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EX-32 - EX-32 - Genesis Healthcare, Inc.gen-20191231xex32.htm
EX-31.2 - EX-31.2 - Genesis Healthcare, Inc.gen-20191231ex3124ae52e.htm
EX-31.1 - EX-31.1 - Genesis Healthcare, Inc.gen-20191231ex3111d0434.htm
EX-23.1 - EX-23.1 - Genesis Healthcare, Inc.gen-20191231ex23146d609.htm
EX-21 - EX-21 - Genesis Healthcare, Inc.gen-20191231ex217513f35.htm
EX-10.18 - EX-10.18 - Genesis Healthcare, Inc.gen-20191231ex1018b71b8.htm
EX-4.2 - EX-4.2 - Genesis Healthcare, Inc.gen-20191231ex42cf84574.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019.

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)

 

(I.R.S. 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.001 par value per share

GEN

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

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

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

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

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated Filer

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

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

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

As of June 30, 2019, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the shares of Class A common stock, par value $0.001 per share, held by non-affiliates of the registrant, computed based on the closing sale price of $1.24 per share on June 30, 2019, as reported by The New York Stock Exchange, was approximately $115.6 million. The aggregate number of shares held by non-affiliates is calculated by excluding all shares held by executive officers, directors and holders known to hold 5% or more of the voting power of the registrant’s common stock. As of March 13, 2020, there were 108,163,948 shares of the registrant’s Class A common stock issued and outstanding, 744,396 shares of the registrant’s Class B common stock issued and outstanding, and 55,902,144 shares of the registrants Class C common stock, par value $0.001 per share, issued and outstanding. 

Documents Incorporated by Reference:

The information called for by Part III is incorporated by reference to the Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of the Registrant which will be filed with the U.S. Securities and Exchange Commission not later than April 29, 2020.

 

Genesis Healthcare, Inc.

Annual Report

Index

 

8

 

 

 

 

 

    

Page

 

 

 

Number

Forward-Looking Statements 

 

 

1

 

 

 

 

PART I 

 

 

 

 

 

 

 

Item 1. 

Business

 

1

 

 

 

 

Item 1A. 

Risk Factors

 

21

 

 

 

 

Item 1B. 

Unresolved Staff Comments

 

44

 

 

 

 

Item 2. 

Properties 

 

45

 

 

 

 

Item 3. 

Legal Proceedings

 

46

 

 

 

 

Item 4. 

Mine Safety Disclosures 

 

46

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5. 

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

46

 

 

 

 

Item 6. 

Selected Financial Data

 

47

 

 

 

 

Item 7. 

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

 

49

 

 

 

 

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

 

78

 

 

 

 

Item 8. 

Financial Statements and Supplementary Data

 

78

 

 

 

 

Item 9. 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

78

 

 

 

 

Item 9A. 

Controls and Procedures

 

78

 

 

 

 

Item 9B. 

Other Information

 

81

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

 

81

 

 

 

 

Item 11. 

Executive Compensation

 

81

 

 

 

 

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

81

 

 

 

 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

 

81

 

 

 

 

Item 14. 

Principal Accounting Fees and Services

 

81

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15. 

Exhibits, Financial Statement Schedules

 

81

 

 

 

 

Item 16. 

Form 10-K Summary

 

86

 

 

 

 

Signatures 

 

 

87

 

 

 

 

 

Forward-Looking Statements

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities 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. These forward-looking statements are necessarily estimates and expectations reflecting the best judgment of our senior management based on our current estimates, expectations, forecasts and projections, and include comments that express our current opinions about trends and factors that may impact future operating results. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements, or industry results, to differ materially from any anticipated future results, performance or achievements, expressed or implied by such forward-looking statements. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our business and other matters. These risks and uncertainties include, but are not limited to, those described in Item 1A. “Risk Factors" and elsewhere in this report and those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (SEC).

Any forward-looking statements contained herein are made only as of the date of this report. We expressly disclaim any duty to update the forward-looking statements and other information contained in this report, except as required by law. Investors are cautioned not to place undue reliance on these forward-looking statements.

 

PART I

Item 1. Business

 

Company Overview

Genesis Healthcare, Inc. (Genesis) is a holding company with subsidiaries that, on a consolidated basis, comprise one of the nation's largest post-acute care providers.  As used in this report, the terms “we,” “us,” “our,” and the “Company,” and similar terms, refer collectively to Genesis and its consolidated subsidiaries, unless the context requires otherwise.  We offer inpatient services through our network of 381 skilled nursing and assisted/senior living facilities located in 26 states.  We also supply rehabilitation and respiratory therapy to approximately 1,200 locations in 44 states, the District of Columbia and China as of December 31, 2019.  In addition, we provide a full complement of administrative and consultative services to our affiliated operators through our administrative services subsidiaries and to third-party operators with whom we contract through our management services subsidiary. There were 19 facilities subject to such management services agreements with unaffiliated or jointly owned skilled nursing facility operators as of December 31, 2019. All of our healthcare operating subsidiaries focus on providing quality care to the people we serve, and our skilled nursing facility subsidiaries, which comprise the largest portion of our consolidated business, have a strong commitment to treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy, whom we refer to as high-acuity patients.  For additional information regarding our financial condition, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Overview.”

 

Operations

As of December 31, 2019, we offered inpatient services through our network of 381 skilled nursing and assisted/senior living facilities across 26 states, consisting of 357 skilled nursing facilities and 24 stand-alone assisted/senior living facilities. Of the 381 facilities, 299 are leased, 30 are owned, 13 are managed and 39 are joint ventures. Additionally, we have fixed-price options to purchase the real property of 23 of our leased facilities and 33 of our joint venture facilities. Collectively, our skilled nursing and assisted/senior living facilities have 45,136 licensed beds, approximately 70% of which are concentrated in the states of California, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania, and West Virginia. See Item 2. “Properties” for the full count of facilities by state.  Our skilled nursing and assisted/senior living facilities are generally clustered in large urban or suburban markets.    For the year ended December 31, 2019, we generated approximately 84% of our revenue from our skilled nursing facilities, with the remainder primarily being generated from our assisted/senior living facilities, rehabilitation therapy services provided to third-party facilities, and other ancillary services.

Our services focus primarily on the medical and physical issues facing elderly patients and are provided by the employees of our skilled nursing facilities, assisted/senior living communities, integrated and third-party rehabilitation therapy business, and other ancillary services.

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As of December 31, 2019, we had three reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted/senior living facilities and is the largest portion of our business; (2) rehabilitation therapy services, which includes our integrated and third-party rehabilitation and respiratory therapy services; and (3) all other services. For the year ended December 31, 2019, the inpatient services segment generated approximately 87% of our revenue, the rehabilitation therapy services segment generated approximately 10% of our revenue and all other services accounted for the remaining balance of our revenue. For additional information regarding the financial performance of our reportable operating segments, see Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 –  “Segment Information,” in the notes to our consolidated financial statements included elsewhere in this report.

Inpatient Services Segment

Skilled Nursing Facilities

As of December 31, 2019, our skilled nursing facilities provided skilled nursing care at 357 regionally clustered facilities, having 41,977 licensed beds, in 26 states.  We have developed programs for, and actively market our services to, high-acuity patients who are typically admitted to our facilities as they recover from strokes, other neurological conditions, cardiovascular and respiratory ailments, joint replacements and other muscular or skeletal disorders.  We also provide 24-hour long-term care services for elderly residents and people with chronic conditions or prolonged illnesses. Our staff is devoted to providing a comforting environment and focused on helping each person achieve their highest level of independence and vitality.

We use interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care to our short-stay and long-stay patients.  Many of our skilled nursing facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management.  We also provide standard services to each of our skilled nursing patients, including room and board, special nutritional programs, social services, recreational activities and related healthcare and other services.

Our PowerBack Rehabilitation branded facilities are designed to provide short-stay skilled nursing facilities that deliver a comprehensive rehabilitation regimen in accommodations specifically designed to serve high-acuity patients. We believe that having PowerBack Rehabilitation facilities enables us to more effectively serve higher acuity patients and achieve a higher skilled mix than a traditional hybrid skilled nursing facility, which in turn results in higher reimbursement rates. Skilled mix is the average daily number of Medicare and insurance patients we serve at our skilled nursing facilities divided by the average daily number of total patients we serve at our skilled nursing facilities.  Insurance as a payor source includes both traditional commercial insurance programs as well as managed care plans, including Medicare Advantage plans.  As of December 31, 2019, we operated 10 PowerBack Rehabilitation facilities with 1,075 beds.

As of December 31, 2019, we have 19 facilities subject to management agreements with unaffiliated or jointly owned skilled nursing facility operators. The income associated with the management services provided to the third-party facility operator is included in inpatient services in our segment reporting as services are performed primarily by personnel supporting the inpatient services segment.

Our administrative service company provides a full complement of administrative and consultative services to our affiliated operators to allow them to better focus on the delivery of healthcare services.

Assisted/Senior Living Facilities

We complement our skilled nursing care business by providing assisted/senior living services at 24 stand-alone facilities with 1,941 beds and offer an additional 1,218 assisted/senior living beds within our skilled nursing facilities as of December 31, 2019. Our assisted/senior living facilities provide residential accommodations, activities, meals, security, housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing facility.

Rehabilitation Therapy Services

As of December 31, 2019, we provided rehabilitation therapy services, including speech-language pathology (SLP), physical therapy (PT), occupational therapy (OT) and respiratory therapy, to approximately 1,200 healthcare locations in 44 states, the District of Columbia and China, including 349 facilities operated by us. We provide rehabilitation therapy services at our skilled nursing facilities and assisted/senior living facilities as part of an integrated service offering in connection with our skilled nursing care.  We believe that an integrated approach to treating high-acuity patients enhances our ability to achieve successful patient outcomes and enables us to

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identify and treat patients who can benefit from our rehabilitation therapy services. We believe hospitals and physician groups often refer high-acuity patients to our skilled nursing facilities because they recognize the value of an integrated approach to providing skilled nursing care and rehabilitation therapy services. 

We believe that we have also established a strong reputation as a premium provider of rehabilitation therapy services to third-party skilled nursing operators in our local markets, with a recognized ability to provide these services to high-acuity patients. Our approach to providing rehabilitation therapy services for third-party operators emphasizes quality treatment and successful clinical outcomes.

In addition to our rehabilitation therapy services in the United States, we have a presence in China and Hong Kong with initiatives to develop a rehabilitation therapy care delivery model and other services.  The revenues generated and long-lived assets associated with this expansion are immaterial as of December 31, 2019.

Other Services

As of December 31, 2019, we provided an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

 

Employees and Labor Relations

As of December 31, 2019, we employed an aggregate of approximately 55,000 active employees as follows:  36,250 in our inpatient services segment, 11,800 (primarily therapists) in our rehabilitation therapy segment, and 6,950 in our all other services segment, which includes our administrative services subsidiaries. 

Our most significant operating cost is labor, which accounted for approximately 65% of our operating expenses for the year ended December 31, 2019.  The healthcare industry as a whole has been challenged by shortages of qualified healthcare professionals, resulting in increased competition for staffing services and increased employee turnover.  Consequently, we have instituted various strategies, such as maintaining competitive labor rates and benefits, that seek to improve employee retention and reduce reliance on overtime compensation and temporary staffing services.  Most of our skilled nursing facilities are subject to state-mandated minimum staffing requirements, so our ability to reduce labor costs by decreasing staff is limited and subject to government audits and penalties.  Managing labor costs is proving to be increasingly difficult as reimbursement rate increases are often significantly exceeded by the annual inflationary wage increases. The issue is compounded by the shift in payor mix to lower reimbursed Medicaid as well as increases in the federal or state minimum wage rates.

As of December 31, 2019, we had 83 collective bargaining agreements with unions covering approximately 5,200 active employees at our skilled nursing facilities. As these agreements are renegotiated, we may be subject to wage increases in excess of market rates. We consider our relationship with our employees to be good.

 

Customers

With the exception of our rehabilitation therapy services segment, no individual customer or client accounts for a significant portion of our revenue. We do not expect that the loss of a single customer or client within our inpatient services segment would have a material adverse effect on our business, financial condition or results of operations.  Within the rehabilitation services business, there are over 140 distinct customers, many of which are chain operators with more than one location.  One customer, which is a related party of ours, comprises $28.9 million, approximately 34%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019.  See Note 16 – “Related Party Transactions.”  One former customer comprises $7.0 million, approximately 8%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019.

 

Business Strategy

We believe that we are well positioned to succeed in what will be an increasingly integrated healthcare delivery system.  Our core strategy is to provide superior clinical outcomes with an approach that is patient-centered and focused on lowering costs by reducing lengths of stay and improving outcomes by developing programs to prevent avoidable rehospitalizations.

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The key elements of our business strategy include:

Commitment to quality care.  We are focused on qualitative and quantitative clinical performance measures in order to enhance and improve the care provided in our facilities.  We continually seek to enhance our reputation for providing clinical capabilities and favorable outcomes.  Among other things, we have and will continue to increase our professional nursing mix and integrate nurse practitioners and employed physicians into our clinical model.  We have incentivized our management team to improve clinical performance to further ensure accountability for the quality of care.

Position ourselves for success in a value-based 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 operate with scale will have a competitive advantage in an episodic payment environment.  Our ongoing clinical and operational initiatives position us as a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay, more effectively manage healthcare costs and develop new care delivery and payment models.

Improve operating efficiency.  We are continually focused on improving operating efficiency and controlling costs, while maintaining quality patient care.  Investments in information systems, the development of tools to more effectively manage operating costs and the reengineering of key business and operating processes are an effective way to grow cash flow and improve operating margins.  Such investments involve significant upfront costs that must be assessed on a long-term cost-benefit basis and can be limited due to our available liquidity.

Focusing on core markets by optimizing our facility portfolio.  We are continually evaluating the long-term strategic value of our portfolio of facilities and other operating businesses.  In this regard, we will continue to pursue the sale, divestiture, closure or reconfiguration of facilities or businesses that are unprofitable, located in unattractive or saturated markets, physically obsolete or not core to our business strategy.  Shedding non-core or non-strategic assets increases our focus and resources to assets in markets where we have geographic density, strong hospital partnerships and the greatest growth potential.  Between January 1, 2017 and December 31, 2019, we have divested, sold or closed the operations of 129 facilities.  We seek strategic acquisitions in selected target markets with strong demographic trends for growth in our service population.  Expansion of existing facility clusters and the creation of new clusters in local markets will allow us to leverage existing operations and to achieve greater operating efficiencies.

 

Improving overall capital structure and focusing on real estate ownership and strategic partnerships. In early 2018,  we executed a number of restructuring activities to provide increased liquidity and reduce annual cash fixed charges.  These activitities included closing on a new asset based lending facility, expansion of an existing term loan agreement, and the restructuring of several significant master leases, which resulted in more favorable terms. We currently lease the majority of the facilities used in our operations, many of which are subject to annual rent escalation clauses.  We are continually focused on reducing the impact of rising rents through the restructuring of existing lease arrangements, the acquisition of real estate, and the execution of other strategic partnerships. Further, we seek to own facilities or acquire fixed price options to purchase them, thus allowing us to participate in the upside appreciation of the facilities and the opportunity to lower our future costs by replacing rent subject to escalators with debt financing.

Since January 1, 2019, we entered into two strategic partnerships that provide us with fixed price options to purchase the underlying real property of an aggregate of 34 facilities and contain rental terms with no annual escalators for at least four years.   See Note 4 – “Significant Transactions and Events – Strategic Partnerships” and Note 23 – “Subsequent Events.”

Subsequent to December 31, 2019, we entered into an additional strategic partnership under which we transferred operational responsibility for 19 facilities to an operator with local market expertise and relationships.  Under the terms of the arrangement, we will continue to provide administrative support to the facilities and also provide certain ancillary services.  See Note 23 – “Subsequent Events.”

Competitive Strengths

We believe that the following competitive strengths support our business strategy:

Quality Patient Care, Differentiated Clinical Capabilities and Clinical Specialization. To ensure clinical oversight and continuity of patient care, our facilities contract with our physician services division to obtain services of physicians, physician assistants and nurse

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practitioners that are primarily involved in providing medical direction and/or direct patient care. Utilization of physicians and non-physician practitioners allows for significant patient involvement at all levels of the organization, thus ensuring an emphasis on quality care is maintained.  In an effort to further enhance the quality of care we provide to our patients, we have made investments to expand rehabilitation gym capacity and develop clinical specialty units. The development of clinical specialty units in our facility portfolio has allowed us to better meet the needs of our patients.  These specialty units, along with our advanced capabilities in post-acute cardiac and pulmonary management, differentiate us in local areas, as competitors often do not offer these programs.  Our focus on quality patient care, differentiated clinical capabilities and clinical specialization allows us to care for higher acuity patients who are typically reimbursed by Medicare or managed care payors.

Strong Geographic Density in Regional Markets.  We have developed geographic density in markets with 70% of our total licensed skilled nursing beds located in nine states: California, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania and West Virginia.  Within these and other states, we seek to cluster our facilities to create a dense, localized footprint.   By clustering our facilities, we are able to provide a larger and more diverse number of clinical services within a regional market.  As a result, we are often the leading skilled nursing facility operator in many of the regional markets in which we operate, based on number of beds.  Strategically clustered facilities in single or contiguous markets also allow us to achieve lower operating costs through greater purchasing power and operating efficiencies, facilitate the development of strong relations with state and local regulators and provide us with the ability to coordinate sales and marketing strategies.  Our strong reputation and operating performance in regional markets also allows us to develop relationships with key referral sources, including hospitals and other managed care payors.

Experienced Management Team with Proven Operating Performance. We have an experienced management team with deep post-acute experience. Our management team has demonstrated an ability to adapt to a rapidly changing business climate, providing a distinct competitive advantage in navigating the complex and evolving post-acute care industry.

Key Partnerships and Relationships. We have partnered with hospitals in our local markets to enhance the coordination of patient care during and after a post-acute rehabilitation stay. The goal of these relationships is to provide quality care while lowering hospital readmission rates and reducing overall healthcare costs.  Further, these relationships allow us to manage patient outcomes and coordinate care once a patient leaves the acute care setting and enters one of our facilities.  We have also forged key relationships with managed care payors to better align quality goals and reimbursement, resulting in a more coordinated care approach that reduces hospital readmissions.  As an increasing number of patients gain access to health insurance through healthcare reform or move to managed Medicare and Medicaid programs, we are poised to capture additional market share as managed care companies look to match quality patient care with a cost efficient setting. In addition, we created our own Accountable Care Organization (ACO).  As the industry continues to migrate from fee-for-service to pay-for-value, our unique capabilities in the area of physician services has given us a competitive advantage in advancing participation in value-based programs.  We offer the only captive SNFist company in the industry and the only post-acute sponsored ACO in the United States.

Leading Post-Acute Provider Well Positioned for Increased Demand for Post-Acute Care. As life expectancy continues to increase in the United States and seniors account for a higher percentage of the U.S. population, we believe overall demand for the services we provide will increase.  As one of the largest operators of skilled nursing facilities and post-acute rehabilitation therapy services in the U.S., we are well positioned to benefit from these trends by delivering cost effective, high quality services.

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Competition

Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with inpatient rehabilitation facilities (IRF) and long-term acute care (LTAC) hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility.  In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities.

We seek to compete effectively in each market by establishing a reputation within the local community for quality of care, attractive and comfortable facilities, and providing specialized healthcare with an emphasized focus on high-acuity patients. Programs targeting high-acuity patients, including our PowerBack Rehabilitation facilities, generally have a higher staffing level per patient than our other inpatient facilities and compete more directly with an IRF or LTAC hospitals, in addition to other skilled nursing facilities. We believe that the average cost to a third-party payor for the treatment of our typical high-acuity patient is lower if that patient is treated in one of our skilled nursing facilities than if that same patient were to be treated in an IRF or LTAC hospital.

 

Our other services, such as assisted/senior living facilities and rehabilitation therapy provided to third-party facilities, also compete with local, regional, and national companies. The primary competitive factors in these businesses are similar to those for our skilled nursing facilities and include reputation, cost to provide the services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as information management and patient recordkeeping.

 

Increased competition could limit our ability to attract and retain patients, attract and retain employees or to expand our business. Some of our competitors have greater financial and other resources than we have, may have greater brand recognition and may be more established in their respective communities than we are. Competing companies may also offer newer facilities or different programs or services than we do and may as a result be more attractive to our current patients, to potential patients and to referral sources.

Industry Trends

We believe the following post-acute care industry trends are likely to impact our business:

 

Increased Demand Due to Favorable Demographics. The majority are our services are provided to individuals aged 75 and older.  This population is one of the fastest growing segments in the United States. We expect that as the number of individuals aged 75 and older continues to increase, we will experience an increase in demand for our services.

 

Shift of Care to Lower Cost Alternatives. In response to rising healthcare costs, governmental and other payors have adopted various cost-containment measures that serve to reduce admissions and encourage reduced lengths of stay in hospitals and other post-acute settings.  Consequently, these providers are discharging patients earlier and referring incremental high-acuity patients to lower cost settings, such as skilled nursing facilities.

 

Limited Supply of Facilities. There has been a moderate decline in the number of skilled nursing facilities over the past several years. Additionally, most states impose strict regulations that limit or restrict the development or expansion of healthcare projects.  Consequently, we believe that as the industry demographics continue to trend positively, the supply and demand balance in the industry will continue to improve.

 

Reduced Reliance on Family Care. We believe that increases in the percentage of dual income earning families, reductions in the average family size, and an increased mobility in society will lessen seniors’ reliance on family as a form of care.  We believe that it will be necessary for more seniors to seek alternative care options as they age, which will increase the demand for our services.

 

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Healthcare Reform and Reimbursement Trends.  In recent years, healthcare reforms and other policy changes have reshaped the healthcare payment and delivery landscape in the United States.  A significant objective of these reforms is to transform delivery of and payment for healthcare services by holding providers accountable for the cost and quality of care provided.  In response to these reforms, Medicare and many commercial third party payors have implemented ACO models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals.  Other reimbursement methodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality and patient satisfaction metrics.  In addition, the Centers for Medicare and Medicaid Services (CMS) has implemented demonstration and mandatory programs to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans.  As alternative payment models seek to incentivize delivery of better care at lower costs, providers are making fundamental changes in their day-to-day operations to better coordinate and manage the care of patients, improve care transitions, reduce lengths of stay and prevent avoidable rehospitalizations.

 

Further, continuing efforts of governmental and private third party payors to contain the rate of payment for the provision of healthcare services has impacted providers like us.  Federal Medicare and Medicaid reimbursement rates in many states are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. In recent years, those adjustments have not reflected actual increases in the cost of providing healthcare services. In addition to rate pressure, in recent years we have continued to see a shift from “traditional” Fee-for-Service (FFS) Medicare patients to Medicare Advantage patients.  Reimbursement rates and average lengths of stay are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients, negatively impacting our profitability.  In addition to the federal Medicare program, a number of states use managed care to coordinate long-term care support services and many states are interested in implementing or expanding existing ones.  The emergence of managed Medicaid programs has resulted in lower rates of reimbursement for our services and has introduced new challenges and complexities with respect to billings and collections. We expect further migration towards managed Medicare and Medicaid programs.

 

Revenue Sources

 

We derive revenue primarily from the following programs: Medicaid, Medicaid Managed Care, Medicare, Medicare Advantage Plans, commercial insurance payors and private pay patients.

   

 Medicaid

 

Medicaid, which is the largest source of funding for skilled nursing facilities, typically covers patients that require standard room and board services, and provides reimbursement rates that are generally lower than rates earned from other sources. Medicaid is a program financed by state funds and matching federal funds administered by the states and their political subdivisions. Medicaid programs generally provide health benefits for qualifying individuals, and may supplement Medicare benefits for the disabled and for persons aged 65 and older meeting financial eligibility requirements. Medicaid reimbursement formulas are established by each state with the approval of the federal government in accordance with federal guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they have substantially depleted their assets.

 

Medicaid reimbursement varies from state to state and is based upon a number of different systems, including cost-based, prospective payment, case mixed adjusted payments and negotiated rate systems. Reimbursement rates are subject to a number of factors, such as a state’s annual budgetary requirements and funding, statutory and regulatory changes and interpretations and rulings by authoritative agencies.

 

Medicaid Managed Care

 

Medicaid Managed Care is a health care delivery system of Medicaid health benefits and additional services through contracted arrangements between state Medicaid agencies and managed care organizations (MCOs) designed to manage cost, utilization and quality of care.  The delivery of long-term care services is provided through capitated payment programs.  Such programs are in place in the majority of states in which we operate and states may implement such programs in the future if approved by CMS.

 

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Medicare

 

Medicare is a federal program that provides healthcare benefits to individuals who are aged 65 years and older or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must sign a Medicare provider agreement and meet the CMS “Requirements of Participation” on an ongoing basis, as determined in periodic facility inspections or “surveys” conducted primarily by the state licensing agency in the state where the facility is located.  Medicare pays for inpatient skilled nursing facility services under the prospective payment system (PPS). The prospective payment for each beneficiary is based upon the medical condition of and care needed by the beneficiary. Medicare Part A skilled nursing facility coverage is limited to 100 days per episode of illness for those beneficiaries who require daily care following discharge from an acute care hospital.

 

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Medicare Part A provides for inpatient services including hospital care, skilled nursing care, hospice and home healthcare, and end-stage renal disease.

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Medicare Part B provides for outpatient services including physician services, diagnostic services, durable medical equipment, skilled therapy services and medical supplies.

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Medicare Part C is a managed care option (Medicare Advantage) for beneficiaries who are entitled to Part A and enrolled in Part B and are administered by commercial health insurers that contract with Medicare or Medicaid.

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Medicare Part D is a benefit that provides prescription drug benefits for both Medicare and Medicare/Medicaid dual eligible patients.

 

Medicare reimbursed our skilled nursing facilities under PPS for a defined bundle of inpatient covered services. Medicare coverage criteria require that a beneficiary spend at least three qualifying days in an inpatient acute setting before Medicare will cover the skilled nursing service. While beneficiaries are eligible for up to 100 days per episode of illness of skilled nursing care services (defined as requiring daily skilled nursing and/or skilled rehabilitation services), current law imposes a daily co-payment after the 20th day of covered services. Under PPS, facilities are paid a predetermined amount per patient, per day, for certain services based on the anticipated costs of treating patients.  Effective October 1, 2019, the amount to be paid is determined based on a new case-mix classification system known as the Patient-Driven Payment Model (PDPM). Prior to this date, payment rates were determined by classifying each patient into a resource utilization group (RUG) category based upon each patient's acuity level.

 

Medicare rules and reimbursement rates are subject to statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services.  Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins.

 

For Medicare beneficiaries who qualify for the Medicare Part A coverage, rehabilitation services are included in the per diem payment. For beneficiaries who do not meet the coverage criteria for Part A services, rehabilitation services may be provided under Medicare Part B, subject to specific coverage and payment requirements.

 

Patient-Driven Payment Model (PDPM)

 

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV.  PDPM is designed to increase focus on patients’ conditions and clinical needs, as opposed to the volume of services provided, thereby improving payment accuracy and encouraging a more patient-driven care model.  Under PDPM, there are only two required minimum data set (MDS) assessments, the admission assessment and discharge assessment, with one optional MDS assessment, the interim payment assessment.

 

PDPM utilizes a combination of six components to determine the amount of the per diem payment.  Five of the components are case-mix adjusted, meaning they are intended to cover the utilization of skilled nursing facility resources that vary according to patient characteristics. These components are as follows:  PT, OT, SLP, non-therapy ancillary (NTA) services, and nursing. The sixth component is non-case-mix adjusted, meaning it is intended to cover those skilled nursing facility resources that do not vary by patient.  The PT, OT, and NTA components are also subject to a variable adjustment factor that serves to adjust the per diem payment over the course of the patient’s stay. PT and OT services have variable per diem adjustments beginning on the 21st day of the Medicare stay and

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further adjusted every seven days thereafter.  NTA services have variable per diem adjustments beginning on the 4th day of the Medicare stay.  PDPM utilizes patient specific, data-driven characteristics to classify patients into payment groups within each of the six components, which are used as the basis for the payment amount.

 

Effective October 1, 2019, CMS has also revised the definition of skilled nursing facility group therapy so that it aligns with the group therapy definition used in the inpatient rehabilitation facility setting.  The new definition defines group therapy in the skilled nursing facility Medicare Part A setting as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

 

PDPM also revises the limits on group and concurrent therapy.  RUG-IV included a 25% limit per discipline (PT, OT, SLP), for group therapy and did not impose a limit for concurrent therapy.  PDPM includes a 25% limit per discipline (PT, OT, SLP) for both combined group and concurrent therapy.

 

CMS has finalized the implementation of PDPM in a budget neutral manner and has updated the unadjusted federal per diems and related case mix groups (CMGs) and related Case Mix Indices (CMIs).  Under CMIs, there are differences between RUG-IV and PDPM in terms of patient classifications and billing.  CMS has reflected these differences by modifying the PDPM case mixed adjusted federal rates and associated indexes through the application of a CMI multiplier for each PDPM Group.

 

Part B Rehabilitation Requirements

 

We receive payment for certain of our services from the Medicare Part B program under a fee schedule. The payments we received for these services was limited by separate “therapy caps” for combined SLP and PT services and OT services. The therapy caps were implemented under the authority of the Balanced Budget Amendments of 1997. 

 

Congress has historically interceded on several occasions to suspend the therapy caps, offering an exceptions process to permit the processing of claims in excess of the therapy cap. The Deficit Reduction Act of 2005 directed CMS to develop a process that allows exceptions to therapy cap limits when continued therapy is deemed medically necessary.  Specifically, the Middle Class Tax Relief and Job Creation Act of 2012 extended the exceptions process but added a second tier cap mandating manual medical review (MMR) for claims submitted that exceeded $3,700 for combined SLP and PT services and a separate threshold of $3,700 for OT services. In April 2015, The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) was signed into law. MACRA authorized payment reforms for physicians and other professional services, including SLP, PT, and OT services. Further, it included provisions to not only stabilize the professional fee schedules, but also to extend the therapy cap exceptions process through December 31, 2017.

 

In February 2018, the Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018. The new law preserves the former therapy cap amounts as thresholds above which claims must include a modifier as a confirmation that services are medically necessary as justified by appropriate documentation in the medical record. The law retained the MMR process for claims over the threshold, but reduced the claim threshold to $3,000. Just as with the incurred expenses for the therapy cap amounts, there is one amount for PT and SLP services combined and a separate amount for OT services. This amount is indexed annually by the Medicare Economic Index.  The modifier threshold amount for both combined SLP and PT services and OT services is $2,080 in 2020 compared to $2,040 in 2019.

 

In November 2019, CMS issued the calendar year 2020 Physician Fee Schedule Final Rule establishing that therapy assistant claim modifiers will be required starting in calendar year 2020. This rule is consistent with the requirement of the Balanced Budget Act of 2018, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day. While the modifiers are required to be applied to the claims beginning in calendar year 2020, the 15% therapist assistant payment reduction will not be applied until calendar year 2022. The final rule clarified the meaning of “in whole or in part” to mean when 10% or more of the services are provided by a PTA or OTA.

 

The FY 2020 Physician Fee Schedule (PFS), indicates that there will be no decrease in PT and OT code payments in 2020. However, CMS also indicated its intent to make changes to reimbursement rates that would become effective January 1, 2021. These changes, if finalized, will effectively lower the reimbursement rate for Medicare Part B specialty providers; specific to our industry, CMS is proposing cuts to Part B therapy services by 8%.

 

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The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day. The implementation of MPPR includes 1) facilities that provide Medicare Part B SLP, OT, and PT services and bill under the same provider number; and 2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single day.

 

Medicare Annual Market Basket

 

Current law requires CMS to calculate an annual market basket update to the payment rates. Provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA) directed the agency to reduce that payment level by a calculated multi-factor productivity adjustment. The agency also retains the authority to review and adjust payments for corrections to previous year market baskets where over/under payment exceeded 0.05% between the projected market basket and the actual performance. Annually, on a federal fiscal year basis (October 1), the agency makes its payment changes. Normally, CMS issues proposed rules during April, providing 60-days for stakeholder input, and issues finalized rules 60 days prior to the start of the fiscal year. If there are no substantive changes in rules and regulations, the agency has the authority to issue rate adjustments in a notice, rather than a proposed rule. The notice must be issued 60 days before the beginning of the fiscal year.

 

On July 31, 2017, CMS issued a final rule for fiscal year 2018 outlining Medicare payment rates for skilled nursing facilities.  The final rule uses a market basket percentage of 1.0% effective October 1, 2017.

 

On August 8, 2018, CMS issued a final rule for fiscal year 2019 outlining Medicare payment rates for skilled nursing facilities.  A market basket increase of 2.4% was mandated by the Bipartisan Budget Act of 2018 effective October 1, 2018. Reimbursement for fiscal year 2019 was based on the current payment methodology using the Resource Utilization Group, Version IV (RUG-IV) model with one significant change, the addition of the Skilled Nursing Facility Value-Based Purchasing (see below) incentive multiplier.

 

On July 30, 2019, CMS released a final rule for skilled nursing facilities prospective payment services (SNF PPS) for fiscal year 2020 Medicare Part A services.  The final rule made revisions from the proposed rule for the PDPM market basket increase and additional modifications to the skilled nursing facility Quality Reporting Program (QRP).  PDPM replaced the existing case-mix classification methodology, RUG-IV, effective October 1, 2019.  The final rule addresses specific issue areas, discussed below, related to the fiscal year 2020 requirements. 

 

The final rule provides for a net SNF PPS market basket update factor for skilled nursing facilities of 2.4% effective October 1, 2019.  This is a full market basket update of 2.8% with no forecast error incurred and a 0.4% multifactor productivity adjustment.

 

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

 

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed data reporting requirements for skilled nursing facilities and certain other post-acute care providers in an effort to improve Medicare beneficiary outcomes through shared-decision making, care coordination, and enhanced discharge planning. Beginning with federal fiscal year 2018, skilled nursing facilities that fail to submit required quality data are subject to a 2.0% reduction to the annual market basket update.

 

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

 

The Protecting Access to Medicare Act of 2014 (PAMA) required the establishment of a SNF-VBP Program. Effective October 1, 2018, the SNF-VBP Program allowed skilled nursing facilities to earn incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a specified quality measure related to hospital readmissions. In order to fund the incentive payment pool, CMS withholds 2.0% of Medicare payments and then redistributes 60% of the withheld payments to skilled nursing facilities.  Skilled nursing facilities are evaluated based on both improvement and achievement of their hospital readmission measure. Skilled nursing facilities also receive quarterly confidential feedback reports regarding their performance.  CMS periodically publishes updates regarding the program’s administrative matters, such as scoring methodology.

 

Sequestration of Medicare Rates

 

The Budget Control Act of 2011 required mandatory reductions in federal spending, known as sequestration.  Sequestration

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imposed Medicare spending reductions of up to 2.0% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2.0% reduction on Medicare FFS payments beginning in April 2013. These reductions have been extended through 2023.

 

Medicare Advantage Plans

 

Medicare Advantage Plans, sometimes called Medicare Part C or MA Plans, are offered by private companies that are approved by CMS.  Medicare Advantage Plans cover all Medicare services and manage care of patients through a network of doctors, hospitals and other providers. Reimbursement rates for nursing care are negotiated with the plans and are not set by skilled nursing facility PPS rules of payments. CMS has indicated that Medicare Advantage Plans can determine whether to incorporate any aspects of PDPM into their reimbursement methodology or use other appropriate reimbursement methodologies.

 

Commercial Insurance

 

A different type of insurance, commercial long-term care insurance, is also available to consumers. However, its role as a significant contributor to industry revenues has not been fully realized. Factors contributing to the lack of revenues include high premium costs and intermittent, often significant premium rate increases throughout the life of the policy and denials of coverage.

 

Private and Other Payors

 

Private and other payors consist primarily of self-pay individuals, family members or other third parties who directly pay for the services we provide.

 

Reimbursement for our Services

 

Reimbursement for Skilled Nursing Facilities

 

The majority of skilled nursing facility revenues in the U.S. come from Medicare and Medicaid, with the remainder of revenues derived from managed care and commercial insurance, other third-party sources and private pay.  Typically, all patients that enter a skilled nursing facility begin as a short-term acute care patient and either get discharged or become long-term care residents.  After a patient no longer qualifies for skilled care under Medicare, the reimbursement of costs incurred by a skilled nursing facility patient will be shifted to private pay (out of pocket) resources and then Medicaid if the patient qualifies. 

Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations.  Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business.  Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations.  Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

 

Reimbursement for Assisted/Senior Living Facilities

 

Assisted/senior living facilities generate revenues primarily from private pay sources, including third-party insurance and self-pay, with only a small portion derived from government sources.

 

Reimbursement for Rehabilitation Services

 

Outside of therapy received during a Medicare Part A covered stay of up to 100 days, most of our rehabilitation therapy services are typically reimbursed under the Medicare Part B program. The payments made to our rehabilitation therapy services segment for services it provides to skilled nursing facilities are determined by negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered. In addition, this segment is also directly reimbursed from the Medicare Part B program, Medicaid, and other insurance companies through its certified outpatient rehabilitation agencies and group practices for services provided in assisted living facilities, homes and the community.

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Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue

 

The revenue and operating environment for the post-acute and long-term care services we deliver has been significantly shaped by a series of healthcare laws passed by Congress and implemented by government entities. The broad healthcare reforms enacted as part of PPACA have been among the most significant of revisions. Embedded in this complex legislation were provisions redesigning the private insurance market place, expanding the obligations of Medicaid, empowering changes in Medicare and stimulating innovations in payment and care delivery. The implementation of the provisions of PPACA has shaped the policy landscape.

 

Our operating environment has been further influenced by specific provisions in other legislation, such as:

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Provisions of PAMA mandated implementation of skilled nursing facilities value-based incentives based on hospital readmission performance; provisions including a 2% payment withholding and redistribution based on performance incentive provisions.

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Provisions of the IMPACT Act established standardized patient assessment and quality performance measures for post-acute providers; provisions which are being implemented through specific regulations and instructions. This legislation mandated studies examining the feasibility of a unified post-acute care payment methodology.

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Provisions of MACRA revised the payment methodology for physician and non-physician professional services stimulating the development of alternative payment models. Included in this legislation was a provision limiting the fiscal year 2018 skilled nursing facility market basket increase to 1%, a provision implemented in the fiscal year 2018 skilled nursing facilities PPS rules.

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Provisions of the Bipartisan Budget Act of 2015 that required government agencies to update and annually index civil monetary penalties (CMPs). This provision has been implemented by rule making.

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Provisions of the Notice of Observation Treatment and Implications for Care Eligibility Act implemented in 2016 requiring hospitals to inform Medicare beneficiaries whether services would qualify for the three-day inpatient requirement.

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Provisions of the Bipartisan Budget Act of 2018, which, among other provisions, repeals effective January 1, 2018 the Medicare Part B Therapy Caps for PT/SLP and OT services. As signed into law, this legislation has provisions restricting the Medicare skilled nursing facilities PPS market basket index for fiscal year 2019 to 2.4%, limits the physician/non-physician fee schedules update for the coming year, and alters payment beginning in 2022 for services provided by therapy assistants.

 

Medicaid Fiscal Accountability Regulation (MFAR)

 

In November 2019, CMS issued a proposed rule, the Medicaid Fiscal Accountability Regulation (MFAR), regarding the use of Medicaid supplemental payment programs and financing arrangements.  The proposed rule could negatively impact Medicaid revenue for our facilities that currently rely upon provider taxes, intergovernmental transfers (IGTs), and upper payment limit (UPL) payments if states fail to meet the new requirements within a two to three year period after the proposed rule is finalized.  The proposed rule clarified certain definitions with respect to these topics and imposed new requirements on certain financing mechanisms. Additionally, MFAR introduced new reporting requirements with respect to Medicaid supplemental payment programs, such as the requirement for states to furnish provider-level data in lieu of aggregated data and the use of an approved template for certain payment demonstration programs. These requirements are intended to allow CMS to better track payments and analyze payment detail.  The proposed rule also clarifies that providers must receive and retain 100 percent of the payment, helping to prevent states and other units of government from reusing Medicaid payments as a source of state financing for additional payments.  Further, existing and new supplemental payment methodologies would be phased out after no more than 3 years and states would be required to request a new CMS approval to continue a supplemental payment beyond the maximum 3 year approved period. Currently, the majority of the states in which we operate could be impacted by the proposed provider tax regulations, which if implemented, would become effective three years after the effective date of the regulation. Additionally, we operate one center in Indiana that could be impacted by the proposed changes in the IGT regulations. The comment period for the proposed rule closed during the first quarter of 2020.

 

Medicaid Healthy Adult Opportunity (HAO) Demonstration Initiative

 

In January 2020, CMS announced an optional demonstration initiative, the Healthy Adult Opportunity (HAO), that would permit states to pursue a capped Medicaid financing model for certain Medicaid populations and the opportunity to share in program savings. The HAO will utilize Section 1115 waiver authority to provide coverage to adults not eligible for benefits under the state’s Medicaid

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state plan, while offering states increased flexibility in administering the benefits of such individuals. Specifically, the HAO targets adults under age 65 who are not eligible for Medicaid on the basis of disability or their need for long-term care services and supports, and who are not eligible under a state plan. Other very low-income parents, children, pregnant women, elderly adults, and people eligible on the basis of a disability will not be directly affected – except from the improvements that result from states reinvesting savings into strengthening their overall programs. Under this initiative, states may implement an “aggregate” (commonly referred to as a “block grant”) or per capita cap financing model.  The HAO demonstrations generally will be approved for an initial five-year period from the date of implementation, and successful demonstrations may be renewed for a period of up to 10 years.

 

Skilled Nursing Facilities

 

Healthcare Reform Initiatives

 

We believe we have positioned our business and operations for success in a healthcare environment that rewards quality outcomes as opposed to volume of services provided.  We believe that 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 business 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 continue to engage in this environment, we will continue to adapt to changes that are ultimately made to the delivery system. For example, several of our skilled nursing facilities successfully participated in the CMS Bundled Payment for Care Improvement (BPCI) demonstration, which encouraged coordination of care amongst providers for certain episodes of care. The latest demonstration term for the program expired on September 30, 2018.  We are not participating in the new BPCI Advanced model, which commenced October 1, 2018, as it precludes post-acute providers from participating in a manner similar to the original program.

Medicare Shared Savings Program (MSSP)

The Medicare Shared Savings Program (MSSP) is an alternative payment model created by CMS that moves the payment system towards a more value-based model through the promotion of accountability for a patient population, coordination of care for Medicare beneficiaries, and encouragement of investment in high quality and efficient services. Under MSSP, providers and suppliers are able to create an ACO, which in turn agrees to be held accountable for the quality, cost, and experience of care of an assigned Medicare FFS beneficiary population. MSSP has various risk-sharing tracks that allow ACOs to select an arrangement. Participation in the program grants certain advantages to ACOs. For example, eligible ACOs may apply for a waiver to the 3-day qualifying stay rule.

 

Effective January 1, 2016, LTC ACO, LLC (formerly known as Genesis Healthcare ACO, LLC) began participating in MSSP through our physician services division.  Successful participation requires us to carefully document delivery, meet specific performance criteria and meet specific savings targets. Our physician services providers make more than half a million visits annually to both short- and long-stay patients, helping them improve overall healthcare quality and reduce unnecessary hospital readmissions.  As of December 2019, LTC ACO had contracted with nearly 200 new unaffiliated long-term care facilities. LTC ACO has plans to significantly expand its resident attribution beginning in 2020, not only inside Genesis but also more broadly throughout the skilled nursing industry. 

 

2019 Performance Year

Effective July 1, 2019, we entered into a new MSSP agreement with CMS, which is scheduled to remain in effect through December 31, 2024. Under this agreement, we can share in up to 75% of the savings with CMS, but we are also at risk for 40% of any costs in excess of CMS-defined targets, which is further capped at 15% of our annualized benchmark costs under management. For the first half of 2019, we operated under our initial MSSP agreement, which allowed us to share in up to 50% of the savings with CMS, while assuming no downside risk.

With four years of participation under MSSP, we have gained valuable experience driving better outcomes and improved quality, managing episodic cost and developing in-house capabilities to predict program performance.  Based upon the data available to us with respect to the 2019 performance year, we have recognized $6.6 million of cumulative MSSP income, net of expenses and provider distributions.  The final reconciliation and settlement of the 2019 performance year is expected to be received from CMS in the third quarter of 2020.  We will continue to closely monitor and evaluate our estimated performance under the 2019 performance year and will adjust our MSSP income accordingly.

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Past Performance Years

During 2018 and the first half of 2019, we managed, under an upside-only risk track, approximately 6,400 and 6,000, respectively, Medicare FFS beneficiaries under MSSP with annualized Medicare spend of more than $155.0 million.  In August 2019, we were informed by CMS that we reached the minimum savings rate set by CMS required for MSSP gain share for 2018.  As a result, in the third quarter of 2019, we recognized MSSP income of approximately $1.7 million, net of expenses and provider distributions.  We did not generate savings in the 2017 performance year, and in the 2016 performance year, we generated savings, but did not achieve the minimum savings target and therefore, did not share in any of the savings.

Government Regulation

General

Healthcare is an area of extensive and frequent regulatory change. Changes in the law or new interpretations of existing laws may have a significant impact on our methods and costs of doing business.  Our subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies.  In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians.  Such laws include, but are not limited to, the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect our skilled nursing facilities, assisted/senior living facilities and outpatient rehabilitation agencies to verify that we continue to comply with the applicable regulations and standards. We must pass these inspections to remain licensed under state laws, to comply with our Medicare and Medicaid provider agreements, and, in some instances, to continue our participation in the Veterans Administration program. We can only participate in these third-party payment programs if inspections by regulatory authorities reveal that our facilities and agencies are in substantial compliance with applicable requirements. In the ordinary course of business, we may receive notices from federal or state regulatory authorities alleging deficiencies in certain regulatory practices. These statements of deficiency may require us to take corrective action to regain and maintain compliance.  In some cases, federal or state regulators may impose other remedies including imposition of CMPs, temporary payment bans, loss of certification as a provider in the Medicare and/or Medicaid program or revocation of a state operating license.

We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny. In the ordinary course of business, providers are subject to inquiries, investigations and audits by federal and state agencies related to compliance with participation and payment rules under government payment programs. These inquiries may originate from the HHS Office of the Inspector General (OIG) audits, state Medicaid agencies, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies.  In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded CMPs that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs. We vigorously contest these matters where appropriate; however, there are significant legal and other expenses involved that consume our financial and personnel resources. Expansion of enforcement activity could adversely affect our business, financial condition or the results of our operations.

Five-Star Quality Rating

 

In 2008, CMS created the Five-Star Quality Rating System (the Star Ratings) to help consumers, families and caregivers compare skilled nursing facilities and choose providers more easily.  Skilled nursing facilities receive an overall star rating from one to five stars based on three components: health inspection rating (survey results), quality measure calculations and staffing data. Each of the components receives star rankings as well. Skilled nursing facilities with five stars are considered to have much above average quality and skilled nursing facilities with one star are considered to have quality much below average. Families are increasingly consulting the Star Ratings prior to placing a family member in a skilled nursing facility and hospital referral partners are increasingly narrowing their panels of skilled nursing facilities to include only those with at least a three-star overall rating. However, CMS has acknowledged that there are limitations in using the Star Ratings to make inferences about nursing center quality, including (i) variations by state in survey processes, (ii) the use of payroll based data that may not fully reflect actual staffing patterns and (iii) quality measures do not represent all aspects of care that could be important to consumers.  The foundation of the Star Ratings is the annual survey.

 

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In April 2016, CMS added six quality measures to the Nursing Home Compare website. These quality measures include:  successful discharges to the community; visits to the emergency department; rehospitalizations; improvements in function; long-stay residents whose ability to move independently worsened; and antianxiety or hypnotic medications.  Five quality measures were used to compute Star Ratings in July 2016 (antianxiety or hypnotic medications were excluded).  Starting in January 2017, the five quality measures have the same weight as the other quality measures.  This change was the largest addition of quality measures to Nursing Home Compare since 2003 and nearly doubles the number of short-stay measures about key short-stay outcomes. Short-stay measures reflect care provided to residents who are in the nursing home for 100 days or less, while long-stay measures reflect care for residents who are in the nursing home for more than 100 days.  The health inspection star rating for surveys was frozen in February 2018 and did not reflect surveys conducted between November 28, 2017 through the first quarter of 2019. This freeze was in anticipation of the phase 2 implementation of the Requirements of Participation on the same date, as well as the implementation of the new Long-Term Care Survey Process. CMS notified providers that all surveys conducted during the freeze would be incorporated into the health inspection star.

 

In April 2019, CMS implemented changes to the Five-Star Quality Rating System. These changes included a lifting of the freeze, revisions to the inspection process, adjustment of staffing rating thresholds, including increased emphasis on registered nurse staffing, implementation of new quality measures and changes in the scoring of various quality measures. CMS added two new quality measures: long-stay emergency department transfers and long-stay hospitalizations. CMS also established separate quality ratings for short-stay and long-stay residents and will now provide separate short-stay and long-stay ratings in addition to the overall quality measure rating.

 

The impact of the most recent five star rating methodology was significant across the industry. CMS initially estimated the changes would cause 47% of all nursing centers to lose stars in their "Quality" ratings. In addition, 33% would lose stars in their "Staffing" ratings, and 36% would lose stars in their "Overall" ratings. Accordingly, despite no significant changes in our staffing levels or quality of our care, these changes to the staffing and quality thresholds had a negative impact on our star rating in 2019.

The table below summarizes the Star Ratings of our qualified skilled nursing facilities:

 

 

 

 

 

 

 

 

 

 

    

 

Year ended December 31, 

 

 

    

 

2019

2018

 

Number of skilled nursing facilities

 

 

 

355

 

 

393

 

Number of 3, 4 and 5-Star skilled nursing facilities

 

 

 

193

 

 

251

 

Percentage of 3, 4 and 5-Star skilled nursing facilities

 

 

 

54

%  

 

64

%  

 

Payroll-Based Journal

One of the CMS initiatives authorized by the PPACA was to improve the accuracy of nursing home staffing data. CMS initiated and rolled-out an electronic payroll-based journal (PBJ) requirement effective July 1, 2016. This system allows staffing and census information to be collected on a regular and more frequent basis than previously collected. It is also auditable to ensure accuracy.  All long-term care facilities have access to this system at no cost to facilities. Effective January 2018, the Staffing Star component of 5 star is calculated using the data collected from PBJ coupled with MDS data.

 

Requirements of Participation

 

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

 

Changes finalized in this rule include:

·

Strengthening the rights of long-term care facility residents.

·

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

·

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

·

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

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·

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

·

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

 

The new requirements were implemented in three phases. The regulations included in the first phase were effective November 28, 2016; the regulations included in the second phase were effective November 28, 2017; the regulations included in third phase were effective November 28, 2019, despite recent proposals to delay implementation of certain aspects of the rule.  The total costs associated with implementing the new regulations have been absorbed into our general operating costs.  Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations. We have timely implemented the changes required under the three phases, in all material respects. In July 2019, CMS proposed revisions to the requirements of participation, which if finalized, would result in the removal or simplification of certain requirements that could potentially impede or divert resources away from the provision of high-quality resident care, thus increasing facilities’ ability to devote their resources to improving resident care.

Civil and Criminal Fraud and Abuse Laws and Enforcement

Federal and state healthcare fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for submitting claims for services that are not provided; that have been inadequately provided; billed in an incorrect manner, intentionally or accidentally, or other than as actually provided; not medically necessary; provided by an improper person; accompanied by an illegal inducement to utilize or refrain from utilizing a service or product; or billed or coded in a manner that does not otherwise comply with applicable governmental requirements. Penalties also may be imposed for violation of anti-kickback and patient referral laws.

Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate healthcare fraud and abuse, including exclusion of the provider from participation in the Medicare and Medicaid programs, imposition of civil and criminal fines, suspension of payments and, in the case of individuals, imprisonment.

We have internal policies and procedures, including a program designed to facilitate compliance with and to reduce exposure for violations of these and other laws and regulations. However, because enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that our internal policies and procedures will significantly reduce or eliminate exposure to civil or criminal sanctions or adverse administrative determinations.

Anti-Kickback Statute

Federal law commonly referred to as the Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of anything of value, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by a federal healthcare program such as Medicare or Medicaid. Violation of the Anti-Kickback Statute is a felony, and sanctions for each violation include imprisonment of up to five years, significant criminal fines, significant CMPs plus three times the amount claimed or three times the remuneration offered, and exclusion from federal healthcare programs (including Medicare and Medicaid). Additionally, violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA.  Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals applicable to all payors.

We are required under the Medicare Requirements of Participation and some state licensing laws to contract with numerous healthcare providers and practitioners, including physicians, hospitals and hospice agencies and to arrange for these individuals or entities to provide services to our residents and patients. In addition, we have contracts with other suppliers, including pharmacies, laboratories, x-ray companies, ambulance services and medical equipment companies. Some of these individuals or entities may refer, or be in a position to refer, patients to us, and we may refer, or be in a position to refer, patients to these individuals or entities. Certain safe harbor provisions have been created so that although a relationship could potentially implicate the federal anti-kickback statute, it would not be treated as an offense under the statute. We attempt to structure these arrangements in a manner that falls within one of the safe harbors. Some of these arrangements may not ultimately satisfy the applicable safe harbor requirements, but failure to meet the safe harbor does not necessarily mean an arrangement is illegal.

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We believe that our arrangements with providers, practitioners and suppliers are in compliance with the Anti-Kickback Statute and similar state laws. However, if any of our arrangements with third parties were to be challenged and found to be in violation of the Anti-Kickback Statute, we could be required to repay any amounts we received, subject to criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business, financial condition or results of operations.

Stark Law

Federal law commonly known as the Stark Law prohibits a physician from making referrals for particular healthcare services to entities with which the physician (or an immediate family member of the physician) has a financial relationship if the services are payable by Medicare or Medicaid. If an arrangement is covered by the Stark Law, the requirements of a Stark Law exception must be met for the physician to be able to make referrals to the entity for designated health services and for the entity to be able to bill for these services. Although the term “designated health services” does not include long-term care services, some of the services provided at our skilled nursing facilities and other related business units are classified as designated health services, including PT, SLP and OT services. The term “financial relationship” is defined very broadly to include most types of ownership or compensation relationships. The Stark Law also prohibits the entity receiving the referral from seeking payment from the patient or the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral.

The Stark Law contains exceptions for certain physician ownership or investment interests in, and certain physician compensation arrangements with, certain entities. If a compensation arrangement or investment relationship between a physician, or immediate family member, and an entity satisfies the applicable requirements for a Stark Law exception, the Stark Law will not prohibit the physician from referring patients to the entity for designated health services. The exceptions for compensation arrangements cover employment relationships, personal services contracts and space and equipment leases, among others.

If an entity violates the Stark Law, it could be subject to significant civil penalties. The entity also may be excluded from participating in federal and state healthcare programs, including Medicare and Medicaid. If the Stark Law were found to apply to our relationships with referring physicians and no exception under the Stark Law were available, we would be required to restructure these relationships or refuse to accept referrals for designated health services from these physicians. If we were found to have submitted claims to Medicare or Medicaid for services provided pursuant to a referral prohibited by the Stark Law, we would be required to repay any amounts we received from Medicare or Medicaid for those services and could be subject to CMPs. Further, we could be excluded from participating in Medicare and Medicaid and other federal and state healthcare programs. If we were required to repay any amounts to Medicare or Medicaid, subjected to fines, or excluded from the Medicare and Medicaid Programs, our business, financial condition or results of operations could be harmed significantly.

As directed by PPACA, in 2010 CMS released a self-referral disclosure protocol (SRDP) for potential or actual violations of the Stark Law. Under SRDP, CMS states that it may, but is not required to, reduce the amounts due and owing for a Stark Law violation, and will consider the following factors in deciding whether to grant a reduction: (1) the nature and extent of the improper or illegal practice; (2) the timeliness of the self-disclosure; (3) the cooperation in providing additional information related to the disclosure; (4) the litigation risk associated with the matter disclosed; and (5) the financial position of the disclosing party.

Many states have physician relationship and referral statutes that are similar to the Stark Law. These laws generally apply regardless of the payor. We believe that our operations are structured to comply with the Stark Law and applicable state laws with respect to physician relationships and referrals. However, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties. This, in turn, could significantly harm our business, financial condition or results of operations.

False Claims Act

Federal and state laws prohibit the submission of false claims and other acts that are considered fraudulent, wasteful or abusive. Under the federal FCA, actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties, who are often referred to as “qui tam relators” or “relators,” are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam relator actions have increased significantly in recent years. The use of private enforcement actions against healthcare providers has increased dramatically, in part because the relators are entitled to share in a portion of any settlement or judgment.

An FCA violation occurs when a provider knowingly submits a claim for items or services not provided.  The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by creating liability for knowingly retaining an overpayment received from the government and broadening protections for whistleblowers. The submission of false claims or the failure to timely repay

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overpayments may lead to the imposition of significant CMPs, significant criminal fines and imprisonment, and/or exclusion from participation in state and federally-funded healthcare programs, including the Medicare and Medicaid programs.

Allegations of poor quality of care can also lead to FCA actions under a theory of worthless services.  Worthless services cases allege that although care was provided it was so deficient that it was tantamount to no service at all.   

In recent years, prosecutors and relators are increasingly bringing FCA claims based on the implied certification theory as an expansion of the scope of the FCA.  Under the implied certification theory, a violation of the FCA occurs when a provider’s request for payment implies a certification of compliance with the applicable statutes, regulations or contract provisions that are preconditions to payment.  This development has increased the risk that a healthcare company will have to defend a false claims action, pay fines and treble damages or settlement amounts or be excluded from the federal and state healthcare programs as a result of an investigation arising out of the FCA. Many states have enacted similar laws providing for imposition of civil and criminal penalties for the filing of fraudulent claims.

Because we submit thousands of claims to Medicare each year, and there is a relatively long statute of limitations under the FCA, there is a risk that intentional, or even negligent or recklessly submitted claims that prove to be incorrect, or even billing errors, cost reporting errors or lapses in statutory or regulatory compliance with regard to the provision of healthcare services (including, without limitation the Anti-Kickback Statue and the federal self-referral law discussed above), could result in significant civil or criminal penalties against us.  For information regarding matters in which the government is pursuing, or has expressed an intent to pursue, legal remedies against us under the FCA and similar state laws, see Note 21 – "Commitment and Contingencies - Legal Proceedings."

We believe that our operations comply with the FCA and similar state laws. However, if our claims practices were challenged and found to violate the applicable laws, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties or make us ineligible to participate in certain government funded healthcare programs, which could in turn significantly harm our business, financial condition or results of operations.

Patient Privacy and Security Laws

There are numerous legislative and regulatory requirements at the federal and state levels addressing patient privacy and security of health information.  The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains provisions that require us to adopt and maintain business procedures designed to protect the privacy, security and integrity of patients' individual health information.  States also have laws that apply to the privacy of healthcare information. We must comply with these state privacy laws to the extent that they are more protective of healthcare information or provide additional protections not afforded by HIPAA.

HIPAA's security standards were designed to protect specified information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure.  These standards have had and are expected to continue to have a significant impact on the healthcare industry because they impose extensive requirements and restrictions on the use and disclosure of identifiable patient information.  In addition, HIPAA established uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of certain individually identifiable health information.

The Health Information Technology for Clinical Health Act of 2009 (HITECH Act) expanded the requirements and noncompliance penalties under HIPAA and require correspondingly intensive compliance efforts by companies such as ours, including self-disclosures of breaches of unsecured health information to affected patients, federal officials, and, in some cases, the media.  These laws make unauthorized employee access illegal and subject to self-disclosure and penalties.  Other states may adopt similar or more extensive breach notice and privacy requirements. Compliance with these regulations could require us to make significant investments of money and other resources. We believe that we are in substantial compliance with applicable state and federal regulations relating to privacy and security of patient information.  However, if we fail to comply with the applicable regulations, we could be subject to significant penalties and other adverse consequences.

Certificates of Need (CON) and Other Regulatory Matters

There are CON programs in the majority of states and the District of Columbia, many of which are states in which we operate skilled nursing facilities.  We are required in these jurisdictions to obtain CON approval or exemption prior to certain changes including without limitation, change in ownership, capital expenditures over certain limits, development of a new facility or expansion of services of an existing facility or service in order to control overdevelopment of healthcare projects. Certain states that do not have CON programs may have other laws or regulations that limit or restrict the development or expansion of healthcare projects. In the event we choose to develop or expand the operations of our subsidiaries, the development or expansion could be affected adversely by the inability to obtain the necessary approvals, changes in the standards applicable to such approvals or possible delays and expenses

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associated with obtaining such approvals.  Failure to comply with state requirements with CON or other regulations that address development or expansion of services could adversely affect the progress or completion of a healthcare project.

State Operating License Requirements

We are required to obtain state licenses, certificates or permits to operate each of our skilled nursing facilities. Many states require similar licenses or certificates for assisted/senior living facilities, and some states require a license to operate outpatient agencies. Medicare requires compliance with applicable state laws as a requirement of participation.  In addition, healthcare professionals and practitioners are required to be licensed in most states. We take measures to ensure that our healthcare professionals are properly licensed and participate in required continuing education programs. We believe that our operating companies and personnel that provide these services have required licenses or certifications necessary for our current operations. Failure to obtain, maintain or renew a required license, permit or certification could adversely affect our ability to bill for services or operate in the ordinary course of business.

 

Federal Health Care Reform

In addition to the matters described above affecting Medicare and Medicaid participating providers, PPACA enacted several reforms with respect to skilled nursing facilities, including payment measures to realize significant savings of federal and state funds by deterring and prosecuting fraud and abuse in both the Medicare and Medicaid programs. While many of the provisions of PPACA will not take effect for several years or are subject to further refinement through the promulgation of regulations, some key provisions of PPACA are presently effective.

·

Expanded CMPs and Escrow Provisions. PPACA includes expanded CMP and related provisions applicable to all Medicare and Medicaid providers. CMS rules adopted to implement applicable provisions of PPACA also provide that assessed CMPs may be collected and placed in whole or in part into an escrow account pending final disposition of the applicable administrative and judicial appeals processes. To the extent our businesses are assessed large CMPs that are collected and placed into an escrow account pending lengthy appeals, such actions could adversely affect our liquidity and results of operations.

·

Nursing Home Transparency Requirements. In addition to expanded CMP provisions, PPACA imposes new transparency requirements for Medicare-participating nursing facilities. In addition to previously required disclosures regarding a facility's owners, management and secured creditors, PPACA expanded the required disclosures to include information regarding the facility's organizational structure, additional information on officers, directors, trustees and "managing employees" of the facility (including their names, titles, and start dates of services), and information regarding certain parties affiliated with the facility. The transparency provisions could result in the potential for greater government scrutiny and oversight of the ownership and investment structure for skilled nursing facilities, as well as more extensive disclosure of entities and individuals that comprise part of skilled nursing facilities' ownership and management structure.

·

Suspension of Payments During Pending Fraud Investigations. PPACA provides the federal government with expanded authority to suspend Medicare and Medicaid payments if a provider is investigated for allegations or issues of fraud. This suspension authority creates a new mechanism for the federal government to suspend both Medicare and Medicaid payments for allegations of fraud, independent of whether a state exercises its authority to suspend Medicaid payments pending a fraud investigation. To the extent the suspension of payments provision is applied to one of our businesses for allegations of fraud, such a suspension could adversely affect our liquidity and results of operations.

·

Overpayment Reporting and Repayment; Expanded False Claims Act Liability. PPACA enacted several important changes that expand potential liability under the federal FCA. Overpayments related to services provided to both Medicare and Medicaid beneficiaries must be reported and returned to the applicable payor within specified deadlines, or else they are considered obligations of the provider for purposes of the federal FCA. This new provision substantially tightens the repayment and reporting requirements generally associated with operations of healthcare providers to avoid FCA exposure.

·

Home- and Community-Based Services. PPACA provides that states can provide home- and community-based attendant services and supports through the Community First Choice State plan option. States choosing to provide home- and community-based services under this option must make such services available to assist with activities of daily living and health related tasks under a plan of care agreed upon by the individual and his/her representative. PPACA also includes additional measures related to the expansion of home- and community-based services and authorizes states to expand coverage of home- and community-based services to individuals who would not otherwise be eligible for them. The expansion of home- and community-based services could reduce the demand for the facility-based services that we provide.

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·

Health Care-Acquired Conditions. PPACA provides that the Secretary of HHS must prohibit payments to states for any amounts expended for providing medical assistance for certain medical conditions acquired during the patient's receipt of healthcare services. The CMS regulation implementing this provision of PPACA prohibits states from making payments to providers under the Medicaid program for conditions that are deemed to be reasonably preventable. It uses Medicare's list of preventable conditions in inpatient hospital settings as the base (adjusted for the differences in the Medicare and Medicaid populations) and provides states the flexibility to identify additional preventable conditions and settings for which Medicaid payment will be denied.

The provisions of PPACA discussed above are examples of recently enacted federal health reform provisions that we believe may have a material impact on the long-term care industry generally and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that other provisions of PPACA may be interpreted, clarified, or applied to our businesses in a way that could have a material adverse impact on our business, financial condition and results of operations. Similar federal and/or state legislation that may be adopted in the future could have similar effects.

 

Insurance and Related Risks

We maintain a variety of types of insurance, including general and professional liability, workers' compensation, fiduciary liability, property, cyber/privacy liability, directors' and officers' liability, crime, boiler and machinery, automobile liability, employment practices liability and earthquake and flood. We believe that our insurance programs are adequate and where there has been a direct transfer of risk to the insurance carrier, our risk is limited to the cost of the premium. We self-insure a significant portion of our potential liabilities for several risks, including certain types of general and professional liability, workers’ compensation, automobile liability and health benefits. To the extent our insurance coverage is insufficient or unavailable to cover losses that would otherwise be insurable, or to the extent that our estimates of anticipated liabilities that we self-insure are significantly lower than the actual self-insured liabilities that we incur, our business, financial condition or results of operations could be materially and adversely affected.  For additional information regarding our insurance programs, see Note 21 – “Commitments and Contingencies – Loss Reserves for Certain Self-Insured Programs,” in the financial statements included elsewhere in this report.

We have developed a risk management program intended to control our insurance and professional liability costs.  As part of this program, we have implemented an arbitration agreement program at each of our nursing facilities under which, upon admission and to the extent permitted under existing regulations, patients are requested (but not required) to execute an agreement that requires disputes to be arbitrated instead of litigated in court. We believe that this program accelerates resolution of disputes and reduces our liability exposure and related costs. We have also established an incident reporting process that involves the provision of tracking and trending data to our facility administrators for purposes of quality assurance and improvement. We apply an enterprise risk management program to continually evaluate risks and opportunities impacting the business.

 

Environmental Matters

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. As a healthcare provider, we face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste management and disposal, asbestos management, response to mold and lead-based paint in our facilities and employee safety.

In our role as owner of subsidiaries which operate our facilities (including our leased facilities), we also may be required to investigate and remediate hazardous substances that are located on the property, including any such substances that may have migrated off, or discharged or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. These activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. We believe that we are in material compliance with applicable environmental and occupational health and safety requirements. However, there can be no assurance that we will not incur environmental liabilities in the future, and such liabilities may result in material adverse consequences to our business, financial condition or results of operations.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are filed with the SEC. Such reports and other information filed by us with the SEC are available free of charge at the investor relations section of our website at www.genesishcc.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Copies are also available, without charge, by writing to Genesis Healthcare, Inc. Investor Relations, 101 East State Street, Kennett Square, PA

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19348. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The inclusion of our website address in this annual report does not include or incorporate by reference the information on our website into this annual report.

 

Company History

Genesis Healthcare, Inc., a Delaware corporation, was incorporated in October 2005 under the name of SHG Holding Solutions, Inc., and subsequently changed its name to Skilled Healthcare Group, Inc. (Skilled).  On February 2, 2015, Skilled combined its businesses and operations (the Combination) with FC-GEN Operations Investment, LLC, a Delaware limited liability company (FC-GEN), pursuant to a Purchase and Contribution Agreement dated August 18, 2014. In connection with the Combination, Skilled changed its name to Genesis Healthcare, Inc.

In 2007, private equity funds managed by affiliates of Formation Capital, LLC and certain other investors acquired all the outstanding shares of Genesis HealthCare Corporation (GHC).  In 2011, (i) GHC transferred to FC-GEN its business of operating and managing senior housing and care facilities, its joint venture entities and its other ancillary businesses, (ii) all the outstanding shares of GHC were sold to Welltower Inc. (Welltower) for purposes of transferring the ownership of GHC’s senior housing facilities to Welltower and (iii) FC-GEN entered into a master lease agreement with Welltower pursuant to which FC-GEN leased back the senior housing facilities that it had transferred ownership to Welltower.

Unless the context otherwise requires, references in this report to the "Company" include the predecessors of Genesis Healthcare, Inc., including GHC, prior to 2011.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, results of operations or liquidity in future periods.  We operate in a rapidly changing and highly regulated environment that involves a number of risks and uncertainties, some of which are highlighted below and others are discussed elsewhere in this report.  These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. The following risk factors are not the only ones facing us. 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, results of operations, liquidity and stock price.

Risks Related to Reimbursement and Regulation of our Business

Reductions in Medicare reimbursement rates, or changes in the rules governing the Medicare program could have a material adverse effect on our revenues, financial condition and results of operations.

We receive a significant portion of our revenue from Medicare, which accounted for 20% of our consolidated revenue during 2019 and 21% in 2018.  In addition, many private payors base their reimbursement rates on the published Medicare rates or, in the case of our rehabilitation therapy services customers, are themselves reimbursed by Medicare for the services we provide. Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicare program that are disadvantageous to our business or industry, our business and results of operations will be adversely affected.

The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services.  Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. For example, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013.  Subsequent actions by Congress extended sequestration through 2023. 

In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business include:

•  administrative or legislative changes to base rates or the bases of payment;

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•  limits on the services or types of providers for which Medicare will provide reimbursement;

•  changes in methodology for patient assessment and/or determination of payment levels;

•  the reduction or elimination of annual rate increases; or

•  an increase in co-payments or deductibles payable by beneficiaries.

Among the important changes in statute that are being implemented by CMS include provisions of the IMPACT Act. This law imposes a stringent timeline for implementing benchmark quality measures and data metrics across post-acute care providers (Long Stay Hospitals, IRFs, Skilled Nursing Facilities and Home Health Agencies). The enactment also mandates specific actions to design a unified payment methodology for post-acute providers. CMS is in the process of promulgating regulations to implement provisions of this enactment. Depending on the final details, the costs of implementation could be significant. The failure to meet implementation requirements could expose providers to fines and payment reductions. 

Reductions in reimbursement rates or the scope of services being reimbursed could have a material, adverse effect on our revenue, financial condition and results of operations or even result in reimbursement rates that are insufficient to cover our operating costs. Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Reductions in Medicaid reimbursement rates or changes in the rules governing the Medicaid program could have a material, adverse effect on our revenues, financial condition and results of operations.

A significant portion of reimbursement for long-term care services comes from Medicaid, a joint federal-state program purchasing healthcare services for the low income and indigent as well as certain higher-income individuals with significant health needs.  Under broad federal criteria, states establish rules for eligibility, services and payment.  Medicaid is our largest source of revenue, accounting for 58% of our consolidated revenue during 2019 and 57% in 2018.  Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending.  We expect these state and federal efforts to continue for the foreseeable future. The Medicaid program and its reimbursement rates and rules are subject to frequent change at both the federal and state level. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which our services are reimbursed by state Medicaid plans. To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements commonly referred to as provider taxes. Under provider tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider's total revenue. There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider tax-related Medicaid expenditures could have a significant and adverse effect on states' Medicaid expenditures, and as a result could have a material and adverse effect on our business, financial condition or results of operations.

Our revenue could be impacted by a shift to value-based reimbursement models, such as PDPM.

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV.  PDPM will focus more on the clinical condition of the patient and less on the volume of services provided.  The following represent examples of potential risks associated with PDPM:

 

·

Transition to a new reimbursement model.  There is a short-term risk related to decreased accuracy due to the inherent learning curve associated with the implementation of a new reimbursement system and the corresponding process changes required to ensure that all the clinical conditions affecting the patient are accurately captured. During the initial transition from RUG IV to PDPM, it is possible that providers may not capture all aspects of a patient’s condition, resulting in lower reimbursement under PDPM. However, this risk should subside over time as providers gain experience with the new system.

 

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·

Future reimbursement levels.  The final rule indicates that payments under PDPM will be budget neutral. CMS has made assumptions in the final rule as to the comparison of payments under RUG-IV to PDPM in fiscal year 2020.  This estimate determined that a parity adjustment would be required to increase PDPM payments to bring them equal to what they would have been under RUG-IV payments. This increase, for fiscal year 2020, would achieve budget neutrality. However, the risk to providers is that going forward from fiscal year 2020 a lower parity adjustment could be applied to recapture any exceptional overpayments to providers caused by overestimating the parity adjustment.  With the increased focus on therapy utilization under RUGs IV, there is concern as to the accuracy of the parity adjustment and how closely it will reflect the data that will be captured under PDPM where the focus is on the clinical condition of the patient in lieu of resource utilization. In addition, the entire parity adjustment could be removed by CMS and this would cause a drastic reduction in payments.

 

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Medicare Managed Care Programs and Rates.  The introduction of PDPM could pose an indirect risk on existing Medicare Managed Care Plans.  For example, many of the Medicare Managed Care Plans have relied upon the existing RUG-IV rates to set their own rates.  Medicare Managed Care Plan contracts with providers may even make reference to RUG-IV rates. With the implementation of PDPM, CMS will no longer support the RUG-IV system after fiscal year 2020.  This will leave providers to negotiate individual Medicare Managed Care reimbursement rates not based on the traditional Medicare Part A program.  The risk is that the Medicare Managed Care Plans could negotiate much lower reimbursement rates and or leave providers without a contract for their Medicare Managed Care patients because the reimbursement rates would be too low to cover the cost of care.

 

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Impact on Medicaid Reimbursement.   Certain state Medicaid programs currently use data collected using the MDS based on RUG-based reimbursement models. With the shift to PDPM, the MDS data elements needed to continue to support a RUG-based reimbursement model will only be available upon completion of the Optional State Assessment (OSA).  CMS has notified state Medicaid programs that the support of RUG-based reimbursement models will be limited to use of the OSA after federal fiscal year 2020 and recommended that states implement changes to existing Medicaid reimbursement models to accommodate the upcoming changes. Until such time that a state elects to transition to an alternative payment model, states have the option to sustain their existing Medicaid reimbursement models by requiring providers to complete the OSA. With limited time to understand and address the implications of transitioning to a new reimbursement model, we believe states are more likely to elect to use the OSA to sustain existing reimbursement models.  In addition to the administrative burden associated with the completion of the OSA, we may be adversely affected by the rates at which our services are reimbursed by state Medicaid plans.

 

Reforms to the U.S. healthcare system have imposed new requirements upon us.

PPACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) included sweeping changes to how healthcare is paid for and furnished in the U.S. It has imposed new obligations on skilled nursing facilities, requiring them to disclose information regarding ownership, expenditures and certain other information. Moreover, the law requires skilled nursing facilities to electronically submit verifiable data on direct care staffing. CMS rules implementing these reporting requirements became effective on July 1, 2016.

To address potential fraud and abuse in federal healthcare programs, including Medicare and Medicaid, PPACA includes provider screening and enhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting false claims. It also provides funding for enhanced anti-fraud activities. PPACA imposes an enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs. PPACA also provides the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the Secretary of HHS determines that good cause exists not to suspend payments. If one or more of our affiliated facilities were to experience an extended payment suspension for allegations of fraud, such a suspension could adversely affect our consolidated results of operations and liquidity.

PPACA gave authority to the HHS to establish, test and evaluate alternative payment methodologies for Medicare services. Various payment and services models have been developed by the Centers for Medicare and Medicaid Innovations. Current models provide incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

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PPACA attempts to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care. One of these key delivery system reforms is the encouragement of ACOs, which will facilitate coordination and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such categories as clinical processes and outcomes of care, patient experience and utilization of services.  Initiatives by managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital readmissions and to divert referrals to home health or other community-based care settings may have an adverse impact on our census and length of stays. 

In addition, PPACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities, including measures and performance standards regarding preventable hospital readmissions. Beginning October 1, 2018, HHS began withholding 2% of Medicare payments from all skilled nursing facilities and distributing this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to hospitals.  In addition to the requirements that are being implemented, legislation is pending in Congress to broaden the value-based purchasing requirements featuring a payment withholding designed to fund the program across all post-acute services.  We are unable to determine the degree to which our participation in innovative “pay for value” programs with other providers of service will affect our financial results versus traditional business models for the long-term care industry.

The provisions of PPACA discussed above are examples of some federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that these and other provisions of PPACA may be interpreted, clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the results of operations.

We currently cannot predict the full effect that all of these changes will have on our business, including the demand for our services or the amount of reimbursement available for those services. However, it is possible these laws may reduce reimbursement and adversely affect our business.

PPACA and the implementation of provisions not yet effective could impact our business.

PPACA has resulted in and could continue to result in sweeping changes to the existing U.S. system for the delivery and financing of healthcare. As an employer, we must abide by the numerous reporting requirements imposed by the law and regulations implementing PPACA. These provisions could impact our compensation costs and force changes in how the company supports health benefits for its employees. The details for implementation of many of the requirements under PPACA will depend on the promulgation of regulations by a number of federal government agencies, including the HHS. It is impossible to predict the outcome of these changes, what many of the final requirements of PPACA will be, and the net effect of those requirements on us. As such, we cannot fully predict the impact of PPACA on our business, operations or financial performance.

Our business may be materially impacted if certain aspects of PPACA are amended, repealed, or successfully challenged.

A number of lawsuits have been filed challenging various aspects of PPACA and related regulations. In addition, the efficacy of PPACA is the subject of much debate among members of Congress and the public. The outcome of the 2016 election altered leadership in the executive branch of  the government. New leaders in CMS have begun making revisions to some of the demonstrations supported by the previous leaders. These revisions could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy that could significantly impact our business and the health care industry. In the event that legal challenges are successful or PPACA is repealed or materially amended, particularly any elements of PPACA that are beneficial to our business or that cause changes in the health insurance industry, including reimbursement and coverage by private, Medicare or Medicaid payors, our business, operating results and financial condition could be harmed. While it is not possible to predict whether and when any such changes will occur, such changes could harm our business, operating results and financial condition. In addition, even if PPACA is not amended or repealed, the executive branch of the federal government has significant influence on the implementation of the provisions of PPACA, and the administration could make changes impacting the implementation and enforcement of PPACA, which could harm our business, operating results and financial condition. If we are slow or unable to adapt to any such changes, our business, operating results and financial condition could be adversely affected.  PPACA significantly expanded Medicaid and it provided states incentives

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for broadening coverage beyond the traditional Medicaid program assisting eligible aged, blind and disabled individuals. Major Medicaid policy revisions under consideration could potentially alter fundamental structure of the Medicaid program; such revisions could be significantly challenging with the potential of undermining funding adequacy and essential coverage requirements.

Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.

Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with investigative audits by regulatory and governmental authorities, could adversely affect our business, financial condition or results of operations.

Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the service provided.  Overpayments may result from a variety of factors, including insufficient documentation supporting the services rendered or medical necessity of the services, other failures to document the satisfaction of the necessary requirements for payment, or in some cases providing services that are deemed to be worthless. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us. Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other requirements for payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties, including pursuant to the FCA and the Federal Civil Monetary Penalties Law (FCMPL).  Violations of the FCA could lead to any combination of a variety of criminal, civil and administrative fines and penalties.  CMPs under the FCA range from approximately $11,600 to $23,000 and are adjusted annually for inflation. Treble damages can be assessed on each claim that was submitted to the government for payment.  We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law.  Our repayment of any such amounts, as well as any fines, penalties or other sanctions that we may incur, could be significant and could have a material and adverse effect on our business, financial condition or results of operations.

From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits and investigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. For example, the OIG conducts a variety of routine, regular and special investigations, audits and reviews across our industry. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our business, financial condition or results of operations. Furthermore, becoming subject to these governmental investigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperate with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues. For example, as discussed in Note 21 – “Commitments and Contingencies - Legal Proceedings – Settlement Agreement,” in the notes to the consolidated financial statements included elsewhere in this report, in June 2017, we and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare Group, Inc. prior to their operations becoming part of our operations (collectively, the Successor Matters).  We have agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.  The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  We will continue to remit the remaining Settlement Amount balance of $25.7 million as of December 31, 2019 through 2022. 

Changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical professionals.

MACRA revised the payment system for physician and non-physician services. Section 1 of that law, the sustainable growth rate repeal and Medicare Provider Payment Modernization impacted payment provisions for medical professional services. There was a combined cap for PT and SLP and a separate cap for OT services that apply subject to certain exceptions. On February 9, 2018, the

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Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018.  The law retained the MMR process reducing the threshold on claims for SLP and PT at $3,000 and OT at $3,000. Prior to January 1, 2018, the MMR requirement generally provided that, on a per beneficiary basis and subject to limited exceptions, services above $3,700 for PT and SLP services combined and/or $3,700 for OT services would be subject to MMR. The reduction in the MMR services threshold could result in increased number of reviews, which could in turn have a negative effect on our business, financial condition or results of operations. 

We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance.

 

We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

•  licensure and certification;

•  adequacy and quality of healthcare services;

•  qualifications of healthcare and support personnel;

•  quality of medical equipment;

•  confidentiality, maintenance and security issues associated with medical records and claims processing;

•  relationships with physicians and other referral sources and recipients;

•  constraints on protective contractual provisions with patients and third-party payors;

•  operating policies and procedures;

•  addition of facilities and services; and

•  billing for services.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant guidance or judicial interpretation of these laws and regulations. In addition, many of these laws and regulations evolve to include additional obligations and restrictions, sometimes with retroactive effect. Certain other regulatory developments, such as revisions in the building code requirements for assisted/senior living and skilled nursing facilities, mandatory increases in scope and quality of care to be offered to residents, revisions in licensing and certification standards, mandatory staffing levels, regulations regarding conditions for payment and regulations restricting those we can hire could also have a material adverse effect on us. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

In addition, federal and state government agencies have increased and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, including skilled nursing facilities. This includes investigations of:

•  fraud and abuse;

•  quality of care;

•  financial relationships with referral sources; and

•  the medical necessity of services provided.

In the ordinary course of our business, we are subject regularly to inquiries, investigations, and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. Audits may include enhanced medical necessity reviews pursuant to the Medicare, Medicaid, and the SCHIP Extension Act of 2007 (the SCHIP Extension Act) and audits under the CMS Recovery Audit Contractor (RAC) program.

We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and

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state governments continue to impose intensive enforcement policies resulting in a significant number of inspections, citations of regulatory deficiencies, and other regulatory penalties, including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and CMPs. These enforcement policies, along with the costs incurred to respond to and defend reviews, audits, and investigations, could have a material adverse effect on our business, financial position, results of operations, and liquidity. We vigorously contest such penalties where appropriate; however, these cases can involve significant legal and other expenses and consume our resources.

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations. Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies, home health services, and clinical laboratory services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor. Many of the compensation arrangements exceptions permit referrals if, among other things, the arrangement is set forth in a written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. Exceptions may have other requirements. Any funds collected for an item or service resulting from a referral that violates the Stark Law must be repaid to Medicare or Medicaid, any other third-party payor, and the patient. In addition, CMPs, which are adjusted for annual inflation, and treble damages may be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the designated health services under the Stark Law.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (the Anti-Kickback Statute) prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce the referral of an individual, in return for recommending, or to arrange for, the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or Medicaid. The OIG has issued regulations that create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-Kickback Statute. In order to receive safe harbor protection, all of the requirements of a safe harbor must be met. The fact that a given business arrangement does not fall within one of these safe harbors, however, does not render the arrangement per se illegal. Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities. Potential fines under the Anti-Kickback Statute range from $25,000 to $100,000 per violation, up to ten years in prison, or both. We believe that business practices of providers and financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels. State Medicaid programs are required to enact an anti-kickback statute. Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care.

The DOJ may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. The FCA clarifies that if an item or service is provided in violation of the Anti-Kickback Statute, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim.  CMPs under the FCA range from approximately $11,600 to $23,000 and are adjusted annually for inflation. Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery. Due to these whistleblower incentives, lawsuits have become more frequent.

In addition to the penalties described above, if we violate any of these laws, we may be excluded from participation in federal and/or state healthcare programs. These fraud and abuse laws and regulations are complex, and we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. While we do not believe we are in violation of these prohibitions, we cannot assure you that governmental officials charged with the responsibility for enforcing these prohibitions will not

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assert that we are violating the provisions of such laws and regulations.

 

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, the intensity of federal and state enforcement actions or the extent and size of any potential sanctions, fines or penalties. Changes in the regulatory framework, our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other enforcement sanctions, fines or penalties could have a material adverse effect upon our business, financial condition or results of operations. Furthermore, should we lose licenses or certifications for a number of our facilities or other businesses as a result of regulatory action, legal proceedings such as those described in Note 21 – “Commitments and Contingencies - Legal Proceedings,” or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and the report of such issues at one of our facilities could harm our reputation for quality care and lead to a reduction in our patient referrals and ultimately our revenue and operating income.

Our physician services operations are subject to corporate practice of medicine laws and regulations. Our failure to comply with these laws and regulations could have a material adverse effect on our business and operations.

One line of our business that we continue to develop is physician services.  Certain states have laws and regulations prohibiting the corporate practice of medicine and fee-splitting, which generally prohibit business entities from owning or controlling medical practices or may limit the ability of clinical professionals to share professional service income with non-professional or business interests. These requirements may vary significantly from state to state.  Compliance with applicable regulations may cause us to incur expenses that we have not anticipated, and if we are unable to comply with these additional legal requirements, we may incur liability, which could have a material adverse effect on our business, financial condition or results of operations.

We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance.  An adverse inspection, review, audit or investigation could result in:

•  refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;

•  state or federal agencies imposing fines, penalties and other sanctions on us;

•  temporary suspension of payment for new patients to the facility or agency;

•  decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;

•  self-disclosure of violations to applicable regulatory authorities;

•  damage to our reputation;

•  the revocation of a facility's or agency's license; and

•  loss of certain rights under, or termination of, our contracts with managed care payors.

We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties, as a result of these inspections, reviews, audits and investigations.  If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results.  Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

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Our operations are subject to environmental and occupational health and safety regulations, which could subject us to fines, penalties and increased operational costs.

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Regulatory requirements faced by healthcare providers such as us include those relating to air emissions, wastewater discharges, air and water quality control, occupational health and safety (such as standards regarding blood-borne pathogens and ergonomics), management and disposal of low-level radioactive medical waste, biohazards and other wastes, management of explosive or combustible gases, such as oxygen, specific regulatory requirements applicable to asbestos, lead-based paints, polychlorinated biphenyls and mold, other occupational hazards associated with our workplaces, and providing notice to employees and members of the public about our use and storage of regulated or hazardous materials and wastes. Failure to comply with these requirements could subject us to fines, penalties and increased operational costs. Moreover, changes in existing requirements or more stringent enforcement of them, as well as discovery of currently unknown conditions at our owned or leased facilities, could result in additional cost and potential liabilities, including liability for conducting cleanup, and there can be no guarantee that such increased expenditures would not be significant.

Risks Relating to Our Operations

Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.

We have now and will for the foreseeable future continue to have a significant amount of indebtedness and lease obligations. At December 31, 2019, our total indebtedness was $1.6 billion, excluding debt issuance costs and other non-cash debt discounts and premiums, and our total lease obligations are $5.0 billion.  Our substantial indebtedness and lease obligations could have important consequences. For example, it could:

•  increase our vulnerability to adverse economic and industry conditions;

•  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and lease obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

•  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•  place us at a competitive disadvantage compared to our competitors that have less debt or lease obligations;

•  increase the cost or limit the availability of additional financing, if needed or desired, to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;

•  require us to maintain debt coverage and financial ratios at specified levels, reducing our financial flexibility; and

•  limit our ability to make strategic acquisitions and develop new or expanded facilities.

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in our leases and loans is dependent upon, among other things, our ability to attain a sustainable capital structure.  We have recently restructured agreements with certain of our landlord and lenders in an effort to attain a sustainable capital structure.  However, there can be no assurance that the reduction in our annual fixed charges that we have projected in connection with such restructuring will be realized or will be sufficient to sustain us in the event our business suffers from reductions in occupancy and/or inflation in costs continues to outpace the rate of third party reimbursement rate growth.

If we are unable to extend (or refinance, as applicable) any of our maturing credit facilities prior to their scheduled maturity or accelerated maturity dates, our liquidity and financial condition will be adversely impacted. In addition, even if we are able to extend or refinance our maturing debt credit facilities, the terms of the new financing may be less favorable to us than the terms of the existing financing.

Much of our indebtedness is subject to floating interest rates and/or payment in kind features.  Changes in interest rates or discontinuation of payment in kind terms could result in increased interest payments, and accordingly, reduce our future earnings and cash flows limiting our ability to obtain additional financing.  Payment in kind terms defer cash payment obligations until maturity of

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the debt instrument.  Such a feature increases the debt obligation due at maturity, which could make it difficult to obtain additional financing.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These contractual obligation increases may outpace any increase in our results of our operations placing an additional burden on our results of operations, liquidity and financial position.  Such a burden could limit our ability to obtain additional financing.

In recent years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.

A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. Disruptions in the financial markets could have an adverse effect on us and our business. If we are not able to obtain additional or replacement financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.

We lease a significant number of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.

We face risks because of the number of facilities we lease.  As of December 31, 2019, we leased approximately 78% of our centers; 45% were leased pursuant to master lease agreements with four landlords.  The loss or deterioration of a favorable relationship with any of such landlords may adversely affect our business.

Each of our lease agreements provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including, the defaults in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease.  Termination of certain of our lease agreements could result in a cross-default under our debt agreements or other lease agreements.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and covenants, specifically coverage ratios.  If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity and financial position.  Our annual rent escalators are oftentimes outpacing our annual reimbursement escalators.  This issue is compounded by the shift in payor mix to lower reimbursed Medicaid.

Our leases generally provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension.  In addition, if we are unable to renew or extend any of our master leases, we may lose all of the facilities subject to that master lease agreement.  If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Leasing facilities pursuant to master lease agreements may limit our ability to exit markets.  For instance, if one facility under a master lease becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility.   We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition or results of operations.

Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other master lease agreements and agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease

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agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity.

We are subject to numerous covenants and requirements under our various credit and leasing agreements and a breach of any such covenants or requirements could, unless timely and effectively remediated, lead to default and potential cross default under such agreements.

Our credit and leasing agreements contain various covenants, restrictions and events of default.  Among other things, these provisions require us to maintain certain financial ratios.  Breaches of these covenants could result in defaults under the instruments governing the applicable loans and leases, in addition to any other indebtedness or leases cross-defaulted against such instruments.  These defaults could have a material adverse impact on our business, results of operations and financial condition.

Despite our substantial indebtedness, we may still be able to incur more debt. This could intensify the risks associated with this indebtedness.

The terms of our credit facilities contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these exceptions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. The more we become leveraged, the more we become exposed to the risks described above under “Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.

Our credit and leasing agreements may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

The terms of our credit and leasing agreements include a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our and our restricted subsidiaries’ ability to, among other things:

•  incur additional indebtedness;

•  consolidate or merge;

•  make or incur capital improvements;

•  sell assets; and

•  make investments, loans and acquisitions.

These restrictions could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities.

Floating rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

We have significant indebtedness in multiple instruments that bear interest at variable rates. Interest rate changes could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could have a material adverse effect on our liquidity, financial condition and results of operations. See Item 7.  “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources” for a description of the types and level of indebtedness.

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We may be adversely affected by changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.

 

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  We have a significant number of debt instruments with attributes that are dependent on LIBOR. The transition from LIBOR to an alternative reference rate could have a material adverse effect on our liquidity, financial condition and results of operations.

 

We are presently operating under waivers of certain of our master leases.  There can be no assurance such waivers will be received in future periods.  In the event future waivers are not extended and our creditors accelerate our loan and lease obligations, it would have a material adverse effect on our liquidity,  financial condition and results of operations.

At December 31, 2019, we did not meet certain of the financial covenants contained under certain of our lease agreements.  Although we have received waivers with our counterparties to these agreements related to our breach of financial covenants at December 31, 2019, there can be no assurance such waivers will be received in future periods.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not obtained, the defaults can cause acceleration of our financial obligations, which we may not be in a position to satisfy.  In the event this occurs and we are unable to satisfy an acceleration of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.

 

Significant legal actions, which are commonplace in our industry, could subject us to increased operating costs, which would materially and adversely affect our results of operations, liquidity, financial condition and reputation.

The long-term care industry has experienced an increasing trend in the number and severity of litigation claims. We believe that this trend is endemic to the industry and is a result of a variety of factors, including the number of large verdicts, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiffs' lawyers of potentially large recoveries. While some states have enacted tort reform legislation that limits plaintiffs' recoveries in some respects, should our professional liability and general liability costs increase significantly in the future our operating income could suffer.

We also may be subject to lawsuits under the FCA and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse. See Note 21 - “Commitments and Contingencies - Legal Proceedings,” in the notes to the consolidated financial statements included elsewhere in this report for pending litigation and investigations which, based upon information currently available, could have a potentially material adverse effect on our results of operations, liquidity and financial condition.

We may incur significant liabilities in conjunction with legal actions against us, including as a result of damages, fines and penalties that may be assessed against us, as well as a result of the sometimes significant commitments of financial and management resources that are often required to defend against such legal actions.  The incurrence of such liabilities and related commitments of resources could materially and adversely affect our business, financial condition and results of operations.

Insurance coverages, including professional liability coverage, may become increasingly expensive and difficult to obtain for healthcare companies, and our self-insurance may expose us to significant losses.

It may become more difficult and costly for us to obtain coverage for patient care liabilities and certain other risks, including property and casualty insurance. Insurance carriers may require healthcare companies to increase significantly their self-insured retention levels and/or pay substantially higher premiums for reduced coverage for most insurance coverages, including workers' compensation, employee healthcare and patient care liability.

We self-insure a significant portion of our potential liabilities for several risks, including certain types of professional and general liability, workers' compensation and employee healthcare benefits. Due to our self-insured retentions under many of our professional and general liability, workers' compensation and employee healthcare benefits programs, there is no limit on the maximum number of

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claims or amount for which we can be liable in any policy period. We base our loss estimates and related accruals on actuarial analyses, which determine expected liabilities on an undiscounted basis, including incurred but not reported losses, based upon the available information on a given date. It is possible, however, for the ultimate amount of losses to exceed our estimates and related accruals, as well as our insurance limits as applicable. In the event our actual liability exceeds our estimates for any given period, our results of operations and financial condition could be materially adversely impacted. Additionally, we may from time to time need to increase our accruals as a result of future actuarial reviews and claims that may develop. Such increases could have an adverse impact on our business and results of operations.  An adverse determination in legal proceedings, whether currently asserted or arising in the future, could have a material adverse effect on our business, liquidity, financial condition and results of operations.

Changes in the acuity mix of patients as well as payor mix and payment methodologies may significantly reduce our profitability or cause us to incur losses.

Our revenue is affected by our ability to attract a favorable patient acuity mix and by our mix of payment sources. Changes in the type of patients we attract, as well as our payor mix among private payors, managed care companies, Medicare (both traditional Medicare and Medicare Advantage) and Medicaid significantly affect our profitability because not all payors reimburse us at the same rates. Particularly, if we fail to maintain our proportion of high-acuity patients or if there is any significant increase in the percentage of our population for which we receive Medicaid reimbursement, our financial position, results of operations and liquidity may be adversely affected. Furthermore, in recent periods we have continued to see a shift from “traditional” FFS Medicare patients to Medicare Advantage patients.  Reimbursement rates are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients.  This trend may continue in future periods.  Our financial results have been negatively affected by this shift to date.  Our financial results will continue to be negatively affected if the trend towards Medicare Advantage continues, and particularly if it accelerates.

Federal, state and local employment-related laws and regulations could increase our cost of doing business and subject us to significant back pay awards, fines and lawsuits.

Our operations are subject to a variety of federal, state and local employment-related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, the Family Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, Title VII of the Civil Rights Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of the Department of Labor (DOL), regulations of state attorneys general, federal and state wage and hour laws, and a variety of similar laws enacted by the federal and state governments that govern these and other employment-related matters. Because labor represents such a large portion of our operating costs, compliance with these evolving federal and state laws and regulations could substantially increase our cost of doing business while failure to do so could subject us to significant back pay awards, fines and lawsuits. We are currently subject to employee-related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. In addition, federal proposals to introduce a system of mandated health insurance and flexible work time and other similar initiatives could, if implemented, adversely affect our operations. Our failure to comply with federal and state employment-related laws and regulations could have a material adverse effect on our business, financial position, results of operations and liquidity.

It can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees.

Our employees are our most important asset. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel, especially center executive directors, nurses, therapists, certified nurses' aides and other important healthcare personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges.

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Tight labor markets and high demand for such employees can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected facilities. In addition, turnover of such employees will result in additional expenses related to recruiting and training replacement employees. If we are unable to attract and retain qualified professionals, our ability to provide adequate services to our residents and patients may decline and our ability to grow may be constrained.

Our cost of labor may be influenced by unanticipated factors in certain markets or, with respect to collective bargaining agreements that we are a party to, we may experience above-market increases.  A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rate.  As collective bargaining agreements are renegotiated or minimum wage rates increase we may need to increase the wages paid to employees.  This may be applicable to not only minimum wage employees but also to employees at wage rates which are currently above the minimum wage. 

Because we are largely funded by government programs, we do not have an ability to pass such wage increases through to revenue sources.  Any such mandated wage increases could have a material adverse effect on our results of operations, liquidity and financial condition.

If we are unable to comply with state minimum staffing requirements at one or more of our facilities, we could be subject to fines or other sanctions.

In most of the states where we operate, our skilled nursing facilities are subject to state mandated staffing ratios that require minimum nursing hours of direct care per resident per day. Our ability to satisfy any minimum staffing requirements depends upon our ability to attract and retain qualified healthcare professionals, including nurses, certified nurse's assistants and other personnel. Attracting and retaining qualified personnel is difficult, given a tight labor market for these professionals in many of the markets in which we operate. Furthermore, if states do not appropriate additional funds (through Medicaid program appropriations or otherwise) sufficient to pay for any additional operating costs resulting from minimum staffing requirements, our profitability may be materially adversely affected.  Failure to comply with these requirements can, among other things, jeopardize a facility's compliance with the Requirements of Participation under relevant state and federal healthcare programs. In addition, if a facility is determined to be out of compliance with these requirements, it may be subject to a notice of deficiency, a citation, or a significant fine or litigation risk. Deficiencies (depending on the level) may also result in the suspension of patient admissions and/or the termination of Medicaid participation, or the suspension, revocation or nonrenewal of the skilled nursing facility's license. If the federal or state governments were to issue regulations which materially change the way compliance with the minimum staffing standard is calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact us more significantly.

If we fail to attract patients and residents and to compete effectively with other healthcare providers, our revenue and profitability may decline and we may incur losses.

The healthcare services industry is highly competitive. Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with IRFs and LTAC hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility.  In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services.  Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. If we are unable to attract patients, particularly high-acuity patients, to our facilities and agencies, our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing long-term care companies may also offer newer facilities or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current patients, potential patients and referral sources. Furthermore, while we budget for routine capital expenditures at our facilities to keep them competitive in

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their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be negatively affected.

 

We believe we adhere to a conservative approach in complying with laws prohibiting kickbacks and referral payments to referral sources.  If our competitors use more aggressive methods than we do with respect to obtaining patient referrals, our competitors may from time to time obtain patient referrals that are not otherwise available to us.

The primary competitive factors for our assisted/senior living and rehabilitation therapy services are similar to those for our skilled nursing businesses and include reputation, the cost of services, the quality of services, responsiveness to patient/resident needs and the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping. Furthermore, given the relatively low barriers to entry and continuing healthcare cost containment pressures, we expect that the markets we service will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain patients and residents, maintain or increase our fees, or expand our business.

If our referral sources fail to view us as an attractive healthcare provider, our patient base would likely decrease.

We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities in which we deliver our services to attract the kinds of patients we target. Our referral sources are not obligated to refer business to us and generally also refer business to other healthcare providers. We believe many of our referral sources refer business to us as a result of the quality of our patient care and our efforts to establish and build a relationship with them. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships or if we are perceived by our referral sources for any reason as not providing quality patient care, our volume of referrals would likely decrease, the quality of our patient mix could suffer and our revenue and results of operations could be adversely affected.

If we do not achieve or maintain a reputation for providing quality of care, our business may be negatively affected.

Our ability to achieve and to maintain a reputation for providing quality of care to our patients at each of our skilled nursing and assisted/senior living facilities, or through our rehabilitation therapy, is important to our ability to attract and retain patients, particularly high-acuity patients. In some instances, our referral sources are affiliated with healthcare systems that may have affiliated businesses that offer services that compete with ours, and the frequency of this occurring may increase in the future as ACOs are formed in the markets we serve.  We believe that the perception of our quality of care by a potential patient or potential patient's family seeking to contract for our services is influenced by a variety of factors, including physician and other healthcare professional referrals, community information and referral services, newspapers and other print and electronic media, results of patient surveys, recommendations from family and friends, and quality care statistics or rating systems compiled and published by CMS or other industry data. Through our focus on retaining quality staffing, reviewing feedback and surveys from our patients and referral sources to highlight areas of improvement and integrating our service offerings at each of our facilities, we seek to maintain and to improve on the outcomes from each of the factors listed above in order to build and to maintain a strong reputation at our facilities. If we fail to achieve or to maintain a reputation for providing quality care, or are perceived to provide a lower quality of care than competitors within the same geographic area, our ability to attract and to retain patients would be adversely affected. If our businesses fail to maintain a strong reputation in the areas in which we operate, our business, revenue and profitability could be adversely affected.

If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, or if the frequency of CMS surveys and enforcement sanctions increases, our business may be negatively affected.

 

CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available to the public on its website, rating every skilled nursing facility operating in each state based upon quality of care indicators.  These quality of care indicators include such measures as percentages of patients with infections, bedsores and unplanned weight loss.  In addition, CMS previously increased the number of Medicaid and Medicare surveys and enforcement activities, to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified.  We have found a correlation between negative Medicaid and Medicare surveys and the incidence of professional liability litigation.  From time to time, we experience a higher than normal number of negative survey findings in some of our affiliated facilities.

 

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CMS publishes Star Ratings to help consumers, their families and caregivers compare nursing homes more easily.  The Star Ratings give each nursing home a rating of between one and five stars for (i) staffing, (ii) health inspections, (iii) quality measures and (iv) overall score.  In cases of acquisitions, the previous operator's clinical ratings are included in our overall Star Ratings.  The prior operator's results will impact our rating until we have sufficient clinical measurements subsequent to the acquisition date.  CMS from time to time revises the manner in which the Star Ratings are calculated, and such revisions could have a negative impact on our Star Ratings. If we are unable to achieve and to maintain Star Ratings that are comparable or superior to those of our competitors, our ability to attract and to retain patients could be adversely affected.

 

Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.

We produce our consolidated financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America (U.S. GAAP). Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting.

Testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law or if our independent registered public accounting firm does not issue an unqualified attestation report. See Item 9A.  "Controls and Procedures—Management's Report on Internal Control over Financial Reporting," for management’s disclosure on its responsibility for establishing and maintaining adequate internal controls.

We also cannot provide assurance that our internal control over financial reporting will be operating effectively in the future. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

 

Our success is dependent upon retaining key executives and personnel.

 

Our senior management team has extensive experience in the healthcare industry. We believe that they have been instrumental in guiding our businesses, instituting valuable performance and quality monitoring, and driving innovation. Our future performance is substantially dependent upon the continued services of our senior management team or their successors. The loss of the services of any of these persons could have a material adverse effect upon us.

We may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely.

We depend on implementing adequate cost management initiatives in response to fluctuations in levels of patient census in our businesses in order to maintain our current cash flow and earnings levels. Fluctuation in our patient census levels may become more common as we continue our emphasis in our skilled nursing facilities on patients with shorter stays but higher acuities. A decline in patient census levels would likely result in decreased revenue. If we are unable to put in place corresponding reductions in costs in response to decreases in our patient census or other revenue shortfalls, our financial condition and operating results would be adversely affected.  There are limits in our ability to reduce the costs of our centers because we must maintain required staffing levels.

Consolidation of managed care organizations and other third-party payors or reductions in reimbursement from these payors may adversely affect our revenue and income or cause us to incur losses.

Managed care organizations and other third-party payors have in many instances consolidated in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. These organizations have become an increasingly important source of revenue

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and referrals for us. To the extent that such organizations terminate us as a preferred provider or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected.

In addition, private third-party payors, including managed care payors, are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization reviews, or reviews of the propriety of, and charges for, services provided, and greater enrollment in managed care programs and preferred provider organizations. As these private payors increase their purchasing power, they are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk associated with the provision of care. Significant reductions in reimbursement from these sources could materially adversely affect our business and financial condition.

MLTSS programs granted under waivers of the Social Security Act are currently being extended and or modified in some states with approval by CMS.  SNF-VBP programs are therefore being submitted by some states which may include changes from Any Willing Provider, a model that permits all licensed providers to serve the Medicaid population, to programs that may exclude nursing home providers that do not score high enough under certain metrics thus causing a narrowing of network participation for some providers.  The narrowing of a skilled nursing facility’s participation in MLTSS would cause providers not to be able to accept Medicaid Managed Care enrollees into their facility until the facility meets the metrics standard as set by the state’s Medicaid program.

Under Section 1115 of the Social Security Act, the Secretary of HHS can waive specific provisions of the Medicaid program and that in order to apply for the Section 1115 waivers states must follow specific procedures for notice and stakeholder input established by CMS.  Giving states permission to use federal Medicaid funds in ways that are not otherwise allowed under the federal rules, as long as the Secretary of HHS determines that the initiative is an experimental or demonstration project that is likely to assist in promoting the objectives of the Medicaid program.  States can obtain Section 1115 waivers that make broad changes in Medicaid eligibility, benefits and cost-sharing, and provider payments.  CMS has recently approved, in some Section 1115 waivers, the elimination of retroactive eligibility benefits for Medicaid beneficiaries.

Delays in reimbursement may cause liquidity problems.

If we have information systems problems or payment or other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. On occasion, states have delayed reimbursement at fiscal year ends for budget balancing purposes.  Any significant payment timing delay could cause us to experience working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

Our rehabilitation and other related healthcare services are also subject to delays in reimbursement, as we act as vendors to other providers who in turn must wait for reimbursement from other third-party payors. Each of these customers is therefore subject to the same potential delays to which our nursing homes are subject, meaning any such delays would further delay the date we would receive payment for the provision of our related healthcare services. To the extent we grow and expand the rehabilitation and other complementary services that we offer to third parties, these payment delays could have an increased adverse effect on our liquidity and financial condition. We may also experience delays in reimbursement related to change of ownership applications for our acquired facilities, as well as changes in fiscal intermediaries.

We are exposed to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses.

 

Deterioration in the financial condition of our customer relationships due to systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may result in a reduction in services provided, an inability to collect receivables and payment delays or losses due to a customer’s bankruptcy, receivership, liquidation, reorganization or insolvency. Such actions could result in our customers seeking to cancel or to renegotiate the terms of current agreements or renewals, and failure to meet contractual obligations.  Our inability to collect receivables may decrease profitability and liquidity.

We provide rehabilitation therapy services and other healthcare related services to numerous customers of varying size and

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significance on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency and credit limits, as well as prevailing terms with customers having similar characteristics.  Despite an initial credit assessment, customers deemed creditworthy may experience an undetected decline in their financial condition while contracting with us.  Our rehabilitation therapy services segment, in particular, has several significant contracts with national skilled nursing home chains that increases our exposure to potential material losses.  Even when existing contract customers exhibit factors indicating negative credit trends, it can be costly to implement measures to reduce our exposure to those customers.  Challenging systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may impair the ability of our customers to pay for services that have been provided by us, and as a result, our write-off of accounts receivable could increase. Our exposure to credit risks may increase if such unpaid balances serve as collateral under our revolving credit facilities and we have drawn funds thereunder. If one or more of these customers delay payments or default on credit extended to them, it could adversely impact our business, financial condition, operating results and liquidity.

 

We are subject to federal and state income taxes.  Changes in tax laws and regulations and the interpretation of those tax law changes could have a material adverse effect on our effective tax rate, provision for income taxes and income tax obligations.

 

We are a U.S. domiciled company subject to income tax in multiple U.S. tax jurisdictions and China. Significant judgment is required in determining our provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our provision for income taxes.

 

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies.  If U.S. or China tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

 

The Tax Cuts and Jobs Act of 2017 (Tax Act) resulted in significant changes to the Internal Revenue Code.  During the second half of the year ended December 31, 2018, the U.S. Treasury issued temporary and final regulations for various provisions contained within the Tax Act. Of the provisions, the reduction in corporate dividends received deduction, the Net Operating Loss limitation to 80% of taxable income, the business interest limitation and the bonus depreciation expensing could result in a material adverse effect to the Company’s income taxes.  Management has reviewed these provisions and their supporting regulations and has developed positions claimed in the Company’s income tax provision.

 

Throughout the year ended December 31, 2018, the U.S. states in which the Company has the most business presence, enacted various statutes and supporting regulations to many of the significant provisions of the Tax Act.  Many of the state statutes could result in a material adverse effect to the Company’s income taxes.  Management has reviewed the significant state statutes and regulations in its preparation of the Company’s income tax provision.

 

The various provisions within the Tax Act, the supporting regulations and U.S. state statutes enacted in response to the significant provisions within the Tax Act are still being developed.  It is anticipated that the application of the provisions will continue to be refined by the U.S. Treasury and U.S. states.  It cannot be predicted how refinements may impact the Company’s income taxes.  Management will continue to monitor and review any changes to assess the effect upon the Company’s income taxes. 

 

Completed and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities and integration risks.

We have in the past pursued, and expect to pursue in the future, selective acquisitions and the development of skilled nursing facilities, contract rehabilitation therapy businesses, and other related healthcare operations. Acquisitions may involve significant cash expenditures, debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions, including our recently completed acquisitions, involve numerous risks, including:

•  difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;

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•  diversion of management's attention from other business concerns;

•  potential loss of key employees or customers of acquired companies;

•  entry into markets in which we may have limited or no experience;

•  increased indebtedness and reduced ability to access additional capital when needed;

•  assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and

•  straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Certain events or circumstances could result in the impairment of our assets or other charges, including, without limitation, impairments of goodwill and identifiable intangible assets that result in material charges to earnings.

We review the carrying value of certain long-lived assets, definite-lived intangible assets and indefinite-lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period may be necessary, such as when the market value of our common stock is below book equity value. On an ongoing basis, we also evaluate, based upon the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If circumstances suggest that the recorded amounts of any of these assets cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value. If the carrying value of any of these assets is impaired, we may incur a material charge to earnings.  See Note 19 – “Asset Impairment Charges.”  

Future adverse changes in the operating environment and related key assumptions used to determine the fair value of our reporting units and indefinite-lived intangible assets or a decline in the value of our common stock may result in future impairment charges for a portion or all of these assets. Moreover, the value of our goodwill and indefinite-lived intangible assets could be negatively impacted by potential healthcare reforms. Any such impairment charges could have a material adverse effect on our business, financial position and results of operations.

A portion of our workforce is unionized and our operations may be adversely affected by work stoppages, strikes or other collective actions.

As of December 31, 2019, approximately 5,200 of our 55,000 active employees were represented by unions and covered by collective bargaining agreements.  In addition, certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. We cannot predict the effect that continued union representation or future organizational activities will have on our business or future operations. There can be no assurance that we will not experience a material work stoppage in the future.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes, floods and wildfires, may cause damage or disruption to us, our employees and our facilities, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability of employees to provide services at our facilities and other locations. If the delivery of goods or the ability of employees to reach our facilities and patients were interrupted in any material respect due to a natural disaster or other reasons, it could have a significant impact on our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients and employees. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

39

A pandemic, epidemic or outbreak of a contagious illness, such as COVID-19, could adversely impact our business, operating results and financial condition.

 

If a pandemic, epidemic, or other outbreak of an infectious illness or other public health crisis were to occur in areas in which we operate, our business, operations and financial condition could be materially and adversely impacted.  Federal, state or local health departments may require a ban or limit admissions to our facilities as a precautionary measure in a crisis to avoid the spread of a contagious illness or other public health crisis.  Patients may postpone or refuse necessary care in an attempt to avoid possible exposure, thereby reducing occupancy.  If the residents in any of our facilities test positive for a contagious illness, it would result in increased costs of caring for the residents in that facility and, in all likelihood, a reduced occupancy at that facility.  Further, a pandemic, epidemic or other outbreak might adversely impact our operations by causing staffing and supply shortages. In addition, outbreaks, such as the recent coronavirus (COVID-19), cause our facilities and our management to spend considerable time planning for such events, which diverts their attention from other business concerns.  We are continuing to evaluate and consider the potential impact of the COVID-19 outbreak, which could result in some or all of these negative outcomes and adversely impact our business, operating results and financial condition.  There can be no assurances that a pandemic, epidemic or outbreak of a contagious illness, such as COVID-19, will not have a material and adverse impact on our business, operating results and financial condition in the future.

 

The operation of our business is dependent on effective and secure information systems.

 

Our business is dependent on the proper functioning, reliability and availability of our business systems and technology.  While we have implemented strong security controls and continue to enhance those controls to protect the safety and security of our information systems, and the patient health information, personal information, and other data maintained within those systems, we cannot assure you that our safety and security measures and disaster recovery plan will prevent damage, interruption or breach of our information systems and operations.  Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect, we may be unable to anticipate these techniques or implement adequate preventive measures.

 

In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our information systems.  Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees or contractors.

 

If our business and technology systems are compromised and personal or other protected information regarding patients, employees or others with whom we do business is stolen, tampered with or otherwise improperly accessed, our ability to conduct our business and our reputation may be impaired. If personal or other protected information of our patients, employees or others with whom we do business is tampered with, stolen or otherwise improperly accessed, we may incur significant costs to remediate possible injury to the affected persons, compensate the affected persons, pay any applicable fines, or take other action with respect to judicial or regulatory actions arising out of the incident, including under HIPAA, the HITECH Act or any other similar federal or state privacy laws, as applicable.  Any of the foregoing could have a material adverse effect on our financial position, results of operations and liquidity.

 

Furthermore, while we budget for changes and upgrades to our business and technology systems, it is possible that we may underestimate the actual costs of those changes and upgrades.  Failure to make necessary changes and upgrades due to financial or other concerns could negatively impact the effectiveness of our business and technology systems, as well as our operations and financial performance. The board of directors is kept abreast of significant changes, updates or issues regarding our information systems as the need arises.

 

We employ a wide range of perimeter, endpoint, infrastructure, and business application controls, and device, email, file and website encryption to limit our risk and exposure.  As our third party software suppliers move the services we use to public cloud services, we are implementing security configurations and conducting appropriate reviews to ensure the protection of our data and compliance with our security policies and business continuity plans.

 

We conducted annual internal and third party cybersecurity risk assessments with the goal of identifying any areas of exposure, focusing our resources on remediating those risks, and strengthening our overall cybersecurity profile and infrastructure.

 

40

Risks Related to Ownership of Our Class A Common Stock

We are subject to the Continued Listing Criteria of the New York Stock Exchange (NYSE), and our failure to satisfy these criteria may result in the delisting of our common stock.

 

On March 13, 2020, the closing sales price of our Class A common stock on the NYSE was $1.15 per share. There can be no assurance that our stock price will continue to close above $1.00 per share and we will remain compliant with the Continued Listing Criteria of the NYSE.  If our common stock is ever delisted and we are not able to list our common stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our common stock will develop or be sustained.

 

The issuance and subsequent conversion or exercise of debt securities or stock warrants, respectively, into our common stock may dilute the ownership of existing stockholders.

 

We may, from time to time, issue convertible debt securities or common stock warrants. For example, in connection with a transaction with Welltower we issued a note, which was subsequently converted into our common stock. The conversion, if any, of such convertible debt or exercise of stock warrants 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 or exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes and stock warrants may encourage short selling by market participants because the conversion of the notes or exercise of stock warrants could depress the market price of our common stock. Issuance of such common stock upon conversion or exercise also may affect our earnings (loss) on a per share basis.

A small group of stockholders owns a large quantity of our common stock, thereby potentially exerting significant influence over the Company.

 

The holders of a majority of the voting power of our common stock had previously entered into a voting agreement governing the election of our directors, which resulted in our being deemed a “controlled company.”  Although the voting agreement expired in 2018 and we are no longer a “controlled company,” ownership of our common stock remains concentrated among certain stockholders. The five largest holders of our common stock beneficially own shares representing approximately 48% of the Company’s voting power as of March 13, 2020.  This concentration of ownership could influence matters requiring approval by our stockholders and/or our board of directors, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions.  Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of our other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

 

Some of our directors are significant stockholders or representatives of significant stockholders, which may present issues regarding the diversion of corporate opportunities and other potential conflicts.

Our board of directors includes certain of our significant stockholders and representatives of certain of our significant stockholders. Those stockholders and their affiliates may invest in entities that directly or indirectly compete with us, companies in which we transact business, or companies in which they are currently invested or in which they serve as an officer or director may already compete with us. As a result of these relationships, when conflicts between the interests of those stockholders or their affiliates and the interests of our other stockholders arise, these directors may not be disinterested.

Also, in accordance with Delaware law, our board of directors adopted resolutions to specify the obligation of certain of our directors to present certain corporate opportunities to us.  Such directors are required to present any corporate opportunities in our main lines of business, which may be expanded by our board of directors, as well as any other opportunity that is expressly offered for us. The resolutions renounce our rights to certain other business opportunities that do not meet those criteria.  The resolutions further provide that such directors will not be liable to us or to our stockholders for breach of any fiduciary duty that would otherwise exist by reason of the fact that any such individual directs a corporate opportunity (other than those certain types of opportunities set forth in the resolutions) to any person instead of us or is engaged in certain current business activities, or does not refer or communicate information

41

regarding certain corporate opportunities to us.  Accordingly, we may not be presented with certain corporate opportunities that we may find attractive and may wish to pursue.

Purchasers of our Class A common stock could incur substantial losses because of the volatility of our stock price.

Our stock price has been and is likely to continue to be volatile. The stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. The price for our Class A common stock may be influenced by many factors, including:

•  the depth and liquidity of the market for our Class A common stock;

•  developments generally affecting the healthcare industry;

•  investor perceptions of us and our business;

•  actions by institutional or other large stockholders;

•  strategic actions, such as acquisitions or restructurings, or the introduction of new services by us or our competitors;

•  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

•  litigation and governmental investigations;

•  changes in accounting standards, policies, guidance, interpretations or principles;

•  adverse conditions in the financial markets, state and federal government or general economic conditions, including those resulting from statewide, national or global financial and deficit considerations, overall market conditions, war, incidents of terrorism and responses to such events;

•  sales of Class B common stock;

•  sales of units by certain significant stockholders and members of our management team;

•  additions or departures of key personnel; and

•  our results of operations, financial performance and future prospects.

These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our Class A common stock is significantly influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

We do not intend to pay dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and lease obligations as well as to fund the operation and expansion of our business. Any payment of future dividends will be at the

42

discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, lease obligations, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

Our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our Class A common stock.

In addition to the effect that the concentration of ownership and voting power in our significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management, even if doing so might be beneficial to our stockholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our Class A common stock. The provisions in our amended and restated certificate of incorporation or amended and restated bylaws include:

•  our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of our Class A common stock, Class B common stock and Class C common stock;

•  advance notice requirements for stockholders to nominate individuals to serve on our board of directors or to submit proposals that can be acted upon at stockholder meetings;

•  our board of directors is classified so not all of the members of our board of directors are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

•  special meetings of the stockholders are permitted to be called only by the chairman of our board of directors, our chief executive officer, a majority of our board of directors or a majority of the voting power of the shares entitled to vote in connection with the election of our directors;

•  stockholders are not permitted to cumulate their votes for the election of directors;

•  newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors will be filled only by majority vote of the remaining directors;

•  a majority of our board of directors is expressly authorized to make, alter or repeal our bylaws; and

•  the affirmative vote of the holders of at least 66 2/3% of the combined voting power of the shares entitled to vote in connection with the election of our directors is required to amend, alter, change, or repeal, or to adopt any provision inconsistent with the purpose and intent of certain articles of the Restated Charter relating to the management of our business and conduct of the affairs; the rights to call special meetings of the stockholders; the ability to take action by written consent in lieu of a meeting of stockholders; our obligations to indemnify our directors and officers; amendments to the bylaws; and amendments to the certificate of incorporation.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could discourage acquisition proposals and make it more difficult or expensive for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our Class A common stock to decline.

43

Risks Related to Our Organizational Structure

We will be required to pay the members of FC-GEN for certain tax benefits we may claim as a result of the tax basis step-up we receive in connection with exchanges of the members of FC-GEN for our shares. In certain circumstances, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual tax benefits we realize.

FC-GEN Class A Common Units may be exchanged for shares of Class A common stock. Such exchanges of Class A Common Units in FC-GEN may result in increases in the tax basis of the assets of FC-GEN that otherwise would not have been available. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax we would otherwise be required to pay in the future. These increases in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those capital assets.

On February 2, 2015 we entered into a tax receivable agreement (the TRA) with the members of FC-GEN that provides for the payment by us to such members of FC-GEN of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (a) the increases in tax basis attributable to the members of FC-GEN and (b) tax benefits related to imputed interest deemed to be paid by us as a result of this TRA. While the actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, the payments that we may make to the members of FC-GEN could be substantial.

Although we are not aware of any issue that would cause the Internal Revenue Service (the IRS) to challenge a tax basis increase, the IRS may challenge all or part of these tax basis increases, and a court could sustain such a challenge.  In such event, the FC-GEN members generally will not reimburse us for any payments that may previously have been made to them under the TRA. As a result, in certain circumstances we could make payments to the FC-GEN members under the TRA in excess of our cash tax savings.

In addition, the TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we elect an early termination of the TRA, our (or our successor's) obligations with respect to exchanged or acquired Class A Common Units (whether exchanged or acquired before or after such change of control or early termination) would be based on certain assumptions, including that (i) in a case of an early termination, we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the TRA; (ii) in the case of a change of control, we would have taxable income at least equal to our taxable income for the 12-month period ending on the last day of the month immediately preceding the change of control; and (iii) any Class A Common Units that have not been exchanged will be deemed exchanged for the market value of the Class A common stock at the time of early termination or change of control. Consequently, it is possible, in these circumstances also, that the actual cash tax savings realized by us may be significantly less than the corresponding TRA payments.

If we were deemed an “investment company” under the Investment Company Act of 1940 as a result of our ownership of FC-GEN, applicable restrictions could make it impractical for us to continue our business as contemplated and could materially and adversely affect our operating results.

If we were to cease participation in the management of FC-GEN, our interests in FC-GEN could be deemed an "investment security" for purposes of the Investment Company Act of 1940 (the 1940 Act).  Generally, a person is deemed to be an "investment company" if it owns investment securities having a value exceeding 40% of the value of our total assets (exclusive of U.S. government securities and cash items), absent an applicable exemption.  We have substantially no assets other than our equity interests in the managing member of FC-GEN and FC-GEN’s interests in our subsidiaries. A determination that this interest in FC-GEN was an investment security could result in our being an investment company under the 1940 Act and becoming subject to the registration and other requirements of the 1940 Act.  We intend to conduct our operations so that we will not be deemed an investment company.  However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and have a material adverse effect on our business and operating results and the price of our Class A common stock.

 

Item 1B. Unresolved Staff Comments

 

None.

 

44

Item 2. Properties

 

As of December 31, 2019, our 381 long-term care facilities consisted of 30 which were owned, 299 which were leased, 13 which were managed and 39 which were joint ventures.  As of December 31, 2019, our operated facilities had a total of 45,136 licensed beds. 

The following table provides the facility count and licensed beds by state as of December 31, 2019 for all owned, leased, managed or joint venture skilled nursing and assisted/senior living facilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned Facilities

 

Leased Facilities

 

Managed Facilities

 

Joint Venture Facilities (1)

 

Total Facilities

State

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

Alabama

 

 —

 

 —

 

 9

 

940

 

 —

 

 —

 

 —

 

 —

 

 9

 

940

Arizona

 

 —

 

 —

 

 5

 

722

 

 —

 

 —

 

 —

 

 —

 

 5

 

722

California

 

 5

 

553

 

20

 

2,096

 

 1

 

150

 

 —

 

 —

 

26

 

2,799

Colorado

 

 —

 

 —

 

10

 

1,437

 

 —

 

 —

 

 —

 

 —

 

10

 

1,437

Connecticut

 

 2

 

300

 

14

 

2,009

 

 —

 

 —

 

 3

 

480

 

19

 

2,789

Delaware

 

 —

 

 —

 

 5

 

590

 

 —

 

 —

 

 1

 

110

 

 6

 

700

Florida

 

 —

 

 —

 

 9

 

1,120

 

 —

 

 —

 

 —

 

 —

 

 9

 

1,120

Idaho

 

 —

 

 —

 

 5

 

552

 

 —

 

 —

 

 —

 

 —

 

 5

 

552

Indiana

 

 —

 

 —

 

 —

 

 —

 

 1

 

88

 

 —

 

 —

 

 1

 

88

Kentucky

 

 —

 

 —

 

18

 

1,580

 

 —

 

 —

 

 —

 

 —

 

18

 

1,580

Maine

 

 —

 

 —

 

11

 

953

 

 —

 

 —

 

 —

 

 —

 

11

 

953

Maryland

 

 2

 

300

 

20

 

2,590

 

 —

 

 —

 

 7

 

992

 

29

 

3,882

Massachusetts

 

 2

 

225

 

14

 

1,798

 

 4

 

370

 

 8

 

1,163

 

28

 

3,556

Montana

 

 —

 

 —

 

 3

 

450

 

 —

 

 —

 

 —

 

 —

 

 3

 

450

Nevada

 

 1

 

100

 

 1

 

190

 

 —

 

 —

 

 —

 

 —

 

 2

 

290

New Hampshire

 

 1

 

108

 

28

 

2,966

 

 —

 

 —

 

 2

 

160

 

31

 

3,234

New Jersey

 

 2

 

300

 

25

 

3,524

 

 2

 

279

 

 4

 

565

 

33

 

4,668

New Mexico

 

 2

 

208

 

23

 

2,588

 

 —

 

 —

 

 —

 

 —

 

25

 

2,796

North Carolina

 

 2

 

340

 

 7

 

837

 

 —

 

 —

 

 —

 

 —

 

 9

 

1,177

Pennsylvania

 

 1

 

194

 

23

 

2,637

 

 5

 

727

 

 9

 

1,329

 

38

 

4,887

Rhode Island

 

 1

 

120

 

 8

 

1,059

 

 —

 

 —

 

 —

 

 —

 

 9

 

1,179

Tennessee

 

 —

 

 —

 

 2

 

259

 

 —

 

 —

 

 —

 

 —

 

 2

 

259

Vermont

 

 6

 

630

 

 3

 

309

 

 —

 

 —

 

 —

 

 —

 

 9

 

939

Virginia

 

 —

 

 —

 

 2

 

208

 

 —

 

 —

 

 —

 

 —

 

 2

 

208

Washington

 

 3

 

371

 

 5

 

468

 

 —

 

 —

 

 —

 

 —

 

 8

 

839

West Virginia

 

 —

 

 —

 

29

 

2,684

 

 —

 

 —

 

 5

 

408

 

34

 

3,092

Total

 

30

 

3,749

 

299

 

34,566

 

13

 

1,614

 

39

 

5,207

 

381

 

45,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing

 

29

 

3,698

 

278

 

32,891

 

12

 

1,489

 

38

 

5,117

 

357

 

43,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assisted/Senior living

 

 1

 

51

 

21

 

1,675

 

 1

 

125

 

 1

 

90

 

24

 

1,941

 

(1)

Our joint venture facilities include 37 skilled nursing facilities and one assisted/senior living facility that are consolidated in our financial statements and one skilled nursing facility which is not consolidated.  In the year ended December 31, 2019, we entered into two strategic partnerships, which include fixed-price purchase options to acquire the real property of 33 skilled nursing facilities, in which we operate, beginning in 2024.  See Note 4 – “Significant Transactions and EventsStrategic Partnerships.” The remaining six joint venture facilities are subject to management agreements.

45

The following table provides the leased and joint venture facility count and licensed beds by state as of December 31, 2019, for our four master lease agreements in which we have a fixed-price purchase option.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased Facilities

 

Joint Venture Facilities

 

Total Fixed Price Purchase Option Facilities

State

    

 

 

 

    

 

 

 

    

Count

    

Beds

    

Count

    

Beds

 

Count

    

Beds

Connecticut

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 3

 

480

 

 3

 

480

Delaware

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 1

 

110

 

 1

 

110

Florida

 

 

 

 

 

 

 

 

 

 5

 

660

 

 —

 

 —

 

 5

 

660

Maine

 

 

 

 

 

 

 

 

 

11

 

953

 

 —

 

 —

 

11

 

953

Maryland

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 3

 

320

 

 3

 

320

Massachusetts

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 7

 

939

 

 7

 

939

New Hampshire

 

 

 

 

 

 

 

 

 

 7

 

664

 

 1

 

70

 

 8

 

734

New Jersey

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 4

 

565

 

 4

 

565

Pennsylvania

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 9

 

1,329

 

 9

 

1,329

West Virginia

 

 

 

 

 

 

 

 

 

 —

 

 —

 

 5

 

408

 

 5

 

408

Total

 

 

 

 

 

 

 

 

 

23

 

2,277

 

33

 

4,221

 

56

 

6,498

 

Our executive offices are located in Kennett Square, Pennsylvania and we have several other corporate offices, including Andover, Massachusetts; Towson, Maryland; Albuquerque, New Mexico; and Irvine, California. We own our executive offices in Kennett Square, Pennsylvania.

 

Item 3. Legal Proceedings

 

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 21 - “Commitments and Contingencies – Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our Class A common stock is listed on the NYSE under the symbol "GEN." Information with respect to sales prices and record holders of our Class A common stock is set forth below. There is no established trading market for our Class B common stock or Class C common stock. 

Holders

On March 13, 2020, there were 70 holders of record of our Class A common stock, 10 holders of record of our Class B common stock, and 63 holders of record of our Class C common stock.

Dividends

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We have made and will continue to make distributions on the behalf of FC-GEN members to satisfy tax obligations. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and to fund the operation and expansion of our business.

Securities Authorized for Issuance Under Equity Compensation Plans

We primarily issue restricted stock units under our share-based compensation plans, which are part of a broad-based, long-term retention program that is intended to attract and retain talented employees and directors, and align stockholder and employee interests.

46

Our 2015 Omnibus Equity Incentive Plan (2015 Plan) provides for the grant of incentive and non-qualified stock options as well as stock appreciation rights, restricted stock, restricted stock units, performance units and shares, and other stock-based awards. Generally, restricted stock unit grants to employees vest over three years. Approximately 50% of our awards to executives and certain employees have performance based criteria that must be met in order for the awards to vest. The Board of Directors may terminate the 2015 Plan at any time. Only shares of our Class A common stock can be issued or transferred pursuant to awards under the 2015 Plan. 

Additional information regarding our stock plan activity for fiscal year 2019 and 2018 is provided in the notes to our consolidated financial statements in this annual report. See Note 14 - “Stock-Based Compensation."

The equity compensation plan information set forth in Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters"   of this report contains information concerning securities authorized for issuance under our equity compensation plans.

 

 

Item 6. Selected Financial Data

 

We derived the selected historical consolidated financial data below as of and for the years ended December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this report. We derived the selected historical consolidated financial data as of and for the years ended December 31, 2017, 2016, and 2015 from our consolidated financial statements not included in this report. Historical results are not necessarily indicative of future performance.

 

47

Please refer to the information set forth below in conjunction with other sections of this report, including Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated historical financial statements and related notes included elsewhere in this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(in thousands, except per share data)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (1)

 

$

4,565,834

 

$

4,976,650

 

$

5,373,740

 

$

5,732,430

 

$

5,619,224

 

Expenses (1)

 

 

4,556,606

 

 

5,351,490

 

 

6,343,339

 

 

5,867,943

 

 

5,972,249

 

Income (loss) before income tax (benefit) expense

 

 

9,228

 

 

(374,840)

 

 

(969,599)

 

 

(135,513)

 

 

(353,025)

 

Income tax expense (benefit)

 

 

1,754

 

 

(2,423)

 

 

(10,427)

 

 

(17,435)

 

 

172,524

 

Income (loss) from continuing operations

 

 

7,474

 

 

(372,417)

 

 

(959,172)

 

 

(118,078)

 

 

(525,549)

 

(Loss) income from discontinued operations, net of taxes

 

 

 —

 

 

 —

 

 

(32)

 

 

27

 

 

(1,219)

 

Net income (loss)

 

 

7,474

 

 

(372,417)

 

 

(959,204)

 

 

(118,051)

 

 

(526,768)

 

Less net loss attributable to noncontrolling interests

 

 

7,145

 

 

137,186

 

 

380,222

 

 

54,038

 

 

100,573

 

Net income (loss) attributable to Genesis Healthcare, Inc.

 

$

14,619

 

$

(235,231)

 

$

(578,982)

 

$

(64,013)

 

$

(426,195)

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

107,286

 

 

101,007

 

 

94,217

 

 

89,873

 

 

85,755

 

Diluted

 

 

165,314

 

 

101,007

 

 

94,217

 

 

152,532

 

 

85,755

 

Net income (loss) per common share attributable to Genesis Healthcare, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

(2.33)

 

$

(6.15)

 

$

(0.71)

 

$

(4.97)

 

Diluted

 

 

0.10

 

 

(2.33)

 

 

(6.15)

 

 

(0.82)

 

 

(4.97)

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(62,727)

 

$

(51,152)

 

$

(64,106)

 

$

(93,118)

 

$

(85,723)

 

Net cash (used in) provided by operating activities

 

 

(7,166)

 

 

18,584

 

 

120,455

 

 

68,361

 

 

8,618

 

Net cash (used in) provided by investing activities

 

 

(387,003)

 

 

11,876

 

 

47,552

 

 

(35,106)

 

 

(255,504)

 

Net cash provided by (used in) financing activities

 

 

377,699

 

 

53,178

 

 

(172,829)

 

 

(65,708)

 

 

218,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

 

(in thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,097

 

$

20,865

 

$

54,525

 

$

51,408

 

$

61,543

 

Restricted cash and equivalents

 

 

113,709

 

 

121,411

 

 

4,113

 

 

12,052

 

 

34,370

 

Working capital (2) (3)

 

 

33,192

 

 

69,038

 

 

40,713

 

 

201,427

 

 

212,828

 

Property and equipment, net

 

 

962,105

 

 

2,887,554

 

 

3,413,599

 

 

3,765,393

 

 

4,085,247

 

Right-of-use assets, net

 

 

2,436,602

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total assets

 

 

4,662,140

 

 

4,263,623

 

 

4,787,865

 

 

5,779,201

 

 

6,059,948

 

Long-term debt, including current installments (recourse)

 

 

1,115,198

 

 

1,178,981

 

 

1,049,321

 

 

1,141,987

 

 

1,168,128

 

Long-term debt, including current installments (non-recourse)

 

 

498,222

 

 

26,483

 

 

27,978

 

 

29,157

 

 

30,507

 

Finance lease obligations, including current installments

 

 

42,174

 

 

970,113

 

 

1,027,866

 

 

999,226

 

 

1,055,658

 

Operating Lease obligations, including current installments

 

 

2,822,290

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Financing obligations, including current installments

 

 

 —

 

 

2,734,940

 

 

2,931,361

 

 

2,869,147

 

 

3,065,066

 

Stockholders' deficit

 

 

(1,082,565)

 

 

(2,044,866)

 

 

(1,680,132)

 

 

(730,188)

 

 

(619,387)

 

 

(1) The Company adopted Topic 606 effective January 1, 2018, the effects of which have not been reflected in prior periods.  For the years ended December 31, 2019 and 2018, respectively, the Company recorded approximately $74.0 million and $95.8 million of implicit price concessions as a direct reduction of net revenues that would have been recorded as expenses prior to the adoption of Topic 606.

(2) Working capital at December 31, 2019 and 2018, respectively, excludes the outstanding revolving credit facility borrowings balance of $136.0 million and $105.6 million classified in current installments of long-term debt due to a swinging lockbox arrangement under our asset based lending facilities despite a maturity date of March 6, 2023.

(3) The Company adopted Topic 842 effective January 1, 2019, the effects of which resulted in $140.9 million of current operating lease liability at December 31, 2019.  For purposes of comparability, the $140.9 million of current operating lease liability was excluded from the working capital calculation.

 

48

 

 

 

 

 

 

Item 7. 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 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. Historical results may not indicate future performance. Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in Item 1A. “Risk Factors,” of this report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Selected Financial Data” in Item 6 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included in this report.

 

Business Overview

 

Genesis is a healthcare services holding company that through its subsidiaries owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business.  We have an administrative service 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 381 skilled nursing, assisted/senior living and behavioral health centers located in 26 states.  Revenues of our owned, leased and otherwise consolidated centers constitute approximately 87% 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 10% 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.

 

Strategic Partnerships

 

Next Partnership

 

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which we acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next Healthcare (Next), a related party.  See Note 16 – “Related Party Transactions.”  In conjunction with the facility sales, we received aggregate annual rent credits of $17.2 million. We will continue to operate these facilities pursuant to a master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  We will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter.  We also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the net price paid by the partnership to acquire the facilities from Welltower.

 

We have concluded the Next Partnership qualifies as a VIE and we are the primary beneficiary.  As such, we have consolidated all of the accounts of the Next Partnership in the accompanying consolidated financial statements.  The ROU assets and lease obligations related to the Next Partnership lease agreement have been fully eliminated in our consolidated financial statements. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million.  The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million.  The impact of consolidation on the accompanying consolidated statement of operations was not material for the year ended December 31, 2019 apart from transaction costs of $5.3 million.

 

49

Vantage Point Partnership

 

On September 12, 2019, Welltower and Second Spring Healthcare Investments (Second Spring) sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which we invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million.  In conjunction with the facility sales, we received aggregate annual rent credits of $30.3 million. We will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  We will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter.  We also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price.  Further, Vantage Point holds a put option that would require us to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.

 

We have concluded the Vantage Point Partnership qualifies as a VIE and we are the primary beneficiary.  As such, we have consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements.  The ROU assets and lease obligations related to the Vantage Point Partnership lease agreement have been fully eliminated in our consolidated financial statements. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million.  The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million.  We have not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period.  Other than transaction costs of $11.0 million, the impact of consolidation on the accompanying consolidated statement of operations was not material for the year ended December 31, 2019.

 

During the third quarter of 2019, we sold the real property of seven skilled nursing facilities and one assisted/senior living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire our interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested.  Three of the facilities were subject to real estate loans and two were subject to loans insured by the U.S. Department of Housing and Urban Development (HUD). See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” We also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $57.8 million.

 

On January 10, 2020, Welltower sold the real estate of one skilled nursing facility located in Massachusetts to Vantage Point Partnership.  The sale represents the final component of the transaction that was initiated on September 12, 2019.  We will receive an annual rent credit of $0.7 million from Welltower as a result of the lease termination.  The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million.  The initial consolidation of this one additional skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing.  We will continue to operate the facility under the master lease agreement with Vantage Point Partnership along with the other 18 facilities.  The addition of this one skilled nursing facility resulted in an increase of annual rent of $0.9 million.  See Note 4 - “Significant Transactions and Events – Strategic Partnerships - Vantage Point Partnership.”

 

NewGen Partnership

 

On February 1, 2020, we transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to New Generation Health, LLC (NewGen). We sold the real estate and operations of six skilled nursing facilities and transferred the leasehold rights to 13 skilled nursing, behavioral health and assisted living facilities for a total of $78.9 million.  We will retain a 50% interest in the facilities.  Net transaction proceeds were used by us to repay indebtedness, including prepayment fees, of $33.7 million, fund our initial equity contribution and working capital requirement of approximately $15.0 million, and provide financing to the partnership of $9.0 million.  Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services

50

agreements.  We are currently assessing whether we will continue to consolidate the financial statements of these facilities for financial reporting purposes.

 

Divestiture of Non-Strategic Facilities

 

2020 Divestitures 

 

On January 31, 2020, Omega sold the real estate of one skilled nursing facility located in Massachusetts. We leased the facility under a master lease agreement, but closed the facility on July 1, 2019.  The sale resulted in the lease termination of the facility and an annual rent credit of $0.4 million. 

 

On February 1, 2020, we sold two owned skilled nursing facilities in North Carolina and one owned skilled nursing facility in Maryland for $61.8 million.  Proceeds were used to retire $29.1 million of HUD financed debt.  The three facilities generated revenues of $38.7 million and pre-tax income of $0.5 million.

 

On February 26, 2020, we completed the sale of one owned HUD-insured skilled nursing facility in California for $20.8 million.  The facility had been classified as an asset held for sale as of December 31, 2019.  Proceeds were used to retire $20.5 million of HUD financed debt.  The facility generated revenues of $14.0 million and pre-tax loss of $0.1 million.  See Note 20 – “Assets Held for Sale.”

 

On March 4, 2020, we divested the operations of one leased assisted/senior living facility in Montana. The lease termination resulted in an annual rent credit of $0.7 million.  The facility generated revenues of $2.5 million and pre-tax income of $0.1 million.

 

We are currently assessing the impact the 2020 divestitures and lease amendments will have on our consolidated financial statements.

 

2019 Divestitures 

 

California Divestitures

 

During the second quarter of 2019, we sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” We incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million.  The divestiture resulted in a gain of $25.0 million. We also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million.

 

During the third quarter of 2019, we sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing.  See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – HUD Insured Loans.” The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $0.6 million.

 

Texas Divestitures

 

During the fourth quarter of 2019, we sold the real property of seven facilities in Texas for a sales price of $20.1 million. The net proceeds were used principally to repay the indebtedness of the facilities. We recognized a net gain of $3.3 million associated with the sale of the facilities. We recognized a gain on early extinguishment of debt of $2.6 million associated with the write off of the debt premiums and issuance costs on the underlying HUD loans. These seven facilities had been classified as held for sale as of December 31, 2018.  See Note 20 – “Assets Held for Sale.”

 

51

Other Divestitures

 

During the first quarter of 2019, we divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease).  The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million.  We recognized a loss on exit reserves of $3.5 million.  We also completed the closure of one facility located in Ohio.  The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

 

During the second quarter of 2019, we divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

 

During the third quarter of 2019, we divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility.  Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $3.5 million.

 

During the fourth quarter of 2019, we divested the operations of one leased skilled nursing facility in New Jersey. The facility generated annual revenues of $19.0 million and pre-tax net loss of $1.2 million. The divestiture resulted in a loss of $0.9 million, which was primarily attributable to exit costs.

2018 Divestitures

 

During the year ended December 31, 2018, we divested the operations of 54 skilled nursing facilities and one assisted/senior living facility.  These divestitures resulted in net gains of $34.8 million, which are included in other income on the consolidated statements of operations.  See Note 18 – “Other Income.”

 

Texas Divestitures

 

During the fourth quarter of 2018, we divested the operations of 23 skilled nursing facilities located in Texas, consisting of 22 owned facilities and one leased facility. We sold the real property associated with 15 of the owned facilities, with the real property of the remaining seven owned facilities being classified as held for sale at December 31, 2018.  Sale proceeds of approximately $89.4 million, net of transaction costs, were used principally to repay the indebtedness of the facilities. We recognized a gain of $3.4 million primarily attributable to the derecognition of financing lease assets and obligations offset by a loss of $4.6 million for exit costs. Debt premiums and issuance costs of $9.4 million associated with underlying HUD loans were written off as a gain on early extinguishment of debt.

 

Other Divestitures

 

During the first quarter of 2018, we closed one leased skilled nursing facility located in Massachusetts. The facility remained subject to a master lease with Welltower until its sale in the second quarter of 2019. The facility generated annual revenues of $9.0 million and pre-tax net loss of $2.7 million. The closure resulted in a loss of $0.3 million.

 

During the second quarter of 2018, we divested 19 leased skilled nursing facilities, one of which had previously been closed during 2017. The facilities were located across the states of California, Kentucky, Massachusetts, New Jersey, and Pennsylvania.  Twelve of the facilities were subject to a master lease with Second Spring and six were subject to a master lease with Sabra Health Care REIT, Inc. (Sabra).  The facilities generated annual revenues of $182.7 million and pre-tax loss of $23.8 million.  We recorded a gain of $22.5 million on the divestitures, offset by a loss on exit costs of $8.4 million.  Additionally, we recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million associated with 12 of the facilities. We recorded accelerated depreciation expense of $5.3 million associated with the divestitures.

 

52

During the third quarter of 2018, we divested seven leased facilities, consisting of six skilled nursing facilities and one behavioral health clinic. The facilities were located across the states of California, Indiana, Maryland, Pennsylvania, Ohio, and Texas.   Three of the facilities were subject to a master lease with Welltower, while two others were subject to master leases with Second Spring and Sabra.  The facilities generated annual revenues of $71.7 million and pre-tax loss of $9.7 million.  We recorded a gain of $27.9 million on the divestitures, offset by a loss on exit costs of $3.1 million.  Additionally, we recognized capital lease and financing obligation net asset write-downs of $44.5 million and capital lease and financing obligation write-downs of $77.0 million associated with four of the facilities. We recorded accelerated depreciation expense of $7.3 million associated with the divestitures. We received an annual rent credit of $0.6 million associated with the divestiture of one of the facilities.

 

During the fourth quarter of 2018, we divested 6 facilities, consisting of five leased skilled nursing facilities and one owned assisted/senior living facility.  The facilities were located across the states of Georgia, Idaho, Montana, and Nevada.  Four of the facilities were subject to a master lease with Sabra.  The facilities generated annual revenues of $36.8 million and pre-tax income of $3.1 million.  We recorded a gain of $0.4 million on the divestitures, offset by a loss on exit costs of $1.1 million.  We received an annual rent credit of $0.3 million associated with the divestiture of one of the leased facilities. The owned facility was sold for $2.2 million with net proceeds of $1.9 million being primarily used to pay down indebtedness. Additionally, we recorded a loss of $1.9 million for exit costs associated with the pending closure of certain clinics associated with our rehabilitation services business.

 

Acquisitions

 

On June 1, 2019, we acquired the operations of one skilled nursing facility in New Mexico. The new facility has 80 licensed beds and generates approximate annual net revenue of $3.4 million. The facility is leased from Omega and is classified as an operating lease. The facility’s 2019 pre-tax net income was de minimis.

 

On November 1, 2018, we acquired the operations of eight skilled nursing facilities and one assisted/senior living facility in New Mexico and Arizona.  The nine new facilities have approximately 1,000 beds and generate approximate annual net revenue of $60.0 million.  The facilities are leased from Omega.  Four of the facilities were classified as capital leases and resulted in an initial capital lease asset and obligation gross up of $14.6 million.  The remaining five facilities were initially classified as operating leases.

 

Lease Transactions

 

Gains, losses and termination charges associated with master lease terminations and amendments are recorded as non-recurring charges.  These amendments and terminations resulted in net gains of $93.8 million and net losses of $21.9 million for the years ended December 31, 2019 and 2018, respectively.  These gains and losses are included in other income on the consolidated statements of operations. 

 

Welltower

 

During the first quarter of 2019, we amended the Welltower Master Lease several times to reflect the lease termination of 24 facilities, including the 15 facilities sold and now leased from the Next Partnership.  As a result of the lease termination on the 24 facilities, we received annual rent credits of approximately $23.4 million.  A lease modification analysis was performed and the remaining 49 facilities subject to the master lease were reclassified from finance leases to operating leases. Finance lease ROU assets and obligations of $61.5 million and $130.2 million, respectively, were written off.  On a net basis, operating lease ROU assets and obligations of $159.8 million and $111.3 million, respectively, were written down, resulting in a gain of $20.3 million.

 

During the second quarter of 2019, we amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million.  Operating lease ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off, resulting in a gain of $0.5 million.

 

During the third quarter of 2019, we amended the Welltower Master Lease to reflect the lease termination of four facilities and received annual rent credits of $1.9 million.  Operating lease ROU assets and lease obligations of $102.0 million and $74.4 million, respectively, were written off, resulting in a gain of $27.6 million.

53

Omega

 

During the third quarter of 2019, we amended our master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold.  Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively.  The lease termination and remeasurement resulted in an aggregate gain of $23.4 million.

 

During the fourth quarter of 2019, we amended our master lease with Omega to reflect the inclusion of nine skilled nursing facilities and one assisted living facility in New Mexico and Arizona.  These facilities were previously leased from Omega, following the terms of a separate lease agreement, and all facilities were classified as operating leases.  There was no change in base rent for the 10 facilities upon addition to master lease.  The lease assessment and measurement resulted in operating lease classification with a $10.6 million ROU asset and lease liability gross up.  In addition, we received $15.0 million as a short-term note payable in full to Omega by April 30, 2020.  See Note 12 – “Long-Term Debt – Notes Payable.”

 

Second Spring

 

During the third quarter of 2019, we amended our master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off.  Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold.  Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively.  The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

 

Sabra

We are party to an agreement with Sabra resulting in permanent and unconditional annual cash rent savings of $19 million effective January 1, 2018.  Sabra has pursued and we have supported Sabra’s previously announced sale of our leased assets.  At the closing of such sales, we have entered into lease agreements with new landlords for a majority of the assets currently leased with Sabra.  During the year ended December 31, 2018, Sabra completed the sale of 34 facilities to third party landlords with whom we have entered into new lease agreements.  Those transactions are summarized below.

 

During the second quarter of 2018, Sabra completed the sale and lease termination of 21 facilities, consisting of 20 skilled nursing facilities and one assisted/senior living facility.  The facilities were located across nine states.  As a result of the sales, we will receive an annual rent credit of $19.4 million for the remainder of the lease term.  We continue to operate 12 of the facilities under a new lease with a new landlord, Next Healthcare Capital (Next), as described in Note 16 - "Related Party Transactions." We continue to operate the other nine facilities under a separate lease with a new landlord. The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million.  We recognized accelerated depreciation expense of $9.6 million associated with the property and equipment sold and a gain on the write off of certain lease liabilities of $9.9 million.

 

During the fourth quarter of 2018, Sabra completed the sale and lease termination of 13 skilled nursing facilities located in California, Colorado, Connecticut, and New Mexico. As a result of the sales, we will receive an annual rent credit of $6.7 million for the remainder of the lease term.  We continue to operate four of the facilities under a lease agreement with a new landlord.  The new lease has a 9.5 year initial term, one five-year renewal option and initial annual rent of $3.4 million.  We continue to operate the other nine facilities under a lease agreement with a new landlord.  The new lease has a ten-year initial term, one five-year renewal option, and initial annual rent of $3.3 million. We recognized accelerated depreciation expense of $7.4 million associated with the property and equipment sold and a gain on the write off of certain lease liabilities of $6.2 million.

 

As a result of the amendments and lease terminations noted above, we recorded a lease termination charge of $34.1 million in the year ended December 31, 2018, with an offsetting obligation recorded in other long-term liabilities.  The charge represents the

54

discounted residual rents we will continue to pay Sabra on the facilities that have been terminated due to either divestiture or sale to a new landlord. On an undiscounted basis, we were obligated to pay Sabra approximately $41.0 million as of December 31, 2018. This obligation will be repaid over a period of approximately four years ending in 2023. 

 

Other

 

During the first quarter of 2019, we amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed our option to purchase certain facilities under the lease and adjusted certain financial covenants. We had previously determined that the renewal option period was not reasonably certain of exercise.  Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

 

During the third quarter of 2019, we amended a master lease agreement to reflect the lease termination of six facilities subject to the lease.  In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

 

During the second quarter of 2018, we negotiated the extensions of four separate lease agreements resulting in the derecognition of certain lease assets totaling $1.9 million.

 

During the year ended December 31, 2018, the cease to use asset associated with a leased facility divestiture initially recorded during 2017 was further adjusted to reflect changes in the sublease assumption, resulting in a loss of $2.0 million.

 

Restructuring Transactions

 

Overview

 

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

 

In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior revolving credit facilities, expanding our term loan borrowings, amending our real estate loans with Welltower while refinancing some of those loan amounts through new real estate loans.  The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.  See Note 12 – “Long-Term Debt.”  We also amended the financial covenants in all of our material loan agreements and all but two of our material master leases.  Financial covenants were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate. 

 

Welltower Master Lease Amendment

 

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

 

55

Omnibus Agreement

 

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

 

The Omnibus Agreement also provided that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower would be written off and (b) we may request conversion of not more than $50.0 million of the outstanding balance of our Welltower Real Estate Loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.  The conditions described above have not been satisfied as of December 31, 2019.

 

In connection with the Omnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of our Class A Common Stock at an exercise price equal to $1.33 per share.  Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions, which had not occurred as of December 31, 2019.  The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.

 

Settlement Agreement

 

During 2017, we and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled Healthcare Group, Inc. (Skilled) or Sun Healthcare Group, Inc. prior to their operations becoming part of our operations (collectively, the Successor Matters).  We agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  We will continue to remit the Settlement Amount through January 1, 2022.  The remaining outstanding Settlement Amount at December 31, 2019 was $25.7 million, of which $12.1 million is recorded in accrued expenses and $13.6 million is recorded in other long-term liabilities.   

 

Critical Accounting Policies

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires us to consolidate company financial information and make informed estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in our consolidated financial statements relate to valuation of accounts receivable, self-insured liabilities, income taxes, long-lived assets and goodwill, and other contingencies.  Actual results could differ from those estimates.

 

56

Revenue Recognition

 

We adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018, using the modified retrospective transition method. There was no cumulative effect on the opening balance of accumulated deficit as a result of adopting the standard as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 5 – “Net Revenues and Accounts Receivable.”  

 

Impairment of Long-Lived Assets

 

Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less costs to sell.  See Note 19 – “Asset Impairment Charges.”

 

Self-Insurance Reserves

 

We provide for self-insurance reserves for both general and professional liability and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported.  Estimated losses from asserted and incurred but not reported claims are accrued based on our estimate of the ultimate costs of the claims, which include costs associated with litigating or settling claims, and the relationship of past reported incidents to eventual claims payments.  All relevant information, including our own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims.  The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability are recorded on an undiscounted basis.  We also consider amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.  See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs – General and Professional Liability and Workers’ Compensation.”

 

Income Taxes

Our effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. We account for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.

We evaluate, on a quarterly basis, our ability to realize deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of pre-tax earnings, our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.  To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.  We record accrued interest and penalties associated with uncertain tax

57

positions as income tax expense in the consolidated statement of operations.

 

Leases

 

We adopted a new leasing standard, FASB ASC Topic 842, Leases (Topic 842), on January 1, 2019 and elected the option to apply the transition requirements thereof at the effective date with the effects of initially applying the new standard recognized as a cumulative-effect adjustment to accumulated deficit in the period of adoption.  Consequently, financial information has not been updated for periods prior to January 1, 2019.  See Note 2 – “Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements.”

 

We lease skilled nursing facilities and assisted/senior living facilities, as well as certain office space, land, and equipment.  Under Topic 842, we evaluate at contract inception whether a lease exists and recognizes a lease liability and right-of-use (ROU) asset for all leases with a term greater than 12 months. Leases are classified as either finance or operating. While many of our facilities are subject to master lease agreements, leases are assessed, classified, and measured at the facility level.

 

All lease liabilities are measured as the present value of the future lease payments using a discount rate, which is generally our incremental borrowing rate for collateralized borrowings.  The future lease payments used to measure the lease liability include both fixed and variable payments that depend on a rate or index, as well as the exercise price of any options to purchase the underlying asset that have been deemed reasonably certain of being exercised. Future lease payments for optional renewal periods that are not reasonably certain of being exercised are excluded from the measurement of the lease liability. Regarding variable payments that depend on a rate or index, the lease liability is measured using the applicable rate or index as of lease commencement and is only remeasured under certain circumstances, such as a change in the lease term. Lease incentives serve to reduce the amount of future lease payments included in the measurement of the lease liability.  For all leases, the ROU asset is initially derived from the measurement of the lease liability and adjusted for certain items, such as initial direct costs and lease incentives received.  ROU assets are subject to long-lived asset impairment testing.

 

Amortization of finance lease ROU assets, which is generally recognized on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset, is included within depreciation and amortization expense in the consolidated statements of operations. Interest expense associated with finance lease liabilities is included within interest expense in the consolidated statements of operations. Operating lease expense is recognized on a straight-line basis over the lease term and included within lease expense in the consolidation statements of operations. The lease term is determined based on the date we acquire control of the leased premises through the end of the lease term. Optional renewals periods are not initially included in the lease term unless they are deemed to be reasonably certain of being exercised at lease commencement.  For further discussion, see Note 10 – “Leases.”

 

Business Combinations

 

Our acquisition strategy is to identify facilities for purchase or lease that are complementary to our current affiliated facilities, accretive to our business or otherwise advance our strategy.  The results of all of our operating subsidiaries are included in the accompanying financial statements subsequent to the date of acquisition.  Acquisitions are accounted for using the acquisition method of accounting and include leasing and other financing arrangements as well as cash transactions.  Assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date.  Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets.  Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, the initial fair value might not be finalized up to one year after the date of acquisition.

 

In developing estimates of fair values for long-lived assets, we utilize a variety of factors including market data, cash flows, growth rates, and replacement costs.  Determining the fair value for specifically identified intangible assets involves significant judgment, estimates and projections related to the valuation to be applied to intangible assets such as favorable leases, customer relationships, management contracts and trade names.  The subjective nature of management’s assumptions increases the risk associated with estimates surrounding the projected performance of the acquired entity.  In transactions where significant judgment or other assumptions could have a material impact on the conclusion, we may engage third party specialists to assist in the valuation of the acquired assets and liabilities.  Additionally, as we amortize definite-lived acquired intangible assets over time, the purchase accounting allocation directly impacts the amortization expense recorded on the financial statements.

 

58

Key Performance and Valuation Measures

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Financial Results (in thousands)

 

 

 

 

 

 

Financial Performance Measures:

 

 

 

 

 

 

Net revenues (GAAP)

 

$

4,565,834

 

$

4,976,650

Net income (loss) attributable to Genesis Healthcare, Inc. (GAAP)

 

 

14,619

 

 

(235,231)

EBITDA (Non-GAAP)

 

 

312,779

 

 

309,794

Adjusted EBITDA (Non-GAAP)

 

 

199,027

 

 

474,075

Valuation Measure:

 

 

 

 

 

 

Adjusted EBITDAR (Non-GAAP)

 

$

586,090

 

 

 

59

 

INPATIENT SEGMENT:

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2019

    

2018

    

Occupancy Statistics - Inpatient

 

 

 

 

 

 

 

Available licensed beds in service at end of period

 

 

43,252

 

 

48,859

 

Available operating beds in service at end of period

 

 

41,370

 

 

47,020

 

Available patient days based on licensed beds

 

 

15,777,465

 

 

17,705,185

 

Available patient days based on operating beds

 

 

15,119,996

 

 

17,073,587

 

Actual patient days

 

 

13,252,851

 

 

14,587,970

 

Occupancy percentage - licensed beds

 

 

84.0

%  

 

82.4

%  

Occupancy percentage - operating beds

 

 

87.7

%  

 

85.4

%  

Skilled mix

 

 

18.3

%  

 

18.9

%  

Average daily census

 

 

36,309

 

 

39,967

 

Revenue per patient day (skilled nursing facilities)

 

 

 

 

 

 

 

Medicare Part A

 

$

535

 

$

526

 

Insurance

 

 

462

 

 

455

 

Private and other

 

 

366

 

 

352

 

Medicaid

 

 

236

 

 

226

 

Medicaid (net of provider taxes)

 

 

215

 

 

206

 

Weighted average (net of provider taxes)

 

$

282

 

$

275

 

Patient days by payor (skilled nursing facilities)

 

 

 

 

 

 

 

Medicare

 

 

1,318,793

 

 

1,516,655

 

Insurance

 

 

961,329

 

 

1,080,193

 

Total skilled mix days

 

 

2,280,122

 

 

2,596,848

 

Private and other

 

 

732,888

 

 

815,475

 

Medicaid

 

 

9,466,310

 

 

10,372,459

 

Total Days

 

 

12,479,320

 

 

13,784,782

 

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

 

 

 

 

 

 

 

Medicare

 

 

10.6

%  

 

11.0

%  

Insurance

 

 

7.7

%  

 

7.9

%  

Skilled mix

 

 

18.3

%  

 

18.9

%  

Private and other

 

 

5.9

%  

 

5.9

%  

Medicaid

 

 

75.8

%  

 

75.2

%  

Total

 

 

100.0

%  

 

100.0

%  

Facilities at end of period

 

 

 

 

 

 

 

Skilled nursing facilities

 

 

 

 

 

 

 

Leased

 

 

278

 

 

339

 

Owned

 

 

29

 

 

42

 

Joint Venture

 

 

38

 

 

 5

 

Managed

 

 

12

 

 

13

 

Total skilled nursing facilities

 

 

357

 

 

399

 

Total licensed beds

 

 

43,195

 

 

48,748

 

Assisted/Senior living facilities:

 

 

 

 

 

 

 

Leased

 

 

21

 

 

20

 

Owned

 

 

 1

 

 

 3

 

Joint Venture

 

 

 1

 

 

 1

 

Managed

 

 

 1

 

 

 2

 

Total assisted/senior living facilities

 

 

24

 

 

26

 

Total licensed beds

 

 

1,941

 

 

2,209

 

Total facilities

 

 

381

 

 

425

 

 

 

 

 

 

 

 

 

Total Jointly Owned and Managed— (Unconsolidated)

 

 

13

 

 

15

 

 

 

 

60

REHABILITATION THERAPY SEGMENT*:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2019

    

2018

    

Revenue mix %:

 

 

 

 

 

 

 

Company-operated

 

 

35.7

%  

 

37.1

%  

Non-affiliated

 

 

64.3

%  

 

62.9

%  

Sites of service (at end of period)

 

 

1,155

 

 

1,295

 

Revenue per site

 

$

620,016

 

$

631,272

 

Therapist efficiency %

 

 

68.0

%  

 

63.7

%  


* Excludes respiratory therapy services.

 

Reasons for Non-GAAP Financial Disclosure

 

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

 

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

 

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

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

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

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

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

 

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

61

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

 

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

 

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

 

EBITDA

 

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

 

Adjustments to EBITDA

 

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

 

We adjust EBITDA for the following items:

 

·

(Gain) loss on early extinguishment of debt. We recognize gains or losses on the early extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees.  We exclude the effect of gains or losses 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.  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.

62

·

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.

·

Long-lived asset impairments.  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.

·

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

·

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

·

Losses of newly acquired, constructed or divested businesses.  The acquisition and construction of new businesses is an element of our growth strategy.  Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition.  Newly constructed or developed businesses also generate losses while in their start-up phase.  We view these losses as both temporary and an expected component of our long-term investment in the new venture.  We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business.  The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA.  The operating performance of new businesses is no longer adjusted when computing 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 businesses.

·

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.

·

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

·

Other non-recurring costs – In the year ended December 31, 2019, we excluded $1.1 million in insurance recoveries and costs related to 2017 hurricane damage and the partial recovery of receivables written down in 2018.  In the year ended December 31, 2018, we excluded $13.0 million of costs attributable to the write down of receivables in our non-core physician services business and the impairment of unrealized incentives associated with a government program rewarding the meaningful use of technology in delivery of healthcare.  This incentive was estimated to be earned and recognized between 2015 and 2016 within our physician services line of business.  We do not believe the excluded costs are recurring or reflect the underlying performance of our operating businesses.

Adjusted EBITDAR

 

We use Adjusted EBITDAR as one measure in determining the value of our business and the value of prospective acquisitions or divestitures.  Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare and other industries.  In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of compliance.  The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.  See the reconciliation of net loss attributable to Genesis Healthcare, Inc. included herein.

 

63

Supplemental Information

 

We provide supplemental information about certain capital costs we believe are beneficial to an investor’s understanding of our capital structure and cash flows.  This supplemental information includes (1) cash interest payments on our recourse and HUD guaranteed indebtedness (2) cash rent payments made to partially owned real estate joint ventures that is eliminated in consolidation, net of any distributions returned to us, and (3) total cash lease payments made pursuant to operating leases, finance leases and financing obligations.

 

This supplemental information is used by us to evaluate our leverage, fixed charge coverage and cash flow.  This supplemental information is consistent with information used by our major creditors in evaluating compliance with financial covenants contained in our material lease and loan agreements.

 

The following table provides a reconciliation of net income (loss) attributable to Genesis Healthcare, Inc. to Non-GAAP financial information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Genesis Healthcare, Inc.

 

 

 

$

14,619

 

$

(235,231)

Adjustments to compute EBITDA:

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

 

 

 

(7,145)

 

 

(137,186)

Depreciation and amortization expense

 

 

 

 

123,159

 

 

220,896

Interest expense

 

 

 

 

180,392

 

 

463,738

Income tax expense (benefit)

 

 

 

 

1,754

 

 

(2,423)

EBITDA

 

 

 

 

312,779

 

 

309,794

Adjustments to compute Adjusted EBITDA:

 

 

 

 

 

 

 

 

(Gain) loss on early extinguishment of debt

 

 

 

 

(122)

 

 

391

Other income

 

 

 

 

(173,505)

 

 

(12,920)

Transaction costs

 

 

 

 

26,362

 

 

31,953

Long-lived asset impairments

 

 

 

 

16,937

 

 

104,997

Goodwill and identifiable intangible asset impairments

 

 

 

 

 —

 

 

3,538

Severance and restructuring

 

 

 

 

4,705

 

 

9,024

Loss of newly acquired, constructed, or divested businesses

 

 

 

 

4,883

 

 

5,148

Stock-based compensation

 

 

 

 

7,309

 

 

8,820

Regulatory defense and related costs

 

 

 

 

804

 

 

609

Other non-recurring costs

 

 

 

 

(1,125)

 

 

12,721

Adjusted EBITDA

 

 

 

$

199,027

 

$

474,075

Lease Expense

 

 

 

 

387,063

 

 

129,859

Adjusted EBITDAR

 

 

 

$

586,090

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash interest payments on recourse and HUD debt

 

 

 

$

84,355

 

$

77,400

Cash  payments made to partially owned real estate joint ventures, net of distributions received

 

 

 

 

22,257

 

 

 —

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

 

 

 

$

408,230

 

$

428,991

 

Results of Operations

 

Same-store Presentation

   

We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare.  We are also focused on “right-sizing” our operations to fit that new environment and to divest underperforming and non-strategic assets.

 

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

64

assisted/senior living centers, those operations are excluded from our “same-store” inpatient operations until the revenue driven by operating patient census is stable in the comparable periods. 

 

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

 

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

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

A summary of our results of operations for the year ended December 31, 2019 as compared with the same period in 2018 follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

 

 

 

2019

 

2018

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,857,793

 

84.4

%  

$

4,195,596

 

84.3

%  

$

(337,803)

 

(8.1)

%

Assisted/Senior living facilities

 

 

93,054

 

2.0

%  

 

95,571

 

1.9

%  

 

(2,517)

 

(2.6)

%

Administration of third party facilities

 

 

8,310

 

0.2

%  

 

8,733

 

0.2

%  

 

(423)

 

(4.8)

%

Elimination of administrative services

 

 

(3,125)

 

(0.1)

%  

 

(3,027)

 

 —

%  

 

(98)

 

(3.2)

%

Inpatient services, net

 

 

3,956,032

 

86.5

%  

 

4,296,873

 

86.4

%  

 

(340,841)

 

(7.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

738,124

 

16.2

%  

 

889,069

 

17.9

%  

 

(150,945)

 

(17.0)

%

Elimination of intersegment rehabilitation therapy services

 

 

(275,578)

 

(6.0)

%  

 

(341,155)

 

(6.9)

%  

 

65,577

 

19.2

%

Third party rehabilitation therapy services, net

 

 

462,546

 

10.2

%  

 

547,914

 

11.0

%  

 

(85,368)

 

(15.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

198,920

 

4.4

%  

 

161,038

 

3.2

%  

 

37,882

 

23.5

%

Elimination of intersegment other services

 

 

(51,664)

 

(1.1)

%  

 

(29,175)

 

(0.6)

%  

 

(22,489)

 

(77.1)

%

Third party other services, net

 

 

147,256

 

3.3

%  

 

131,863

 

2.6

%  

 

15,393

 

11.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,565,834

 

100.0

%  

$

4,976,650

 

100.0

%  

$

(410,816)

 

(8.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

 

 

 

2019

 

2018

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

371,210

 

9.4

%  

$

394,286

 

9.2

%  

$

(23,076)

 

(5.9)

%

Rehabilitation therapy services

 

 

92,469

 

12.5

%  

 

101,774

 

11.4

%  

 

(9,305)

 

(9.1)

%

Other services

 

 

12,456

 

6.3

%  

 

(10,618)

 

(6.6)

%  

 

23,074

 

217.3

%

Corporate and eliminations

 

 

(163,356)

 

 —

%  

 

(175,648)

 

 —

%  

 

12,292

 

7.0

%

EBITDA

 

$

312,779

 

6.9

%  

$

309,794

 

6.2

%  

$

2,985

 

1.0

%

 

65

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,959,157

 

$

738,124

 

$

198,676

 

$

244

 

$

(330,367)

 

$

4,565,834

 

Salaries, wages and benefits

 

 

1,761,273

 

 

601,196

 

 

122,541

 

 

 —

 

 

 —

 

 

2,485,010

 

Other operating expenses

 

 

1,599,549

 

 

44,088

 

 

62,104

 

 

 —

 

 

(330,894)

 

 

1,374,847

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

144,471

 

 

 —

 

 

144,471

 

Lease expense

 

 

382,897

 

 

1,297

 

 

1,463

 

 

1,406

 

 

 —

 

 

387,063

 

Depreciation and amortization expense

 

 

99,529

 

 

12,230

 

 

720

 

 

10,775

 

 

(95)

 

 

123,159

 

Interest expense

 

 

83,887

 

 

55

 

 

35

 

 

97,831

 

 

(1,416)

 

 

180,392

 

Gain on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(122)

 

 

 —

 

 

(122)

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(8,712)

 

 

1,416

 

 

(7,296)

 

Other (income) loss

 

 

(172,709)

 

 

(926)

 

 

112

 

 

18

 

 

 —

 

 

(173,505)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

26,362

 

 

 —

 

 

26,362

 

Long-lived asset impairments

 

 

16,937

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16,937

 

Equity in net loss (income) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

4,091

 

 

(4,803)

 

 

(712)

 

Income (loss) before income tax expense

 

 

187,794

 

 

80,184

 

 

11,701

 

 

(275,876)

 

 

5,425

 

 

9,228

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,754

 

 

 —

 

 

1,754

 

Net income (loss)

 

$

187,794

 

$

80,184

 

$

11,701

 

$

(277,630)

 

$

5,425

 

$

7,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

4,299,900

 

$

889,069

 

$

160,913

 

$

125

 

$

(373,357)

 

$

4,976,650

 

Salaries, wages and benefits

 

 

1,944,091

 

 

733,763

 

 

109,054

 

 

 —

 

 

 —

 

 

2,786,908

 

Other operating expenses

 

 

1,740,537

 

 

51,590

 

 

61,110

 

 

 —

 

 

(373,357)

 

 

1,479,880

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

149,182

 

 

 —

 

 

149,182

 

Lease expense

 

 

127,323

 

 

 —

 

 

1,289

 

 

1,247

 

 

 —

 

 

129,859

 

Depreciation and amortization expense

 

 

193,930

 

 

12,779

 

 

684

 

 

13,503

 

 

 —

 

 

220,896

 

Interest expense

 

 

367,562

 

 

55

 

 

36

 

 

96,085

 

 

 —

 

 

463,738

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

391

 

 

 —

 

 

391

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(6,832)

 

 

 —

 

 

(6,832)

 

Other (income) loss

 

 

(14,872)

 

 

1,942

 

 

78

 

 

(68)

 

 

 —

 

 

(12,920)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

31,953

 

 

 —

 

 

31,953

 

Long-lived asset impairments

 

 

104,997

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

104,997

 

Goodwill and identifiable intangible asset impairments

 

 

3,538

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,538

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

1,508

 

 

(100)

 

(Loss) income before income tax benefit

 

 

(167,206)

 

 

88,940

 

 

(11,338)

 

 

(283,728)

 

 

(1,508)

 

 

(374,840)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(2,423)

 

 

 —

 

 

(2,423)

 

Net (loss) income

 

$

(167,206)

 

$

88,940

 

$

(11,338)

 

$

(281,305)

 

$

(1,508)

 

$

(372,417)

 

 

Net Revenues

 

Net revenues for the year ended December 31, 2019 as compared with the year ended December 31, 2018 decreased by $410.8 million, or 8.3%.   

 

Inpatient Services – Revenue decreased $340.8 million, or 7.9%, for the year ended December 31, 2019 as compared with the same period in 2018. On a same-store basis, inpatient services revenue increased $64.0 million, or 1.8%, excluding 99 divested underperforming facilities and the acquisition or development of 12 additional facilities.  Included in the same-store revenue increase is $19.0 million related to a new provider tax program in the state of New Mexico for the period July 1, 2019 through December 31, 2019, which was not in place for the corresponding period in 2018.  An additional $10.0 million of the increase in the year ended December 31, 2019 is attributed to the transition from RUGs based reimbursement to the PDPM reimbursement methodology in the fourth fiscal quarter of 2019.  The remaining $35.0 million same-store increase is due to increasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the skilled mix of our inpatient facilities.  For the past several years, census and skilled mix trends have been affected by 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 payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings.  While overall census is recovering as compared with the

66

preceding year, the skilled mix continued to decline.  We believe population demographics will present opportunities in the near future to recapture census, and to some extent skilled mix, where it was lost through reform measures.  Over the course of the year ended December 31, 2019, we saw overall same-store occupancy rates exceed that of the same period in 2018 by over 90 basis points.  However, at the same time, same-store skilled mix in the year ended December 31, 2019 lagged the same period in 2018 by nearly 90 basis points.

 

For an expanded discussion regarding the factors influencing our census trends, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in this Form 10-K, as well as the Key Performance and Valuation Measures in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for quantification of the census trends and revenue per patient day. 

 

Rehabilitation Therapy Services – Revenue decreased $85.4 million, or 15.6% for the year ended December 31, 2019 as compared with the same period in 2018.  Of that decrease, $67.0 million is due to lost contract business, offset by $21.5 million attributed to new contracts.  The remaining decrease of $39.9 million is principally due to reduced volume of services provided to existing customers and amended customer pricing terms in connection with the implementation of PDPM.

   

Other Services – Revenue increased $15.4 million, or 11.7% for the year ended December 31, 2019 as compared with the same period in 2018.  Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO.  In the year ended December 31, 2019, the ACO recognized revenue of $10.8 million under MSSP.  There was no MSSP revenue recognized in the comparable period in 2018.  Revenue in our physician services business increased $8.8 million in the year ended December 31, 2019 as compared with the same period in 2018.  Our staffing services business accounts for the remaining decrease in other services revenue of $4.2 million.  While the staffing business gross revenue has increased 19.5% in the year ended December 31, 2019 as compared with the same period in 2018, its revenue from external customers has decreased 4.2% over that same period.  This decrease is the result of a shift in focus of that business to expand its services to our affiliated nursing facilities and therapy gyms.  Prioritizing our internal staffing needs is a strategic goal for our staffing business, amid record low unemployment nationally.

 

EBITDA

 

EBITDA for the year ended December 31, 2019 increased by $3.0 million, or 1.0% as compared with the same period in 2018.  Excluding the impact of (gain) loss on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and goodwill and identifiable intangible asset impairments, EBITDA decreased $255.3 million, or 58.3% when compared with the same period in 2018.  The contributing factors for this net increase are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDA decreased $23.1 million, or 5.9% in the year ended December 31, 2019 as compared with the same period in 2018.  Excluding the impact of other (income) loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $272.5 million, or 55.8% when compared with the same period in 2018.  On a same-store basis, the inpatient EBITDA decreased $243.1 million.  Of that same-store decline, lease expense increased $254.6 million, principally resulting from the adoption of Topic 842, which became effective on January 1, 2019.  The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 2 – “Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements.”  See also Note 10 – “Leases.”  Our self-insurance programs resulted in an increase of $4.1 million EBITDA in the year ended December 31, 2019 as compared with the same period in 2018.  While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures particularly in our general and professional liability claims experience.  The reduction in the provision for general and professional liability for the year ended December 31, 2019 as compared with the same period in 2018 is the result of favorable prior year claim development and lower current year loss exposures.  The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives.  Offsetting some of the positive trends in professional liability experience, self-insured health benefits on the same-store population saw an increase over the prior year due to some singularly large claims that presented throughout 2019. Same-store staffing costs, net of nursing agency and other purchased services, increased $40.9 million.  Nursing wage inflation increased 4.2% while non-nursing wage inflation increased 2.6% in the year ended December 31, 2019 as compared with the same period in 2018. The introduction of the new provider tax program in New Mexico for period July 1, 2019 through December 31, 2019 resulting in an increase of EBITDA of $10.5 million compared to the same period in 2018 before the program was enacted.  The remaining $37.8 million increase in EBITDA, as adjusted, of the segment is attributed to ongoing expense

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management, reduced therapy services cost due to the implementation of PDPM and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix of our inpatient facilities described above under “Net Revenues.”

 

Rehabilitation Therapy Services – EBITDA decreased by $9.3 million or 9.1% for the year ended December 31, 2019 as compared with the same period in 2018.  Excluding the impact of other (income) loss, EBITDA decreased $12.2 million when compared with the same period in 2018.  Lost therapy contracts exceeded new contracts and service fees by $10.7 million.  The remaining decrease of $1.5 million is principally attributed to the net impact of amended customer pricing terms in connection with the implementation of PDPM offset by a reduction in force of employed therapist, further offset with reductions in overhead and reductions of start-up losses in our operations in China.  Therapist efficiency improved to 68.0% in the year ended December 31, 2019 compared with 63.7% in the comparable period in the prior year. 

 

Other Services – EBITDA increased $23.1 million or 217.3% for the year ended December 31, 2019 as compared with the same period in 2018.  Of this amount, the ACO contributed $4.2 million, most of which was due to the low cost structure and no revenue recognized in that business in the comparable 2018 period.  The remaining increase of $18.9 million pertains to our physician services business.  The year ended December 31, 2018 included charges of $13.0 million to write down accounts receivable to its realizable fair value.  Those charges did not recur in 2019.  The remaining increase of $5.9 million in our physician services business was principally driven by increased physician and nurse practitioner encounters, coupled with improved reimbursement rates, partially offset by increased administrative costs of practice management.

 

Corporate and Eliminations - EBITDA increased $12.3 million or 7.0% in the year ended December 31, 2019 as compared with the same period in 2018.  EBITDA of our corporate function includes (gains) losses on early extinguishment of debt and losses associated with transactions that are outside of the scope of our reportable segments.  These and 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 $6.0 million of the net decrease in Corporate and Eliminations EBITDA.  Corporate overhead costs decreased $4.7 million, or 3.2%, in the year ended December 31, 2019 as compared with the same period in 2018. The remaining increase in EBITDA of $1.6 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments. 

 

Other income – In the years ended December 31, 2019 and 2018, we completed multiple transactions, including the divestitures of numerous owned assets and the termination and refinancing of certain facilities subject to lease agreements. See Note 4 – “Significant Transactions and Events.”  These transactions resulted in net gains of $173.5 million and $12.9 million for the years ended December 31, 2019 and 2018, respectively. See Note 18 – “Other Income.”

 

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 years ended December 31, 2019 and 2018 were $26.4 million and $32.0 million, respectively.

 

Long-lived asset impairments — In the years ended December 31, 2019 and 2018, we recognized impairments of property and equipment of $16.9 million and $105.0 million, respectively.  For more information about the conditions of the business which contributed to these impairments, see Note 19 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

 

Goodwill and identifiable intangible asset impairments — In the year ended December 31, 2018, we recognized impairment of identifiable intangible favorable lease assets of $3.5 million.  For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 19 – “Asset Impairment Charges - Identifiable Intangible Assets with a Definite Useful Life.”

 

Other Expense

 

The following discussion applies to the expense categories between EBITDA and income (loss) of all reportable segments and corporate and eliminations in our consolidating statement of operations for the year ended December 31, 2019 as compared with the same period in 2018. 

 

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Depreciation and amortization — Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance leased ROU assets.  Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets.  Depreciation and amortization expense decreased $97.7 million in the year ended December 31, 2019 as compared with the same period in 2018.  On a same-store basis, depreciation and amortization decreased $75.4 million in the year ended December 31, 2019 as compared with the same period in 2018.  Of this decrease, approximately $75.4 million resulted from the adoption of Topic 842, which was effective on January 1, 2019.  The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 2 – “Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements” and Note 10 – “Leases.”

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations.  Interest expense decreased $283.3 million in the year ended December 31, 2019 as compared with the same period in 2018.  On a same-store basis, interest expense decreased $259.6 million in the year ended December 31, 2019 as compared with the same period in 2018.  Of this decrease, approximately $282.6 million resulted from the adoption of Topic 842, which was effective on January 1, 2019.  The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 2 – “Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements” and Note 10 – “Leases.”  The decrease was offset by $23.0 million that is principally the result of higher rates of interest incurred in the year ended December 31, 2019 on the debt instruments impacted by the financial restructuring, which was not fully realized in the prior year period, in addition to consolidating debt and the associated interest expense of two real-estate partnerships in 2019, which were determined to be VIEs of which we are the primary beneficiary.  See Note 1 – “General Information – Basis of Presentation” and Note 12 – “Long-Term Debt.”

 

Income tax expense (benefit) — For the year ended December 31, 2019, we recorded income tax expense of $1.8 million, representing an effective tax rate of 19.0% compared to an income tax benefit of $2.4 million, representing an effective tax rate of 0.7% for the same period in 2018.  There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of December 31, 2019, we have determined that the valuation allowance is still necessary.

 

Net Loss Attributable to Genesis Healthcare, Inc.

 

The following discussion applies to categories between net income (loss) and net income (loss) attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the year ended December 31, 2019 as compared with the same period in 2018.  

 

Net loss attributable to noncontrolling interests — Following the combination of Skilled and FC-GEN Operations Investment, LLC (FC-GEN), direct noncontrolling economic interest was recorded as noncontrolling interest in the financial statements of the combined entity.  The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares.  Since the combination, there have been conversions of 8.3 million Class C common stock reducing the initial, approximately 42% direct noncontrolling economic interest to 33.9% at December 31, 2019.  For the years ended December 31, 2019 and 2018, income (loss) of $2.8 million and $(139.2) million, respectively, has been attributed to the Class C common stock. 

 

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both.  We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs.  For the years ended December 31, 2019 and 2018, (loss) income of $(9.9) million and $2.0 million, respectively, has been attributed to these unaffiliated third parties.

69

Liquidity and Capital Resources

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

 

2019

    

2018

 

Net cash (used in) provided by operating activities

 

 

$

(7,166)

 

$

18,584

 

Net cash (used in) provided by investing activities

 

 

 

(387,003)

 

 

11,876

 

Net cash provided by financing activities

 

 

 

377,699

 

 

53,178

 

Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents

 

 

 

(16,470)

 

 

83,638

 

Beginning of period

 

 

 

142,276

 

 

58,638

 

End of period

 

 

$

125,806

 

$

142,276

 

 

Net cash used in operating activities in the year ended December 31, 2019 of $7.2 million was unfavorably impacted by funded transaction costs of approximately $22.3 million.  Adjusted for transaction costs, net cash provided by operating activities in the year ended December 31, 2019 would have been approximately $15.1 million.  Net cash provided by operating activities in the year ended December 31, 2018 was unfavorably impacted by funded transaction costs of approximately $32.0 million.  Adjusted for funded transaction costs, net cash provided by operating activities in the year ended December 31, 2018 would have been $50.6 million.   In addition to transaction costs, operating cash flow activities in the year ended December 31, 2019 were unfavorably impacted by the timing associated with the collection of outstanding accounts receivable and payments of certain self-insured liabilities.

 

Net cash used in investing activities in the year ended December 31, 2019 was $387.0 million, compared to cash provided by investing activities of $11.9 million in the year ended December 31, 2018.  Cash used for routine capital expenditures for the year ended December 31, 2019 increased from the same period in the prior year by $11.6 million.  Net sales and maturities of marketable securities of $0.9 million in 2019 exceeded net purchases of marketable securities of $10.5 million in 2018, resulting in a net reduction in cash used of $11.3 million.  In the year ended December 31, 2019, there were asset purchases of $252.5 million as a result of the consolidation of the Next Partnership and its acquisition of 22 skilled nursing facilities and asset sale proceeds of $79.0 million resulting from the simultaneous sale of seven skilled nursing facilities as described in “Significant Transaction and Events – Strategic Partnerships – Next Partnership.” In the year ended December 31, 2019, there were asset purchases of $339.2 million as a result of the consolidation of the Vantage Point Partnership and its acquisition of 18 skilled nursing facilities as described in “Significant Transaction and Events – Strategic Partnerships – Vantage Point Partnership.” In the year ended December 31, 2018, there were no asset purchases.  The year ended December 31, 2019 also included $66.9 million in proceeds from the sale of seven facilities in California, $91.7 million in proceeds from the sale of eight facilities in Georgia, New Jersey, Virginia and Maryland and $20.2 million from the sale of seven facilities in Texas. The year ended December 31, 2018, included proceeds of $74.4 million from the sale of 15 owned skilled nursing facilities in Texas and one assisted/senior living facility in Nevada.  The year ended December 31, 2019 also included the receipt of a $12.0 million payment of a note receivable. The remaining incremental use of cash from investing activities of $2.4 million in the year ended December 31, 2019 as compared with the same period in 2018 is principally due to an increase in restricted deposit payments. 

 

Net cash provided by financing activities in the year ended December 31, 2019 was $377.7 million compared to net cash provided by financing activities of $53.2 million in the year ended December 31, 2018.  The net increase in cash provided by financing activities of $324.5 million is principally attributed to debt borrowings exceeding debt repayments in the year ended December 31, 2019 as compared to the same period in 2018.  In the year ended December 31, 2019, we received proceeds from the issuance of debt of $538.5 million, consisting primarily of $479.4 from the consolidation of the Next Partnership and Vantage Point Partnership, $41.7 million due to the refinancing of three facilities within the Next Partnership with HUD financing and $15.0 million due to a short-term loan from Omega. In the year ended December 31, 2018, we received proceeds from the issuance of debt of $574.2 million, consisting primarily of $438.0 million from the ABL Credit Facilities, $83.0 million from proceeds from the MidCap Real Estate Loans, $40.0 million from the expanded Term Loan Agreement and $10.9 million from the refinancing of a bridge loan with a HUD insured loan.  Repayment of long-term debt in the year ended December 31, 2019 was $199.6 million compared to $544.1 million in the same period of the prior year.  In the year ended December 31, 2019, we repaid $39.8 million in MidCap Real Estate Loans and $65.6 million in HUD-insured loans using proceeds from the sale of 19 facilities; reduced the term loan facility of the ABL Credit Facilities by $40.0 million while increasing the revolving credit facilities by the same amount; and the Next Partnership reduced its term loan by $38.8 million refinancing three facilities through HUD.  In the year ended December 31, 2018, we repaid $363.2 million in the retirement of our prior revolving credit facilities, $85.5 million in the paydown of Welltower Real Estate Loans, $51.9 million in the retirement of HUD insured loans for divested skilled nursing facilities, $10.0 million in the retirement of a mortgage on a corporate office building and $9.9 million in the payoff of a bridge loan with the proceeds from a HUD-insured refinancing.  The remaining decrease in cash used to repay long-term debt of $8.2 million relates to a decrease in routine debt payments. In the year ended December 31, 2019, we had net

70

borrowings under the revolving credit facilities of $30.3 million as compared with $42.6 million of net repayments under the revolving credit facilities in the same period in 2018.  In the year ended December 31, 2019, we paid debt issuance costs of $10.2 million resulting from financing activities associated with the consolidation of the Next Partnership and the Vantage Point Partnership compared to debt issuance costs of $17.0 million, which includes $13.6 million in fees for the ABL Credit Facilities and $3.2 million in fees for the MidCap Real Estate Loans in 2018.  In the year ended December 31, 2019, we received contributions from a noncontrolling interest for $18.5 million and $8.5 million resulting from the consolidation of the aforementioned Next Partnership and Vantage Point Partnership, respectively, compared to no contributions from noncontrolling interests in 2018.  The remaining net increase in cash used in financing activities of $5.9 million in the year ended December 31, 2019 compared to the same period in 2018 is primarily due to an increase in distributions to noncontrolling interests and repayments of finance lease obligations offset by a reduction in debt settlement costs.

 

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

 

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

 

At December 31, 2019, we had total liquidity of $90.0 million consisting of cash on hand of $74.5 million and available borrowings under our ABL Credit Facilities of $15.5 million. During the year ended December 31, 2019, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities. 

 

Recent Developments Potentially Affecting our Results of Operations

 

As the recent outbreak of the coronavirus (COVID-19) continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a negative impact on our operating results and financial condition.  The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our patients, employees and vendors, all of which are uncertain and cannot be predicted.  Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition, if any.

 

Strategic Partnerships

 

Next Partnership

 

On January 31, 2019, Welltower sold the real estate of 15 facilities to the Next Partnership, of which we acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next, a related party.  See Note 16 – “Related Party Transactions.”  In conjunction with the facility sales, we received aggregate annual rent credits of $17.2 million. We continue to operate these facilities pursuant to a new master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  We will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter.  We also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.

 

Vantage Point Partnership

 

On September 12, 2019, Welltower and Second Spring sold the real estate of four and 14 facilities, respectively, to the Vantage Point Partnership, in which we invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million.  In conjunction with the facility sales, we received aggregate annual rent credits of $30.3 million. We continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  We will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter.  We also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price.  Further, Vantage Point holds a put option that would require us to acquire its

71

membership interests in the Vantage Point Partnership. The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.

 

NewGen Partnership

 

On February 1, 2020, we transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to NewGen. We sold the real estate and operations of six skilled nursing facilities and transferred the leasehold rights to 13 skilled nursing, behavioral health and assisted living facilities for a total of $78.9 million.  We will retain a 50% interest in the facilities.  Net transaction proceeds were used by us to repay indebtedness, including prepayment fees, of $33.7 million, fund our initial equity contribution and working capital requirement of approximately $15.0 million, and provide financing to the partnership of $9.0 million.  Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements.  We are currently assessing whether we will continue to consolidate the financial statements of these facilities for financial reporting purposes.

 

Restructuring Transactions

 

Overview

 

During the year ended December 31, 2018, we entered into a number of agreements, amendments and new financing facilities further described below in an effort to strengthen significantly our capital structure.  In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.

 

In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior revolving credit facilities and eliminating its forbearance agreement.  Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases.  Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate.

 

Asset Based Lending Facilities

 

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

 

On June 5, 2019, the ABL Credit Facilities were amended to simultaneously increase the aggregate revolving credit facility commitment by $40.0 million and partially prepay the first lien term loan facility by $40.0 million.  The resulting commitment levels of the revolving credit facility and first lien term loan facility were $240.0 million and $285.0 million, respectively.

 

The ABL Credit Facilities have a five-year term set to mature on March 6, 2023.  The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced.  The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within its designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed.  We have presented the entire revolving credit facility borrowings balance of $136.0 million in current installments of long-term debt at December 31, 2019 and 2018.  Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity date.  Cash proceeds of $50.6 million received under the ABL Credit Facilities remain in a restricted account.  This amount is pledged to cash collateralize letters of credit previously issued under the retired revolving credit facilities. We have classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents within the consolidated balance sheets at December 31, 2019 and 2018.

 

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

 

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

 

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

 

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

 

Term Loan Amendments

 

On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower and Omega (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes.  The additional $40 million term loan bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind.  The Term Loan Amendment also changed the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind.  Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.

 

On May 9, 2019, the Term Loan Agreement was further amended extending the maturity date from July 29, 2020 to November 30, 2021. 

 

Welltower Master Lease Amendment

 

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

 

Omnibus Agreement

 

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

 

The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50 million of outstanding indebtedness owed to Welltower will be written off and (b) we may request conversion of not more than $50 million of the outstanding balance of our Welltower real estate loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind

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interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.

 

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

 

Welltower Real Estate Loans Amendment

 

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

 

We agreed to make commercially reasonable efforts to secure commitments to repay no less than $105.0 million of the Welltower Real Estate Loan obligations.  As of December 31, 2019, we have not yet secured the total required repayments or commitments.  As a result, the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest.

 

MidCap Real Estate Loans

 

On March 30, 2018, we entered into the MidCap Real Estate Loans which had combined available proceeds of $75.0 million, $73.0 million of which was drawn as of December 31, 2018.  The MidCap Real Estate Loans are secured by 12 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023.  The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated.  The loans, which were interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%.  Beginning April 1, 2019, mandatory principal payments commenced with the balance of the loans to be repaid at maturity.  Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans. 

 

On November 8, 2018, one of the MidCap Real Estate Loans was amended with an additional borrowing of $10.0 million.  The proceeds were used to retire a maturing mortgage loan on a corporate office building.  The office building has been added as collateral and the loan maturity remains March 30, 2023. The $10.0 million additional loan is subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 2.0%) plus an applicable margin of 6.25% with principal amortizing immediately and the balance due at maturity. 

 

On May 1, 2019, we divested the real property and operations of five skilled nursing facilities in California, three of which were subject to the MidCap Real Estate Loans. We used the sale proceeds to repay $27.7 million on the MidCap Real Estate Loans. During the third quarter of 2019, we divested the real property of two skilled nursing facilities in New Jersey and one skilled nursing facility in Maryland that were subject to the MidCap Real Estate Loans and used the sale proceeds to repay $12.1 million on the loans. See Note 4 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The MidCap Real Estate Loans had an outstanding principal balance of $42.2 million and $83.0 million at December 31, 2019 and 2018, respectively.

 

Sabra Master Leases

In 2017, we entered into a definitive agreement with Sabra resulting in permanent and unconditional annual cash rent savings of $19.0 million, which became effective January 1, 2018.  For the year ended December 31, 2018, we terminated the Sabra lease agreement for 33 skilled nursing facilities and one assisted/senior living facility but continue to operate these facilities under new lease arrangements with different landlords and terminated the Sabra lease agreement associated with nine divested skilled nursing facilities.

 

As a result of the amendments and lease terminations noted above, we recorded a lease termination charge of $34.1 million in the year ended December 31, 2018.  The charge represented the discounted residual rents due to Sabra on the skilled nursing facilities that

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have been terminated due to either divestiture or sale to a new landlord.  As of December 31, 2019, there remains an obligation of $26.7 million, $18.4 million recorded in other long-term liabilities and $8.3 million recorded in accrued expenses, to be repaid through 2023.

 

Other Financing Activities

 

Mortgages and other secured debt (non-recourse) refinancings

 

In December 2019, a portion of the Next Partnership’s term loan facility was refinanced via three new HUD insured loans.  The new loans had an aggregate initial principal balance of $41.7 million, all of which remained outstanding as of December 31, 2019. The loans have an original amortization term of 35 years and a fixed interest rate of 3.15%.  Proceeds were principally used to repay a portion of the term loan associated with the Next Partnership and fees.

 

Divestiture of Non-Strategic Facilities

 

Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 111 skilled nursing facilities, five assisted/senior living facilities and seven behavioral outpatient clinics in 17 states since January 1, 2018, including:

 

·

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

·

The sale of five skilled nursing facilities located in Massachusetts and Kentucky on April 1, 2018 that were subject to a master lease agreement with Sabra.  A gain was recognized totaling $0.2 million.

·

The lease termination of one previously closed skilled nursing facility located in California on May 4, 2018 that was subject to a master lease agreement with Sabra. A gain was recognized totaling $0.5 million.

·

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

·

The sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey on June 1, 2018 and June 13, 2018, respectively.  These skilled nursing facilities were subject to a master lease agreement with Second Spring.  A gain was recognized totaling $14.4 million.

·

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

·

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

·

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

·

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

·

The sale and lease termination of one skilled nursing facility located in Ohio on September 7, 2018 that was subject to a master lease agreement with Sabra.  A loss was recognized totaling $0.1 million.

·

The sale of 15 owned skilled nursing facilities and lease termination of one skilled nursing facility located in Texas on October 1, 2018.  A gain was recognized totaling $0.4 million. 

·

The operations transfer of seven owned skilled nursing facilities located in Texas on November 1, 2018.  A loss was recognized totaling $1.6 million.

·

The sale and lease termination of two skilled nursing facilities in Idaho on November 1, 2018.  A loss was recognized totaling $0.5 million.

·

The sale and lease termination of two skilled nursing facilities in Montana on November 1, 2018 that were subject to a master lease agreement with Sabra.  A gain was recognized totaling $0.3 million. 

·

The sale of one owned assisted/senior living facility in Nevada on November 1, 2018.  The gain was de minimis.

·

The sale and lease termination of one skilled nursing facility in Georgia on December 1, 2018.  A loss was recognized totaling $0.5 million.

·

The sale and lease termination of nine skilled nursing facilities located in New Jersey and Ohio between January 31, 2019 and February 7, 2019 that were subject to a master lease agreement with Welltower.  A loss was recognized totaling $3.6 million.

·

The closure of one skilled nursing facility located in Ohio on February 26, 2019.  The facility remains subject to a master lease agreement.  A loss was recognized totaling $0.2 million.

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·

The lease expiration of one behavioral health center located in California on April 1, 2019.  A loss was recognized totaling $0.1 million.

·

The sale and lease termination of two skilled nursing facilities located in Connecticut on May 1, 2019 that were subject to a master lease agreement with Welltower.  A loss was recognized totaling $0.8 million.

·

The sale of five owned skilled nursing facilities located in California on May 1, 2019.  A gain was recognized totaling $25.0 million.

·

The sale and lease termination of one skilled nursing facility located in Ohio on June 30, 2019.  A loss was recognized totaling $0.3 million.

·

The closure of one skilled nursing facility located in Massachusetts on July 1, 2019.  The facility remained subject to a master lease agreement with Omega until its sale on January 31, 2020.  A loss was recognized totaling $0.2 million.

·

The sale and lease termination of three skilled nursing facilities located in Ohio on July 1, 2019 that were subject to a master lease with Omega.  A loss was recognized totaling $0.9 million.

·

The sale and lease termination of six skilled nursing facilities located in Ohio on August 1, 2019, marking an exit from the inpatient business in this state.  A loss was recognized totaling $1.6 million.

·

The sale of one owned assisted/senior living facility located in California on August 1, 2019.  A gain was recognized totaling $0.3 million.

·

The sale and lease termination of one skilled nursing facility located in Utah on August 1, 2019.  A loss was recognized totaling $0.3 million.

·

The sale of one owned skilled nursing facility located in Virginia on August 15, 2019.  A gain was recognized totaling $16.5 million.

·

The sale of one owned skilled nursing facility located in Maryland on August 15, 2019 and transfer of operations on September 1, 2019.  A gain was recognized totaling $3.9 million.

·

The sale of two owned skilled nursing facilities, one assisted/senior living facility and the lease termination of one skilled nursing facility located in Georgia on August 19, 2019.  A gain was recognized totaling $7.5 million.

·

The sale and lease termination of one skilled nursing facility located in Idaho on September 1, 2019.  A loss was recognized totaling $0.2 million.

·

The sale of one owned skilled nursing facility located in New Jersey on September 1, 2019.  A gain was recognized totaling $11.0 million.

·

The sale of one owned skilled nursing facility located in California on September 17, 2019.  A gain was recognized totaling $0.4 million.

·

The sale of one owned skilled nursing facility located in New Jersey on September 27, 2019.  A gain was recognized totaling $11.2 million.

·

The sale of one owned skilled nursing facility located in New Jersey on August 27, 2019 and transfer of operations on October 1, 2019.  A gain was recognized totaling $7.8 million.

·

The sale and lease termination of one skilled nursing facility located in California on October 1, 2019.  A loss was recognized totaling $0.4 million.

·

The sale and lease termination of one skilled nursing facility located in New Jersey on December 1, 2019.  A loss was recognized totaling $0.9 million.

·

The sale of three owned skilled nursing facilities located in North Carolina and Maryland on February 1, 2020. 

·

The sale of six owned skilled nursing facilities and lease termination or modification of 13 skilled nursing facilities in California, Washington and Nevada on February 1, 2020.

·

The sale of one owned skilled nursing facility located in California on February 26, 2020. 

·

The sale and lease termination of one assisted/senior living facility located in Montana on March 4, 2020.

 

Financial Covenants

 

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and minimum liquidity.  At December 31, 2019, we were in compliance with all of the financial covenants contained in the Credit Facilities. 

 

We have master lease agreements with Welltower, Sabra, Omega and Second Spring (collectively, the Master Lease Agreements).  Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage

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ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At December 31, 2019, we were in compliance with the covenants contained in the Master Lease Agreements. 

 

We have two master lease agreements with Cindat Best Years Welltower JV LLC involving 28 of our facilities.  We did not meet certain financial covenants contained in one of the master lease agreements involving two of our facilities at December 31, 2019.  On March 9, 2020, we received a waiver for these covenant breaches through April 1, 2021.  At December 31, 2019, we are in compliance with the financial covenants contained in the other master lease agreement.  

 

At December 31, 2019, we did not meet certain financial covenants contained in one lease related to two of our facilities.  We are and expect to continue to be current in the timely payment of our obligations under the lease.  This lease does not have cross default provisions, nor does it trigger cross default provisions in any of our other loan or lease agreements.  We will continue to work with the related credit party to amend the lease and the related financial covenants.  We do not believe the breach of such financial covenants has a material adverse impact on us at December 31, 2019.

 

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

 

Concentration of Credit Risk

 

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

 

Management assesses its exposure to loss on accounts at the customer level.  The greatest concentration of risk exists in our rehabilitation therapy services business where it has over 140 distinct customers, many being chain operators with more than one location.  One of our customers, a related party, comprises $28.9 million, approximately 34%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019. See Note 16 – “Related Party Transactions.” Additionally, one former customer comprises $7.0 million, approximately 8%, of the gross outstanding contract receivables in the rehabilitation therapy services business at December 31, 2019.    An adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on us.

 

Financial Condition and Liquidity Considerations

 

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

 

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (March 16, 2020).  Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before March 16, 2021.  Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about our ability to continue as a going concern for 12 months following the date of issuance of these financial statements (March 16, 2020).

 

Our results of operations continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers.  In recent years, we have implemented a number of cost mitigation strategies to

77

offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments, persists.

 

In response to these issues, we entered into the Restructuring Transactions, exited the operations of 99 non-strategic facilities and restructured/terminated certain leases during the years ended December 31, 2019 and 2018. See Note 4 – “Significant Transactions and Events” for further detail. We expect to continue to pursue cost mitigation and other strategies in 2020 in response to the operating environment and liquidity requirements.  During 2018 and 2019, we also amended, or obtained waivers related to, the financial covenants of all of our material debt and lease agreements to account for these ongoing changes in our capital structure and business conditions.

 

Risk and Uncertainties

 

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

 

Although we are in compliance and project to be in compliance with our material debt and lease covenants through March 31, 2021, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with our covenants. Such uncertainty includes, changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010 currently being considered in Congress, among others.

 

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

 

Off-Balance Sheet Arrangements

 

As of December 31, 2019 and 2018, we are not involved in any 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.

 

 

 

 

 

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

This item is not applicable to smaller reporting companies.

 

Item 8. Financial Statements and Supplementary Data

 

The information required by this item is incorporated herein by reference to the financial statements set forth in Item 15. “Exhibits and Financial Statement Schedules—Consolidated Financial Statements and Supplementary Data.”

 

Item 9. Changes in and Disagreement With Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

   

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods

78

specified in the rules and forms of the U.S. Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the 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 is required to apply its judgment in evaluating and implementing possible controls and procedures.

   

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective as of December 31, 2019. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed the evaluation.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

   

Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

   

·

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; 

   

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and

   

·

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. 

   

A system of internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

   

Management conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the framework set forth in the report entitled, "Internal Control — Integrated Framework (2013 COSO Framework)," issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on management’s evaluation and the criteria set forth in the 2013 COSO Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2019. The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report, which appears herein.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Genesis Healthcare, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Genesis Healthcare, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (income) loss, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 16, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 16, 2020

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Item 9B. Other Information

 

Not applicable.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information to be included in the sections entitled, “Election of Directors,” “Our Executive Officers," “Code of Conduct” and “Corporate Governance – Committees of the Board of Directors – Audit Committee,” respectively, in the Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed by us with the U.S. Securities and Exchange Commission no later than 120 days after December 31, 2019 (the 2020 Proxy Statement) is incorporated herein by reference.

 

Item 11. Executive Compensation

The information to be included in the sections entitled “Executive Compensation” and “Directors Compensation” in the 2020 Proxy Statement is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information to be included in the section entitled “Security Ownership of Directors and Executive Officers and Certain Beneficial Owners” and “Equity Compensation Plan Information” in the 2020 Proxy Statement is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information to be included in the sections entitled “Certain Relationships and Related Transactions,” “Board Independence,” and “Compensation Committee Interlocks and Insider Participation” in the 2020 Proxy Statement is incorporated herein by reference.

 

Item 14. Principal Accounting Fees and Services

The information to be included in the section entitled “Independent Registered Public Accounting Firm” in the 2020 Proxy Statement is incorporated herein by reference.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a)1. Consolidated Financial Statements and Supplementary Data:

The following consolidated financial statements, and notes thereto, and the related Report of our Independent Registered Public Accounting Firm, are filed as part of this Form 10-K:

 

 

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(b)Exhibits:

 

 

 

Number

Description

2.1 

Purchase and Contribution Agreement, dated as of August 18, 2014, by and between FC-GEN Operations Investment, LLC and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed on August 18, 2014, and incorporated herein by reference).

 

2.2 

Amendment No. 1 to Purchase and Contribution Agreement, dated as of January 5, 2015, by and between FC-GEN Operations Investment, LLC and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed on January 9, 2015, and incorporated herein by reference).

 

3.1 

Third Amended and Restated Certificate of Incorporation of Genesis Healthcare, Inc. (filed as Exhibit 3.1 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

 

3.2 

Amended and Restated By-Laws of Genesis Healthcare, Inc. (filed as Exhibit 3.2 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

 

4.1 

Amended and Restated Registration Rights Agreement, dated as of August 18, 2014, among Onex Holders (as defined therein), Greystone Holders (as defined therein) and Skilled Healthcare Group, Inc. (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 3, 2014, and incorporated herein by reference).

 

4.2 

Description of Capital Stock.

 

10.1 

Sixth Amended and Restated Limited Liability Company Operating Agreement of FC-GEN Operations Investment, LLC, dated as of February 2, 2015 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

 

10.2 

Amendment No. 1 to Sixth Amended and Restated Limited Liability Company Operating Agreement of FC-GEN Operations Investment, LLC, dated as of April 1, 2015 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).    

 

10.3 

Tax Receivable Agreement, dated as of February 2, 2015, by and among Genesis Healthcare, Inc. (formerly Skilled Healthcare Group, Inc.), FC-GEN Operations Investment, LLC and each of the Members (as defined therein) (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

 

10.4* 

Form of Indemnification Agreement with Genesis Healthcare, Inc.’s directors (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).

 

10.5* 

Amended and Restated Employment Agreement, dated as of April 1, 2019, between George V. Hager, Jr. and Genesis Administrative Services, LLC (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

 

10.6* 

Employment Agreement, dated February 2, 2015, between Thomas DiVittorio and Genesis Administrative Services, LLC (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).

 

10.7* 

Employment Agreement dated as of March 2, 2015 by and between Genesis Administrative Services, LLC and Paul Bach (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.8* 

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and JoAnne Reifsnyder (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2016, and incorporated herein by reference).

 

10.9* 

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Michael Sherman (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

 

10.10* 

Amended and Restated Genesis Healthcare, Inc. 2015 Omnibus Equity Incentive Plan (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 8, 2017, and incorporated herein by reference).

 

10.11* 

Form of Restricted Stock Unit Agreement to be entered into between Genesis Healthcare, Inc. and its executive officers (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on August 10, 2015, and incorporated herein by reference).

 

10.12* 

Form of Restricted Stock Unit Agreement to be entered into between Genesis Healthcare, Inc. and its non-employee directors (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on August 10, 2015, and incorporated herein by reference).

 

10.13 

Fourth Amended and Restated Credit Agreement, dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent and collateral agent thereto (filed as Exhibit 10.15 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.14 

First Amendment, dated March 13, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

 

10.15 

Second Amendment, dated April 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

 

10.16 

Third Amendment, dated June 5, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

 

10.17 

Fourth Amendment, dated September 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 8, 2019, and incorporated herein by reference).

 

10.18 

Fifth Amendment, dated December 3, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent. 

 

10.19 

Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 10, 2016, and incorporated herein by reference).

 

10.20 

 

Amendment No. 1 dated as of December 21, 2017 to that certain Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.22 to our Annual Report on Form 10-K filed on March 16, 2018, and incorporated herein by reference). 

 

10.21 

Amendment No. 2 dated as of March 6, 2018 to that certain Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities affiliated with Genesis Healthcare LLC set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and MidCap Funding IV Trust LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.22 

Form of Healthcare Facility Note with respect to HUD-insured loans (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on September 24, 2013, and incorporated herein by reference).

 

10.23 

Term Loan Agreement dated as of July 29, 2016, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.6 to our Quarterly Report filed on Form 10-Q filed on August 5, 2016, and incorporated herein by reference).

 

10.24 

Amendment No. 1 to Term Loan Agreement, dated as of December 22, 2016, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.25 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

 

10.25 

Amendment No. 2, dated as of May 5, 2017, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on August 9, 2017, and incorporated herein by reference).

 

10.26 

Amendment No. 3, dated as of August 8, 2017, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 8, 2017, and incorporated herein by reference).

 

10.27 

Amendment No. 4, dated as of March 6, 2018, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.28 

Amendment No. 5, dated as of March 13, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

 

10.29 

Amendment No. 6, dated as of May 9, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

 

10.30 

Amendment No. 7, dated as of September 12, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 8, 2019, and incorporated herein by reference).

 

10.31 

Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.26 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

 

10.32 

First Amendment, dated December 22, 2017, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.33 

Second Amendment, dated February 21, 2018, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.11 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.34 

Third Amendment, dated March 30, 2018, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.35 

Amended and Restated Loan Agreement (A-2), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.28 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

 

10.36 

First Amendment, dated February 21, 2018, to the Amended and Restated Loan Agreement (A-2), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.37 

Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.29 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

 

10.38 

First Amendment, dated June 30, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.39 

Second Amendment, dated September 27, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.40 

Third Amendment, dated October 20, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.41 

Fourth Amendment, dated February 21, 2018, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.9 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

10.42 

Omnibus Agreement dated as of February 21, 2018 by and between Welltower Inc., Welltower TRS Holdco LLC, OHI Mezz Lender LLC and Genesis Healthcare, Inc. (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

 

 

 

21

Subsidiaries of the Registrant.

 

23.1 

Consent of Independent Registered Public Accounting Firm.

 

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** 

Certification 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.

 


    

 

 

*

Management contract or compensatory plan or arrangement.

**

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

 

Item 16. Form 10-K Summary

 

None.

 

82

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

GENESIS HEALTHCARE, INC.

 

 

 

 

Date:

March 16, 2020

By

/S/   GEORGE V. HAGER JR.

 

 

 

George V. Hager Jr.

 

 

 

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Date:

March 16, 2020

By

/S/    GEORGE V. HAGER JR.

 

 

 

George V. Hager Jr.

 

 

 

Chief Executive Officer

 

 

 

 

Date:

March 16, 2020

By

/S/    TOM DIVITTORIO

 

 

 

Tom DiVittorio

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Authorized Signatory)

 

 

 

 

Date:

March 16, 2020

By

/S/    STEPHEN S. YOUNG

 

 

 

Stephen S. Young

 

 

 

Chief Accounting Officer and Treasurer

 

 

 

(Principal Accounting Officer and Authorized Signatory)

 

 

 

 

Date:

March 16, 2020

By

/S/    JAMES H. BLOEM

 

 

 

James H. Bloem

 

 

 

Director

 

 

 

 

Date:

March 16, 2020

By

/S/    JOHN F. DEPODESTA

 

 

 

John F. DePodesta

 

 

 

Director

 

 

 

 

Date:

March 16, 2020

By

/S/    ROBERT FISH

 

 

 

Robert Fish

 

 

 

Chairman of the Board

 

 

 

 

Date:

March 16, 2020

By

/S/    ROBERT HARTMAN

 

 

 

Robert Hartman

 

 

 

Director

 

 

 

 

Date:

March 16, 2020

By

/S/    JAMES V. MCKEON

 

 

 

James V. McKeon

 

 

 

Director

 

 

 

 

Date:

March 16, 2020

By

/S/    TERRY ALLISON RAPPUHN

 

 

 

Terry Allison Rappuhn

 

 

 

Director

 

 

 

 

Date:

March 16, 2020

By

/S/    ARNOLD WHITMAN

 

 

 

Arnold Whitman

 

 

 

Director

 

 

 

83

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Genesis Healthcare, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Genesis Healthcare, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Philadelphia, Pennsylvania
March 16, 2020

F-1

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

December 31, 2018

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,097

 

$

20,865

 

Restricted cash and equivalents

 

 

63,101

 

 

73,762

 

Restricted investments in marketable securities

 

 

31,855

 

 

35,631

 

Accounts receivable

 

 

567,636

 

 

622,717

 

Prepaid expenses

 

 

108,908

 

 

82,747

 

Other current assets

 

 

44,079

 

 

36,528

 

Assets held for sale

 

 

1,171

 

 

3,375

 

Total current assets

 

 

828,847

 

 

875,625

 

Property and equipment, net of accumulated depreciation of $431,361 and $976,802 at December 31, 2019 and December 31, 2018, respectively

 

 

962,105

 

 

2,887,554

 

Finance lease right-of-use assets, net of accumulated amortization of $23,401 at December 31, 2019

 

 

37,097

 

 

 —

 

Operating lease right-of-use assets

 

 

2,399,505

 

 

 —

 

Restricted cash and equivalents

 

 

50,608

 

 

47,649

 

Restricted investments in marketable securities

 

 

105,087

 

 

100,522

 

Other long-term assets

 

 

85,725

 

 

125,595

 

Deferred income taxes

 

 

3,772

 

 

5,867

 

Identifiable intangible assets, net of accumulated amortization of $76,243 and $99,160 at December 31, 2019 and December 31, 2018, respectively

 

 

87,446

 

 

119,082

 

Goodwill

 

 

85,642

 

 

85,642

 

Assets held for sale

 

 

16,306

 

 

16,087

 

Total assets

 

$

4,662,140

 

$

4,263,623

 

Liabilities and Stockholders' Deficit:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

162,426

 

$

122,531

 

Current installments of finance lease obligations

 

 

2,839

 

 

2,171

 

Current installments of operating lease obligations

 

 

140,887

 

 

 —

 

Current installments of financing obligations

 

 

 —

 

 

2,001

 

Accounts payable

 

 

238,384

 

 

234,786

 

Accrued expenses

 

 

226,092

 

 

227,813

 

Accrued compensation

 

 

153,698

 

 

172,726

 

Self-insurance reserves

 

 

146,476

 

 

149,545

 

Current portion of liabilities held for sale

 

 

368

 

 

639

 

Total current liabilities

 

 

1,071,170

 

 

912,212

 

Long-term debt

 

 

1,450,994

 

 

1,082,933

 

Finance lease obligations

 

 

39,335

 

 

967,942

 

Operating lease obligations

 

 

2,681,403

 

 

 —

 

Financing obligations

 

 

 —

 

 

2,732,939

 

Deferred income taxes

 

 

5,245

 

 

6,281

 

Self-insurance reserves

 

 

406,864

 

 

453,993

 

Liabilities held for sale

 

 

19,789

 

 

25,942

 

Other long-term liabilities

 

 

69,905

 

 

126,247

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 107,888,854 and 101,235,935 at December 31, 2019 and December 31, 2018, respectively)

 

 

108

 

 

101

 

Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at December 31, 2019 and December 31, 2018, respectively)

 

 

 1

 

 

 1

 

Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 56,172,193 and 59,700,801 at December 31, 2019 and December 31, 2018, respectively)

 

 

56

 

 

60

 

Additional paid-in-capital

 

 

248,594

 

 

270,408

 

Accumulated deficit

 

 

(1,010,296)

 

 

(1,609,828)

 

Accumulated other comprehensive income (loss)

 

 

602

 

 

(262)

 

Total stockholders’ deficit before noncontrolling interests

 

 

(760,935)

 

 

(1,339,520)

 

Noncontrolling interests

 

 

(321,630)

 

 

(705,346)

 

Total stockholders' deficit

 

 

(1,082,565)

 

 

(2,044,866)

 

Total liabilities and stockholders’ deficit

 

$

4,662,140

 

$

4,263,623

 

 

See accompanying notes to consolidated financial statements.

F-2

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Net revenues

 

$

4,565,834

 

$

4,976,650

Salaries, wages and benefits

 

 

2,485,010

 

 

2,786,908

Other operating expenses

 

 

1,374,847

 

 

1,479,880

General and administrative costs

 

 

144,471

 

 

149,182

Lease expense

 

 

387,063

 

 

129,859

Depreciation and amortization expense

 

 

123,159

 

 

220,896

Interest expense

 

 

180,392

 

 

463,738

(Gain) loss on early extinguishment of debt

 

 

(122)

 

 

391

Investment income

 

 

(7,296)

 

 

(6,832)

Other income

 

 

(173,505)

 

 

(12,920)

Transaction costs

 

 

26,362

 

 

31,953

Long-lived asset impairments

 

 

16,937

 

 

104,997

Goodwill and identifiable intangible asset impairments

 

 

 —

 

 

3,538

Equity in net income of unconsolidated affiliates

 

 

(712)

 

 

(100)

Income (loss) before income tax expense (benefit)

 

 

9,228

 

 

(374,840)

Income tax expense (benefit)

 

 

1,754

 

 

(2,423)

Net income (loss)

 

 

7,474

 

 

(372,417)

Less net loss attributable to noncontrolling interests

 

 

7,145

 

 

137,186

Net income (loss) attributable to Genesis Healthcare, Inc.

 

$

14,619

 

$

(235,231)

Earnings (loss) per common share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Weighted-average shares outstanding for basic net income (loss) per share

 

 

107,286

 

 

101,007

Basic net income (loss) per common share attributable to Genesis Healthcare, Inc.

 

$

0.14

 

$

(2.33)

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Weighted-average shares outstanding for diluted net income (loss) per share

 

 

165,314

 

 

101,007

Diluted net income (loss) per common share attributable to Genesis Healthcare, Inc.

 

$

0.10

 

$

(2.33)

 

See accompanying notes to consolidated financial statements.

F-3

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Net income (loss)

 

$

7,474

 

$

(372,417)

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

 

 

1,198

 

 

(48)

Comprehensive income (loss)

 

 

8,672

 

 

(372,465)

Less: comprehensive loss attributable to noncontrolling interests

 

 

6,811

 

 

137,334

Comprehensive income (loss) attributable to Genesis Healthcare, Inc.

 

$

15,483

 

$

(235,131)

 

See accompanying notes to consolidated financial statements.

 

F-4

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

    

    

 

    

    

    

    

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

Total

 

 

Class A Common Stock

 

Class B Common Stock

 

Class C Common Stock

 

Additional

 

Accumulated

 

comprehensive

 

Stockholders'

 

Noncontrolling

 

stockholders'

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

paid-in capital

 

deficit

 

(loss) income

 

deficit

 

interests

 

deficit

Balance at December 31, 2017

 

97,101

 

$

97

 

744

 

$

 1

 

61,561

 

$

61

 

$

290,573

 

$

(1,374,597)

 

$

(362)

 

$

(1,084,227)

 

$

(595,905)

 

$

(1,680,132)

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(235,231)

 

 

 —

 

 

(235,231)

 

 

(137,186)

 

 

(372,417)

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

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

100

 

 

100

 

 

(148)

 

 

(48)

Share based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

8,820

 

 

 —

 

 

 —

 

 

8,820

 

 

 —

 

 

8,820

Issuance of common stock

 

2,275

 

 

 2

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Conversion of common stock among classes

 

1,860

 

 

 2

 

 —

 

 

 —

 

(1,860)

 

 

(1)

 

 

(29,855)

 

 

 —

 

 

 —

 

 

(29,854)

 

 

29,854

 

 

 —

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(64)

 

 

 —

 

 

 —

 

 

(64)

 

 

(1,961)

 

 

(2,025)

Issuance of stock warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

936

 

 

 —

 

 

 —

 

 

936

 

 

 —

 

 

936

Balance at December 31, 2018

 

101,236

 

$

101

 

744

 

$

 1

 

59,701

 

$

60

 

$

270,408

 

$

(1,609,828)

 

$

(262)

 

$

(1,339,520)

 

$

(705,346)

 

$

(2,044,866)

Net income (loss)

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

14,619

 

 

 —

 

 

14,619

 

 

(7,145)

 

 

7,474

Net unrealized gain on marketable securities, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

864

 

 

864

 

 

334

 

 

1,198

Share based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,309

 

 

 —

 

 

 —

 

 

7,309

 

 

 —

 

 

7,309

Issuance of common stock

 

3,124

 

 

 3

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(3)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Conversion of common stock among classes

 

3,529

 

 

 4

 

 —

 

 

 —

 

(3,529)

 

 

(4)

 

 

(29,184)

 

 

 —

 

 

 —

 

 

(29,184)

 

 

29,184

 

 

 —

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

64

 

 

 —

 

 

 —

 

 

64

 

 

(5,817)

 

 

(5,753)

Contributions from noncontrolling interests

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27,031

 

 

27,031

Cumulative effect of accounting change

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

584,913

 

 

 —

 

 

584,913

 

 

340,129

 

 

925,042

Balance at December 31, 2019

 

107,889

 

$

108

 

744

 

$

 1

 

56,172

 

$

56

 

$

248,594

 

$

(1,010,296)

 

$

602

 

$

(760,935)

 

$

(321,630)

 

$

(1,082,565)

 

See accompanying notes to consolidated financial statements.

 

F-5

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

2019

    

2018

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

7,474

 

$

(372,417)

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

 

 

 

 

 

 

Non-cash interest and leasing arrangements, net

 

 

27,311

 

 

72,193

Other non-cash gain, net

 

 

(173,505)

 

 

(12,920)

Share based compensation

 

 

7,309

 

 

8,820

Depreciation and amortization expense

 

 

123,159

 

 

220,896

Reduction in the carrying amount of operating lease right-of-use assets

 

 

117,127

 

 

 —

(Recovery) provision for losses on accounts receivable

 

 

(4,469)

 

 

2,554

Equity in net income of unconsolidated affiliates

 

 

(712)

 

 

(100)

Benefit for deferred taxes

 

 

(179)

 

 

(3,475)

Long-lived asset impairments

 

 

16,937

 

 

104,997

Goodwill and identifiable intangible asset impairments

 

 

 —

 

 

3,538

Gain on early extinguishment of debt

 

 

(2,822)

 

 

(94)

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

45,745

 

 

66,508

Accounts payable and other accrued expenses and other

 

 

(76,911)

 

 

(71,916)

Operating lease obligations

 

 

(93,630)

 

 

 —

Net cash (used in) provided by operating activities

 

 

(7,166)

 

 

18,584

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(62,727)

 

 

(51,152)

Purchases of marketable securities

 

 

(70,316)

 

 

(79,650)

Proceeds on maturity or sale of marketable securities

 

 

71,174

 

 

69,180

Purchases of assets

 

 

(591,660)

 

 

 —

Sales of assets

 

 

257,806

 

 

74,375

Restricted deposits

 

 

(3,820)

 

 

(873)

Notes receivable and other investment reductions

 

 

12,590

 

 

396

Other, net

 

 

(50)

 

 

(400)

Net cash (used in) provided by investing activities

 

 

(387,003)

 

 

11,876

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings under revolving credit facilities

 

 

4,661,000

 

 

4,591,439

Repayments under revolving credit facilities

 

 

(4,630,664)

 

 

(4,548,815)

Proceeds from issuance of long-term debt

 

 

538,538

 

 

574,171

Repayment of long-term debt

 

 

(199,626)

 

 

(544,077)

Repayment of finance lease obligations

 

 

(2,645)

 

 

 —

Debt issuance costs

 

 

(10,182)

 

 

(17,030)

Debt settlement costs

 

 

 —

 

 

(485)

Contributions from noncontrolling interests

 

 

27,031

 

 

 —

Distributions to noncontrolling interests and stockholders

 

 

(5,753)

 

 

(2,025)

Net cash provided by financing activities

 

 

377,699

 

 

53,178

Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents

 

 

(16,470)

 

 

83,638

Cash, cash equivalents and restricted cash and equivalents:

 

 

 

 

 

 

Beginning of period

 

 

142,276

 

 

58,638

End of period

 

$

125,806

 

$

142,276

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

153,589

 

$

393,632

Net taxes paid

 

 

1,496

 

 

4,427

Non-cash investing and financing activities:

 

 

 

 

 

 

Finance lease obligations, net write-down due to lease activity

 

$

(930,110)

 

$

(69,255)

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

 

 

(53,588)

 

 

50,321

Operating lease obligations, net gross-up due to lease activity

 

 

2,916,017

 

 

 —

Assets subject to operating leases, net (gross-up) due to lease activity

 

 

(2,523,708)

 

 

 —

Financing obligations, net write-down due to lease activity

 

 

(2,734,940)

 

 

(168,993)

Assets subject to financing obligations, net write-down due to lease activity

 

 

1,718,507

 

 

131,048

 

See accompanying notes to consolidated financial statements.

 

 

F-6

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1)General Information

 

Description of Business

 

Genesis Healthcare, Inc. is a healthcare services holding company that through its subsidiaries (collectively, the Company or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business.  The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At December 31, 2019, the Company provides inpatient services through 381 skilled nursing, assisted/senior living and behavioral health centers located in 26 states.  Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 87% of its revenues.

 

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. The Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% 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 income (loss) attributable to Genesis Healthcare, Inc. and net loss attributable to noncontrolling interests in its consolidated statements of operations.

 

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of 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 control and economics that considers whether the Company 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. During 2019, the Company entered into two partnerships that acquired the real property of 33 skilled nursing facilities that are leased to the Company.  Management has concluded that these entities are VIEs, of which the Company is the primary beneficiary. As a result, it has included the assets, liabilities, and operating results of these entities in its consolidated financial statements.  See Note 4 – “Significant Transactions and Events – Strategic Partnership.”

 

Certain prior year disclosure amounts have been reclassified to conform to current period presentation.

 

Financial Condition and Liquidity Considerations

 

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

 

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s

F-7

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

financial statements were issued (March 16, 2020). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before March 16, 2021. Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date of issuance of these financial statements (March 16, 2020).

 

The Company’s results of operations continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers. In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.

 

The Company expects to continue to pursue cost mitigation and other strategies in response to the operating environment and liquidity requirements. During the year ended December 31, 2019, the Company amended, or obtained waivers related to, the financial covenants of all of its material debt and lease agreements to account for these ongoing changes in its capital structure and business conditions. Although the Company is and projects to be in compliance with all of its material debt and lease covenants through March 16, 2021, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with the covenants. Should the Company fail to comply with its debt and lease covenants at a future measurement date it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements.  To the extent any cross-default provisions apply, the default could have a more significant impact on the Company’s financial position.

 

(2)Summary of Significant Accounting Policies

 

Estimates and Assumptions

 

The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to consolidate company financial information and make informed estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to revenues, valuation of accounts receivable, self-insured liabilities, income taxes, impairment of long-lived assets, and other contingencies.  Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018. The Company’s adoption of Topic 606 primarily impacted the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers.  Under Topic 606, amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues.  To the extent there are material subsequent events that affect the payor's ability to pay, such amounts are recorded within operating expenses. 

 

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

 

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

 

F-8

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions.  The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known.  Adjustments arising from a change in the transaction price were not significant for the years ended December 31, 2019 and 2018. The Company does not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

 

The Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services have been provided.  Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.  Payments that the Company receives from customers in advance of providing services represent contract liabilities.  Such payments primarily relate to private pay patients, which are billed monthly in advance. See Note 5 – “Net Revenues and Accounts Receivable.

 

Accounts Receivable

 

The Company’s accounts receivable are primarily comprised of amounts due from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care providers that utilize its rehabilitation therapy and other services.  The Company evaluates the valuation of accounts receivable based on analysis of historical collection trends, as well as its understanding of the nature and collectibility of accounts based on their age and other factors.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less when purchased and therefore, approximate fair value. The Company’s available cash is held in accounts at commercial banking institutions.  The Company currently has bank deposits with commercial banking institutions that exceed Federal Deposit Insurance Corporation insurance limits.  

 

Restricted Cash and Equivalents

 

Restricted cash and equivalents includes cash and money market funds held by the Company’s wholly-owned captive insurance subsidiary, which are substantially restricted to securing outstanding claims losses.  Further, restricted cash and equivalents includes cash proceeds received under the ABL Credit Facilities that are pledged to cash collateralize letters of credit previously issued under the retired revolving credit facilities, as well as cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities resulting in the majority of the Company’s cash accounts being classified as restricted.  See Note 12 – “Long-Term Debt Asset Based Lending Facilities.” The restricted cash and equivalents balances at December 31, 2019 and 2018 were $113.7 million and $121.4 million, respectively.

 

Restricted Investments in Marketable Securities

 

Restricted investments in marketable securities primarily consist of fixed interest rate securities that are considered to be available-for-sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income (loss), a separate component of stockholders’ deficit.  Fair values for fixed interest rate securities are based on quoted market prices.

 

A decline in the market value of any security below cost that is deemed other-than-temporary is charged to income, resulting in the establishment of a new cost basis for the security.  Realized gains and losses for securities classified as available-for-sale are derived using the specific identification method for determining the cost of securities sold.

 

F-9

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The restricted investments in marketable securities balances at December 31, 2019 and 2018 were $136.9 million and $136.2 million, respectively.

 

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation.  Depreciation expense is calculated using the straight-line method over the estimated useful lives of the depreciable assets, which generally range from 20-35 years for buildings, building improvements and land improvements, and 3-15 years for equipment, furniture and fixtures.  Depreciation expense on leasehold improvements is calculated using the straight-line method over the lesser of the lease term or the estimated useful life of the asset.  Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are expensed as incurred.  Costs of additions and improvements are capitalized.

 

Total depreciation expense for the years ended December 31, 2019 and 2018 was $96.1 million and $210.0 million, respectively.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less costs to sell.  See Note 19 – “Asset Impairment Charges.”

 

Goodwill and Identifiable Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.  The Company tests goodwill on an annual basis and between annual tests if events occur or circumstances exist that would reduce the fair value of a reporting unit below its carrying amount.  The Company performs its annual goodwill impairment assessment for its reporting units as of September 30 of each year.  The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing.  If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any.

 

Definite-lived intangible assets consist of management contracts, customer relationships and favorable leases.  These assets are amortized in accordance with the authoritative guidance for intangible assets using the straight-line method over their estimated useful lives. These assets are tested for impairment consistent with the Company’s long-lived assets.  Indefinite-lived intangible assets consist of trade names.  The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events occur or circumstances exist that would indicate that the carrying amount of the intangible asset may not be recoverable. See Note 11 – “Goodwill and Identifiable Intangible Assets” and Note 19 – “Asset Impairment Charges.”

 

 Self-Insurance Reserves

 

The Company provides for self-insurance reserves for both general and professional liability and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported.  Estimated losses from asserted and incurred but not reported claims are accrued based on the Company’s estimates of the ultimate costs of the claims, which include costs associated with litigating or settling claims, and the relationship of past reported incidents to eventual claims payments.  All relevant information, including the Company’s own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims.  The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability are recorded on an undiscounted basis.  The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.  See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs – General and Professional Liability and Workers’ Compensation.”

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which it operates. The Company accounts for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized.

 

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.

 

The Company evaluates, on a quarterly basis, its ability to realize deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are its forecast of pre-tax earnings, its forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.  To the extent the Company prevails in matters for which reserves have been established, or is required to pay amounts in excess of its reserves, its effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in the Company’s effective tax rate in the year of resolution.  The Company records accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations.

 

Leases

 

The Company adopted a new leasing standard, FASB ASC Topic 842, Leases (Topic 842), on January 1, 2019 and elected the option to apply the transition requirements thereof at the effective date with the effects of initially applying the new standard recognized as a cumulative-effect adjustment to accumulated deficit on the adoption date.  Consequently, financial information has not been updated for periods prior to January 1, 2019.  See Recently Adopted Accounting Pronouncements below.

 

The Company leases skilled nursing facilities and assisted/senior living facilities, as well as certain office space, land, and equipment.  Under Topic 842, the Company evaluates at contract inception whether a lease exists and recognizes a lease liability and right-of-use (ROU) asset for all leases with a term greater than 12 months. Leases are classified as either finance or operating. While many of the Company’s facilities are subject to master lease agreements, leases are assessed, classified, and measured at the facility level.

 

All lease liabilities are measured as the present value of the future lease payments using a discount rate, which is generally the Company’s incremental borrowing rate for collateralized borrowings.  The future lease payments used to measure the lease liability include both fixed and variable payments that depend on a rate or index, as well as the exercise price of any options to purchase the underlying asset that have been deemed reasonably certain of being exercised. Future lease payments for optional renewal periods that are not reasonably certain of being exercised are excluded from the measurement of the lease liability. Regarding variable payments that depend on a rate or index, the lease liability is measured using the applicable rate or index as of lease commencement and is only remeasured under certain circumstances, such as a change in the lease term. Lease incentives serve to reduce the amount of future lease payments included in the measurement of the lease liability.  For all leases, the ROU asset is initially derived from the measurement of the lease liability and adjusted for certain items, such as initial direct costs and lease incentives received.  ROU assets are subject to impairment testing.

 

Amortization of finance lease ROU assets, which is generally recognized on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset, is included within depreciation and amortization expense in the consolidated statements of

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

operations. Interest expense associated with finance lease liabilities is included within interest expense in the consolidated statements of operations. Operating lease expense is recognized on a straight-line basis over the lease term and included within lease expense in the consolidation statements of operations. The lease term is determined based on the date the Company acquires control of the leased premises through the end of the lease term. Optional renewals periods are not initially included in the lease term unless they are deemed to be reasonably certain of being exercised at lease commencement.  For further discussion, see Note 10 – “Leases.”

 

Earnings (Loss) Per Share

 

The Company follows the Financial Accounting Standards Board’s (FASB) authoritative guidance for the financial reporting of earnings (loss) per share. Earnings (loss) per share excludes dilution and is based upon the weighted average number of common shares outstanding during the respective periods. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company.  See Note 6 – “Earnings (Loss) Per Share.”

 

Business Combinations

 

The Company’s acquisition strategy is to identify facilities for purchase or lease that are complementary to its current affiliated facilities, accretive to its business or otherwise advance its strategy.  The results of all of the Company’s operating subsidiaries are included in the accompanying financial statements subsequent to the date of acquisition.  Acquisitions are accounted for using the acquisition method of accounting and include leasing and other financing arrangements as well as cash transactions.  Assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date.  Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets.  Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, the initial fair value might not be finalized up to one year after the date of acquisition.

 

In developing estimates of fair values for long-lived assets, the Company utilizes a variety of factors including market data, cash flows, growth rates, and replacement costs.  Determining the fair value for specifically identified intangible assets involves significant judgment, estimates and projections related to the valuation to be applied to intangible assets such as favorable leases, customer relationships, management contracts and trade names.  The subjective nature of management’s assumptions increases the risk associated with estimates surrounding the projected performance of the acquired entity.  In transactions where significant judgment or other assumptions could have a material impact on the conclusion, the Company may engage third party specialists to assist in the valuation of the acquired assets and liabilities.  Additionally, as the Company amortizes definite-lived acquired intangible assets over time, the purchase accounting allocation directly impacts the amortization expense recorded on the financial statements.

 

Recently Adopted Accounting Pronouncements

 

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

 

The Company adopted the new standard on January 1, 2019. The Company elected the option to apply the transition requirements in Topic 842 at the effective date of January 1, 2019 with the effects of initially applying Topic 842 recognized as a cumulative-effect adjustment to accumulated deficit in the period of adoption.  Consequently, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.

 

The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’, which permit it to not reassess its prior conclusions about lease identification, lease classification and initial direct

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.

 

The adoption of the new standard had a material effect on the Company’s financial statements. The most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for real estate operating leases; (2) the derecognition of existing assets and liabilities for sale-leaseback transactions (including those arising from build-to-suit lease arrangements for which construction is complete and the Company is leasing the constructed asset) that historically did not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities.

 

Upon adoption, the Company:

 

·

Recognized operating lease liabilities of $0.6 billion based on the present value of the remaining minimum rental payments as determined in accordance with Topic 842 for leases that had historically been accounted for as operating leases under the previous leasing standards. The Company recognized corresponding ROU assets of approximately $0.5  billion based on the operating lease liabilities, adjusted for existing straight-line lease liabilities, existing assets and liabilities related to favorable and unfavorable terms of operating leases previously recognized in respect of business combinations, and the impairment of the ROU assets. The resulting net impact of $0.1 billion associated with this change in accounting was recognized as an increase to opening accumulated deficit as of January 1, 2019.

 

·

Derecognized existing financing obligations of $2.7 billion and existing property and equipment of $1.7 billion. The Company recognized new operating lease liabilities and corresponding ROU assets of $1.9 billion on its balance sheet for the associated leases. The resulting net impact of $1.0 billion associated with this change in accounting was recognized as a reduction to opening accumulated deficit as of January 1, 2019.

 

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. See Note 10 – “Leases.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act (Tax Reform Act) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects."  Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act.  Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income is not affected by this update.  The Company adopted the new standard on January 1, 2019.  The adoption of ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements. The Company adopted the new standard on January 1, 2020.  The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased.  The standard has been further refined through subsequent releases by the FASB, including the extension of the effective date.  As a smaller reporting company, the standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those annual periods, with early adoption permitted.  The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which serves to remove or amend certain requirements associated with the accounting for income taxes. The standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the effect, if any, that the standard will have on its consolidated financial statements and related disclosures.

 

(3)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 78% 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 years ended December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Medicare

 

20

%  

 

21

%  

Medicaid

 

58

%  

 

57

%  

Insurance

 

12

%  

 

12

%  

Private

 

 7

%  

 

 8

%  

Other

 

 3

%  

 

 2

%  

Total

 

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 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. 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Concentration of Credit Risk

 

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

 

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in the Company’s rehabilitation therapy services business where it has over 140 distinct customers, many being chain operators with more than one location.  One of the Company’s customers, a related party, comprises $28.9 million, approximately 34%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2019. See Note 16 – “Related Party Transactions.” Additionally, one former customer comprises $7.0 million, approximately 8%, of the gross outstanding contract receivables in the rehabilitation therapy services business at December 31, 2019.  A future adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on the Company.

 

Covenant Compliance

 

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

 

Although the Company is in compliance, and projects to remain in compliance, with the covenants required by its material debt and lease agreements, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with its financial covenants through March 16, 2021.

 

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

 

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

 

(4)Significant Transactions and Events

 

Strategic Partnerships

 

Next Partnership

 

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which the Company acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next Healthcare (Next), a related party.  See Note 16 – “Related Party Transactions.”  In conjunction with the facility sales, the Company received aggregate annual rent credits of $17.2 million. The Company will continue to operate these facilities pursuant to a master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  The Company will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter.  The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the net price paid by the partnership to acquire the facilities from Welltower.

 

The Company has concluded the Next Partnership qualifies as a VIE and the Company is the primary beneficiary.  As such, the Company has consolidated all of the accounts of the Next Partnership in the accompanying consolidated financial statements.  The ROU

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

assets and lease obligations related to the Next Partnership lease agreement have been fully eliminated in the Company’s consolidated financial statements. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million.  The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million.  The impact of consolidation on the accompanying consolidated statement of operations was not material for the year ended December 31, 2019 apart from transaction costs of $5.3 million.

 

Vantage Point Partnership

 

On September 12, 2019, Welltower and Second Spring Healthcare Investments (Second Spring) sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which the Company invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million.  In conjunction with the facility sales, the Company received aggregate annual rent credits of $30.3 million. The Company will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available.  The Company will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter.  The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities.  The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the purchase price paid by the partnership.  Further, Vantage Point holds a put option that would require the Company to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if the Company opts not to purchase the facilities or upon the occurrence of certain events of default.

 

The Company has concluded the Vantage Point Partnership qualifies as a VIE and the Company is the primary beneficiary.  As such, the Company has consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements.  The ROU assets and lease obligations related to the Vantage Point Partnership lease agreement have been fully eliminated in the Company’s consolidated financial statements. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million.  The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million.  The Company has not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period.  Other than transaction costs of $11.0 million, the impact of consolidation on the accompanying consolidated statement of operations was not material for the year ended December 31, 2019.

 

During the third quarter of 2019, the Company sold the real property of seven skilled nursing facilities and one assisted/senior living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire its interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested.  Three of the facilities were subject to real estate loans and two were subject to loans insured by the U.S. Department of Housing and Urban Development (HUD). See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $57.8 million.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Divestiture of Non-Strategic Facilities

 

2019 Divestitures 

 

California Divestitures

 

During the second quarter of 2019, the Company sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million.  The divestiture resulted in a gain of $25.0 million. The Company also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million.

 

During the third quarter of 2019, the Company sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing.  See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – HUD Insured Loans.” The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $0.6 million.

 

Texas Divestitures

 

During the fourth quarter of 2019, the Company sold the real property of seven facilities in Texas for a sales price of $20.1 million. The net proceeds were used principally to repay the indebtedness of the facilities. The Company recognized a net gain of $3.3 million associated with the sale of the facilities. The Company recognized a gain on early extinguishment of debt of $2.6 million associated with the write off of the debt premiums and issuance costs on the underlying HUD loans. These seven facilities had been classified as held for sale as of December 31, 2018.  See Note 20 – “Assets Held for Sale.”

 

Other Divestitures

 

During the first quarter of 2019, the Company divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease).  The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million.  The Company recognized a loss on exit reserves of $3.5 million.  The Company also completed the closure of one facility located in Ohio.  The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

 

During the second quarter of 2019, the Company divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

 

During the third quarter of 2019, the Company divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility.  Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $3.5 million.

 

During the fourth quarter of 2019, the Company divested the operations of one leased skilled nursing facility in New Jersey. The facility generated annual revenues of $19.0 million and pre-tax net loss of $1.2 million. The divestiture resulted in a loss of $0.9 million, which was primarily attributable to exit costs.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2018 Divestitures

 

During the year ended December 31, 2018, the Company divested the operations of 54 skilled nursing facilities and one assisted/senior living facility.  These divestitures resulted in net gains of $34.8 million, which are included in other income on the consolidated statements of operations.  See Note 18 – “Other Income.”

Texas Divestitures

 

During the fourth quarter of 2018, the Company divested the operations of 23 skilled nursing facilities located in Texas, consisting of 22 owned facilities and one leased facility. The Company sold the real property associated with 15 of the owned facilities, with the real property of the remaining seven owned facilities being classified as held for sale at December 31, 2018.  Sale proceeds of approximately $89.4 million, net of transaction costs, were used principally to repay the indebtedness of the facilities. The Company recognized a gain of $3.4 million primarily attributable to the derecognition of financing lease assets and obligations offset by a loss of $4.6 million for exit costs. Debt premiums and issuance costs of $9.4 million associated with underlying HUD loans were written off as a gain on early extinguishment of debt.

 

Other Divestitures

 

During the first quarter of 2018, the Company closed one leased skilled nursing facility located in Massachusetts. The facility remained subject to a master lease with Welltower until its sale in the second quarter of 2019. The facility generated annual revenues of $9.0 million and pre-tax net loss of $2.7 million. The closure resulted in a loss of $0.3 million.

 

During the second quarter of 2018, the Company divested 19 leased skilled nursing facilities, one of which had previously been closed during 2017. The facilities were located across the states of California, Kentucky, Massachusetts, New Jersey, and Pennsylvania.  Twelve of the facilities were subject to a master lease with Second Spring and six were subject to a master lease with Sabra Health Care REIT, Inc. (Sabra).  The facilities generated annual revenues of $182.7 million and pre-tax loss of $23.8 million.  The Company recorded a gain of $22.5 million on the divestitures, offset by a loss on exit costs of $8.4 million.  Additionally, the Company recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million associated with 12 of the facilities. The Company recorded accelerated depreciation expense of $5.3 million associated with the divestitures.

 

During the third quarter of 2018, the Company divested seven leased facilities, consisting of six skilled nursing facilities and one behavioral health clinic. The facilities were located across the states of California, Indiana, Maryland, Pennsylvania, Ohio, and Texas.   Three of the facilities were subject to a master lease with Welltower, while two others were subject to master leases with Second Spring and Sabra.  The facilities generated annual revenues of $71.7 million and pre-tax loss of $9.7 million.  The Company recorded a gain of $27.9 million on the divestitures, offset by a loss on exit costs of $3.1 million.  Additionally, the Company recognized capital lease and financing obligation net asset write-downs of $44.5 million and capital lease and financing obligation write-downs of $77.0 million associated with four of the facilities. The Company recorded accelerated depreciation expense of $7.3 million associated with the divestitures. The Company received an annual rent credit of $0.6 million associated with the divestiture of one of the facilities.

 

During the fourth quarter of 2018, the Company divested six facilities, consisting of five leased skilled nursing facilities and one owned assisted/senior living facility.  The facilities were located across the states of Georgia, Idaho, Montana, and Nevada.  Four of the facilities were subject to a master lease with Sabra.  The facilities generated annual revenues of $36.8 million and pre-tax income of $3.1 million.  The Company recorded a gain of $0.4 million on the divestitures, offset by a loss on exit costs of $1.1 million.  The Company received an annual rent credit of $0.3 million associated with the divestiture of one of the leased facilities. The owned facility was sold for $2.2 million with net proceeds of $1.9 million being primarily used to pay down indebtedness. Additionally, the Company recorded a loss of $1.9 million for exit costs associated with the pending closure of certain clinics associated with the Company’s rehabilitation services business.

 

Acquisitions

 

On June 1, 2019, the Company acquired the operations of one skilled nursing facility in New Mexico. The new facility has 80 licensed beds and generates approximate annual net revenue of $3.4 million. The facility is leased from Omega and is classified as an operating lease. The facility’s 2019 pre-tax net income was de minimis.

F-18

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On November 1, 2018, the Company acquired the operations of eight skilled nursing facilities and one assisted/senior living facility in New Mexico and Arizona.  The nine new facilities have approximately 1,000 beds and generate approximate annual net revenue of $60.0 million.  The facilities are leased from Omega.  Four of the facilities were classified as capital leases and resulted in an initial capital lease asset and obligation gross up of $14.6 million.  The remaining five facilities were initially classified as operating leases.

 

Lease Transactions

 

Gains, losses and termination charges associated with master lease terminations and amendments are recorded as non-recurring charges.  These amendments and terminations resulted in net gains of $93.8 million and net losses of $21.9 million for the years ended December 31, 2019 and 2018, respectively.  These gains and losses are included in other income on the consolidated statements of operations. 

 

Welltower

 

During the year ended December 31, 2019, the Company amended the Welltower Master Lease several times to reflect the lease termination of 30 facilities, including the 15 facilities sold to and now leased from the Next Partnership.  As a result of the lease termination on the 30 facilities, the Company received annual rent credits of approximately $25.9 million.  For those facilities remaining under the Welltower Master Lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold.  Lease modification analyses were performed at each amendment date and as of December 31, 2019 all 43 facilities subject to the Welltower Master Lease are classified as operating leases.  In total, the amendments resulted in a net reduction to finance lease ROU assets and obligations of $11.7 million and $22.4 million, respectively, a net reduction to operating lease ROU assets and obligations of $112.8 million and $150.4 million, respectively and a gain of $48.3 million.

 

Omega

 

During the third quarter of 2019, the Company amended its master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold.  Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively.  The lease termination and remeasurement resulted in an aggregate gain of $23.4 million.

 

During the fourth quarter of 2019,  the Company amended its master lease with Omega to reflect the inclusion of nine skilled nursing facilities and one assisted living facility in New Mexico and Arizona.  These facilities were previously leased from Omega, following the terms of a separate lease agreement, and all facilities were classified as operating leases.  There was no change in base rent for the 10 facilities upon addition to the master lease.  The lease assessment and measurement resulted in operating lease classification with a $10.6 million ROU asset and lease liability gross up.  In addition, the Company received $15.0 million as a short-term note payable in full to Omega by April 30, 2020.  See Note 12 – “Long-Term Debt – Notes Payable.”

 

Second Spring

 

During the third quarter of 2019, the Company amended its master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off.  Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold.  Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively.  The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

F-19

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Sabra

The Company is party to an agreement with Sabra resulting in permanent and unconditional annual cash rent savings of $19 million effective January 1, 2018.  Sabra has pursued and the Company has supported Sabra’s previously announced sale of the Company’s leased assets.  At the closing of such sales, the Company has entered into lease agreements with new landlords for a majority of the assets currently leased with Sabra.  During the year ended December 31, 2018, Sabra completed the sale of 34 facilities to third party landlords with whom the Company has entered into new lease agreements.  Those transactions are summarized below.

 

During the second quarter of 2018, Sabra completed the sale and lease termination of 21 facilities, consisting of 20 skilled nursing facilities and one assisted/senior living facility.  The facilities were located across nine states.  As a result of the sales, the Company will receive an annual rent credit of $19.4 million for the remaining lease term.  The Company continues to operate 12 of the facilities under a new lease with a new landlord, Next Healthcare Capital (Next), as described in Note 16 - "Related Party Transactions." The Company continues to operate the other nine facilities under a separate lease with a new landlord. The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million.  The Company recognized accelerated depreciation expense of $9.6 million associated with the property and equipment sold and a gain on the write off of certain lease liabilities of $9.9 million.

 

During the fourth quarter of 2018, Sabra completed the sale and lease termination of 13 skilled nursing facilities located in California, Colorado, Connecticut, and New Mexico. As a result of the sales, the Company will receive an annual rent credit of $6.7 million for the remaining lease term.  The Company continues to operate four of the facilities under a lease agreement with a new landlord.  The new lease has a 9.5 year initial term, one five-year renewal option and initial annual rent of $3.4 million.  The Company continues to operate the other nine facilities under a lease agreement with a new landlord.  The new lease has a ten-year initial term, one five-year renewal option, and initial annual rent of $3.3 million. The Company recognized accelerated depreciation expense of $7.4 million associated with the property and equipment sold and a gain on the write off of certain lease liabilities of $6.2 million.

 

As a result of the amendments and lease terminations noted above, the Company recorded a lease termination charge of $34.1 million in the year ended December 31, 2018, with an offsetting obligation recorded in other long-term liabilities.  The charge represents the discounted residual rents the Company will continue to pay Sabra on the facilities that have been terminated due to either divestiture or sale to a new landlord. On an undiscounted basis, the Company was obligated to pay Sabra approximately $41.0 million as of December 31, 2018. This obligation will be repaid over a period of approximately four years ending in 2023. 

 

Other

 

During the first quarter of 2019, the Company amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed the Company’s option to purchase certain facilities under the lease and adjusted certain financial covenants. The Company had previously determined that the renewal option period was not reasonably certain of exercise.  Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

 

During the third quarter of 2019, the Company amended a master lease agreement to reflect the lease termination of six facilities subject to the lease.  In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

 

During the second quarter of 2018, the Company negotiated the extensions of four separate lease agreements resulting in the derecognition of certain lease assets totaling $1.9 million.

 

During the year ended December 31, 2018, the cease to use asset associated with a leased facility divestiture initially recorded during 2017 was further adjusted to reflect changes in the sublease assumption, resulting in a loss of $2.0 million.

 

F-20

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restructuring Transactions

 

Overview

 

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

 

In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior revolving credit facilities, expanding its term loan borrowings, amending its real estate loans with Welltower while refinancing some of those loan amounts through new real estate loans.  The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.  See Note 12 – “Long-Term Debt.”  The Company also amended the financial covenants in all of its material loan agreements and all but two of its material master leases.  Financial covenants were amended to account for changes in the Company’s capital structure as a result of the Restructuring Transactions and to account for the current business climate. 

 

Welltower Master Lease Amendment

 

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

 

Omnibus Agreement

 

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

 

The Omnibus Agreement also provided that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower would be written off and (b) the Company may request conversion of not more than $50.0 million of the outstanding balance of the Company’s Welltower Real Estate Loans into equity.  If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied.  Moreover, the Company agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.  The conditions described above have not been satisfied as of December 31, 2019.

 

In connection with the Omnibus Agreement, the Company agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of the Company’s Class A Common Stock at an exercise price equal to $1.33 per share.  Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions, which had not occurred as of December 31, 2019.  The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.

 

F-21

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(5)   Net Revenues and Accounts Receivable

 

Revenue Streams

 

Inpatient Services

 

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

 

Rehabilitation Therapy Services

 

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

 

Other Services

 

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

 

Disaggregation of Revenues

 

The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.  The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source.  Payments are generally received within 30 to 60 days after billing.  See Note 7 – “Segment Information.”

 

The composition of net revenues by payor type and operating segment for the years ended December 31, 2019 and 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

800,253

 

$

90,811

 

$

 —

 

$

891,064

 

Medicaid

 

 

2,313,479

 

 

2,144

 

 

 —

 

 

2,315,623

 

Insurance

 

 

463,135

 

 

22,273

 

 

 —

 

 

485,408

 

Private

 

 

310,022

(1)

 

296

 

 

 —

 

 

310,318

 

Third party providers

 

 

 —

 

 

336,509

 

 

78,709

 

 

415,218

 

Other

 

 

69,143

(2)

 

10,513

(2)

 

68,547

(3)

 

148,203

 

Total net revenues

 

$

3,956,032

 

$

462,546

 

$

147,256

 

$

4,565,834

 

 

F-22

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

Medicare

 

$

913,615

 

$

89,514

 

$

 —

 

$

1,003,129

 

Medicaid

 

 

2,461,228

 

 

2,096

 

 

 —

 

 

2,463,324

 

Insurance

 

 

517,512

 

 

23,071

 

 

 —

 

 

540,583

 

Private

 

 

339,680

(1)

 

438

 

 

 —

 

 

340,118

 

Third party providers

 

 

 —

 

 

415,541

 

 

83,952

 

 

499,493

 

Other

 

 

64,838

(2)

 

17,254

(2)

 

47,911

(3)

 

130,003

 

Total net revenues

 

$

4,296,873

 

$

547,914

 

$

131,863

 

$

4,976,650

 

 

(1)

Includes Assisted/Senior living revenue of $93.1 million and $96.1 million for the years ended December 31, 2019 and 2018, respectively.  Such amounts do not represent contracts with customers under Topic 606.

(2)

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

(3)

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

 

 

 

 

(6)  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 each of the other two classes, representing the voting interests of the legacy FC-GEN Operations Investment, LLC (FC-GEN) owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.

 

Basic EPS was computed by dividing net income (loss) attributable to Genesis Healthcare, Inc. by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net income (loss) attributable to Genesis Healthcare, Inc. plus the effect of any assumed conversions of noncontrolling interests by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common stock.

 

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

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Numerator:

 

 

 

 

 

 

Net income (loss)

 

$

7,474

 

$

(372,417)

Less: Net loss attributable to noncontrolling interests

 

 

7,145

 

 

137,186

Net income (loss) attributable to Genesis Healthcare, Inc.

 

$

14,619

 

$

(235,231)

Denominator:

 

 

 

 

 

 

Weighted-average shares outstanding for basic net income (loss) per share

 

 

107,286

 

 

101,007

 

 

 

 

 

 

 

Basic net income (loss) per common share attributable to Genesis Healthcare, Inc.

 

$

0.14

 

$

(2.33)

 

F-23

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Numerator:

 

 

 

 

 

 

Net income (loss)

 

$

7,474

 

$

(372,417)

Less: Net loss attributable to noncontrolling interests

 

 

7,145

 

 

137,186

Net income (loss) attributable to Genesis Healthcare, Inc.

 

$

14,619

 

$

(235,231)

Plus: Assumed conversion of noncontrolling interests

 

 

1,868

 

 

 —

Net income (loss) available to common stockholders after assumed conversions

 

$

16,487

 

$

(235,231)

Denominator:

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

107,286

 

 

101,007

Plus: Assumed conversion of noncontrolling interests

 

 

57,074

 

 

 —

Plus: Unvested restricted stock units and stock warrants

 

 

954

 

 

 —

Adjusted weighted-average common shares outstanding, diluted

 

 

165,314

 

 

101,007

 

 

 

 

 

 

 

Diluted net income (loss) per common share attributable to Genesis Healthcare, Inc.

 

$

0.10

 

$

(2.33)

 

As the Company was in a net loss position for the year ended December 31, 2018, the computation of diluted net loss per common share for this period excludes the effects of 61.5 million anti-dilutive shares attributable to the assumed conversion of noncontrolling interests, unvested restricted stock units, and stock warrants.  As of December 31, 2018, there were 59.7 million units attributable to the noncontrolling interests outstanding.

 

In the year ended December 31, 2018, the Company issued a warrant to purchase 600,000 shares of its Class A common stock at an exercise price of $1.33 per share, exercisable beginning on September 6, 2018 and ending on March 6, 2023.  See Note 4 – “Significant Transactions and Events – Restructuring Transactions – Omnibus Agreement.”  In the year ended December 31, 2017, the Company issued a warrant to purchase 900,000 shares of its Class A common stock at an exercise price of $1.00 per share, exercisable through December 30, 2022.

 

(7)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.”

 

F-24

Table of Contents

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

 

 

 

2019

 

2018

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,857,793

 

84.4

%  

$

4,195,596

 

84.3

%  

$

(337,803)

 

(8.1)

%

Assisted/Senior living facilities

 

 

93,054

 

2.0

%  

 

95,571

 

1.9

%  

 

(2,517)

 

(2.6)

%

Administration of third party facilities

 

 

8,310

 

0.2

%  

 

8,733

 

0.2

%  

 

(423)

 

(4.8)

%

Elimination of administrative services

 

 

(3,125)

 

(0.1)

%  

 

(3,027)

 

 —

%  

 

(98)

 

(3.2)

%

Inpatient services, net

 

 

3,956,032

 

86.5

%  

 

4,296,873

 

86.4

%  

 

(340,841)

 

(7.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

738,124

 

16.2

%  

 

889,069

 

17.9

%  

 

(150,945)

 

(17.0)

%

Elimination of intersegment rehabilitation therapy services

 

 

(275,578)

 

(6.0)

%  

 

(341,155)

 

(6.9)

%  

 

65,577

 

19.2

%

Third party rehabilitation therapy services, net

 

 

462,546

 

10.2

%  

 

547,914

 

11.0

%  

 

(85,368)

 

(15.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

198,920

 

4.4

%  

 

161,038

 

3.2

%  

 

37,882

 

23.5

%

Elimination of intersegment other services

 

 

(51,664)

 

(1.1)

%  

 

(29,175)

 

(0.6)

%  

 

(22,489)

 

(77.1)

%

Third party other services, net

 

 

147,256

 

3.3

%  

 

131,863

 

2.6

%  

 

15,393

 

11.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,565,834

 

100.0

%  

$

4,976,650

 

100.0

%  

$

(410,816)

 

(8.3)

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,959,157

 

$

738,124

 

$

198,676

 

$

244

 

$

(330,367)

 

$

4,565,834

 

Salaries, wages and benefits

 

 

1,761,273

 

 

601,196

 

 

122,541

 

 

 —

 

 

 —

 

 

2,485,010

 

Other operating expenses

 

 

1,599,549

 

 

44,088

 

 

62,104

 

 

 —

 

 

(330,894)

 

 

1,374,847

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

144,471

 

 

 —

 

 

144,471

 

Lease expense

 

 

382,897

 

 

1,297

 

 

1,463

 

 

1,406

 

 

 —

 

 

387,063

 

Depreciation and amortization expense

 

 

99,529

 

 

12,230

 

 

720

 

 

10,775

 

 

(95)

 

 

123,159

 

Interest expense

 

 

83,887

 

 

55

 

 

35

 

 

97,831

 

 

(1,416)

 

 

180,392

 

Gain on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(122)

 

 

 —

 

 

(122)

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(8,712)

 

 

1,416

 

 

(7,296)

 

Other (income) loss

 

 

(172,709)

 

 

(926)

 

 

112

 

 

18

 

 

 —

 

 

(173,505)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

26,362

 

 

 —

 

 

26,362

 

Long-lived asset impairments

 

 

16,937

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16,937

 

Equity in net loss (income) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

4,091

 

 

(4,803)

 

 

(712)

 

Income (loss) before income tax expense

 

 

187,794

 

 

80,184

 

 

11,701

 

 

(275,876)

 

 

5,425

 

 

9,228

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,754

 

 

 —

 

 

1,754

 

Net income (loss)

 

$

187,794

 

$

80,184

 

$

11,701

 

$

(277,630)

 

$

5,425

 

$

7,474

 

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2018

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

4,299,900

 

$

889,069

 

$

160,913

 

$

125

 

$

(373,357)

 

$

4,976,650

 

Salaries, wages and benefits

 

 

1,944,091

 

 

733,763

 

 

109,054

 

 

 —

 

 

 —

 

 

2,786,908

 

Other operating expenses

 

 

1,740,537

 

 

51,590

 

 

61,110

 

 

 —

 

 

(373,357)

 

 

1,479,880

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

149,182

 

 

 —

 

 

149,182

 

Lease expense

 

 

127,323

 

 

 —

 

 

1,289

 

 

1,247

 

 

 —

 

 

129,859

 

Depreciation and amortization expense

 

 

193,930

 

 

12,779

 

 

684

 

 

13,503

 

 

 —

 

 

220,896

 

Interest expense

 

 

367,562

 

 

55

 

 

36

 

 

96,085

 

 

 —

 

 

463,738

 

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

391

 

 

 —

 

 

391

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(6,832)

 

 

 —

 

 

(6,832)

 

Other (income) loss

 

 

(14,872)

 

 

1,942

 

 

78

 

 

(68)

 

 

 —

 

 

(12,920)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

31,953

 

 

 —

 

 

31,953

 

Long-lived asset impairments

 

 

104,997

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

104,997

 

Goodwill and identifiable intangible asset impairments

 

 

3,538

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,538

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

1,508

 

 

(100)

 

(Loss) income before income tax benefit

 

 

(167,206)

 

 

88,940

 

 

(11,338)

 

 

(283,728)

 

 

(1,508)

 

 

(374,840)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(2,423)

 

 

 —

 

 

(2,423)

 

Net (loss) income

 

$

(167,206)

 

$

88,940

 

$

(11,338)

 

$

(281,305)

 

$

(1,508)

 

$

(372,417)

 

 

 

The following table presents the segment assets as of December 31, 2019 compared to December 31, 2018 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

 

Inpatient services

 

$

4,221,579

 

$

3,735,778

 

Rehabilitation therapy services

 

 

281,978

 

 

329,687

 

Other services

 

 

49,877

 

 

36,240

 

Corporate and eliminations

 

 

108,706

 

 

161,918

 

Total assets

 

$

4,662,140

 

$

4,263,623

 

 

 

 

 

 

(8)Restricted Investments in Marketable Securities

 

The current portion of restricted investments in marketable securities principally represents an estimate of the level of outstanding self-insured losses the Company expects to pay in the succeeding year through its wholly-owned captive insurance company.  See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs.”

 

Restricted investments in marketable securities at December 31, 2019 consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

Amortized

 

Unrealized

 

Less than

 

Greater than

 

 

 

 

    

cost

    

gains

    

12 months

    

12 months

    

Fair value

Restricted investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage/government backed securities

 

$

20,957

 

$

90

 

$

(17)

 

$

(7)

 

$

21,023

Corporate bonds

 

 

48,362

 

 

566

 

 

 —

 

 

(2)

 

 

48,926

Government bonds

 

 

66,734

 

 

286

 

 

(22)

 

 

(5)

 

 

66,993

 

 

$

136,053

 

$

942

 

$

(39)

 

$

(14)

 

 

136,942

Less:  Current portion of restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,855)

Long-term restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

105,087

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted investments in marketable securities at December 31, 2018 consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

Amortized

 

Unrealized

 

Less than

 

Greater than

 

 

 

 

    

cost

    

gains

    

12 months

    

12 months

    

Fair value

Restricted investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage/government backed securities

 

$

11,945

 

$

 4

 

$

 —

 

$

(130)

 

$

11,819

Corporate bonds

 

 

56,199

 

 

49

 

 

(42)

 

 

(387)

 

 

55,819

Government bonds

 

 

68,767

 

 

76

 

 

(2)

 

 

(326)

 

 

68,515

 

 

$

136,911

 

$

129

 

$

(44)

 

$

(843)

 

 

136,153

Less:  Current portion of restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,631)

Long-term restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

100,522

Maturities of restricted investments yielded proceeds of $69.2 million and $65.7 million for the years ended December 31, 2019 and 2018, respectively.

 

Sales of investments yielded proceeds of $2.0 million and $3.5 million for the years ended December 31, 2019 and 2018, respectively.  Associated gross realized gain and loss for the years ended December 31, 2019 and 2018 were de minimis. 

 

The majority of the Company’s investments are investment grade government and corporate debt securities that have maturities of five years or less. The Company generally holds the investments until maturity.

 

Restricted investments in marketable securities held at December 31, 2019 mature as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

    

cost

    

value

Due in one year or less

 

$

46,681

 

$

46,766

Due after 1 year through 5 years

 

 

86,372

 

 

87,165

Due after 5 years through 10 years

 

 

 —

 

 

 —

Due after 10 years

 

 

3,000

 

 

3,011

 

 

$

136,053

 

$

136,942

Actual maturities may differ from stated maturities because borrowers may have the right to call or prepay certain obligations and may exercise that right with or without prepayment penalties.

 

The Company has issued letters of credit totaling $125.0 million at December 31, 2019 to its third party administrators and excess insurance carriers.  Restricted cash of $0.7 million and restricted investments with an amortized cost of $136.1 million and a fair value of $136.9 million are pledged as security for these letters of credit as of December 31, 2019.

 

(9)Property and Equipment

 

Property and equipment consisted of the following as of December 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

 

Land, buildings and improvements

 

$

1,004,447

 

$

469,575

 

Finance lease land, buildings and improvements

 

 

 —

 

 

693,546

 

Financing obligation land, buildings and improvements

 

 

 —

 

 

2,274,211

 

Equipment, furniture and fixtures

 

 

386,248

 

 

417,684

 

Construction in progress

 

 

2,771

 

 

9,340

 

Gross property and equipment

 

 

1,393,466

 

 

3,864,356

 

Less: accumulated depreciation

 

 

(431,361)

 

 

(976,802)

 

Net property and equipment

 

$

962,105

 

$

2,887,554

 

 

 

 

 

 

 

 

On January 1, 2019, the Company derecognized net financing obligation land and buildings of $1.7 billion and reclassified net finance lease land and buildings of $0.6 billion to finance lease ROU assets within the consolidated balance sheets due to the adoption of Topic 842.  See Note 2 – “Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements” and Note 10 – “Leases.”  Additionally, improvements of approximately $12.7 million and $73.6 million, which were historically associated with

F-27

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

finance leases (referred to as “capital leases” prior to the adoption of Topic 842) and financing obligations, respectively, have been reclassified to “Land, buildings and improvements.”

 

During 2019, the Company identified a buyer for eight facilities located in California.  Seven of these facilities were sold in 2019, resulting in a net reduction of property and equipment of $36.9 million, and closure of the eighth is pending regulatory approval. At December 31, 2019, net property and equipment of $16.3 million attributable to one California skilled nursing facility remains classified as held for sale. The property and equipment of these facilities was primarily classified in the “Land, buildings and improvements” line item as of December 31, 2018. See Note 4 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – 2019 Divestitures – California Divestitures” and Note 20 – “Assets Held for Sale.”

 

During the year ended December 31, 2019, the Company sold the real property of eight facilities and consolidated the property and equipment of the Next Partnership and the Vantage Point Partnership.  See Note 4 – “Significant Transactions and Events – Strategic Partnerships.”  The sales resulted in a net reduction of property and equipment of $29.4 million, while the consolidation of the partnerships resulted in an increase of $512.7 million, both of which were primarily classified in the “Land, buildings and improvements” line item.

 

During the year ended December 31, 2019, the Company recognized long-lived asset impairment charges resulting in the reduction of net property and equipment of $10.7 million.  See Note 19 – “Asset Impairment Charges – Long-Lived Assets with a Definite Useful Life.” 

 

(10)Leases

 

The Company leases the majority of the skilled nursing facilities and assisted/senior living facilities used in its operations, most of which are subject to triple-net leases, meaning that in addition to rent, the Company is responsible for paying property taxes, insurance, and maintenance and repair costs.  As of December 31, 2019, the Company leased approximately 78% of its centers; 45% were leased pursuant to master lease agreements with four landlords.  The Company also leases certain office space, land, and equipment.

 

The Company’s real estate leases generally have initial lease terms of 10 to 15 years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional five to ten years or more. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term.  The Company assesses renewal options using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, the majority of its leases’ terms do not include renewal periods when measuring the lease liability.  For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the ROU asset and lease liability.  The payment structure of the Company’s leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices.  Leases with an initial term of 12 months or less are not recorded on the balance sheet; expense for these leases is recognized on a straight-line basis over the lease term as an other operating expense.

 

Certain leases include options for the Company to purchase the leased asset.  For such leases, the Company assesses the likelihood of exercising the purchase option using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, purchase options are generally assumed to be exercised when a compelling economic reason to exercise the option exists.  Certain leases include options to terminate the lease, the terms and conditions of which vary by contract.  Such options allow the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration.  The Company’s lease agreements do not contain any material residual value guarantees.  The Company leases certain facilities from affiliates of related parties.  See Note 16 – “Related Party Transactions.”

 

The Company makes certain assumptions in determining the discount rate.  As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate for collateralized borrowings, based on the information available at commencement date, in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach was utilized to group assets based on similar lease terms in a manner whereby the Company reasonably expects that the application does not differ materially from application to individual leases.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Subsequent to lease commencement date, the Company reassesses lease classification when there is a contract modification that is not accounted for as a separate contract, a change in lease term, or a change in the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. This reassessment is made using current facts, circumstances and conditions. As a result of a lease’s modification, the remaining consideration in the contract is reallocated to lease and non-lease components, as applicable, and the lease liability is remeasured using the applicable discount rate at the effective date of the modification. The remeasurement of the lease liability will result in adjustment to the corresponding ROU asset, unless the lease is fully or partially terminated, in which case, a gain or loss will be recognized.

 

Lease Transactions

 

During the year ended December 31, 2019, the Company amended, extended and terminated the leases with respect to numerous facilities subject to material lease agreements, resulting in ROU asset and liability adjustments. See Note 4 – “Significant Transactions and Events – Lease Transactions.”

 

During the year ended December 31, 2019, the Company recognized impairment charges resulting in the reduction of ROU assets of $6.2 million. See Note 19 – “Asset Impairment Charges – Long-Lived Assets with a Definite Useful Life.”

 

The maturity of total operating and finance lease obligations at December 31, 2019 is as follows (in thousands): 

 

 

 

 

 

 

 

 

Year ending December 31, 

    

Operating Leases

    

Finance Leases (1)

2020

 

$

382,926

 

$

7,659

2021

 

 

386,440

 

 

7,468

2022

 

 

384,450

 

 

7,264

2023

 

 

382,649

 

 

7,032

2024

 

 

388,091

 

 

6,812

Thereafter

 

 

3,045,668

 

 

35,886

Total lease payments

 

 

4,970,224

 

 

72,121

Less interest

 

 

(2,147,934)

 

 

(29,947)

Total lease obligations

 

 

2,822,290

 

 

42,174

Less current portion

 

 

(140,887)

 

 

(2,839)

Long-term lease obligations

 

$

2,681,403

 

$

39,335

(1)

Finance lease payments include $37.2 million related to options to renew lease terms that are reasonably certain of being exercised.

 

 

The Company’s future minimum commitments under finance leases (formerly capital leases), financing obligations, and operating leases as of December 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 

    

Finance Leases

    

Financing Obligations

    

Operating Leases

2019

 

$

88,793

 

$

237,335

 

$

110,755

2020

 

 

89,397

 

 

242,052

 

 

109,391

2021

 

 

91,292

 

 

245,311

 

 

106,031

2022

 

 

93,281

 

 

242,214

 

 

84,003

2023

 

 

95,376

 

 

247,852

 

 

76,701

Thereafter

 

 

3,325,042

 

 

6,661,624

 

 

373,753

Total future minimum lease payments

 

 

3,783,181

 

 

7,876,388

 

$

860,634

Less amount representing interest

 

 

(2,813,068)

 

 

(5,141,448)

 

 

 

Total lease obligation

 

 

970,113

 

 

2,734,940

 

 

 

Less current portion

 

 

(2,171)

 

 

(2,001)

 

 

 

Long-term obligation

 

$

967,942

 

$

2,732,939

 

 

 

 

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides lease costs by expense line item on the consolidated statements of operations for the year ended December 31, 2019:

 

 

 

 

 

 

 

 

    

Year ended

Lease Cost

Classification

 

December 31, 2019

Operating lease cost

Lease expense

 

$

387,063

Finance lease cost:

 

 

 

 

Amortization of finance lease right-of-use assets

Depreciation and amortization expense

 

 

16,224

Interest on finance lease obligations

Interest expense

 

 

50,162

Total finance lease expense

 

 

 

66,386

Variable lease cost

Other operating expenses

 

 

37,841

Short-term leases

Other operating expenses

 

 

24,297

Total lease cost

 

 

$

515,587

 

The following table provides remaining lease term and discount rates by lease classification as of December 31, 2019:

 

 

 

 

 

Lease Term and Discount Rate

 

December 31, 2019

Weighted-average remaining lease term (years)

 

 

 

Operating leases

 

 

12.6

Finance leases

 

 

10.2

Weighted-average discount rate

 

 

 

Operating leases

 

 

9.6%

Finance leases

 

 

12.2%

 

The following table includes supplemental lease information for the year ended December 31, 2019 (in thousands):

 

 

 

 

 

 

Year ended

Other information

    

December 31, 2019

Cash paid for amounts included in the measurement of lease obligations

 

 

 

Operating cash flows from operating leases

 

$

364,334

Operating cash flows from finance leases

 

 

47,188

Financing cash flows from finance leases

 

 

2,645

Right-of-use assets obtained in exchange for new lease obligations

 

 

 

Operating leases

 

 

96,718

Finance leases

 

 

1,160

 

Lease Covenants

 

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

 

The Company has master lease agreements with Welltower, Sabra, Omega and Second Spring (collectively, the Master Lease Agreements).  The Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At December 31, 2019, the Company is in compliance with the financial covenants contained in the Master Lease Agreements.

 

The Company has two master lease agreements with Cindat Best Years Welltower JV LLC (CBYW) involving 28 of its facilities.  The Company did not meet certain financial covenants contained in one of the master lease agreements involving two of its facilities at December 31, 2019.  On March 9, 2020, the Company received a waiver for these covenant breaches through April 1, 2021.  At December 31, 2019, the Company is in compliance with the financial covenants contained in the other master lease agreement.

 

At December 31, 2019, the Company did not meet certain financial covenants contained in one lease related to two of its facilities.  The Company is, and expects to continue to be, current in the timely payment of its obligations under this lease.  The lease does not have cross default provisions, nor does it 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 party to amend the lease and the related financial covenants.  The Company does

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

not believe the breach of such financial covenants at December 31, 2019 will have a material adverse impact on its financial condition or results of operations.  The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.

 

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

 

 

 

 

 

(11) Goodwill and Identifiable Intangible Assets

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.  The changes in the carrying value of goodwill are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Rehabilitation Therapy Services

    

Other Services

    

Consolidated

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,814

 

 

11,828

 

 

85,642

Accumulated impairment losses

 

 

 —

 

 

 —

 

 

 —

 

 

$

73,814

 

$

11,828

 

$

85,642

Balance at December 31, 2019

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,814

 

 

11,828

 

 

85,642

Accumulated impairment losses

 

 

 —

 

 

 —

 

 

 —

 

 

$

73,814

 

$

11,828

 

$

85,642

 

During the year ended December 31, 2017, as a result of changes in the regulatory and reimbursement environment, the Company performed a quantitative impairment test for all reporting units, the results of which indicated that the carrying value of the inpatient reporting unit exceeded its fair value.  Consequently, the Company recorded an impairment of $351.5 million, representing the entire balance of goodwill associated with the inpatient reporting unit.

 

Identifiable intangible assets consist of the following at December 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

    

December 31, 2019

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $76,243

 

$

36,891

 

8

Trade names

 

 

50,555

 

Indefinite

Identifiable intangible assets

 

$

87,446

 

 

 

 

 

 

 

 

 

 

    

December 31, 2018

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $65,756

 

$

47,077

 

8

Favorable leases, net of accumulated amortization of $33,404

 

 

21,449

 

10

Trade names

 

 

50,556

 

Indefinite

Identifiable intangible assets

 

$

119,082

 

 

 

Identifiable intangible assets consist of customer relationship assets, favorable lease contracts and trade names.

Customer relationship assets exist in the Company’s rehabilitation services, respiratory services, management services and medical staffing businesses.  These assets are amortized on a straight-line basis over the expected period of benefit.

Favorable lease contracts represented the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement.  Favorable lease contracts

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were amortized on a straight-line basis over the lease terms.  Upon the Company’s adoption of Topic 842, the existing favorable lease balances were included in the measurement of the new operating lease ROU assets.  See Note 2 – “Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements.”

The Company’s trade names have value, in particular in the rehabilitation business which markets its services to other providers of skilled nursing and assisted/senior living services.  The trade name asset has an indefinite life and is measured no less than annually or if indicators of potential impairment become apparent. 

 

Amortization expense related to customer relationship assets, which is included in depreciation and amortization expense, for the years ended December 31, 2019 and 2018 was $10.5 million and $10.5 million, respectively.

 

Amortization expense related to favorable leases, which was included in lease expense, for the year ended December 31, 2018 was $6.5 million.

 

Based upon amounts recorded at December 31, 2019, amortization expense related to identifiable intangible assets is estimated to be $5.2 million in 2020, $5.1 million in 2021, $5.0 million in 2022, $4.6 million in 2023, and $4.6 million in 2024 and $12.4 million, thereafter.

 

The Company recorded no asset impairment charges related to identifiable intangible assets during the year ended December 31, 2019.  During the year ended December 31, 2018, the Company recorded a $3.5 million impairment of favorable lease assets associated with underperforming properties, which is included in goodwill and identifiable asset impairments on the consolidated statements of operations.  See Note 19 – “Asset Impairment Charges – Identifiable Intangible Assets with a Definite Useful Life.”   

 

(12)Long-Term Debt

 

Long-term debt at December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

December 31, 2019

 

December 31, 2018

 

Asset based lending facilities, net of debt issuance costs of $8,615 and $11,335 at December 31, 2019 and December 31, 2018, respectively

 

$

412,346

 

$

419,289

 

Term loan agreements, net of debt issuance costs of $1,084 and $1,851 and debt premium balance of $4,816 and $8,446 at December 31, 2019 and December 31, 2018, respectively

 

 

196,714

 

 

184,652

 

Real estate loans, net of debt issuance costs of $3,846 and $5,360 and debt premium balance of $19,328 and $28,992 at December 31, 2019 and December 31, 2018, respectively

 

 

265,700

 

 

307,690

 

HUD insured loans, net of debt issuance costs of $2,909 and $5,247 and debt premium balance of $0 and $860 at December 31, 2019 and December 31, 2018, respectively

 

 

117,117

 

 

181,762

 

Notes payable

 

 

116,952

 

 

81,398

 

Mortgages and other secured debt (recourse)

 

 

6,369

 

 

4,190

 

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $9,349 and $187 and debt premium balance of $1,422 and $1,520 at December 31, 2019 and December 31, 2018, respectively

 

 

498,222

 

 

26,483

 

 

 

 

1,613,420

 

 

1,205,464

 

Less:  Current installments of long-term debt

 

 

(162,426)

 

 

(122,531)

 

Long-term debt

 

$

1,450,994

 

$

1,082,933

 

 

Asset Based Lending Facilities

 

On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap.  The agreement initially provided for a $555.0 million asset based lending facility comprised of (a) a $325.0 million first lien term loan facility, (b) a $200.0 million first lien revolving credit facility and (c) a $30.0 million delayed draw term loan facility (collectively, the ABL Credit Facilities).  The commitments under the delayed draw term loan facility will be reduced to $27.5 million on March 31, 2020, $25.0 million on June 30, 2020, $22.5 million on September 30, 2020, and $20.0 million on December 31, 2020 and thereafter.

 

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On June 5, 2019, the ABL Credit Facilities were amended to simultaneously increase the aggregate revolving credit facility commitment by $40.0 million and partially prepay the first lien term loan facility by $40.0 million.  The resulting commitment levels of the revolving credit facility and first lien term loan facility were $240.0 million and $285.0 million, respectively.

The ABL Credit Facilities have a five-year term set to mature on March 6, 2023.  The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans (as defined below), in the event those agreements are not extended or refinanced.  The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed.  The Company has presented the entire revolving credit facility borrowings balance of $136.0 million in current installments of long-term debt at December 31, 2019.  Despite this classification, the Company expects that it will have the ability to borrow and repay on the revolving credit facility through its maturity date.  Cash proceeds of $50.6 million received under the ABL Credit Facilities remain in a restricted account.  This amount is pledged to cash collateralize letters of credit previously issued under the retired revolving credit facilities. The Company has classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents within the consolidated balance sheets at December 31, 2019 and 2018.

 

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

 

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

 

The term loan facility and revolving credit facility include a termination fee equal to 2% if the loans are prepaid within the first two years and 1.5% thereafter.  The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loan’s retirement or on the maturity date.

 

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

 

Borrowings and interest rates under the ABL Credit Facilities were as follows at December 31, 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

    

 

 

    

Weighted

 

 

    

 

 

 

    

 

 

    

Average

 

ABL Credit Facilities

 

Commitment

 

 

Borrowings

 

Interest

 

Term loan facility

 

$

285,000

 

 

$

285,000

 

7.91

%

Revolving credit facility (Non-HUD)

 

 

168,000

 

 

 

78,860

 

7.91

%

Revolving credit facility (HUD)

 

 

72,000

 

 

 

27,101

 

7.91

%

Delayed draw term loan facility

 

 

30,000

 

 

 

30,000

 

12.91

%

 

 

$

555,000

 

 

$

420,961

 

8.26

%

 

As of December 31, 2019, the Company had a total borrowing base capacity of $436.5 million with outstanding borrowings under the ABL Credit Facilities of $421.0 million, leaving the Company with approximately $15.5 million of available borrowing capacity under the ABL Credit Facilities.

 

Term Loan Agreements

 

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a term loan agreement, as amended (the Term Loan Agreement) with an affiliate of Welltower and an affiliate of Omega.  The Term Loan Agreement originally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million and later expanded to $160.0 million.  The Term Loan Agreement was amended on May 9, 2019 to extend the maturity date from July 29, 2020 to November 30, 2021.  The original Term

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Loan for $120.0 million bears interest at a rate equal to 14.0% per annum, with up to 9.0% per annum to be paid in kind.  The additional Term Loan for $40.0 million bears interest at a rate equal to 10.0% per annum, with up to 5.0% per annum to be paid in kind. The Term Loans had an outstanding accreted principal balance of $193.0 million and $178.1 million at December 31, 2019 and 2018, respectively.

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions.  The Term Loan Agreement is also secured by a junior lien on the assets that secure the ABL Credit Facilities on a first priority basis. Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants. 

 

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type.  Financial covenants include maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio and a minimum fixed charge coverage ratio.  The most restrictive financial covenant is the minimum interest coverage ratio which requires the Company to maintain a coverage ratio, as defined therein, of no less than 1.70 to 1.0 through December 31, 2020 and increasing to 1.80 to 1.0 thereafter.

 

Real Estate Loans

 

On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million.  The MidCap Real Estate Loans are secured by 12 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023.  The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated.  The loans, which were interest only in the first year, are subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%.  Beginning April 1, 2019, mandatory principal payments commenced with the balance of the loans to be repaid at maturity.  Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below). 

 

On November 8, 2018, one of the MidCap Real Estate Loans was amended with an additional borrowing of $10.0 million.  The proceeds were used to retire a maturing mortgage loan on a corporate office building.  The office building has been added as collateral and the loan maturity remains March 30, 2023. The $10.0 million additional loan is subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 2.0%) plus an applicable margin of 6.25% with principal amortizing immediately and the balance due at maturity. 

 

On May 1, 2019, the Company divested the real property and operations of five skilled nursing facilities in California, three of which were subject to the MidCap Real Estate Loans. The Company used the sale proceeds to repay $27.7 million on the MidCap Real Estate Loans. During the third quarter of 2019, the Company divested the real property of two skilled nursing facilities in New Jersey and one skilled nursing facility in Maryland that were subject to the MidCap Real Estate Loans and used the sale proceeds to repay $12.1 million on the loans. See Note 4 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The MidCap Real Estate Loans had an outstanding principal balance of $42.2 million and $83.0 million at December 31, 2019 and 2018, respectively.

 

The Company is subject to multiple real estate loan agreements with Welltower (Welltower Real Estate Loans).  The Welltower Real Estate Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Real Estate Loans.  Each Welltower Real Estate Loan has a maturity date of January 1, 2022 and an annual interest rate of 12.0%, of which 7.0% will be paid in cash and 5.0% will be paid in kind.  The Company has agreed to make commercially reasonable efforts to secure commitments to repay no less than $105.0 million of the Welltower Real Estate Loan obligations.  As of December 31, 2019, the Company has not yet secured the total required repayments or commitments.  As a result, the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest.  At December 31, 2019, the Welltower Real Estate Loans are secured by a mortgage lien on the real property and a second lien on certain receivables of the operator of the one remaining facility subject to the Welltower Real Estate Loans.  The Welltower Real Estate Loans contain a conversion option, whereby up to $50.0 million of the balance can be converted into Class A common stock of the Company or a 10-year note bearing 2% paid in kind interest.  The conversion option is available to the Company upon the satisfaction of certain conditions, the most significant include:  the raise of new capital and application thereof to existing Welltower debt instruments, the repayment of $105.0 million to Welltower, as described

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

above, the partial repayment of the Term Loans, and the partial repayment of the Welltower Real Estate Loans, such that the remaining outstanding principal balance does not exceed $50.0 million. The Welltower Real Estate Loans had an outstanding accreted principal balance of $208.0 million and $201.1 million at December 31, 2019 and 2018, respectively.

HUD Insured Loans

 

As of December 31, 2019, the Company has 16 owned skilled nursing facility loans insured by HUD. The HUD insured loans have an original amortization term ranging from 30 to 35 years and an average remaining term of 29 years with fixed interest rates ranging from 3.0% to 3.5% and a weighted average interest rate of 3.3%. 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. 

 

The HUD insured loans for owned facilities had an aggregate principal balance of $140.6 million and $210.0 million at December 31, 2019 and 2018, respectively.  The loan of one facility in California was classified as held for sale at December 31, 2019.  This loan had an outstanding balance of $20.2 million, net of debt issuances costs, and escrow reserve funds of $1.1 million.  The loans of three facilities in Texas were classified as held for sale at December 31, 2018.  These loans had an outstanding balance of $26.6 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $3.4 million. See Note 20 – “Assets Held for Sale.”

 

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 December 31, 2019, the Company has total escrow reserve funds of $11.7 million with the loan servicer that are reported within prepaid expenses in the consolidated balance sheets.

 

During the year ended December 31, 2019, the Company sold the real property of three skilled nursing facilities and one assisted/senior living facility in California subject to HUD financing, the proceeds of which were used to retire HUD insured loans totaling $23.8 million. See Note 4 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – 2019 Divestitures – California Divestitures.”  In addition, the Company sold the real property of one skilled nursing facility in New Jersey and one skilled nursing facility in Virginia.  The proceeds of these two sales were used to retire HUD insured loans totaling $18.4 million.  See Note 4 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.”  Finally, the Company sold the real property of three skilled nursing facilities in Texas that were subject to HUD insured loans and had been classified as held for sale in the consolidated balance sheets as of December 31, 2018.  The proceeds from the sale were used to retire HUD insured loans totaling $23.4 million. See Note 4 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – 2019 Divestitures – Texas Divestitures.”

 

Notes Payable

 

On January 17, 2018, the Company converted $19.6 million of its trade payables into a note payable. The note, as amended, was repaid in equal monthly installments through December 2019 at an annual interest rate of 5.75%.  The loan was repaid in full at December 31, 2019 and had an outstanding balance of $7.8 million at December 31, 2018.

 

In November 2016, the Company issued a note totaling $51.2 million to Welltower.  The note accrues cash interest at 3.0% and paid-in-kind interest at 7.0%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1.  The note was amended on May 9, 2019 to extend the maturity date from October 30, 2020 to December 15, 2021.  Upon the satisfaction of certain conditions, including the repayment of the Term Loans, repayment of the other note payable, noted below, to Welltower, and partial repayment of the Welltower Real Estate Loans, the outstanding note balance in excess of $6.0 million will be forgiven by Welltower. The note had an outstanding accreted balance of $64.2 million and $60.0 million at December 31, 2019 and 2018, respectively.  

 

In December 2016, the Company issued a second note for $11.7 million to Welltower, which accrues cash interest at 3.0% and paid-in-kind interest at 7.0%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15.  The note matures on December 15, 2021, and had an outstanding accreted principal balance of $14.6 million and $13.6 million at December 31, 2019 and 2018, respectively.

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In October 2019, the Company converted $23.2 million of its trade payables into a note payable. The note requires monthly interest payments based on an annual interest rate of 3.5%. The balance of the note is due on the maturity date, September 30, 2022.

In November 2019, the Company issued a short-term note payable for $15.0 million, the entire balance of which was outstanding at December 31, 2019. The balance of the note is due no later than April 30, 2020.

 

Other Debt

 

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets.  The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest of 1.5% at December 31, 2019, and maturity dates ranging from 2020 to 2024.  On November 8, 2018, the mortgage loan of $10.0 million on one of the Company’s corporate office buildings matured and was refinanced through a MidCap Real Estate Loan.

 

Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures and VIEs.  The loans consist principally of revenue bonds and secured bank loans.  Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest with a weighted average interest rate of 7.2% at December 31, 2019. Maturity dates range from 2022 to 2034.  Loans are labeled non-recourse” because neither the Company nor any of its wholly-owned subsidiaries is obligated to perform under the respective loan agreements.  The aggregate principal balance of these loans includes a $1.4 million debt premium on one debt instrument. 

 

In the year ended December 31, 2019, the Company consolidated the financial statements of the Next Partnership and the Vantage Point Partnership.  See Note 4 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership” and Note 4 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The Next Partnership’s debt consists of a three-year term loan in an initial amount of $142.1 million and a 10-year mezzanine loan in the amount of $27.0 million.  In December 2019, the Next Partnership term loan was partially refinanced via three new HUD insured loans.  Proceeds from the new HUD insured loans were principally used to pay down $38.7 million on the Next Partnership term loan, such that the outstanding principal balance was $103.4 million at December 31, 2019. The new loans had an aggregate initial principal balance of $41.7 million, all of which remained outstanding as of December 31, 2019. The loans have an original amortization term of 35 years and a fixed interest rate of 3.15%.  Proceeds were principally used to repay a portion of the term loan associated with the Next Partnership and fees.

 

The HUD insured loans are non-recourse loans to the Company and 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 December 31, 2019, the Company has total escrow reserve funds of $3.9 million with the loan servicer that are reported within prepaid expenses in the consolidated balance sheets.

 

The Vantage Point Partnership’s debt consists of a 7-year term loan with available proceeds of $240.9 million, $233.6 million of which was drawn as of December 31, 2019, as well as a promissory note due to Vantage Point in the amount of $76.8 million, due on September 12, 2028.  On January 10, 2020, the Vantage Point Partnership acquired its nineteenth facility.  In conjunction with the acquisition, the remaining available proceeds on the term loan, $7.3 million, were drawn.

 

Debt Covenants

 

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and minimum liquidity.  The Credit Facilities include cross-default provisions with each other and certain material lease agreements.  At December 31, 2019, the Company was in compliance with its financial covenants contained in the Credit Facilities.

 

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

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

The maturity of total debt of $1.6 billion, excluding debt issuance costs and other non-cash debt discounts and premiums, at December 31, 2019 is as follows (in thousands):

 

 

 

 

 

Twelve months ended December 31, 

    

 

 

2020

 

$

162,482

2021

 

 

278,941

2022

 

 

346,155

2023

 

 

344,985

2024

 

 

11,171

Thereafter

 

 

469,923

Total debt maturity

 

$

1,613,657

 

 

 

 

 

 

 

(13)Stockholders’ Deficit

 

The total number of shares of all classes of stock that the Company shall have authority to issue is 1,200,000,000 consisting of:

 

·

1,000,000,000 shares of Class A common stock, par value $0.001 per share, of which 107,888,854 shares and 101,235,935 shares were issued at December 31, 2019 and 2018, respectively;

·

20,000,000 shares of Class B common stock, par value $0.001 per share, of which 744,396 shares and 744,396 shares were issued at December 31, 2019 and 2018, respectively;

·

150,000,000 shares of Class C common stock, par value $0.001 per share, of which 56,172,193 shares and 59,700,801 shares were issued at December 31, 2019 and 2018, respectively; and

·

30,000,000 shares of Preferred Stock, par value $0.001 per share, of which no shares were issued at December 31, 2019 and 2018.

 

(14)Stock-Based Compensation

 

The Company provides stock-based compensation to attract and retain employees while also aligning employees’ interests with the interests of its shareholders.  The 2015 Plan, which is shareholder-approved, permits the grant of various cash-based and equity-based awards to selected employees, directors, independent contractors and consultants of the Company.  The 2015 Plan permits the grant of up to 24.4 million shares of Class A common stock, subject to certain adjustments and limitations. 

 

Stock-based compensation expense is comprised of restricted stock units, which are based on estimated fair value, made to certain employees and directors. The Company accounts for forfeitures when they occur.

 

Restricted Stock Units

 

The Company grants restricted stock units under the 2015 Plan.  Each unit represents an obligation to deliver to the holder one share of the Company’s Class A common stock upon vesting.  Restricted stock units are subject to some combination of service-based, performance-based, and market-based vesting conditions.  Units subject to only service-based vesting conditions generally vest in equal installments over three years on the anniversary of the grant date with expense being recognized over the requisite service period. The fair value of such units is measured at the market price of the Company’s stock on the date of the grant.  Units subject to performance-based or market-based vesting conditions are generally subject to a service-based vesting condition (i.e. cliff vest).  Consequently, expense of such awards is recognized over the requisite service period.  Units subject to performance-based vesting conditions generally cliff vest upon satisfaction of performance targets. The fair value of such units is measured at the market price of the Company’s stock on the date of the grant. Units subject to market-based vesting conditions generally cliff vest upon the Company’s share price meeting specified target prices. The fair value of such units is measured using the Monte-Carlo simulation model, which incorporates into the fair value determination the possibility that the target share prices may not be met. Further, expense related to these units is recognized regardless of whether the market-based vesting condition is satisfied, provided that the requisite service has been provided.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the Company’s non-vested restricted stock units as of and for the year ended December 31, 2019 is shown below (number of units in thousands): 

 

 

 

 

 

 

 

 

 

 

    

Number of Restricted Stock Units

    

Weighted-Average Grant Date Fair Value

 

Non-vested balance at January 1, 2019

 

 

10,192

 

$

1.89

 

Granted

 

 

4,778

 

 

1.30

 

Vested

 

 

(3,375)

 

 

1.82

 

Forfeited

 

 

(1,636)

 

 

1.24

 

Non-vested balance at December 31, 2019

 

 

9,959

 

$

1.74

 

 

For the year ended December 31, 2018, the weighted-average grant date fair value of restricted stock units granted was $2.43.  As of December 31, 2019, there was approximately $12.3 million of unrecognized expense related to non-vested restricted stock units, which is expected to be recognized over a weighted-average term of 1.6 years.  During the years ended December 31, 2019 and 2018, the fair value of restricted stock units that vested was $4.4 million and $5.8 million, respectively.  At December 31, 2019, 5.3 million shares of the Company’s Class A common stock are available for delivery under the 2015 Plan.

 

Stock-based compensation expense related to restricted stock units included in general and administrative costs was $7.3 million and $8.8 million for the years ended December 31, 2019 and 2018, respectively.  The income tax benefit for stock-based compensation expense was $4.4 million and $4.8 million for the years ended December 31, 2019 and 2018, respectively.

 

(15)Income Taxes

 

The Company’s provision for income taxes was based upon management’s estimate of taxable income or loss for each respective accounting period.  The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets, including net operating loss and credit carryforwards, and liabilities and the amounts reported in the financial statements.  These temporary differences would result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled.

 

The Company effectively owns 66.1% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes.  This is the Company’s only source of taxable income.  The taxable income of the partnership is subject to the income allocation rules of IRC Sec. 704.  Management believes the mechanics of IRC Sec. 704 will cause a greater portion of the temporary tax deductions to be allocated to the Company.  This allocation reduced the Company’s taxable income for the years ended December 31, 2019 and 2018, respectively. 

 

Income Tax Provision

 

Total income tax expense (benefit) was as follows (in thousands):

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Continuing operations

 

$

1,754

 

$

(2,423)

Stockholder's deficit

 

 

346

 

 

(115)

Total

 

$

2,100

 

$

(2,538)

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The components of the provision for income taxes on income (loss) for the years ended December 31, 2019 and 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

Current:

 

 

 

 

 

 

Federal

 

$

1,014

 

$

1,064

State

 

 

28

 

 

(12)

 

 

 

1,042

 

 

1,052

Deferred:

 

 

 

 

 

 

Federal

 

 

29

 

 

(521)

State

 

 

683

 

 

(2,954)

 

 

 

712

 

 

(3,475)

Total

 

$

1,754

 

$

(2,423)

 

At December 31, 2019 and 2018, the current income taxes were primarily generated on the taxable income of the Company’s Bermuda captive insurance company.  Reasonable estimates for the Company’s state and local provision were made based on the Company’s analysis of the state’s enacted response to U.S. federal tax reform.

 

During the years ended December 31, 2019 and 2018, the Company’s rehabilitation therapy services business operations within the People’s Republic of China and Hong Kong generated both U.S. federal and foreign taxable losses.  The deferred tax assets generated by the foreign operations were fully valued at December 31, 2019 and 2018.  Management does not anticipate these operations will generate significant taxable income in the near term.  The operations currently do not have a material effect on the Company’s effective tax rate.

 

Under the U.S. Tax Cuts and Jobs Act, the Company's federal net operating losses that have been incurred prior to January 1, 2018 will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. For net operating losses created after December 31, 2017, the net operating losses will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. Further, the Company has recorded a deferred tax asset for the deferred interest that it estimates will not be deducted in tax years 2019 and 2018. The deferred interest can be carried forward indefinitely, such that it may be deductible in future tax years based upon certain limitations. The Company has estimated the impact of the U.S. Tax Cuts and Jobs Act on state income taxes reflected in its income tax benefit for the years ended December 31, 2019 and 2018.

 

In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, the Company gives appropriate consideration to all positive and negative evidence related to the realization of its deferred tax assets. The assessment considers the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods and the Company’s experience with operating loss and tax credit expirations. A history of cumulative losses is a significant piece of negative evidence used in the assessment.

 

At December 31, 2019 and 2018, the Company has established a full valuation allowance against the majority of its net deferred tax assets in the amount of $386.2 million and $342.6 million, respectively, based on management’s assessment that the Company will not realize its deferred tax assets.  The valuation allowance does not include the discounted unpaid loss reserve deferred tax asset of the Company’s captive insurance company, which continues to have taxable income that will allow the Company to utilize its deferred tax assets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Total income tax expense (benefit) for the periods presented was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

Computed “expected” expense (benefit)

 

$

1,939

 

$

(78,716)

(Reduction) increase in income taxes resulting from:

 

 

 

 

 

 

State and local income taxes, net of federal tax benefit

 

 

107

 

 

113

Income tax credits

 

 

(2,088)

 

 

(2,397)

Non-controlling interest

 

 

4,038

 

 

28,366

Adjustment to deferred taxes, including credits and valuation allowance

 

 

(2,977)

 

 

50,302

FIN 48

 

 

 —

 

 

(38)

Other, net

 

 

735

 

 

(53)

Total income tax expense (benefit)

 

$

1,754

 

$

(2,423)

 

The Company’s effective income tax rates were 19.0% and 0.6% in the years ended December 31, 2019 and 2018, respectively.  The 19.0% effective rate is primarily attributable to the current income tax expense of the Company’s captive insurance company.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below (in thousands):

 

 

 

 

 

 

 

    

2019

    

2018

Deferred tax assets:

 

 

 

 

Investment in partnership

$

224,215

$

195,095

Net operating loss carryforwards

 

133,611

 

121,111

Discounted unpaid loss reserve

 

2,156

 

3,567

General business credits

 

30,006

 

28,729

Total deferred tax assets

 

389,988

 

348,502

Valuation allowance

 

(386,216)

 

(342,635)

Deferred tax assets, net of valuation allowance

$

3,772

$

5,867

Deferred tax liabilities:

 

 

 

 

Long-lived assets: intangible property

 

(5,245)

 

(6,281)

Total deferred tax liabilities

 

(5,245)

 

(6,281)

Net deferred tax liabilities

$

(1,473)

$

(414)

 

Uncertain Tax Positions

 

The Company follows ASC 740 guidance for recognizing and measuring tax positions taken or expected to be taken in a tax return that directly or indirectly affect amounts reported in financial statements, and accounting for the related income tax effects of individual tax positions that do not meet the recognition thresholds required in order for any part of the benefit of that tax position to be recognized in an entity’s financial statements.

 

The Company, excluding its corporate groups, is only subject to state and local income tax in certain jurisdictions.  The Company’s corporate groups are subject to federal, state and local income taxes.  The Company is also subject to income based taxes in the People’s Republic of China and Hong Kong.  However, these business operations have generated current taxable losses since their inception. Significant judgment is required in evaluating its uncertain tax positions and determining its provision for income taxes.  The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the technical merits of a tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

 

The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties. While the Company believes its tax positions are appropriate, it cannot assure that the various authorities engaged in the examination of its income tax returns will not challenge the Company’s positions.  The Company believes it has adequately reserved, if necessary, for its potential audit exposures of uncertain tax positions, though no assurance can be given that the final tax outcome of these matters will not be different.  The Company adjusts these reserves through closely monitoring and continuously evaluating, if any, the changes of facts and circumstances and tax legislative development, such as the closing of a tax audit or the expiration of the statute of limitations.  To the extent that the final tax outcome of these matters is different than the amounts

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

recorded, such differences will impact the provision for income taxes in the period in which such determination is made.  The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

 

A reconciliation of unrecognized tax benefits follows (in thousands):

 

 

 

 

 

Balance, December 31, 2017

 

$

115

Reductions due to lapses of applicable statute of limitations

 

 

(38)

Balance, December 31, 2018

 

$

77

Reductions due to lapses of applicable statute of limitations

 

 

 —

Balance, December 31, 2019

 

$

77

 

The Company’s unrecognized tax benefits reserve for uncertain tax positions primarily related to the accrual of penalty on underpayment of quarterly estimated tax.  All of the gross unrecognized tax benefits would affect the effective tax rate if recognized.  Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.  Unrecognized tax benefits are not expected to change significantly over the next twelve months.  The Company recognizes potential accrued interest related to unrecognized tax benefits in income tax expense.  Penalties, if incurred, would also be recognized as a component of income tax expense.  The amount of accrued interest related to unrecognized tax benefits was less than $0.1 million as of both December 31, 2019 and 2018.  Generally, the Company has open tax years for state purposes subject to tax audit on average of between three years to six years. The Company’s U.S. income tax returns from 2013 through 2018 are open and could be subject to examination.

 

Exchange Rights and Tax Receivable Agreement

 

The owners of FC-GEN have the right to exchange their membership units in FC-GEN,  along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option.  As a result of such exchanges, the Company’s membership interest in FC-GEN 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 were exchanges of 3.5 million FC-GEN units and Class C shares during the year ended December 31, 2019, equating to 3.5 million Class A shares.  The exchanges during the year ended December 31, 2019, resulted in a $16.9 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.  There were exchanges of 1.9 million FC-GEN units and Class C shares during the year ended December 31, 2018, equating to 1.9 million Class A shares.  The exchanges during the year ended December 31, 2018 resulted in a $9.6 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.

 

The Company is party to 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;

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 returns 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.

 

(16)Related Party Transactions

 

The Company provides rehabilitation services to certain facilities owned and operated by two customers in which certain members of the Company’s board of directors, board observers, and shareholders with greater than 5% of the Company’s Class A common stock beneficially own an ownership interest.  In the case of one significant customer, these services resulted in net revenues of $114.3 million and $126.4 million in the years ended December 31, 2019 and 2018, respectively.  The services resulted in net accounts receivable balances of $28.9 million and $32.3 million at December 31, 2019 and 2018, respectively.  Further, the Company holds a note receivable from this customer, which was derived from past due accounts receivable, in the amount of $56.3 million.  The Company has reserved $55.0 million on the note receivable balance.  The reserve represents the judgment of management and does not indicate a forgiveness of any amount owed by this related party customer.  The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available.  In the case of the other customer, services began in the third quarter of 2018.  The Company recorded net revenues of $6.6 million and $1.9 million in the years ended December 31, 2019 and 2018, respectively, resulting in net accounts receivable balances of $1.4 million and $1.1 million at December 31, 2019 and 2018, respectively.

 

Prior to December 31, 2019, certain members of the Company’s board of directors, board observers, and shareholders with greater than 5% of the Company’s Class A common stock indirectly beneficially held ownership interests in FC Compassus LLC (Compassus) totaling less than 10% in the aggregate.  Effective December 31, 2019, no members indirectly beneficially hold ownership interests in Compassus.  The Company is party to certain immaterial preferred provider and affiliation agreements with Compassus.  Separately, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Company had a note receivable balance of $23.2 million from Compassus. The note was comprised of principal of $12.0 million and accrued interest, and was associated with the Company’s sale of its hospice and home health operations to Compassus, which was completed during 2016.  The note balance was paid in full during December 2019.

 

Prior to September 20, 2019, certain members of the Company’s board of directors, board observers, and shareholders with greater than 5% of the Company’s Class A common stock indirectly beneficially held ownership interests in Trident USA totaling less than 10% in the aggregate. Effective September 20, 2019, no members indirectly beneficially hold ownership interests in Trident USA. However, the Company remains party to mobile radiology and laboratory/diagnostic services agreements with Trident USA.  Fees for these services were $8.4 million and $12.6 million in the years ended December 31, 2019 and 2018, respectively. 

 

Certain subsidiaries of the Company are subject to a lease of 12 centers in New Hampshire and Florida from 12 separate limited liability companies affiliated with Next (the Next Landlord Entities). The lease was effective June 1, 2018 and the initial annualized rent to be paid is $13.0 million. The lease includes a purchase option that is exercisable in 2022. In addition, certain subsidiaries of the Company are subject to a lease of 15 centers from 15 separate limited liability companies affiliated with the Next Landlord Entities. The Company owns a 46% membership interest in the Next Partnership. The lease was effective February 1, 2019 and the initial annualized rent to be paid is $19.5 million. The lease includes a purchase option that is exercisable during 2024 through 2026. See Note 4 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership.”  Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling approximately 4% in the aggregate.  These members have earned acquisition fees, and may earn asset management fees and other fees paid from the Next Landlord Entities.

 

As of December 31, 2019, Welltower held approximately 8.9% of the shares of the Company’s Class A Common Stock, representing approximately 5.8% of the voting power of the Company’s voting securities. The Company is party to a master lease with an affiliate of Welltower. The initial term of the master lease expires on January 31, 2037 and the Company has one eleven-year renewal option. Beginning January 1, 2019, annual rent escalators under the master lease were 2.0%. During the year ended December 31, 2019, the Company paid rent of approximately $73.7 million to Welltower. The Company holds options to purchase certain facilities subject to the master lease. At December 31, 2019, the Company leased 43 facilities from Welltower. The Company and certain of its affiliates are also party to certain debt instruments with Welltower. See Note 12 – “Long-Term Debt – Term Loan Agreements,” “Long-Term Debt – Real Estate Loans,” and “Long-Term Debt – Notes Payable.”

 

During the third quarter of 2019, the Company entered into a consulting agreement with one of the Company’s board observers.  The consulting agreement has a term of one year and compensation of approximately $0.6 million.  Services provided include sourcing, negotiating and assisting with closing of transactions and financing.  On March 5, 2020, the consulting agreement was terminated.

 

(17)Defined Contribution Plan

 

The Company sponsors a defined contribution plan covering substantially all employees who meet certain eligibility requirements. The Company did not match employee contributions for the defined contribution plan in 2019 and 2018.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(18)Other Income

 

In the years ended December 31, 2019 and 2018, the Company completed multiple transactions, including the divestitures of numerous owned assets and the termination and refinancing of certain facilities subject to lease agreements. See Note 4 – “Significant Transactions and Events.”  These transactions resulted in a net gain recorded as other income in the consolidated statements of operations.  The following table summarizes those net gains (in thousands):

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2019

    

2018

Gain on sale of owned assets (1)

 

$

(90,723)

 

$

 —

Loss recognized for exit costs associated with divestiture of operations (2)

 

 

12,997

 

 

21,459

Gain on lease termination or modification (3)

 

 

(95,779)

 

 

(34,379)

Total other income

 

$

(173,505)

 

$

(12,920)

 

 

(1)

The Company sold 13 owned skilled nursing facilities and two assisted/senior living facilities in 2019.  The gain represents sale proceeds in excess of the carrying value of the assets sold.  The Company sold 22 skilled nursing facilities and one assisted/senior living facility in 2018.  The sale price approximated the carrying value of those assets sold.

(2)

The Company divested operations of 44 facilities and 55 facilities in 2019 and 2018, respectively.  Upon divestiture, the Company recognizes exit costs for uncollectible accounts receivable resulting from a sale, the write-off of inventory balances assumed by the new operator, and other costs associated with the transition of operations.

(3)

The Company has amended numerous lease agreements in 2019 and 2018 in conjunction with its efforts detailed in Note 4 – “Significant Transactions and Events.”   These transactions resulted in a combination of base rent reductions, annual escalator reductions, lease term extensions or reductions and facility terminations.  Each lease amendment triggers a lease reassessment of the respective ROU asset and lease liability with an offsetting adjustment recorded to the consolidated statements of operations as other income or loss.

 

 

(19)Asset Impairment Charges

 

Long-Lived Assets with a Definite Useful Life

 

In each quarter, the Company’s long-lived assets with a definite useful life are tested for impairment at the lowest levels for which there are identifiable cash flows.  The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets.  The cash flow period was based on the remaining useful lives of the primary asset in each long-lived asset group, principally a building or ROU asset in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment.  During the years ended December 31, 2019 and 2018, the Company recognized impairment charges in the inpatient segment totaling $16.9 million and $105.0 million, respectively. 

 

Identifiable Intangible Assets with a Definite Useful Life

 

Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement.  Favorable lease contracts are amortized on a straight-line basis over the lease terms. These favorable lease contracts are measured for impairment using estimated future net undiscounted cash flows expected to be generated from the use of the leased assets compared to the carrying amount of the favorable lease.  The cash flow period was based on the remaining useful lives of the asset, which for favorable lease assets is the lease term.  During the year ended December 31, 2018, the Company recognized impairment charges on its favorable lease intangible assets with a definite useful life of $3.5 million.  This charge is presented in goodwill and identifiable intangible asset impairments on the consolidated statements of operations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Goodwill and Identifiable Intangible Assets with an Indefinite Useful Life

 

The Company performed its annual goodwill impairment test as of September 30, 2019 and 2018.  For the years ended December 31, 2019 and 2018, the Company performed a qualitative impairment test, which indicated that no impairment existed.  The Company conducts the test at the reporting unit level that management has determined aligns with the Company’s segment reporting.  See Note 7 – “Segment Information.”  Indefinite-lived intangible assets consist of trade names. In conjunction with the annual goodwill impairment test, the Company performed an assessment of its indefinite-lived intangible assets, noting no impairment existed for the years ended December 31, 2019 and 2018.

 

(20)Assets Held for Sale

 

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

 

During the year ended December 31, 2019, the Company identified a disposal group of seven skilled nursing facilities and one assisted/senior living facility operated by the Company in the state of California that qualified as assets held for sale, but did not meet the criteria as a discontinued operation. The Company is party to a purchase and sale agreement, as amended, to sell the facilities for $88.8 million.  During the year ended December 31, 2019, the sale of seven of the eight facilities was completed.  See Note 4 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – 2019 Divestitures – California Divestitures.”  The sale of the remaining HUD-insured facility occurred on February 26, 2020.  See Note 23 – “Subsequent Events - Divestitures.”

 

During the year ended December 31, 2018, the Company identified a disposal group of 23 skilled nursing facilities operated by the Company in the state of Texas that qualified as assets held for sale, but did not meet the criteria as a discontinued operation.  The Company completed the sale of the operations of all 23 skilled nursing facilities and the real estate of 16 skilled nursing facilities during the fourth quarter of 2018.  The Company was party to a purchase and sale agreement, as amended, to sell the remaining seven facilities for $20.1 million.  Four of the facilities were subject to Welltower Real Estate Loans and three of the facilities were subject to HUD-insured loans.  The Company classified as assets held for sale in its consolidated balance sheets as of December 31, 2018, the real property and other balances associated with the remaining seven facilities.  In the fourth quarter of 2019, the Company completed the sale of the remaining seven facilities, marking an exit from the inpatient business in Texas.  See Note 4 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – 2019 Divestitures – Texas Divestitures.”

 

In total, the Company classified as assets held for sale in its consolidated balance sheets as of December 31, 2019 and 2018, the real property and other balances associated with one facility and seven facilities, respectively.  The following table sets forth the major classes of assets and liabilities included as part of the disposal groups as of December 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

Current assets:

    

 

 

    

 

 

Prepaid expenses

 

$

1,171

 

$

3,375

Long-term assets:

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,201 and $3,640 at December 31, 2019 and December 31, 2018, respectively

 

 

16,306

 

 

16,087

Total assets

 

$

17,477

 

$

19,462

Current liabilities:

 

 

 

 

 

 

Current installments of long-term debt

 

$

368

 

$

639

Long-term liabilities:

 

 

 

 

 

 

Long-term debt

 

 

19,789

 

 

25,942

Total liabilities

 

$

20,157

 

$

26,581

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(21)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. General and professional liability policies are typically written for a duration of 12 months or less 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. Excess insurance policies are typically written for a duration of 12 months or less and are measured on an “occurrence” basis. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

 

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured 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 frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

 

The Company utilizes a combination of third-party administrators (TPAs), in-house adjusters, and legal counsel, along with systems designed to maintain and process claims to provide it with the data utilized in its assessments of reserve adequacy. Where TPAs are utilized, they operate under the oversight of the Company’s in-house risk management and legal functions. These functions and systems 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 provision for general and professional liability risks totaled $70.1 million and $102.5 million for the years ended December 31, 2019 and 2018, respectively.  The reduction in the provision for general and professional liability for the year ended December 31, 2019 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management activities. The reserves for general and professional liability, which are recorded on an undiscounted basis, were $392.8 million and $435.3 million as of December 31, 2019 and 2018, respectively.

 

The provision for workers’ compensation risks totaled $47.6 million and $49.9 million for the years ended December 31, 2019 and 2018, respectively. The reserves for workers’ compensation risks were $160.5 million and $168.3 million as of December 31, 2019 and 2018, respectively. These reserves are discounted based on actuarial estimates of claim payment patterns using a discount rate for the current policy year of 1.6%. 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 $12.0 million and $8.3 million as of December 31, 2019 and 2018, respectively.

 

Health Insurance

 

The Company offers employees an option to participate in self-insured health plans.  Health insurance claims are paid as they are submitted to the plans’ administrators.  The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid.  This accrual for incurred but not yet reported claims was $15.1 million and

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

$16.6 million as of December 31, 2019 and 2018, respectively.  The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets.  Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

 

Legal Proceedings

 

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, 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.

 

Settlement Agreement

 

In 2017, the Company and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled Healthcare Group, Inc. (Skilled) or Sun Healthcare Group, Inc. prior to their operations becoming part of the Company’s operations (collectively, the Successor Matters).  The Company agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

The settlement agreement called for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  The Company will continue to remit the Settlement Amount through January 1, 2022.  The remaining outstanding Settlement Amount at December 31, 2019 was $25.7 million, of which $12.1 million is recorded in accrued expenses and $13.6 million is recorded in other long-term liabilities.     

 

Conditional Asset Retirement Obligations

 

Certain of the Company’s leased and owned real estate assets contain asbestos, which is believed to be appropriately contained in accordance with environmental regulations.  If these properties were demolished or subject to renovation activities that disturb the asbestos, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed.

 

At December 31, 2019 and 2018, the Company has a liability for the asset retirement obligation associated primarily with the cost of asbestos removal aggregating approximately $6.6 million and $9.0 million, respectively, which is included in other long-term liabilities.  The liability for each facility will be accreted to its settlement value, which is estimated to approximate $16.9 million through the estimated settlement dates extending from 2020 through 2042.  Due to the time over which these obligations could be settled and the judgment used to determine the liability, the ultimate obligation may differ from the estimate.  Upon settlement, any difference between actual cost and the estimate is recognized as a gain or loss in that period.

 

Annual accretion of the liability is recorded each year for the impacted assets until the obligation year is reached, either by sale of the property, demolition or some other future event such as a government action.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Employment Agreements

 

The Company has employment agreements and arrangements with its executive officers and certain members of management. The agreements generally continue until terminated by the executive or management, and provide for severance payments under certain circumstances.

 

(22)Fair Value of Financial Instruments

 

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

 

The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance. 

 

Recurring Fair Value Measures 

 

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

 

 

 

 

 

 

Level 1 —

 

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

 

Level 2 —

 

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

 

Level 3 —

 

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

 

The tables below present the Company’s assets measured at fair value on a recurring basis as of December 31, 2019 and 2018, 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

 

 

 

December 31, 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2019

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

12,097

 

$

12,097

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

113,709

 

 

113,709

 

 

 —

 

 

 —

 

Restricted investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage/government backed securities

 

 

21,023

 

 

 —

 

 

21,023

 

 

 —

 

Corporate bonds

 

 

48,926

 

 

 —

 

 

48,926

 

 

 —

 

Government bonds

 

 

66,993

 

 

45,903

 

 

21,090

 

 

 —

 

Total

 

$

262,748

 

$

171,709

 

$

91,039

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

2018

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

20,865

 

$

20,865

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

121,411

 

 

121,411

 

 

 —

 

 

 —

 

Restricted investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage/government backed securities

 

 

11,819

 

 

 —

 

 

11,819

 

 

 —

 

Corporate bonds

 

 

55,819

 

 

 —

 

 

55,819

 

 

 —

 

Government bonds

 

 

68,515

 

 

40,699

 

 

27,816

 

 

 —

 

Total

 

$

278,429

 

$

182,975

 

$

95,454

 

$

 —

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company places its cash and cash equivalents, restricted cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument.  The Company has not experienced any significant losses on such investments.  Many of the Company’s financial instruments have quoted prices but are traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fairly valued using other financial instruments, the parameters of which can be directly observed.  These financial instruments have been reported as Level 2 measurements.

 

Debt Instruments 

 

The table below shows the carrying amounts and estimated fair values, net of debt issuance costs and other non-cash debt discounts and premiums, of the Company’s primary long-term debt instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

December 31, 2018

 

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Asset based lending facilities

 

$

412,346

 

$

412,346

 

$

419,289

 

$

419,289

 

Term loan agreements

 

 

196,714

 

 

196,714

 

 

184,652

 

 

184,652

 

Real estate loans

 

 

265,700

 

 

265,700

 

 

307,690

 

 

307,690

 

HUD insured loans

 

 

117,117

 

 

117,117

 

 

181,762

 

 

180,950

 

Notes payable

 

 

116,952

 

 

116,952

 

 

81,398

 

 

81,398

 

Mortgages and other secured debt (recourse)

 

 

6,369

 

 

6,369

 

 

4,190

 

 

4,190

 

Mortgages and other secured debt (non-recourse)

 

 

498,222

 

 

498,222

 

 

26,483

 

 

26,483

 

 

 

$

1,613,420

 

$

1,613,420

 

$

1,205,464

 

$

1,204,652

 

 

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 majority of the Company’s debt instruments contain variable rates that are based upon current market prices, or have been refinanced within the recent past.  Consequently, management believes the carrying value of these debt instruments approximates fair value. The Company believes this approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements. 

 

Non-Recurring Fair Value Measures 

 

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test. The following tables present the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

    

    

 

    

Impairment Charges -

 

 

Carrying Value

 

Year ended

 

    

December 31, 2019

    

December 31, 2019

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

962,105

 

$

10,696

Finance lease right-of-use assets, net

 

 

37,097

 

 

 —

Operating lease right-of-use assets

 

 

2,399,505

 

 

6,241

Intangible assets, net

 

 

87,446

 

 

 —

Goodwill

 

 

85,642

 

 

 —

 

 

 

 

 

 

 

 

    

 

    

    

Impairment Charges -

 

 

Carrying Value

 

Year ended

 

 

December 31, 2018

 

December 31, 2018

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

2,887,554

 

$

104,997

Intangible assets, net

 

 

119,082

 

 

3,538

Goodwill

 

 

85,642

 

 

 —

 

The fair value allocation related to the Company’s acquisitions and the fair value of tangible and intangible assets related to the Company’s impairment analysis are 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

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 impact 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.

 

(23)Subsequent Events

 

Strategic Partnerships

 

Vantage Point Partnership

 

On January 10, 2020, Welltower sold the real estate of one skilled nursing facility located in Massachusetts to Vantage Point Partnership.  The sale represents the final component of the transaction that was initiated on September 12, 2019.  The Company will receive an annual rent credit of $0.7 million from Welltower as a result of the lease termination.  The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million.  The initial consolidation of this skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing.  The Company will continue to operate the facility under the master lease agreement with Vantage Point Partnership along with the other 18 facilities.  The addition of this one skilled nursing facility resulted in an increase of annual rent of $0.9 million.  See Note 4 - “Significant Transactions and Events – Strategic Partnerships - Vantage Point Partnership.”

 

NewGen Partnership

 

On February 1, 2020, the Company transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to New Generation Health, LLC (NewGen). The Company sold the real estate and operations of six skilled nursing facilities and transferred the leasehold rights to 13 skilled nursing, behavioral health and assisted living facilities for $78.9 million.  The Company will retain a 50% interest in the facilities.  Net transaction proceeds were used by the Company to repay indebtedness, including prepayment fees, of $33.7 million, fund its initial equity contribution and working capital requirement of approximately $15.0 million, and provide financing to the partnership of $9.0 million.  Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. The Company will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements.  The Company is currently assessing whether it will continue to consolidate the financial statements of these facilities for financial reporting purposes.

 

Divestitures

 

On January 31, 2020, Omega sold the real estate of one skilled nursing facility located in Massachusetts. The Company leased the facility under a master lease agreement, but closed the facility on July 1, 2019.  The sale resulted in the lease termination of the facility and an annual rent credit of $0.4 million. 

 

On February 1, 2020, the Company sold two owned skilled nursing facilities in North Carolina and one owned skilled nursing facility in Maryland for $61.8 million.  Proceeds were used to retire $29.1 million of HUD financed debt.  The three facilities generated revenues of $38.7 million and pre-tax income of $0.5 million.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On February 26, 2020, the Company completed the sale of one owned HUD-insured skilled nursing facility in California for $20.8 million.  The facility had been classified as an asset held for sale as of December 31, 2019.  Proceeds were used to retire $20.5 million of HUD financed debt.  The facility generated revenues of $14.0 million and pre-tax loss of $0.1 million.  See Note 20 – “Assets Held for Sale.”

 

On March 4, 2020, the Company divested the operations of one leased assisted/senior living facility in Montana. The lease termination resulted in an annual rent credit of $0.7 million.  The facility generated revenues of $2.5 million and pre-tax income of $0.1 million.

 

The Company is currently assessing the impact these divestitures and lease amendments will have on its consolidated financial statements.

F-51