 

210,271

 

New term loans

 

 

116,480

 

 

116,480

 

 

 —

 

 

 —

 

Real estate bridge loans

 

 

380,587

 

 

380,587

 

 

484,533

 

 

484,533

 

HUD insured loans

 

 

242,474

 

 

239,638

 

 

106,250

 

 

106,250

 

Mortgages and other secured debt (recourse)

 

 

13,412

 

 

13,412

 

 

13,934

 

 

13,934

 

Mortgages and other secured debt (non-recourse)

 

 

29,466

 

 

29,466

 

 

30,331

 

 

30,331

 

 

 

$

1,186,214

 

$

1,183,378

 

$

1,198,636

 

$

1,198,065

 

 

30


 

Table of Contents

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

 

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 that 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.

 

The following table 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, 2016

 

September 30, 2016

 

Assets:

 

 

 

 

 

 

 

Property and equipment, net

 

$

3,944,620

 

$

 —

 

Goodwill

 

 

444,113

 

 

 —

 

Intangible assets

 

 

185,779

 

 

 —

 

 

 

 

 

 

 

 

 

 

    

 

    

    

Impairment Charges -

 

 

 

Carrying Value

 

Nine months ended

 

 

 

December 31, 2015

 

September 30, 2015

 

Assets:

 

 

 

 

 

 

 

Property and equipment, net

 

$

4,085,247

 

$

 —

 

Goodwill

 

 

470,019

 

 

 —

 

Intangible assets

 

 

209,967

 

 

 —

 

 

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.  

 

31


 

Table of Contents

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

 

(13) Asset Impairment Charges

 

Long-Lived Assets with a Definite Useful Life

 

The Company’s long-lived assets with a definite useful life were 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.  For the three and nine months ended Septemeber 30, 2016, the Company recognized no impairment charges on its long-lived assets with a definite useful life.

 

Goodwill

 

Adverse changes in the operating environment and related key assumptions used to determine the fair value of the Company’s reporting units and indefinite-lived intangible assets may result in future impairment charges for a portion or all of these assets. Specifically, if the rate of growth of government and commercial revenues earned by the Company’s reporting units were to be less than projected or if healthcare reforms were to negatively impact the Company’s business, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations but would not be expected to have an impact on the Company’s cash flows or liquidity.

 

The Company performed its annual goodwill impairment test as of September 30, 2016 and 2015.

 

Although the assessment is still in process, the Company believes that the fair value of the reporting unit exceeded the carrying value based upon the market capitalization including a control premium and a discounted cash flow analysis. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The cash flows employed in the discounted cash flow analyses are based on the Company’s internal business model for 2016 and, for years beyond 2016 the growth rates used are an estimate of the future growth in the industry in which the Company participates. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated cost of capital, which was determined based on the Company’s estimated cost of capital relative to its capital structure. In addition, the market-based approach utilizes comparable company public trading values, research analyst estimates and, where available, values observed in private market transactions.

 

The Company performed a quantitative test for impairment of goodwill to assess the impact of changes in the regulatory and reimbursement environment.  The quantitative analysis is a two-step process as follows:

 

·

Step one, the Company compares the carrying amount of each of the reporting units to the fair value of each of the reporting units. If the carrying amount of each of its reporting units exceeds its fair value, the Company must perform the second step of the process. If not, no further testing is needed.

 

·

Step two, the Company allocates the fair value of each of the reporting units to all assets and liabilities as if each of the reporting units had been acquired in a business combination at the date of the impairment test. The Company would then compare the implied fair value of each of the reporting units’ goodwill to its carrying amount. If the carrying amount of the goodwill exceeds its implied fair value, it recognizes an impairment loss in an amount equal to that excess.

 

32


 

Table of Contents

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

 

Step one of the analysis indicated that the reporting unit fair value exceeded the book value and accordingly did not require the Company to perform the second step in the analysis.  As a result, the Company determined that no impairment was necessary.

 

(14) Subsequent Events

 

New Master Leases

 

The Company recently announced it entered into a lease with a new landlord for 64 skilled nursing facilities previously leased from Welltower.  On November 1, 2016, Welltower sold the real estate of the 64 facilities to Second Spring Healthcare Investments (Second Spring), a joint venture formed by affiliates of Lindsay Goldberg LLC, a private investment firm, and affiliates of Omega.  The Company will continue to operate the facilities pursuant to its new lease with affiliates of Second Spring effective November 1, 2016 and there will be no change in the operations of these facilities. 

 

The 64 facilities had been included in the Company’s master lease with Welltower and were historically subject to 3.4% annual escalators, which were scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease with Second Spring, initial annual rent for the 64 properties is reduced approximately 5% to $103.9 million and annual escalators will decrease to 1.0% after year 1, 1.5% after year 2, and 2.0% thereafter.  The more favorable lease terms are expected to reduce the Company’s cumulative rent obligations through January 2032 by $297 million.  As part of the transaction, the Company issued a note totaling $51.2 million to Welltower, maturing in October 2020. 

 

Divestiture of Non-Strategic Facilities

 

On October 18, 2016, the Company completed the divesture of nine underperforming leased assisted living facilities in the states of Pennsylvania, Delaware and West Virginia.  The nine facilities had annual revenue of $22.5 million and $2.8 million of pre-tax net loss.

 

On October 23, 2016, the Company entered into a purchase and sale agreement to sell 18 facilities (16 owned and 2 leased) in the states of Kansas, Missouri, Nebraska and Iowa.   The transaction will mark an exit from the inpatient business in these states.  Closing is subject to licensure and other regulatory approvals.  The 18 facilities have annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $80 million which approximates the outstanding indebtedness.  Sale proceeds of approximately $80 million, net of transaction costs, will principally be used to repay the indebtedness.

 

 

 

33


 

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 condensed 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, 2015, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 14, 2016 (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.  We provide inpatient services through 507 skilled nursing, senior/assisted living and behavioral health centers located in 34 states.  Revenues of our owned, leased and otherwise consolidated centers constitute approximately 85% 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 12% 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.

 

34


 

Recent Transactions and Events

 

The Combination with Skilled

 

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled) entered into a Purchase and Contribution Agreement with FC-GEN Operations Investment, LLC (FC-GEN) pursuant to which the businesses and operations of FC-GEN and Skilled were combined (the Combination). On February 2, 2015, the Combination was completed.

 

Sale of Kansas ALFs

 

On January 1, 2016, we sold 18 Kansas assisted/senior living facilities acquired in the Combination for $67.0 million.  Of the proceeds received, $54.2 million were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Sale of Hospice and Home Health

 

In March 2016, we announced that we had signed an agreement with FC Compassus LLC, a nationwide network of community-based hospice and palliative care programs, to sell its hospice and home health operations for $84 million. Effective May 1, 2016, we completed the sale and received $72 million in cash and a $12 million short-term note. The sale resulted in a gain of $44.0 million and a derecognition of goodwill and identifiable intangible assets of $30.8 million.  The cash proceeds were used to pay down partially our Term Loan Facility.  See Note 7 – “Long-Term Debt – Term Loan Facility.”  Through the asset purchase agreement, we retained certain liabilities.  See Note 11 – “Commitments and Contingencies – Legal Proceedings - Creekside Hospice Litigation.”  Certain members of our board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate.

 

HUD Insured Loans

 

For the three and nine months ended September 30, 2016, we closed on the HUD insured financings of three and 21 skilled nursing facilities for $14.2 million and $143.2 million, respectively.  The total proceeds from the financings were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Acquisition from Revera

 

On September 1, 2016, we acquired five skilled nursing facilities from Revera for a purchase price of $39.4 million.  We had previously acquired the real property of 15 of Revera’s skilled nursing facilities on December 1, 2015 and entered into leases for four additional skilled nursing facilities while awaiting change of ownership approval for the remaining five skilled nursing facilities located in the State of Vermont.  During the period from December 1, 2015 through August 31, 2016, we managed the operations of the remaining five skilled nursing facilities in the State of Vermont.  The acquisition was financed through a real estate bridge loan for $37.0 million.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Agreement in Principle on Financial Terms of a Settlement

 

See Note 11 – “Commitments and Contingencies – Legal Proceedings” for further description of the matters discussed below.

 

In July 2016, we and the DOJ reached an agreement in principle on the financial terms of a settlement regarding the four matters arising out of the activities of Skilled and Sun Healthcare prior to their operations becoming part of our operations (collectively, the Successor Matters).  The four matters are: the Creekside Hospice Litigation, the Therapy Matters Investigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter.  We have agreed to

35


 

the settlement in principle in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

Based on the agreement in principle and in anticipation of the execution of final agreements and payment of a settlement amount of $52.7 million (the Settlement Amount), we have recorded an additional loss contingency expense in the amount of $13.6 million in the second quarter of 2016, to increase our previously estimated and recorded liability.  We expect to remit the Settlement Amount to the government over a period of five (5) years, once the agreement has been fully documented.

 

The agreement in principle is subject to negotiation, completion and execution of appropriate implementing agreements, including a settlement agreement or agreements, which are expected to be finalized in the fourth quarter of 2016, and the final approval of the respective parties.  There can be no assurance that we will enter into a final settlement agreement with the DOJ.  At this time, we believe that the ultimate outcome of the Successor Matters will not have a material adverse effect on our consolidated financial condition, results of operations and cash flows.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed 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 adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. We are still evaluating the effect, if any, ASU 2014-09 will have on our consolidated financial condition and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (ASU 2014-15) requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances.  ASU 2014-15 is effective for annual and interim periods ending after December 31, 2016.  We are still evaluating the effect, if any, ASU 2014-15 will have on our consolidated financial condition and results of operations.

 

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 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. We are still evaluating the effect, if any, ASU 2016-01 will have on our consolidated financial condition and results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition. The adoption of ASU 2016-02 is expected to have a material impact on our financial position. We are still evaluating the impact on our results of operations and does not expect the adoption of this standard to have an impact on liquidity.

36


 

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.  We are still evaluating the effect, if any, ASU 2016-09 will have on our 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 new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.  We are still evaluating the effect, if any, that ASU 2016-15 will have on our consolidated statements of cash flows.

 

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

 

Healthcare Reform Initiatives

 

Many provisions within the Patient Protection and Affordable Care Act of 2010 (PPACA) have had an impact, or could in the future impact, our business. The expansive potential impact of the PPACA is discussed in Item 1, “Business” and Item 1A, “Risk Factors” in our Annual Report and in Part II, “Other Information,” Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016.

 

We believe we are transforming our business and operations for success in a post-healthcare reform environment.  As healthcare reform continues to be implemented, we believe post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and payors and operate with scale will have a competitive advantage in an episodic payment environment.  We believe our previously described organic and strategic growth strategies should position us to become a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay and hospital readmissions, more effectively manage healthcare costs and develop new care delivery and payment models.

 

As the industry and its regulators engage in this new environment, we are positioning ourselves to adapt to changes that are ultimately made to the delivery system:

 

·

Medicare Shared Savings Program (MSSP) – Effective January 1, 2016, we entered Genesis Physician Services (GPS), our physician services subsidiary, into the MSSP.  While beneficiary attribution is retrospective, preliminary data show that we are managing approximately 15,000 Medicare fee for service beneficiaries with annualized Medicare spending of more than $800 million. These numbers are subject to modification and will not be reconciled by the Centers for Medicare and Medicaid Services (CMS) until mid-2017. The gain share track requires us to save at least approximately three percent of the total Medicare spend under management in order to share in up to 50 percent of the savings with CMS predicated upon achieving certain quality initiatives.  Once the savings hurdle has been reached, Genesis begins sharing based on the first dollar of savings.

 

·

Bundled Payments for Care Improvement (BPCI) – Participation success is determined retrospectively given the lack of available historical data around the bundles, however, we have received four quarterly reconciliations in 2016 representing the last three fiscal quarters of 2015 and the first quarter in 2016.  The reconciliations for these four fiscal quarters netted a positive $3.8 million.  We expect to receive the reconciliation from the second quarter of 2016 in January 2017 and believe we will continue to see positive outcomes for that quarter.

 

37


 

·

Comprehensive Care for Joint Replacement (CJR) – The CJR model focuses on coordinated, patient-centered care. Under this model, the hospital in which the hip or knee replacement takes place would be accountable for the costs and quality of care from the time of the surgery through 90 days after an “episode” of care. On April 1, 2016, the CJR Program went into effect in 67 metropolitan statistical areas (MSAs) throughout the country. We have approximately 100 facilities in 22 of those MSAs.  While the program was recently enacted, we have already experienced a significant decline from this class of diagnosis-related groups from recent years primarily due to the proliferation of Accountable Care Organizations (ACOs) and the BPCI program resulting from the PPACA.   

 

·

Vitality to You – We continue to make great progress with our new Vitality to You service offering that extends our rehabilitation therapy services into the community.  In the third quarter of 2016, Vitality to You saw revenue expand by 36.3% and 15.2% as compared to the first quarter and second quarter of 2016, respectively, and 120% compared to the third quarter of 2015.

 

Medicare Rate Increase

 

On July 29, 2016, CMS issued a final rule for fiscal year 2017 outlining a net increase of 2.4% to Medicare reimbursement rates for skilled nursing facilities attributable to a 2.7% market basket increase, reduced by a 0.3% multi-factor productivity adjustment required by law.  The final rule continues the shift to move the Medicare program, and the health care system at large, toward paying providers based on the quality, rather than the quantity of care.  The final rule also further defines and notes changes in Consolidated Billing for skilled nursing facilities for fiscal year 2017; the Value-Based Purchasing Program; the Quality Reporting Program and the Payments Models Research.  

 

Effective October 1, 2017, the fiscal year 2018 market basket will be limited to a 1% increase.

 

Civil Monetary Penalties (CMP)

 

On November 2, 2015, the President signed into law the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the 2015 Act). Prior to 2015, CMPs authorized under the Social Security Act were exempt from inflation adjustments under the law. The 2015 Act requires agencies to:

 

·

Adjust the level of applicable CMPs with an initial “catch-up” adjustment, through interim final rulemaking (IFR); and,

·

Make subsequent annual adjustments for inflation.

 

The 2015 Act provides that “catch-up” adjustments are based on the percentage change between the Consumer Price Index for all Urban Consumers (CPI-U) for the month of October in the year a CMP was originally established, and the CPI-U for October 2015. Subsequent annual adjustments are based on the extent to which of the CPI-U for the month of October of a current year exceeds the CPI for the month of October of the previous year.

 

These new CMP amounts apply to any CMP imposed on or after September 6, 2016 (the effective date of the IFR) for noncompliant conduct that occurred on or after November 2, 2015, regardless of when the noncompliance was identified. The IFR only affects specific CMP amounts and not any other related provisions, such as the factors reviewed for assessing CMPs for example. 

 

Many of the CMPs have been unadjusted for decades.  The inflationary increase effectively doubles the cost to skilled nursing facilities for these adjusted CMPs.

 

Conditions 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

38


 

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, including prohibiting the use of pre-dispute binding arbitration agreements.

·

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.

·

Allowing dietitians and therapy providers the authority to write orders in their areas of expertise when a physician delegates the responsibility and state licensing laws allow.

·

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 are 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 must be implemented by November 28, 2016.

·

Phase 2: The regulations included in Phase 2 must be 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 is not known at this time.  Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have a significant negative impact on our consolidated financial condition and results of operations.

 

Improving Medicare Post-Acute Care Transformation Act

 

In 2014, with strong support from most stakeholders, Congress enacted the Improving Medicare Post-Acute Care Transformation Act (IMPACT Act). The intent of this enactment was to improve the uniformity of data reporting across the post-acute sector and to move forward with a common assessment tool rationalizing the delivery of post-acute services. The IMPACT Act further requires that CMS develop and implement quality measures from five quality measure domains using standardized assessment data.  In addition, the Act requires the development and reporting of measures pertaining to resource use, hospitalization, and discharge to the community. Through the use of standardized quality measures and standardized data, the intent of the IMPACT Act, among other obligations, is to enable interoperability and access to longitudinal information for such providers to facilitate coordinated care, improved outcomes, and overall quality comparisons.

 

Data collection for certain measures including pressure ulcers, falls and functional goals will be gathered quarterly beginning October 1, 2016 with a deadline to submit errors by May 15, 2017.  Failure to submit required data will result in a 2% Medicare payment penalty beginning October 1, 2017.

 

39


 

Skilled Nursing Facility Value-Based Purchasing Program

 

The CMS Skilled Nursing Facility Value-Based Purchasing (VBP) Program is one of many VBP programs that aims to reward quality and improve health care. Beginning October 1, 2018, skilled nursing facilities will have an opportunity to receive incentive payments based on performance on the specified quality measure.

 

The Protecting Access to Medicare Act (PAMA) of 2014, enacted into law on April 1, 2014, authorized the VBP program. PAMA requires CMS to adopt a VBP payment adjustment for skilled nursing facilities beginning October 1, 2018. By law, the VBP Program is limited to a single readmission measure at a time.

 

PAMA requires CMS, among other things, to:

·

Furnish value-based incentive payments to skilled nursing facilities for services beginning October 1, 2018.

·

Develop a methodology for assessing performance scores.

·

Adopt performance standards on a quality measure that include achievement and improvement.

·

Rank skilled nursing facilities based on their performance from low to high. The highest ranked facilities will receive the highest payments, and the lowest ranked 40 percent of facilities will receive payments that are less than what they otherwise would have received without the Program.

 

CMS will withhold 2% of Medicare payments starting October 1, 2018, to fund the incentive payment pool and will then redistribute 50% to 70% of the withheld payments back to skilled nursing facilities through the VBP Program.  Failure to qualify for the incentive payment pool at levels that at least match the 2% withholding could have a significant negative impact on our consolidated financial condition and results of operations.

 

Texas Minimum Payment Amount Program

 

We manage the operations of 20 skilled nursing facilities in the State of Texas, which we consolidate through our controlling interests in those entities through the management agreements.  Those skilled nursing facilities had participated in a voluntary supplemental Medicaid payment program known as the Minimum Payment Amount Program (MPAP), which expired August 31, 2016.  The purpose of MPAP funds was to continue a level of funding for participating skilled nursing facilities so that they can more readily provide quality care to Medicaid beneficiaries.  While the state had been actively appealing CMS, the MPAP expired and has not been extended or replaced with a similar funding mechanism.  There can be no assurances that such an extension or replacement of those supplemental funds will be reached.  On an annualized basis, MPAP had provided for $62 million of revenue and enhanced pre-tax income of the participating skilled nursing centers by approximately $18 million.

 

Key Financial Performance Indicators

 

In order to assess our financial performance between periods, we evaluate certain key performance indicators for each of our operating segments separately for the periods presented.  Results and statistics presented in the Key Performance Indicators 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 indicators 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 certain excluded items to provide supplemental information regarding our operating performance. 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.

 

“Adjusted EBITDAR” is defined as EBITDAR adjusted for certain excluded items to provide supplemental information regarding our operating performance. See “Reasons for Non-GAAP Financial Disclosure” for an

40


 

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.

 

“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.

 

“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.

 

“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 indicators 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, 

 

 

    

2016

    

2015

 

    

2016

    

2015

 

 

 

(In thousands)

 

 

(In thousands)

 

Financial Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,418,994

 

$

1,416,027

 

 

$

4,329,570

 

$

4,178,503

 

EBITDAR

 

 

150,185

 

 

150,991

 

 

 

522,369

 

 

425,962

 

EBITDA

 

 

114,673

 

 

113,336

 

 

 

412,573

 

 

312,929

 

Adjusted EBITDAR

 

 

172,141

 

 

188,779

 

 

 

539,842

 

 

564,556

 

Adjusted EBITDA

 

 

47,758

 

 

67,205

 

 

 

164,265

 

 

204,187

 

Net loss attributable to Genesis Healthcare, Inc.

 

 

(20,458)

 

 

(28,952)

 

 

 

(86,470)

 

 

(160,704)

 

 

41


 

 

INPATIENT SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2016

    

2015

 

    

2016

    

2015

    

Occupancy Statistics - Inpatient

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available licensed beds in service at end of period

 

 

58,379

 

 

56,499

 

 

 

58,379

 

 

56,499

 

Available operating beds in service at end of period

 

 

56,444

 

 

55,036

 

 

 

56,444

 

 

55,036

 

Available patient days based on licensed beds

 

 

5,325,166

 

 

5,164,465

 

 

 

15,846,651

 

 

15,095,406

 

Available patient days based on operating beds

 

 

5,160,945

 

 

5,027,803

 

 

 

15,403,904

 

 

14,652,995

 

Actual patient days

 

 

4,411,152

 

 

4,324,403

 

 

 

13,202,437

 

 

12,751,587

 

Occupancy percentage - licensed beds

 

 

82.8

%

 

83.7

%

 

 

83.3

%  

 

84.5

%  

Occupancy percentage - operating beds

 

 

85.5

%

 

86.0

%

 

 

85.7

%  

 

87.0

%  

Skilled mix

 

 

19.6

%

 

20.6

%

 

 

20.4

%  

 

21.8

%  

Average daily census

 

 

48,474

 

 

47,004

 

 

 

48,184

 

 

46,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue per patient day (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare Part A

 

$

513

 

$

503

 

 

$

513

 

$

502

 

Medicare total (including Part B)

 

 

555

 

 

545

 

 

 

554

 

 

540

 

Insurance

 

 

458

 

 

451

 

 

 

454

 

 

448

 

Private and other

 

 

309

 

 

263

 

 

 

306

 

 

295

 

Medicaid

 

 

218

 

 

216

 

 

 

219

 

 

216

 

Medicaid (net of provider taxes)

 

 

199

 

 

195

 

 

 

199

 

 

195

 

Weighted average (net of provider taxes)

 

$

270

 

$

266

 

 

$

272

 

$

270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patient days by payor (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

513,720

 

 

538,503

 

 

 

1,617,227

 

 

1,691,696

 

Insurance

 

 

306,366

 

 

288,314

 

 

 

921,519

 

 

883,236

 

Total skilled mix days

 

 

820,086

 

 

826,817

 

 

 

2,538,746

 

 

2,574,932

 

Private and other

 

 

305,545

 

 

299,153

 

 

 

903,951

 

 

862,777

 

Medicaid

 

 

3,063,256

 

 

2,879,447

 

 

 

9,031,537

 

 

8,392,143

 

Total Days

 

 

4,188,887

 

 

4,005,417

 

 

 

12,474,234

 

 

11,829,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

12.3

%

 

13.4

%

 

 

13.0

%  

 

14.3

%  

Insurance

 

 

7.3

%

 

7.2

%

 

 

7.4

%  

 

7.5

%  

Skilled mix

 

 

19.6

%

 

20.6

%

 

 

20.4

%  

 

21.8

%  

Private and other

 

 

7.3

%

 

7.5

%

 

 

7.2

%  

 

7.3

%  

Medicaid

 

 

73.1

%

 

71.9

%

 

 

72.4

%  

 

70.9

%  

Total

 

 

100.0

%

 

100.0

%

 

 

100.0

%  

 

100.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

375

 

 

383

 

 

 

375

 

 

383

 

Owned

 

 

60

 

 

33

 

 

 

60

 

 

33

 

Joint Venture

 

 

5

 

 

5

 

 

 

5

 

 

5

 

Managed *

 

 

34

 

 

32

 

 

 

34

 

 

32

 

Total skilled nursing facilities

 

 

474

 

 

453

 

 

 

474

 

 

453

 

Total licensed beds

 

 

57,896

 

 

54,545

 

 

 

57,896

 

 

54,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assisted/Senior living facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

26

 

 

30

 

 

 

26

 

 

30

 

Owned

 

 

4

 

 

22

 

 

 

4

 

 

22

 

Joint Venture

 

 

1

 

 

1

 

 

 

1

 

 

1

 

Managed

 

 

2

 

 

3

 

 

 

2

 

 

3

 

Total assisted/senior living facilities

 

 

33

 

 

56

 

 

 

33

 

 

56

 

Total licensed beds

 

 

2,643

 

 

4,437

 

 

 

2,643

 

 

4,437

 

Total facilities

 

 

507

 

 

509

 

 

 

507

 

 

509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Jointly Owned and Managed— (Unconsolidated)

 

 

15

 

 

16

 

 

 

15

 

 

16

 

 


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

42


 

REHABILITATION THERAPY SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2016

    

2015

 

    

2016

    

2015

 

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-operated

 

 

37

%  

 

37

%

 

 

37

%  

 

38

%  

Non-affiliated

 

 

63

%  

 

63

%

 

 

63

%  

 

62

%  

Sites of service (at end of period)

 

 

1,582

 

 

1,602

 

 

 

1,582

 

 

1,602

 

Revenue per site

 

$

156,362

 

$

168,797

 

 

$

489,854

 

$

497,731

 

Therapist efficiency %

 

 

67

%  

 

68

%

 

 

69

%  

 

69

%  

 

Reasons for Non-GAAP Financial Disclosure

 

The following discussion includes references to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). For purposes of SEC Regulation G, 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. Pursuant to the requirements of Regulation G, 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 relationship each reporting period between our cash basis lease expense and the level of operating earnings available to fund lease expense; 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 relative 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

43


 

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 the operating performance of the 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 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. 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 income (loss) attributable to Genesis Healthcare, Inc. as an important measure of its 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 measures of our operating performance:

 

EBITDAR and EBITDA

 

We believe EBITDAR 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 and lease expense) and our asset base (depreciation and amortization expense) from our operating results.  We also use EBITDAR as one measure in determining the value of prospective acquisitions or divestitures.  EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry. In addition, covenants in our lease agreements use EBITDAR as a measure of financial compliance.

 

We believe EBITDA is useful to an investor in evaluating our operating performance for the same reasons identified with respect to EBITDAR.  EBITDA is a commonly used measure to estimate the enterprise value of businesses in the healthcare industry.  In addition, covenants in our debt agreements use EBITDA as a measure of financial compliance.

 

Adjustments to EBITDAR and EBITDA

 

We adjust EBITDAR and 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 and that the presentation of Adjusted EBITDAR and Adjusted EBITDA, when combined with GAAP net income (loss) attributable to Genesis Healthcare, Inc., EBITDAR 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 EBITDAR and EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

 

We adjust EBITDAR and EBITDA for the following items:

 

·

Loss on extinguishment of debt. We recognize losses on the extinguishment of debt when we refinance our debt

44


 

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.

 

·

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 acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs.  We exclude 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.

 

·

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.

 

·

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

 

·

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 EBITDAR and Adjusted EBITDA in order to better evaluate the performance of our mature ongoing business.  The activities of such businesses are adjusted when computing Adjusted EBITDAR and Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA.  The operating performance of new businesses is no longer adjusted when computing Adjusted EBITDAR and Adjusted EBITDA beginning in the period in which a new business generates positive Adjusted EBITDA and all periods thereafter.  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 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 operating 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 the Company or our operating businesses.

 

(1)

Skilled Healthcare and other loss contingency expense – We exclude the estimated settlement cost and any adjustments thereto regarding the four legal matters inherited by Genesis in the Skilled and Sun Transactions and disclosed in the commitment and contingencies footnote to our consolidated financial statements describing our material legal proceedings. In the nine months ended September 30, 2016, we increased our estimated loss contingency expense by $15.2 million related to these matters.  In the three and nine months ended September 30, 2015, we increased our estimated loss contingency expense by $30.0 million and $31.5

45


 

million, respectively, related to these matters.  We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters.  We do not exclude the estimated settlement costs associated with all other legal and regulatory matters arising in the normal course of business.  Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.

 

(2)

Regulatory defense and related costs – We exclude the costs of investigating and defending the matters associated with the Skilled Healthcare and other loss contingency expense as noted in footnote (1).  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 business.

 

(3)

Other non-recurring costs – In the three and nine months ended September 30, 2016, we excluded ($0.1) million and $0.8 million, respectively, of costs incurred in connection with a settlement of disputed costs related to previously reported periods and a regulatory audit associated with acquired businesses and related to pre-acquisition periods.  In the nine months ended September 30, 2015, we excluded $10.5 million of costs incurred for self-insured prior period general liability, professional liability and workers’ compensation claims.  We do not believe the excluded costs are recurring or reflect the underlying performance of our business.

 

Adjustments to EBITDA

 

·

Conversion to cash basis operating leases.  Our leases are classified as either operating leases, capital leases or financing obligations pursuant to applicable guidance under U.S. GAAP.  We view the primary provisions and economics of these leases, regardless of their accounting treatment, as being nearly identical.  Virtually all of our leases are structured with triple net terms, have fixed annual rent escalators and have long-term initial maturities with renewal options.  Accordingly, in connection with our evaluation of the financial performance of our business, we reclassify all of our leases to operating lease treatment and reflect lease expense on a cash basis.  This approach allows us to better understand the relationship in each reporting period of our operating performance, as measured by EBITDAR and Adjusted EBITDAR, to the cash basis obligations to our landlords in that reporting period, regardless of the lease accounting treatment.  This presentation and approach is also consistent with the financial reporting and covenant compliance requirements contained in all of our major lease and loan agreements.

 

·

Rent related to newly acquired, constructed or divested businesses.  Consistent with our treatment of excluding the EBITDAR of newly acquired, constructed or divested businesses, we exclude the rent expense associated with such businesses.  While such businesses are in their start-up or wind-down phase, we do not believe including such lease expense reflects the ongoing operating performance of our operating businesses.

 

 

46


 

The following tables provide reconciliations to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA from net loss the most directly comparable financial measure presented in accordance with GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

 

 

2016

    

2015

 

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(20,458)

 

$

(28,952)

 

 

$

(86,470)

 

$

(160,704)

 

Loss (income) from discontinued operations, net of taxes

 

 

24

 

 

(39)

 

 

 

1

 

 

1,571

 

Net loss attributable to noncontrolling interests

 

 

(31,921)

 

 

(31,990)

 

 

 

(72,895)

 

 

(53,424)

 

Depreciation and amortization expense

 

 

61,104

 

 

62,505

 

 

 

190,822

 

 

176,043

 

Interest expense

 

 

131,812

 

 

128,538

 

 

 

400,853

 

 

376,236

 

Income tax benefit

 

 

(25,888)

 

 

(16,726)

 

 

 

(19,738)

 

 

(26,793)

 

EBITDA

 

$

114,673

 

$

113,336

 

 

$

412,573

 

$

312,929

 

Lease expense

 

 

35,512

 

 

37,655

 

 

 

109,796

 

 

113,033

 

EBITDAR

 

$

150,185

 

$

150,991

 

 

$

522,369

 

$

425,962

 

Adjustments to EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (gain) on extinguishment of debt

 

 

15,363

 

 

(3,104)

 

 

 

15,830

 

 

130

 

Other (income) loss

 

 

(5,173)

 

 

38

 

 

 

(48,084)

 

 

(7,522)

 

Transaction costs

 

 

3,057

 

 

3,306

 

 

 

9,804

 

 

92,016

 

Severance and restructuring

 

 

1,123

 

 

742

 

 

 

7,939

 

 

3,121

 

Losses of newly acquired, constructed, or divested businesses

 

 

3,594

 

 

2,563

 

 

 

7,121

 

 

3,615

 

Stock-based compensation

 

 

3,090

 

 

1,950

 

 

 

6,809

 

 

2,479

 

Skilled Healthcare and other loss contingency expense (1)

 

 

 -

 

 

30,000

 

 

 

15,192

 

 

31,500

 

Regulatory defense and related costs (2)

 

 

1,043

 

 

2,293

 

 

 

2,101

 

 

2,755

 

Other non-recurring costs (3)

 

 

(141)

 

 

 -

 

 

 

761

 

 

10,500

 

Adjusted EBITDAR

 

$

172,141

 

$

188,779

 

 

$

539,842

 

$

564,556

 

Less:  GAAP lease expense

 

 

(35,512)

 

 

(37,655)

 

 

 

(109,796)

 

 

(113,033)

 

Less:  Conversion to cash basis operating leases

 

 

(89,934)

 

 

(86,221)

 

 

 

(270,101)

 

 

(254,566)

 

Plus:  Rent related to losses of newly acquired, constructed, or divested businesses

 

 

1,063

 

 

2,302

 

 

 

4,320

 

 

7,230

 

Adjusted EBITDA

 

$

47,758

 

$

67,205

 

 

$

164,265

 

$

204,187

 

 

 

47


 

Results of Operations

 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

 

A summary of our unaudited results of operations for the three months ended September 30, 2016 as compared with the same period in 2015 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,192,498

 

84.0

%  

$

1,155,123

 

81.5

%  

$

37,375

 

3.2

%

Assisted/Senior living facilities

 

 

29,423

 

2.1

%  

 

36,635

 

2.6

%  

 

(7,212)

 

(19.7)

%

Administration of third party facilities

 

 

2,659

 

0.2

%  

 

2,225

 

0.2

%  

 

434

 

19.5

%

Elimination of administrative services

 

 

(340)

 

 —

%  

 

(421)

 

 —

%  

 

81

 

(19.2)

%

Inpatient services, net

 

 

1,224,240

 

86.3

%  

 

1,193,562

 

84.3

%  

 

30,678

 

2.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

261,543

 

18.4

%  

 

281,151

 

19.9

%  

 

(19,608)

 

(7.0)

%

Elimination intersegment rehabilitation therapy services

 

 

(101,156)

 

(7.1)

%  

 

(107,112)

 

(7.6)

%  

 

5,956

 

(5.6)

%

Third party rehabilitation therapy services

 

 

160,387

 

11.3

%  

 

174,039

 

12.3

%  

 

(13,652)

 

(7.8)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

40,376

 

2.8

%  

 

58,804

 

4.1

%  

 

(18,428)

 

(31.3)

%

Elimination intersegment other services

 

 

(6,009)

 

(0.4)

%  

 

(10,378)

 

(0.7)

%  

 

4,369

 

(42.1)

%

Third party other services

 

 

34,367

 

2.4

%  

 

48,426

 

3.4

%  

 

(14,059)

 

(29.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,418,994

 

100.0

%  

$

1,416,027

 

100.0

%  

$

2,967

 

0.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

188,018

 

15.4

%  

$

193,526

 

16.2

%  

$

(5,508)

 

(2.8)

%

Rehabilitation therapy services

 

 

18,054

 

6.9

%  

 

27,497

 

9.8

%  

 

(9,443)

 

(34.3)

%

Other services

 

 

1,881

 

4.7

%  

 

4,173

 

7.1

%  

 

(2,292)

 

(54.9)

%

Corporate and eliminations

 

 

(57,768)

 

 —

%  

 

(74,205)

 

 —

%  

 

16,437

 

(22.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDAR

 

$

150,185

 

10.6

%  

$

150,991

 

10.7

%  

$

(806)

 

(0.5)

%

 

48


 

A summary of our unaudited condensed consolidating statement of operations follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,224,580

 

$

261,543

 

$

40,226

 

$

150

 

$

(107,505)

 

$

1,418,994

 

Salaries, wages and benefits

 

 

586,654

 

 

219,864

 

 

27,896

 

 

 —

 

 

 —

 

 

834,414

 

Other operating expenses

 

 

428,820

 

 

18,903

 

 

10,610

 

 

 —

 

 

(107,505)

 

 

350,828

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

46,545

 

 

 —

 

 

46,545

 

Provision for losses on accounts receivable

 

 

21,088

 

 

4,722

 

 

(161)

 

 

(47)

 

 

 —

 

 

25,602

 

Lease expense

 

 

34,745

 

 

24

 

 

269

 

 

474

 

 

 —

 

 

35,512

 

Depreciation and amortization expense

 

 

53,313

 

 

2,943

 

 

163

 

 

4,685

 

 

 —

 

 

61,104

 

Interest expense

 

 

109,339

 

 

14

 

 

10

 

 

22,449

 

 

 —

 

 

131,812

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,363

 

 

 —

 

 

15,363

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(934)

 

 

 —

 

 

(934)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(5,173)

 

 

 —

 

 

(5,173)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,057

 

 

 —

 

 

3,057

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

715

 

 

(893)

 

(Loss) income before income tax benefit

 

 

(9,379)

 

 

15,073

 

 

1,439

 

 

(84,661)

 

 

(715)

 

 

(78,243)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(25,888)

 

 

 —

 

 

(25,888)

 

(Loss) income from continuing operations

 

$

(9,379)

 

$

15,073

 

$

1,439

 

$

(58,773)

 

$

(715)

 

$

(52,355)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2015

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,193,983

 

$

281,151

 

$

58,501

 

$

303

 

$

(117,911)

 

$

1,416,027

 

Salaries, wages and benefits

 

 

568,888

 

 

229,021

 

 

35,726

 

 

 —

 

 

 —

 

 

833,635

 

Other operating expenses

 

 

413,055

 

 

19,513

 

 

18,261

 

 

 —

 

 

(117,910)

 

 

332,919

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

45,889

 

 

 —

 

 

45,889

 

Provision for losses on accounts receivable

 

 

18,514

 

 

5,120

 

 

341

 

 

(629)

 

 

 —

 

 

23,346

 

Lease expense

 

 

36,577

 

 

28

 

 

589

 

 

461

 

 

 —

 

 

37,655

 

Depreciation and amortization expense

 

 

53,384

 

 

3,904

 

 

349

 

 

4,868

 

 

 —

 

 

62,505

 

Interest expense

 

 

106,433

 

 

14

 

 

11

 

 

22,123

 

 

(43)

 

 

128,538

 

Gain on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(3,104)

 

 

 —

 

 

(3,104)

 

Investment (income) loss

 

 

 —

 

 

 —

 

 

 —

 

 

(396)

 

 

43

 

 

(353)

 

Other loss

 

 

 —

 

 

 —

 

 

 —

 

 

38

 

 

 —

 

 

38

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,306

 

 

 —

 

 

3,306

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

30,000

 

 

 —

 

 

30,000

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,071)

 

 

431

 

 

(640)

 

(Loss) income before income tax benefit

 

 

(2,868)

 

 

23,551

 

 

3,224

 

 

(101,182)

 

 

(432)

 

 

(77,707)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(16,726)

 

 

 —

 

 

(16,726)

 

(Loss) income from continuing operations

 

$

(2,868)

 

$

23,551

 

$

3,224

 

$

(84,456)

 

$

(432)

 

$

(60,981)

 

 

Prior to February 1, 2015, our results of operations exclude the revenue and expenses of Skilled’s businesses.  For comparability, those revenue and expense variances attributed solely to the Combination of Skilled’s businesses with ours, commencing on February 1, 2015, will be identified in the discussion of the results of operations.  References to “legacy” businesses identify those businesses operating as either Skilled or Genesis, respectively, prior to the Combination.

 

On December 1, 2015, we acquired the real property of 15 skilled nursing facilities, entered into leases for four additional skilled nursing facilities and entered into management agreements to manage five skilled nursing facilities from Revera for $206.0 million, financed through a $134.1 million bridge loan.  Effective September 1, 2016, we have acquired the five skilled nursing facilities subject to the management agreements on December 1, 2015 for $39.4 million, financed through a $37.0 million bridge loan (Acquisition from Revera).  Prior to December 1, 2015, our results of operations exclude the revenue and expenses of the acquired Revera businesses.  For comparability, those revenue and

49


 

expense variances attributed solely to the Acquisition from Revera, commencing on December 1, 2015, will be identified in the discussion of the results of operations. 

 

Other, less significant transactions which impact comparability are identified as acquired or under development for businesses which are growing period over period, or as divested for those businesses that we have closed or otherwise exited period over period. 

 

Net Revenues

 

Net revenues for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015 increased by $3.0 million.  Of that increase, the Acquisition from Revera contributed $61.9 million.  The remaining decrease of $58.9 million or 4.2% is primarily attributed to divested business, contracting census in the inpatient business and net lost contract revenue in our rehabilitation services business, partially offset by acquisition and development activities in the inpatient business. 

 

Inpatient Services – Revenue increased $30.7 million, or 2.6%, in the three months ended September 30, 2016 as compared with the same period in 2015. Of this growth, $60.3 million is due to the Acquisition from Revera and $11.4 million is due to the acquisition or development of five facilities, offset by $19.6 million of lost revenue attributed to the divestiture of 29 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  The remaining decrease of $21.4 million, or 1.8%, is primarily 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 referrals to home health or other community based care settings.

 

Rehabilitation Therapy Services – Revenue decreased $13.7 million, or 7.8% comparing the three months ended September 30, 2016 with the same period in 2015.  Lower service volume created by the healthcare reform pressures noted in Inpatient Services revenue above, combined with net lost contract business, contributed $15.4 million of the decrease.  The Acquisition from Revera resulted in $1.7 million of revenue growth in the three months ended September 30, 2016 as compared with the same period in 2015.

 

Other Services – Other services revenue decreased $14.1 million, or 29.0% in the three months ended September 30, 2016 as compared with the same period in 2015. Of this decrease, $16.9 million is the net impact of selling the hospice and homecare businesses on May 1, 2016. 

 

EBITDAR

 

EBITDAR for the three months ended September 30, 2016 decreased by $0.8 million, or 0.5% when compared with the same period in 2015.  The contributing factors for this net increase are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDAR decreased in the three months ended September 30, 2016 as compared with the same period in 2015, by $5.5 million, or 2.8%.  The Acquisition from Revera resulted in incremental EBITDAR of $7.2 million and another $3.0 million is due to the acquisition or development of five facilities.  Those positive additions are partially offset by $2.3 million for the lost earnings attributed to the divestiture or closure of 29 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  Market pricing adjustments from our Genesis rehabilitation therapy services resulted in a $7.8 million increase in EBITDAR of the inpatient services in the three months ended September 30, 2016 as compared with the same period in 2015.  Our self-insurance programs contributed $10.5 million to the decrease in EBITDAR in the three months ended September 30, 2016 as compared with the same period in 2015. Excluding incremental costs of the Acquisition from Revera, that self-insurance variance includes $5.2 million of increased provision for general and professional liability claims, $4.2 million of increased provision for health benefits and $1.1 million of increased provision for our workers’ compensation programs.  Increased levels of provision for losses on accounts receivable resulted in $2.2 million of the reduction of EBITDAR in the three

50


 

months ended September 30, 2016 as compared with the same period in 2015. The remaining $8.5 million decrease in EBITDAR of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described under “Net Revenues.”

 

Rehabilitation Therapy Services – EBITDAR of the rehabilitation therapy segment decreased by $9.4 million or 34.3% for the three months ended September 30, 2016 compared with the same period in 2015.  The Acquisition from Revera contributed $1.1 million, while the EBITDAR of the legacy Genesis rehabilitation therapy business for the three months ended September 30, 2016 decreased $10.5 million from the same period in 2015.  Market pricing adjustments to our Genesis skilled nursing centers resulted in $7.8 million of the rehabilitation therapy services EBITDAR reduction and are included in the Inpatient Services discussion above.  Lost therapy contracts exceeded new therapy contracts, while Therapist Efficiency declined to 67% in the three months ended September 30, 2016 compared with 68% in the same period in 2015.  The remaining decrease of $2.7 million is principally due to the escalating startup costs of our China operations.  In June 2016, our affiliate in China opened a rehabilitation facility with standards found in our traditional short-stay model facilities in the United States, the first of its kind in those foreign markets.  The 174-bed center provides western rehabilitation technologies and service philosophies that are localized for the China market and sets industry standards for Chinese rehabilitation services.

 

Currently, we operate through affiliates in China a total of seven locations comprised of the two rehabilitation clinics in China and Hong Kong, the newly opened rehabilitation facility, and inpatient and outpatient rehabilitation services in four hospital joint ventures.  We plan to open two additional clinics and four hospital joint ventures by the end of 2016, bringing us to a total of 13 facilities operating in China.  Startup costs of these Chinese ventures are expected to exceed revenues in fiscal 2016. 

 

Other Services – EBITDAR decreased $2.3 million in the three months ended September 30, 2016 as compared with the same period in 2015.  The sale of the hospice and home health business effective May 1, 2016 resulted in a net reduction to EBITDAR of $3.1 million with the remaining increase of $0.8 million principally attributed to the staffing services businesses. 

 

Corporate and Eliminations — EBITDAR increased $16.4 million in the three months ended September 30, 2016 as compared with the same period in 2015.  EBITDAR 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 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 $17.0 million of the net increase in EBITDAR.  Corporate overhead costs increased $1.4 million, or 3.2%, in the three months ended September 30, 2016 as compared with the same period in 2015. This increase was largely due to the added overhead costs of Skilled and operating as a public company for the entire period. The remaining increase in EBITDAR of $0.8 million is the result of incremental investment earnings and improved earnings from our unconsolidated affiliates.

 

Other income – During the three months ended September 30, 2016 we have transitioned the operations of two formerly leased facilities to new operators.  That transaction called for derecognition of the financing obligation and associated assets of the leased property resulting in a gain of $5.5 million.  In addition, we sold a previously closed skilled nursing facility resulting in a net loss on sale of $0.6 million. 

 

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, 2016 and 2015 were $3.1million and $3.3 million, respectively, and of the amount in the 2015 period, the Combination contributed $1.9 million.

 

Skilled Healthcare and other loss contingency expense — For the three months ended September 30, 2016, there were no additional accruals for contingent liabilities, compared with $30.0 million in the corresponding period in the

51


 

prior year.  As previously disclosed, this activity pertains to the agreement in principle reached with the DOJ in July 2016.  See note 11 – “Commitments and Contingencies – Legal Proceedings.”

 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDAR 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, 2016 as compared with the same period in 2015. 

 

Lease expense — Lease expense represents the cash rents and non-cash adjustments required to account for operating leases. We have operating leases in each reportable segment, other services and corporate overhead, but the inpatient services business incurs the greatest proportion of this expense for those skilled nursing and assisted living facilities leases accounted for as operating leases.  Lease expense decreased $2.1 million in the three months ended September 30, 2016 as compared with the same period in the prior year principally due to our divestiture of underperforming leased facilities.

 

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 decreased $1.4 million in the three months ended September 30, 2016 compared with the same period in the prior year.  Of this decrease, $2.0 million is attributed to the accounting transactions for the Combination in the 2015 period and $2.8 million is attributed to the divestiture of underperforming facilities in late 2015 and 2016 to date.  The remaining increase of $3.4 million is principally attributed to the Acquisition from Revera and other acquisition and construction activities completed in 2015 and 2016.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations.  Interest expense increased $3.3 million in the three months ended September 30, 2016 as compared with the same period in the prior year.  Of this increase, $4.8 million is attributed to the debt issued in the Acquisition from Revera.  The remaining $1.5 million decrease is primarily attributable to reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt, partially offset by growth in interest pertaining to obligations incurred in connection with newly acquired or constructed facilities, in addition to escalating variable rates on the Real Estate Bridge Loans.

 

Income tax benefit — For the three months ended September 30, 2016, we recorded an income tax benefit of $25.9 million from continuing operations representing an effective tax rate of 33.1% compared to an income tax benefit of $16.7 million from continuing operations, representing an effective tax rate of 21.5% for the same period in 2015.  The increase in the effective tax rate is attributable to a $28.2 million release of a FIN48 reserve for the expiration of the statute of limitations.  There is also a full valuation allowance against the Company’s deferred tax assets, excluding the Company’s deferred tax asset on its Bermuda captive insurance company’s discounted unpaid loss reserve.  On December 31, 2015, 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, 2016, 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, 2016 as compared with the same period in 2015.  

52


 

 

Income (loss) from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited, closed or otherwise disposed as discontinued operations.  ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion.  Therefore, since 2014 none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations.  The activity reported as discontinued operations in the three months ended September 30, 2016 and 2015 was de minimis. 

 

Net loss attributable to noncontrolling interests — Following the closing of the Combination, the combined results of Skilled and FC-GEN are consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The 42% direct noncontrolling economic interest is in the form of Class A common units of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The 42% direct noncontrolling economic interest will continue to decrease as Class A common units of FC-GEN are exchanged for public shares.  Since the Combination, there have been conversions of 200,000 Class A common units.  For the three months ended September 30, 2016 and 2015, loss of $32.8 million and $32.6 million, respectively, has been attributed to the Class A common units. 

 

In addition to the noncontrolling interests attributable to the Class A common unit 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 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, 2016 and 2015, income of $0.9 million and $0.6 million, respectively, has been attributed to these unaffiliated third parties. 

   

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

 

A summary of our unaudited results of operations for the nine months ended September 30, 2016 as compared with the same period in 2015 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,595,258

 

82.9

%  

$

3,424,788

 

81.9

%  

$

170,470

 

5.0

%

Assisted/Senior living facilities

 

 

90,772

 

2.1

%  

 

106,497

 

2.5

%  

 

(15,725)

 

(14.8)

%

Administration of third party facilities

 

 

8,608

 

0.2

%  

 

7,724

 

0.2

%  

 

884

 

11.4

%

Elimination of administrative services

 

 

(1,077)

 

 —

%  

 

(1,445)

 

 —

%  

 

368

 

(25.5)

%

Inpatient services, net

 

 

3,693,561

 

85.2

%  

 

3,537,564

 

84.6

%  

 

155,997

 

4.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

821,704

 

19.1

%  

 

818,335

 

19.6

%  

 

3,369

 

0.4

%

Elimination intersegment rehabilitation therapy services

 

 

(311,060)

 

(7.2)

%  

 

(323,020)

 

(7.7)

%  

 

11,960

 

(3.7)

%

Third party rehabilitation therapy services

 

 

510,644

 

11.9

%  

 

495,315

 

11.9

%  

 

15,329

 

3.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

142,336

 

3.3

%  

 

172,759

 

4.1

%  

 

(30,423)

 

(17.6)

%

Elimination intersegment other services

 

 

(16,971)

 

(0.4)

%  

 

(27,135)

 

(0.6)

%  

 

10,164

 

(37.5)

%

Third party other services

 

 

125,365

 

2.9

%  

 

145,624

 

3.5

%  

 

(20,259)

 

(13.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,329,570

 

100.0

%  

$

4,178,503

 

100.0

%  

$

151,067

 

3.6

%

 

 

53


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

581,580

 

15.7

%  

$

569,338

 

16.1

%  

$

12,242

 

2.2

%

Rehabilitation therapy services

 

 

60,779

 

7.4

%  

 

86,175

 

10.5

%  

 

(25,396)

 

(29.5)

%

Other services

 

 

8,020

 

5.6

%  

 

12,824

 

7.4

%  

 

(4,804)

 

(37.5)

%

Corporate and eliminations

 

 

(128,010)

 

 —

%  

 

(242,375)

 

 —

%  

 

114,365

 

(47.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDAR

 

$

522,369

 

12.1

%  

$

425,962

 

10.2

%  

$

96,407

 

22.6

%

 

A summary of our unaudited condensed consolidating statement of operations follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

3,694,638

 

$

821,704

 

$

141,970

 

$

366

 

$

(329,108)

 

$

4,329,570

 

Salaries, wages and benefits

 

 

1,748,232

 

 

689,833

 

 

96,759

 

 

 —

 

 

 —

 

 

2,534,824

 

Other operating expenses

 

 

1,296,069

 

 

58,927

 

 

36,198

 

 

 —

 

 

(329,108)

 

 

1,062,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

139,999

 

 

 —

 

 

139,999

 

Provision for losses on accounts receivable

 

 

68,757

 

 

12,165

 

 

993

 

 

(139)

 

 

 —

 

 

81,776

 

Lease expense

 

 

107,047

 

 

71

 

 

1,209

 

 

1,469

 

 

 —

 

 

109,796

 

Depreciation and amortization expense

 

 

167,208

 

 

9,137

 

 

805

 

 

13,672

 

 

 —

 

 

190,822

 

Interest expense

 

 

328,385

 

 

43

 

 

30

 

 

72,395

 

 

 —

 

 

400,853

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,830

 

 

 —

 

 

15,830

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,073)

 

 

 —

 

 

(2,073)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(48,084)

 

 

 —

 

 

(48,084)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

9,804

 

 

 —

 

 

9,804

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

15,192

 

 

 —

 

 

15,192

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(3,894)

 

 

1,741

 

 

(2,153)

 

(Loss) income before income tax benefit

 

 

(21,060)

 

 

51,528

 

 

5,976

 

 

(213,805)

 

 

(1,741)

 

 

(179,102)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(19,738)

 

 

 —

 

 

(19,738)

 

(Loss) income from continuing operations

 

$

(21,060)

 

$

51,528

 

$

5,976

 

$

(194,067)

 

$

(1,741)

 

$

(159,364)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2015

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

3,539,009

 

$

818,335

 

$

171,175

 

$

1,584

 

$

(351,600)

 

$

4,178,503

 

Salaries, wages and benefits

 

 

1,674,262

 

 

664,600

 

 

106,432

 

 

 —

 

 

 —

 

 

2,445,294

 

Other operating expenses

 

 

1,240,551

 

 

54,507

 

 

50,260

 

 

 —

 

 

(351,599)

 

 

993,719

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

130,902

 

 

 —

 

 

130,902

 

Provision for losses on accounts receivable

 

 

54,858

 

 

13,053

 

 

1,659

 

 

(715)

 

 

 —

 

 

68,855

 

Lease expense

 

 

109,843

 

 

83

 

 

1,795

 

 

1,312

 

 

 —

 

 

113,033

 

Depreciation and amortization expense

 

 

152,641

 

 

9,803

 

 

909

 

 

12,690

 

 

 —

 

 

176,043

 

Interest expense

 

 

315,902

 

 

16

 

 

31

 

 

60,577

 

 

(290)

 

 

376,236

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

130

 

 

 —

 

 

130

 

Investment (income) loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,490)

 

 

290

 

 

(1,200)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(7,522)

 

 

 —

 

 

(7,522)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

92,016

 

 

 —

 

 

92,016

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

31,500

 

 

 —

 

 

31,500

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(2,528)

 

 

1,375

 

 

(1,153)

 

(Loss) income before income tax benefit

 

 

(9,048)

 

 

76,273

 

 

10,089

 

 

(315,288)

 

 

(1,376)

 

 

(239,350)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(26,793)

 

 

 —

 

 

(26,793)

 

(Loss) income from continuing operations

 

$

(9,048)

 

$

76,273

 

$

10,089

 

$

(288,495)

 

$

(1,376)

 

$

(212,557)

 

54


 

 

Net Revenues

 

Net revenues for the nine months ended September 30, 2016 as compared with the nine months ended September 30, 2015 increased by $151.1 million, or 3.6%.   

 

Inpatient Services – Revenue increased $156.0 million, or 4.4%, in the nine months ended September 30, 2016 as compared with the same period in 2015. Of this growth, $47.6 million is due to the Combination, $174.2 million is due to the Acquisition from Revera and $41.7 million is due to the acquisition or development of eight facilities, offset by $58.6 million of revenue attributed to the divestiture of 32 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  The remaining decrease of $48.9 million, or 1.4%, 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 referrals to home health or other community based care settings.

 

Rehabilitation Therapy Services – Revenue increased $15.3 million, or 3.1% comparing the nine months ended September 30, 2016 with the same period in 2015.  The Combination and Acquisition from Revera combined to contribute $2.2 million of the revenue growth, while the legacy Genesis rehabilitation therapy services business revenue increased another $13.1 million, driven by new therapy contract revenue exceeding lost business contract revenue.

 

Other Services – Other services revenue decreased $20.3 million, or 13.9% in the nine months ended September 30, 2016 as compared with the same period in 2015. Of this decrease, $25.2 million is the net impact of selling the hospice and homecare businesses on May 1, 2016, which we operated for just four months in the period ended September 30, 2016 compared with eight months in the period ended September 30, 2015.  The remaining increase of $4.9 million or 3.4% was principally attributed to new business growth in our staffing services business line.

 

EBITDAR

 

EBITDAR for the nine months ended September 30, 2016 increased by $96.4 million, or 22.6% when compared with the same period in 2015.  The contributing factors for this net increase are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDAR increased in the nine months ended September 30, 2016 as compared with the same period in 2015, by $12.2 million, or 2.2%.  Of the increase, $4.8 million is attributed to the Combination, $23.1 million is due to the Acquisition from Revera, $9.4 million is due to the acquisition or development of eight facilities, and partially offset by $9.8 million for the lost earnings attributed to the divestiture or closure of 32 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  Market pricing adjustments and restructured respiratory therapy service delivery from our Genesis rehabilitation therapy services resulted in $23.9 million increase in EBITDAR of the inpatient services for the nine months ended September 30, 2016 as compared with the same period in 2015.  Our self-insurance programs resulted in a reduction of $3.8 million EBITDAR in the nine months ended September 30, 2016 as compared with the same period in 2015.  That variance excludes the impact of the Combination and the Acquisition from Revera, with $10.7 million of incremental provision for general and professional liability claims and $4.1 million for increased provision for health benefits being offset with reduced reserve requirements of our workers’ compensation programs of $11.0 million.  Increased levels of provision for losses on accounts receivable resulted in $5.4 million of reduction of EBITDAR in the nine months ended September 30, 2016 as compared with the same period in 2015. The remaining $30.0 million decrease in EBITDAR of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues.”

 

Rehabilitation Therapy Services – EBITDAR of the rehabilitation therapy segment decreased by $25.4 million or 29.5% comparing the nine months ended September 30, 2016 with the same period in 2015.  The Combination and

55


 

Acquisition from Revera contributed $2.4 million and $3.4 million, respectively, while the EBITDAR of the legacy Genesis rehabilitation therapy business EBITDAR for the nine months ended September 30, 2016 decreased $31.2 million from the same period in 2015.  Market pricing adjustments and restructured respiratory therapy service delivery to our Genesis skilled nursing centers resulted in $23.9 million of the rehabilitation therapy services EBITDAR reduction and are included in the cost reductions noted in the Inpatient Services discussion above.  New therapy contracts exceeded lost therapy contracts and Therapist Efficiency was relatively flat in the nine months ended September 30, 2016 compared with the same period in 2015.  Restructuring costs, principally severance and related separation benefits, reduced EBITDAR by $3.7 million in the nine months ended September 30, 2016.  The remaining decrease of $3.6 million is principally due to the escalating startup costs of our China operations.  In June 2016, our affiliate in China opened a rehabilitation facility with standards found in our traditional short-stay model facilities in the United States, the first of its kind in those foreign markets.  The 174-bed center provides western rehabilitation technologies and service philosophies that are localized for the China market and sets industry standards for Chinese rehabilitation services.

 

Currently, we operate through affiliates in China a total of seven locations comprised of the two rehabilitation clinics in China and Hong Kong, the newly opened rehabilitation facility, and inpatient and outpatient rehabilitation services in four hospital joint ventures.  We plan to open two additional clinics and four hospital joint ventures by the end of 2016, bringing us to a total of 13 facilities operating in China.  Startup costs of these Chinese ventures are expected to exceed revenues in fiscal 2016. 

 

Other Services – EBITDAR decreased $4.8 million in the nine months ended September 30, 2016 as compared with the same period in 2015.  The sale of the hospice and home health business effective May 1, 2016 resulted in a net reduction to EBITDAR of $3.2 million with the remaining decrease of $1.6 million principally attributed to the physician services business. 

 

Corporate and Eliminations — EBITDAR increased $114.4 million in the nine months ended September 30, 2016 as compared with the same period in 2015.  EBITDAR 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 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 $123.4 million of the net increase in EBITDAR.  Corporate overhead costs increased $10.9 million, or 8.7%, in the nine months ended September 30, 2016 as compared with the same period in 2015. This increase was largely due to the added overhead costs of Skilled and operating as a public company for the entire period. The remaining increase in EBITDAR of $1.9 million is the result of incremental investment earnings and improved earnings from our unconsolidated affiliates. 

 

Other income – As previously described, effective April 30, 2016, we have sold the hospice and homecare business acquired in the Combination.  That sale resulted in a realized gain of $44.0 million.  In addition to that sale, during the second quarter 2016 we transitioned the operations of two formerly leased facilities to new operators resulting in a loss on that transaction of $0.8 million.  That transaction called for derecognition of the financing obligation and associated assets of the leased property, resulting in a gain of $5.5 million.  In addition, we sold a previously closed skilled nursing facility resulting in a net loss on sale of $0.6 million.

 

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, 2016 and 2015 were $9.8 million and $92.0 million, respectively, and of the amount in the 2015 period, the Combination contributed $88.8 million.

 

Skilled Healthcare and other loss contingency expense — For the nine months ended September 30, 2016, we accrued $15.2 million for contingent liabilities compared with $31.5 million in the same period in the prior year.  As previously disclosed, the additional accrual in the current year pertains to the agreement in principle reached with the DOJ in July 2016.   See Note 11 – “Commitments and Contingencies – Legal Proceedings.”

 

56


 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDAR 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, 2016 as compared with the same period in 2015. 

 

Lease expense — Lease expense represents the cash rents and non-cash adjustments required to account for operating leases. We have operating leases in each reportable segment, other services and corporate overhead, but the inpatient services business incurs the greatest proportion of this expense for those skilled nursing and assisted living facilities leases accounted for as operating leases.  Lease expense decreased $3.2 million in the nine months ended September 30, 2016 as compared with the same period in the prior year.  The Combination resulted in an increase of $1.2 million, and $0.5 million resulted from one new operating lease, with the remaining decrease of $4.9 million principally due to our divestiture of underperforming leased facilities.

 

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.  The majority of the $14.8 million increase in depreciation and amortization in the nine months ended September 30, 2016 compared with the same period in the prior year is attributed to the Combination, the Acquisition from Revera and other acquisition and construction activities in 2015, net of $6.5 million of accelerated depreciation on two formerly leased facilities transitioned to new operators in the nine months ended September 30, 2016.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations.  Interest expense increased $24.6 million in the nine months ended September 30, 2016 as compared with the same period in the prior year.  Of this increase, $13.4 million is attributed to the debt issued in the Acquisition from Revera.  The remaining $11.2 million increase is primarily attributable to obligations incurred in connection with newly acquired or constructed facilities, in addition to escalating variable rates on the Real Estate Bridge Loans, and partially offset by reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt.

 

Income tax expense (benefit) — For the nine months ended September 30, 2016, we recorded an income tax benefit of $19.7 million from continuing operations representing an effective tax rate of 11.0% compared to an income tax benefit of $26.8 million from continuing operations, representing an effective tax rate of 11.2% for the same period in 2015.  During the nine months ended September 30, 2016, a $28.2 million FIN48 reserve was released for the expiration of the statute of limitations.  There is also a full valuation allowance against the Company’s deferred tax assets, excluding the Company’s deferred tax asset on its Bermuda captive insurance company’s discounted unpaid loss reserve.  On December 31, 2015, 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, 2016, 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, 2016 as compared with the same period in 2015.  

 

Income (loss) from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited,

57


 

closed or otherwise disposed as discontinued operations.  ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion.  Therefore, since 2014 none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations.  The activity reported as discontinued operations in the nine months ended September 30, 2016 was de minimis and for the nine months ended September 30, 2015, was loss of $1.6 million, representing adjustments associated with exit, closure and disposal activities of reporting units identified as discontinued operations prior to adoption of ASU 2014-08.   

 

Net loss attributable to noncontrolling interests — Following the closing of the Combination, the combined results of Skilled and FC-GEN are consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The 42% direct noncontrolling economic interest is in the form of Class A common units of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The 42% direct noncontrolling economic interest will continue to decrease as Class A common units of FC-GEN are exchanged for public shares.  Since the Combination, there have been conversions of 200,000 Class A common units.  For the nine months ended September 30, 2016 and 2015, loss of $75.1 million and $55.6 million, respectively, has been attributed to the Class A common units. 

 

In addition to the noncontrolling interests attributable to the Class A common unit 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 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, 2016 and 2015, income of $2.2 million and $2.2 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, 

 

 

    

 

2016

    

2015

 

Net cash provided by (used in) operating activities

 

 

$

35,302

 

$

(4,949)

 

Net cash provided by (used in) investing activities

 

 

 

962

 

 

(67,933)

 

Net cash (used in) provided by financing activities

 

 

 

(43,967)

 

 

45,005

 

Net decrease in cash and cash equivalents

 

 

 

(7,703)

 

 

(27,877)

 

Beginning of period

 

 

 

61,543

 

 

87,548

 

End of period

 

 

$

53,840

 

$

59,671

 

 

Net cash provided by operating activities in the nine months ended September 30, 2016 of $35.3 million was unfavorably impacted by funded transaction costs of approximately $9.8 million.  Adjusted for transaction costs, net cash provided by operating activities in the nine months ended September 30, 2016 would have been approximately $45.1 million.  Net cash used in operating activities in the nine months ended September 30, 2015 of $4.9 million was unfavorably impacted by funded transaction costs of approximately $66.6 million.  Adjusted for funded transaction costs, net cash provided by operating activities in the nine months ended September 30, 2015 would have been $61.7 million.  The cash provided by operating activities before funded transaction costs in the 2016 period as compared to the 2015 period declined $16.6 million, primarily due to changes in accounts receivable associated with the Revera Acquisition, which resulted in delayed timing of the receipt of payments for services provided to patients due to federal and state processing of licensure.

 

Net cash provided by investing activities in the nine months ended September 30, 2016 was $1.0 million, compared to a use of cash of $67.9 million in the nine months ended September 30, 2015. The nine months ended September 30, 2016, as compared with the same period in 2015, included the receipt from the sales of assets and joint venture

58


 

investments of $150.4 million consisting primarily of $72.0 million, $67.0 million, $9.4 million and $1.9 million for the sale of our hospice and home care business, 18 assisted living facilities in Kansas, an office building in Albuquerque, New Mexico and a closed skilled nursing facility in Missouri, respectively.  The nine months ended September 30, 2015 included the receipt of $27.6 million of asset and investment in joint venture sale proceeds partially offset by $11.6 million of outlays for the purchases of skilled nursing facilities, rehabilitation therapy clinics and a deposit on the Revera acquisition.  The nine months ended September 30,2016 included a use of investing cash flow of $108.3 million related to the purchase of skilled nursing facilities, which include the acquisition of a skilled nursing facility in Pennsylvania for $12.9 million and ten skilled nursing facilities in North Carolina, Maryland, New Jersey and Vermont for $93.9 million,  as compared to $11.6 million of asset purchases in the nine months ended September 30, 2015.  Routine capital expenditures for the nine months ended September 30, 2016 exceeded the same period in the prior year by $5.3 million.  The remaining incremental source of cash from investing activities of $48.1 million in the nine months ended September 30, 2016 as compared with the same period in 2015 is principally due to the liquidation and transfer of restricted cash and investments by our captive insurance companies to unrestricted cash. 

 

Net cash used in financing activities was $44.0 million in the nine months ended September 30, 2016 compared to a source of $45.0 million in the nine months ended September 30,  2015.  The net increase in cash used in financing activities of $89.0 million is principally attributed to debt extinguishments in the 2016 period exceeding proceeds of new borrowing activities.  In the nine months ended September 30,  2016 we had net increase of borrowings under the Revolving Credit Facilities of $51.0 million as compared with a $60.5 million of incremental Revolving Credit Facilities borrowings in the same period in 2015.  In the nine months ended September 30, 2016, we used $54.2 million of the proceeds from the sale of 18 assisted living facilities in Kansas, $72.0 million from the sale of our hospice and home care business and $1.9 million from the sale of a closed skilled nursing facility in Missouri to repay long-term debt.  In the nine months ended September 30,  2016, we used the proceeds of $53.9 million of newly issued mortgage debt and $37.0 million of Revera Real Estate Bridge Loan to acquire 11 skilled nursing facilities.  In the nine months ended September 30,  2016, we used $143.2 million of proceeds from HUD insured financing on 21 skilled nursing facilities to repay $143.2 million of Skilled Real Estate Bridge Loan indebtedness. In the nine months ended September 30,  2016, we used $120.0 million of proceeds from the New Terms Loans to assist in repayment of the remaining $153.4 million balance of the Term Loan Facility. In the nine months ended September 30,  2015 we used the $360 million of proceeds from the Skilled Real Estate Bridge Loan to repay $326.6 million of indebtedness assumed in the Combination and other transaction costs.  The remaining net source of cash of $24.5 million in the nine months ended September 30,  2016 as compared to the same period in 2015 is principally due to scheduled debt repayments, debt issuance costs and distributions to noncontrolling interests in the 2015 period exceeding the scheduled debt repayments, debt issuance costs and distributions to noncontrolling interests in the 2016 period.

 

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.

 

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 unrestricted cash and cash equivalents and our available borrowing capacity.

 

At September 30, 2016, we had cash and cash equivalents of $53.8 million and available borrowings under our revolving credit facilities of $52.3 million, after taking into account $67.0 million of letters of credit drawn against our revolving credit facilities. During the nine months ended September 30, 2016, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities and we believe we will continue to meet those needs for at least the subsequent twelve month period.

 

59


 

Financing Activities

 

We are progressing on our near-term capital strengthening priorities to refinance our Real Estate Bridge Loans with lower cost and longer maturity HUD insured loans or other permanent financing and to reduce our overall indebtedness through a combination of non-strategic asset sale proceeds and free cash flow. 

 

During the first nine months of 2016, we closed on 21 HUD insured loans totaling $143.2 million. Since the Combination, we have repaid or refinanced $199.3 million of Welltower Real Estate Bridge Loans with $331.8 million remaining outstanding. We expect to continue to seek refinancing opportunities for the Real Estate Bridge Loans with lower cost HUD insured loans or other permanent financing into 2017.

 

In March 2016, we closed on the sale lease back of a corporate office building, generating $9.4 million of proceeds, which were used to pay down partially our Revolving Credit Facility debt.

 

Effective May 1, 2016, we completed the sale of our hospice and home health operations.  The operations were sold for $84 million, consisting of cash consideration of $72 million and a $12 million short-term note.  We used the cash proceeds to repay partially our then outstanding Term Loan Facility maturing in December of 2017. 

 

In April 2016, we acquired one skilled nursing facility and entered into a $9.9 million real estate bridge loan.  In May 2016, we acquired the real property of five skilled nursing facilities we operated under a leasing arrangement and entered into a $44.0 million real estate bridge loan (collectively, the Other Real Estate Bridge Loans).  The Other Real Estate Bridge Loans have an outstanding principal balance of $53.9 million at September 30, 2016.  We expect to refinance the Other Real Estate Bridge Loans with HUD insured loans in early 2017.

 

In June 2016, we amended the Skilled Real Estate Bridge Loan providing for an additional extension option of 180 days, which, if exercised by us, would extend the maturity of the Skilled Real Estate Bridge Loan to February 2018.  The Skilled Real Estate Bridge Loan had an outstanding principal balance of $160.7 million at September 30, 2016.

 

On September 1, 2016, we acquired five skilled nursing facilities from Revera for a purchase price of $39.4 million.  We had previously acquired the real property of 15 of Revera’s skilled nursing facilities on December 1, 2015 and entered into leases for four additional skilled nursing facilities while awaiting change of ownership approval for the remaining five skilled nursing facilities located in the State of Vermont.  The acquisition was financed through the Revera Real Estate Bridge Loan for $37.0 million.

 

New Master Leases

 

We recently announced we entered into a lease with a new landlord for 64 skilled nursing facilities previously leased from Welltower.  On November 1, 2016, Welltower sold the real estate of the 64 facilities to Second Spring Healthcare Investments (Second Spring), a joint venture formed by affiliates of Lindsay Goldberg LLC, a private investment firm, and affiliates of Omega.  We will continue to operate the facilities pursuant to our new lease with affiliates of Second Spring effective November 1, 2016 and there will be no change in the operations of these facilities. 

 

The 64 facilities had been included in our master lease with Welltower and were historically subject to 3.4% annual escalators, which were scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease with Second Spring, initial annual rent for the 64 properties is reduced approximately 5% to $103.9 million and annual escalators will decrease to 1.0% after year 1, 1.5% after year 2, and 2.0% thereafter.  The more favorable lease terms are expected to reduce our cumulative rent obligations through January 2032 by $297 million.  As part of the transaction, we issued a note totaling $51.2 million to Welltower, maturing in October 2020. 

 

On November 2, 2016, in a separate transaction, Welltower announced that it had entered into an agreement to sell the real estate of 28 additional facilities to a joint venture among Welltower, Cindat Capital Management Ltd., and Union Life Insurance Co., Ltd. Similar to the new lease with Second Spring, as part of the Welltower sale, we expect to enter

60


 

into a lease at closing of the sale, which is expected in the fourth quarter of 2016.  We will continue to operate the facilities pursuant to our new lease and there will be no change in the operations of these facilities. 

 

The 28 facilities are currently included in our master lease with Welltower and have been subject to 3.4% annual escalators, which are scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease, the 28 properties’ initial annual rent is expected to be reduced by approximately 5% to $54.5 million and the annual escalators are expected to decrease to 2.0%. The more favorable lease terms are expected to reduce our cumulative rent obligations by $143 million through January 2032.  As part of the transaction, we expect to issue a five-year note totaling $23.7 million to Welltower, a portion of which is expected to be convertible to common stock at approximately $4 per share.  Upon completion of this transaction, Welltower would still lease to us 114 skilled nursing and assisted/senior living facilities.

 

Divestiture of Non-Strategic Facilities

 

Consistent with our strategy to divest assets in non-strategic markets, we intend to exit inpatient operations in eight Midwestern states. The divestiture will occur in two phases:

 

·

The first phase consists of the sale or divestiture of 18 facilities (16 owned and 2 leased) in the states of Kansas, Missouri, Nebraska and Iowa.   The transaction will mark an exit from the inpatient business in these states.  Closing is subject to licensure and other regulatory approvals.  The 18 facilities have annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $80 million which approximates the outstanding indebtedness.  Sale proceeds of approximately $80 million, net of transaction costs, will principally be used to repay the indebtedness.

 

·

The second phase consists of the planned divestiture of 43 facilities in the states of Montana, Kentucky, Indiana and Ohio in a series of transactions.  Forty one of the facilities are leased from a variety of landlords and the remaining 2 facilities are owned by us.  The transactions will mark a complete exit from the inpatient business in these states.  We and our landlords are at varying stages of marketing these facilities. The 43 facilities have annual revenue of $322.0 million and EBITDAR of $50.4 million.  We expect the divestiture of the leased facilities will result in negotiated master lease rent reductions.

 

On October 18, 2016, we completed the divesture of nine underperforming leased assisted living facilities in the states of Pennsylvania, Delaware and West Virginia.  The nine facilities had annual revenue of $22.5 million, no Adjusted EBITDA and $2.8 million of pre-tax net loss.

 

New Term Loan Facility

 

On July 29, 2016, we and certain of our affiliates, including FC-GEN Operations Investment LLC (the Borrower), entered into a four year Term Loan Agreement (the New Term Loan Agreement) with an affiliate of Welltower Inc. (Welltower) and an affiliate of Omega Healthcare Investors, Inc. (Omega).  The New Term Loan Agreement provides for term loans (the New 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 and two, and 6.0% in years three and four.  Borrowings under the New Term Loan Agreement bear interest at a rate equal to a base rate (subject to a floor of 1.00%) or an ABR rate (subject to a floor of 2.0%), plus in each case a specified applicable margin.   The initial applicable margin for base rate loans is 13.0% per annum and the initial applicable margin for ABR rate loans is 12.0% per annum.  At our election, with respect to either base rate or ABR rate loans, up to 2.0% of the interest may be paid either in cash or paid-in-kind.  The proceeds of the New Term Loan, along with cash on hand, were used to repay all outstanding term loans and other obligations under the Prior Term Loan (as defined below). 

 

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

61


 

 

Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which we and/or our affiliates are tenants.  In addition, Welltower currently provides funding, pursuant to two bridge loans, to certain affiliates of ours.

 

The New Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type.  The covenants are effective retroactive to June 30, 2016.  The financial covenants include four maintenance covenants which require us 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 us to maintain a leverage ratio, as defined therein, of no more than 6.0 to 1.0 through March of 2017 and stepping down over the course of the loan to 4.0 to 1.0 beginning in 2020.

 

Repayment of Prior Term Loan Facility

 

On July 29, 2016, we paid the outstanding balance of $153.4 million under the Term Loan Agreement dated as of December 3, 2012, (the Prior Term Loan).  In addition, we paid an early termination fee of approximately $3.1 million. The Prior Term Loan and all guarantees and liens related thereto were terminated upon such payments.

 

Revolving Credit Facility Amendment 

 

On July 29, 2016, we entered into an amendment (the ABL Amendment) to our Revolving Credit Facilities. Among other things, the ABL Amendment (i) modifies financial covenants effective June 30, 2016 to provide additional flexibility to us; (ii) permits us to enter into certain other transactions; and (iii) increases the interest rate margin applicable to the revolving loans under the ABL Credit Agreement (the New Applicable Margin). The New Applicable Margin for LIBOR loans increased (i) for Tranche A-1 loans, from a range of 2.75% to 3.25% to a range of 3.00% to 3.50%, (ii) for Tranche A-2 loans, from a range of 2.50% to 3.00% to a range of 3.00% to 3.50% and (iii) for FILO Tranche, from 5.00% to 6.00%.  The New Applicable Margin for 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) loans increased (i) for Tranche A-1 loans, from a range of 1.75% to 2.25% to a range of 2.00% to 2.50%, (ii) for Tranche A-2 loans, from a range of 1.50% to 2.00% to a range of 2.00% to 2.50% and (iii) for FILO Tranche, from 4.00% to 5.00%. 

 

The amended Revolving Credit Facilities contain financial, affirmative and negative covenants, and events of default that are substantially identical to those of the New Term Loan Agreement, but additionally contain a minimum liquidity covenant and a springing minimum fixed charge coverage covenant tied to the minimum liquidity requirement.     The most restrictive financial covenant is the maximum leverage ratio which requires us to maintain a leverage ratio, as defined, of no more than 6.0 to 1.0 through March of 2017 and stepping down over the course of the loan to 4.0 to 1.0 beginning in 2020.

 

Lease and Other Loan Amendments

 

On July 29, 2016, we entered into amendments (the Master Lease Amendments) of our master lease agreements with Welltower, Sabra and Omega (the Master Lease Agreements) and the Welltower Real Estate Bridge Loans.  Among other things, the Master Lease Amendments modified financial covenants effective June 30, 2016 to provide us with additional flexibility.  No such amended financial covenants are more restrictive than the maximum leverage ratio contained in the New Term Loan and the Revolving Credit Facility agreements.

 

On July 29, 2016, we entered into a memorandum of understanding with Sabra outlining the terms of a restructuring to our master lease agreements.  The significant features of the restructuring include (i) the application of a 7.5% credit against current rent from the proceeds of certain asset sales with any residual rent related to assets sold continuing to be paid by us through our current terms, which expire in 2020 and 2021; (ii) the reallocation of rents among certain of the master leases in order to establish market based lease coverages, with any excess rent above market

62


 

lease coverage scheduled to expire in 2020 and 2021; and (iii) extensions of two to four years to the termination dates of certain master leases, which after 2020 and 2021 will reflect market-based lease coverages.  The restructuring provides a long-term solution to our master leases with Sabra.  Based upon the estimated sale proceeds of certain assets and the excess rent associated with the rent reallocation, we project the annual rent reduction by 2021 to be between $11 million and $13 million.

 

 Financial Covenants

 

The Revolving Credit Facilities, the New Term Loan Agreement and the Welltower Real Estate Bridge Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants.  As of September 30, 2016, we are in compliance with the covenants contained in the Credit Facilities.

 

Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants.  As of September 30, 2016, we are in compliance with all covenants contained in the Master Lease Agreements.

 

At September 30, 2016, we did not meet certain financial covenants contained in four leases related to 30 of our facilities.  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 at September 30, 2016 will have a material adverse impact on us.

 

Off Balance Sheet Arrangements

 

We had outstanding letters of credit of $67.0 million under our letter of credit sub-facility on our revolving credit facilities as of September 30, 2016.  These letters of credit are principally pledged to landlords and insurance carriers as collateral.  We are not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

 

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, 2016 (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

    

 

    

More than

 

 

 

Total

 

1 Yr.

 

2-3 Yrs.

 

4-5 Yrs.

 

5 Yrs.

 

Revolving credit facilities

 

$

483,191

 

$

45,751

 

$

35,229

 

$

402,211

 

$

 —

 

Term loan facility

 

 

184,389

 

 

17,559

 

 

35,403

 

 

131,427

 

 

 —

 

Real estate bridge loans

 

 

463,988

 

 

42,796

 

 

421,192

 

 

 —

 

 

 —

 

HUD insured loans

 

 

401,124

 

 

12,542

 

 

25,084

 

 

25,084

 

 

338,414

 

Mortgages and other secured debt (recourse)

 

 

14,135

 

 

1,059

 

 

11,934

 

 

1,142

 

 

 —

 

Mortgages and other secured debt (non-recourse)

 

 

33,605

 

 

2,195

 

 

14,428

 

 

2,617

 

 

14,365

 

Financing obligations

 

 

11,130,685

 

 

280,656

 

 

585,630

 

 

619,617

 

 

9,644,782

 

Capital lease obligations

 

 

3,681,177

 

 

93,236

 

 

182,911

 

 

191,637

 

 

3,213,393

 

Operating lease obligations

 

 

992,494

 

 

137,412

 

 

269,629

 

 

261,870

 

 

323,583

 

 

 

$

17,384,788

 

$

633,206

 

$

1,581,440

 

$

1,635,605

 

$

13,534,537

 

 

 

 

63


 

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 Term Loan Facility, Real Estate Bridge Loans and Revolving Credit Facilities expose us to variability in interest payments due to changes in interest rates.  As of September 30, 2016, 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 $9.4 million increase in our annual interest expense. 

 

Our investments in marketable securities as of September 30, 2016 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 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. Based on that evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 2016 because of the outstanding material weakness in our internal control over financial reporting as discussed in more detail in our Form 10-K for the year ended December 31, 2015 under Part II, Item 9A. Management continues to implement the remediation plan described in our 10-K for the year ended December 31, 2015 and updated below to address this material weakness and is monitoring that implementation.

 

During the nine months ended September 30, 2016, we have implemented and are continuing to implement a number of measures to address the identified material weakness in our internal control over financial reporting described in Item 9A of our Form 10-K for the year ended December 31, 2015.  However, the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management concludes, through testing, that these controls are operating effectively. 

 

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

64


 

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.

 

Changes in Internal Control Over Financial Reporting

 

Except as discussed above, there has been no change in our internal control over financial reporting that occurred during the quarter covered that has materially affected, or is 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 11  “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

 

With the exception of the revision to an existing risk factor disclosed in Part II, Item 1A “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, and the addition below, there have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 14, 2016.

 

The conversion of debt securities into our common stock may dilute the ownership of existing stockholders.

 

We may, from time to time, issue debt securities convertible into our common stock. For example, in connection with the pending transaction with Welltower, see Note 14 – “Subsequent Events,” we expect to issue a note, a portion of which is expected to be convertible into our common stock. The conversion, if any, of such convertible debt may dilute the ownership interest of our existing stockholders. Any sales in the public market of the shares of common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the market price of our common stock. Issuance of such common stock upon conversion also may affect our earnings (loss) on a per share basis.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

65


 

Item  5. Other Information

 

None.

 

Item 6. Exhibits

 

(a)Exhibits.

 

 

 

 

Number

 

Description

 

 

 

 

10.1

Sixth Amendment dated as of August 15, 2016 to Loan Agreement dated as of February 2, 2015 between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto

10.2

Seventh Amendment dated as of August 22, 2016 to Loan Agreement dated as of February 2, 2015 between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto

10.3

Fourth Amendment dated August 16, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.4

Fifth Amendment dated October 6, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.5

Sixth Amendment dated October 18, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.6

Seventh Amendment dated November 1, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.7

Amendment No. 4 dated as August 22, 2016, to that certain Third Amended and Restated Credit Agreement dated as of February 2, 2015, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, Skilled Healthcare, LLC, Genesis Holdings, LLC, Genesis Healthcare LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent

10.8

Amendment No. 5 dated as October 21, 2016, to that certain Third Amended and Restated Credit Agreement dated as of February 2, 2015, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, Skilled Healthcare, LLC, Genesis Holdings, LLC, Genesis Healthcare LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent

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

66


 

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 4, 2016

By

/S/    GEORGE V. HAGER, JR.

 

 

 

George V. Hager, Jr.

 

 

 

Chief Executive Officer

 

 

 

 

Date:

November 4, 2016

By

/S/    THOMAS DIVITTORIO

 

 

 

Thomas DiVittorio

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Authorized Signatory)

 

67


 

EXHIBIT INDEX

 

 

 

 

Number

 

Description

 

 

 

 

 

 

10.1

Sixth Amendment dated as of August 15, 2016 to Loan Agreement dated as of February 2, 2015 between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto

10.2

Seventh Amendment dated as of August 22, 2016 to Loan Agreement dated as of February 2, 2015 between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto

10.3

Fourth Amendment dated August 16, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.4

Fifth Amendment dated October 6, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.5

Sixth Amendment dated October 18, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.6

Seventh Amendment dated November 1, 2016 to Nineteenth Amended and Restated Master Lease Agreement dated as of December 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC

10.7

Amendment No. 4 dated as August 22, 2016, to that certain Third Amended and Restated Credit Agreement dated as of February 2, 2015, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, Skilled Healthcare, LLC, Genesis Holdings, LLC, Genesis Healthcare LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent

10.8

Amendment No. 5 dated as October 21, 2016, to that certain Third Amended and Restated Credit Agreement dated as of February 2, 2015, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, Skilled Healthcare, LLC, Genesis Holdings, LLC, Genesis Healthcare LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent

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

 

 

 

 

 

 

68