Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nyse  >  Genesis Healthcare, Inc.    GEN

GENESIS HEALTHCARE, INC.

(GEN)
  Report  
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
News SummaryMost relevantAll newsPress ReleasesOfficial PublicationsSector newsAnalyst Recommendations

GENESIS HEALTHCARE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

share with twitter share with LinkedIn share with facebook
share via e-mail
0
11/09/2018 | 11:45am EDT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to assist in understanding and assessing the
trends and significant changes in our results of operations and financial
condition as of the dates and for the periods presented and should be read in
conjunction with the consolidated financial statements and related notes thereto
included in Item 1, "Financial Statements" in this Quarterly Report on Form
10-Q. As used in this MD&A, the words "we," "our," "us" and the "Company," and
similar terms, refer collectively to Genesis Healthcare, Inc. and its
wholly-owned subsidiaries, unless the context requires otherwise. This MD&A
should be read in conjunction with our consolidated financial statements and
related notes included in this report, as well as the financial information and
MD&A contained in the our Annual Report (defined below).



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



Business Overview



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



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



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



                                       41

--------------------------------------------------------------------------------

  Table of Contents


Recent Transactions and Events



Restructuring Transactions



Overview



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



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



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

Asset Based Lending Facilities




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



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



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



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



Term Loan Amendment



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



                                       42
--------------------------------------------------------------------------------

  Table of Contents



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


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

Welltower Master Lease Amendment




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



Omnibus Agreement



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



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



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


Welltower Real Estate Loans Amendment




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



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

                                       43
--------------------------------------------------------------------------------

  Table of Contents





MidCap Real Estate Loans



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



Lease Transactions and Divestitures



Sabra Divestitures



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



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



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



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



Second Spring Divestitures



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



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

                                       44

--------------------------------------------------------------------------------

  Table of Contents


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




Welltower Divestitures



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



Texas Divestitures



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



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

Other Lease Amendments and Divestitures




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



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



Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

Centers for Medicare and Medicaid Services (CMS) Final Rules




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


Skilled Nursing Facility Medicare Part A Payment Rates




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



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




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

                                       45

--------------------------------------------------------------------------------

  Table of Contents



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



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




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



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



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



New Patient-Driven Payment Model (PDPM)




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



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



Decisions Regarding Skilled Nursing Facility Payment




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

                                       46

--------------------------------------------------------------------------------

  Table of Contents


reductions in our revenue and operating margins.

Requirements of Participation




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


Changes finalized in this rule include:

· Strengthening the rights of long-term care facility residents.

· Ensuring that long-term care facility staff members are properly trained on

caring for residents with dementia and in preventing elder abuse.

· Ensuring that long-term care facilities take into consideration the health of

residents when making decisions on the kinds and levels of staffing a facility

needs to properly take care of its residents.

· Ensuring that staff members have the right skill sets and competencies to

provide person-centered care to residents. The care plans developed for

residents will take into consideration their goals of care and preferences.

· Improving care planning, including discharge planning for all residents with

involvement of the facility's interdisciplinary team and consideration of the

caregiver's capacity, giving residents information they need for follow-up

after discharge, and ensuring that instructions are transmitted to any

receiving facilities or services.

· Updating the long-term care facility's infection prevention and control

program, including requiring an infection prevention and control officer and an

antibiotic stewardship program that includes antibiotic use protocols and a

    system to monitor antibiotic use.



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

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

2016.

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

2017.

· Phase 3: The regulations included in Phase 3 must be implemented by November

    28, 2019.



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




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



Key Performance and Valuation Measures

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

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




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



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

                                       47

--------------------------------------------------------------------------------

  Table of Contents





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



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



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



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



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



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

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

"Skilled Mix" refers collectively to Medicare and Insurance payor sources.

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

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


                                                        Three months ended September 30,             Nine months ended September 30,
                                                           2018                  2017                   2018                  2017
Financial Results (in thousands)
Net revenues                                          $      1,217,271$      1,315,452$      3,790,703$      4,045,860
EBITDA                                                          75,612             (429,605)                251,533             (240,975)
Adjusted EBITDAR                                               145,886               147,788                459,829               488,829
Adjusted EBITDA                                                113,520               109,118                362,281               375,825
Net loss attributable to Genesis Healthcare, Inc.             (58,128)             (373,824)              (166,278)             (489,741)




                                       48
--------------------------------------------------------------------------------


  Table of Contents



INPATIENT SEGMENT:




                                                   Three months ended September 30,            Nine months ended September 30,
                                                      2018                  2017                   2018               2017
Occupancy Statistics - Inpatient
Available licensed beds in service at end of
period                                                     51,634                55,005                51,634            55,005
Available operating beds in service at end
of period                                                  49,553                52,907                49,553            52,907
Available patient days based on licensed
beds                                                    4,750,328             5,058,848            14,096,082        15,018,709
Available patient days based on operating
beds                                                    4,555,745             4,872,838            13,522,878        14,479,602
Actual patient days                                     3,838,454             4,123,001            11,424,759        12,323,181
Occupancy percentage - licensed beds                         80.8 %                81.5 %                81.0 %            82.1 %
Occupancy percentage - operating beds                        84.3 %                84.6 %                84.5 %            85.1 %
Skilled mix                                                  17.9 %                18.7 %                19.1 %            19.7 %
Average daily census                                       41,722                44,815                41,849            45,140
Revenue per patient day (skilled nursing
facilities)
Medicare Part A                                 $             522     $             524      $            525     $         527
Insurance                                                     456                   457                   458               456
Private and other                                             337                   328                   336               325
Medicaid                                                      223                   219                   223               218
Medicaid (net of provider taxes)                              204                   199                   204               199
Weighted average (net of provider taxes)        $             270     $             269      $            274     $         272
Patient days by payor (skilled nursing
facilities)
Medicare                                                  378,968               439,240             1,203,234         1,398,286
Insurance                                                 273,200               293,315               854,666           917,343
Total skilled mix days                                    652,168               732,555             2,057,900         2,315,629
Private and other                                         222,890               257,835               670,908           779,228
Medicaid                                                2,758,817             2,924,845             8,098,284         8,616,866
Total Days                                              3,633,875             3,915,235            10,827,092        11,711,723
Patient days as a percentage of total
patient days (skilled nursing facilities)
Medicare                                                     10.4 %                11.2 %                11.1 %            11.9 %
Insurance                                                     7.5 %                 7.5 %                 8.0 %             7.8 %
Skilled mix                                                  17.9 %                18.7 %                19.1 %            19.7 %
Private and other                                             6.1 %                 6.6 %                 6.2 %             6.7 %
Medicaid                                                     76.0 %                74.7 %                74.7 %            73.6 %
Total                                                       100.0 %               100.0 %               100.0 %           100.0 %
Facilities at end of period
Skilled nursing facilities
Leased                                                        337                   362                   337               362
Owned                                                          44                    44                    44                44
Joint Venture                                                   5                     5                     5                 5
Managed *                                                      33                    35                    33                35
Total skilled nursing facilities                              419                   446                   419               446
Total licensed beds                                        51,543                54,935                51,543            54,935
Assisted/Senior living facilities:
Leased                                                         19                    19                    19                19
Owned                                                           4                     4                     4                 4
Joint Venture                                                   1                     1                     1                 1
Managed                                                         2                     2                     2                 2
Total assisted/senior living facilities                        26                    26                    26                26
Total licensed beds                                         2,209                 2,208                 2,209             2,208
Total facilities                                              445                   472                   445               472

Total Jointly Owned and Managed-
(Unconsolidated)                                               15                    15                    15                15




                                       49
--------------------------------------------------------------------------------

  Table of Contents


REHABILITATION THERAPY SEGMENT**:






                                                         Three months
                                                     ended September 30,                Nine months ended September 30,
                                                     2018               2017              2018                 2017
Revenue mix %:
Company-operated                                             37 %            37 %                 37 %                 37 %
Non-affiliated                                               63 %            63 %                 63 %                 63 %
Sites of service (at end of period)                       1,327           1,525                1,327                1,525
Revenue per site                               $        152,273$  152,956$       476,010$       460,360
Therapist efficiency %                                       68 %            66 %                 68 %                 68 %

--------------------------------------------------------------------------------

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

** Excludes respiratory therapy services.

Reasons for Non-GAAP Financial Disclosure




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



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


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

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

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

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




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



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

                                       50

--------------------------------------------------------------------------------

  Table of Contents



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



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



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



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



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



EBITDA



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



Adjustments to EBITDA



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



We adjust EBITDA for the following items:

· (Gain) loss on early extinguishment of debt. We recognize gains or losses on

the early extinguishment of debt when we refinance our debt prior to its

original term, requiring us to write-off any unamortized deferred financing

fees. We exclude the effect of losses or gains recorded on the early

extinguishment of debt because we believe these gains and losses do not

accurately reflect the underlying performance of our operating businesses.




                                       51
--------------------------------------------------------------------------------

  Table of Contents



 ·  Other (income) loss.  We primarily use this income statement caption to capture

gains and losses on the sale or disposition of assets. We exclude the effect of

such gains and losses because we believe they do not accurately reflect the

    underlying performance of our operating businesses.



· Transaction costs. In connection with our restructuring, acquisition and

disposition transactions, we incur costs consisting of investment banking,

legal, transaction-based compensation and other professional service costs. We

exclude restructuring, acquisition and disposition related transaction costs

expensed during the period because we believe these costs do not reflect the

    underlying performance of our operating businesses.



· Customer receivership and other related charges. We excluded the non-cash costs

of a $35.9 million charge recorded in the nine months ended September 30, 2017

related to customer receivership proceedings and the related respective

write-down of unpaid accounts receivable. We believe these charges were caused

by the challenging operating environment, particularly for highly levered

customers of our rehabilitation therapy business. Accordingly, we believe

    these costs do not accurately reflect the underlying performance of our
    operating businesses.



· Long-lived asset impairments. We exclude non-cash long-lived asset impairment

charges because we believe including them does not reflect the ongoing

performance of our operating businesses. Additionally, such impairment charges

represent accelerated depreciation expense, and depreciation expense is also

    excluded from EBITDA.



· Goodwill and identifiable intangible asset impairments. We exclude non-cash

goodwill and identifiable intangible asset impairment charges because we

believe including them does not reflect the ongoing operating performance of

    our operating businesses.



· Severance and restructuring. We exclude severance costs from planned reduction

in force initiatives associated with restructuring activities intended to

adjust our cost structure in response to changes in the business

environment. We believe these costs do not reflect the underlying performance

of our operating businesses. We do not exclude severance costs that are not

    associated with such restructuring activities.



· (Income) losses of newly acquired, constructed or divested businesses.

The

acquisition and construction of new businesses is an element of our growth

strategy. Many of the businesses we acquire have a history of operating losses

and continue to generate operating losses in the months that follow our

acquisition. Newly constructed or developed businesses also generate losses

while in their start-up phase. We view these losses as both temporary and an

expected component of our long-term investment in the new venture. We adjust

these losses when computing Adjusted EBITDA in order to better analyze the

performance of our mature ongoing business. The activities of such businesses

are adjusted when computing Adjusted EBITDA until such time as a new business

generates positive Adjusted EBITDA. The divestiture of underperforming or

non-strategic facilities is also an element of our business strategy. We

eliminate the results of divested facilities beginning in the quarter in which

they become divested. We view the income or losses associated with the

wind-down of such divested facilities as not indicative of the performance of

    our ongoing operating business.



· Stock-based compensation. We exclude stock-based compensation expense because

it does not result in an outlay of cash and such non-cash expenses do not

    reflect the underlying performance of our operating businesses.




 ·  Other Items.  From time to time we incur costs or realize gains that we do not

believe reflect the underlying performance of our operating businesses. In the

current reporting period, we incurred the following expenses that we believe

    are non-recurring in nature and do not reflect the ongoing operating
    performance of our operating businesses.



(1) Regulatory defense and related costs - We exclude the costs of investigating

and defending the inherited legal matters associated with prior

transactions. We believe these costs are non-recurring in nature as they will

no longer be recognized following the final settlement of these matters.

Also, we do not believe the excluded costs reflect the underlying performance

of our operating businesses.

(2) Other non-recurring costs - In the three and nine months ended September 30,

2018, we excluded $8.5 million of costs attributable to the write down of

      receivables in our non-core physician services business and


                                       52
--------------------------------------------------------------------------------

  Table of Contents



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




Adjusted EBITDAR



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



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



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


                                     Three months ended September 30,           Nine months ended September 30,
                                           2018                2017                2018                  2017

Net loss attributable to Genesis
Healthcare, Inc.                     $       (58,128)$  (373,824)$       (166,278)$       (489,741)
Adjustments to compute EBITDA:
Loss from discontinued
operations, net of taxes                            -                 2                      -                    70
Net loss attributable to
noncontrolling interests                     (33,773)         (241,200)               (97,153)             (314,446)
Depreciation and amortization
expense                                        53,038            59,390                168,036               183,986
Interest expense                              115,695           124,431                348,687               373,473
Income tax (benefit) expense                  (1,220)             1,596                (1,759)                 5,683
EBITDA                               $         75,612      $  (429,605)                251,533             (240,975)
Adjustments to compute Adjusted
EBITDA:
Loss on early extinguishment of
debt                                                -                 -                  9,785                 2,301
Other (income) loss                          (20,207)             2,379               (42,360)                15,602
Transaction costs                              11,361             1,056                 26,567                 7,862
Customer receivership and other
related charges                                     -               297                      -                35,864
Long-lived asset impairments                   32,390           163,364                 88,008               163,364
Goodwill and identifiable
intangible asset impairments                      929           360,046                  2,061               360,046
Severance and restructuring                     1,023               256                  7,357                 4,950
Losses of newly acquired,
constructed, or divested
businesses                                      1,385             5,320                  3,560                15,589
Stock-based compensation                        2,176             2,440                  6,732                 7,206
Regulatory defense related costs
(1)                                               463                41                    603                   492
Other non-recurring costs (2)                   8,388             3,524                  8,435                 3,524
Adjusted EBITDA                      $        113,520$    109,118

$ 362,281 $ 375,825


Additional lease payments not
included in GAAP lease expense       $         73,614      $     85,396      $         226,110     $         258,724
Total cash lease payments made
pursuant to operating leases,
capital leases and financing
obligations                                   105,980           124,066                323,658               371,728




                                       53
--------------------------------------------------------------------------------

  Table of Contents



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


                                     Three months ended September 30,           Nine months ended September 30,
                                           2018                2017                2018                  2017

Net loss attributable to Genesis
Healthcare, Inc.                     $       (58,128)$  (373,824)$       (166,278)$       (489,741)
Adjustments to compute Adjusted
EBITDAR:
Loss from discontinued
operations, net of taxes                            -                 2                      -                    70
Net loss attributable to
noncontrolling interests                     (33,773)         (241,200)               (97,153)             (314,446)
Depreciation and amortization
expense                                        53,038            59,390                168,036               183,986
Interest expense                              115,695           124,431                348,687               373,473
Income tax (benefit) expense                  (1,220)             1,596                (1,759)                 5,683
Lease expense                                  32,366            38,670                 97,548               113,004
Loss on early extinguishment of
debt                                                -                 -                  9,785                 2,301
Other (income) loss                          (20,207)             2,379               (42,360)                15,602
Transaction costs                              11,361             1,056                 26,567                 7,862
Customer receivership and other
related charges                                     -               297                      -                35,864
Long-lived asset impairments                   32,390           163,364                 88,008               163,364
Goodwill and identifiable
intangible asset impairments                      929           360,046                  2,061               360,046
Severance and restructuring                     1,023               256                  7,357                 4,950
Losses of newly acquired,
constructed, or divested
businesses                                      1,385             5,320                  3,560                15,589
Stock-based compensation                        2,176             2,440                  6,732                 7,206
Regulatory defense related costs
(1)                                               463                41                    603                   492
Other non-recurring costs (2)                   8,388             3,524                  8,435                 3,524
Adjusted EBITDAR                     $        145,886$    147,788      $         459,829     $         488,829




Results of Operations



Same-store Presentation



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



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



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



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



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

                                       54
--------------------------------------------------------------------------------

  Table of Contents


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

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

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




                                                           Three months ended September 30,
                                                         2018                         2017                Increase / (Decrease)
                                                 Revenue       Revenue        Revenue       Revenue
                                                 Dollars      Percentage      Dollars      Percentage     Dollars      Percentage
Revenues:
Inpatient services:
Skilled nursing facilities                     $ 1,029,453          84.6 % 

$ 1,103,554 83.8 % $ (74,101) (6.7) % Assisted/Senior living facilities

                   23,974           2.0 %       24,185           1.8 %       (211)         (0.9) %
Administration of third party facilities             2,025           0.2 %        2,266           0.2 %       (241)        (10.6) %
Elimination of administrative services               (784)         (0.1) %        (370)             - %       (414)         111.9 %
Inpatient services, net                          1,054,668          86.7 %  

1,129,635 85.8 % (74,967) (6.6) %


Rehabilitation therapy services:
Total therapy services                             214,421          17.6 %  

244,471 18.6 % (30,050) (12.3) % Elimination intersegment rehabilitation therapy services

                                  (82,257)         (6.8) %  

(92,573) (7.0) % 10,316 (11.1) % Third party rehabilitation therapy services 132,164 10.8 %

    151,898          11.6 %    (19,734)        (13.0) %

Other services:
Total other services                                46,977           3.9 %       42,901           3.3 %       4,076           9.5 %
Elimination intersegment other services           (16,538)         (1.4) %      (8,982)         (0.7) %     (7,556)          84.1 %
Third party other services                          30,439           2.5 %       33,919           2.6 %     (3,480)        (10.3) %

Net revenues                                   $ 1,217,271         100.0 %  $ 1,315,452         100.0 %  $ (98,181)         (7.5) %







                                                      Three months ended September 30,
                                                     2018                        2017                Increase / (Decrease)
                                                           Margin                       Margin
                                            Dollars      Percentage      Dollars      Percentage     Dollars      Percentage
EBITDA:
Inpatient services                         $  101,865           9.7 %  $ 

(403,767) (35.7) % $ 505,632 (125.2) % Rehabilitation therapy services

                26,432          12.3 %       15,646           6.4 %      10,786          68.9 %
Other services                                (7,916)        (16.9) %       

(310) (0.7) % (7,606) 2,453.5 % Corporate and eliminations

                   (44,769)             - %     (41,174)             - %     (3,595)           8.7 %
EBITDA                                     $   75,612           6.2 %  $ (429,605)        (32.7) %  $  505,217       (117.6) %






                                       55
--------------------------------------------------------------------------------

  Table of Contents



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





                                                                               Three months ended September 30, 2018
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services     Corporate      Eliminations      Consolidated
Net revenues                                       $ 1,055,452$        214,421$  46,914$       63$     (99,579)$    1,217,271
Salaries, wages and benefits                           480,345             175,098       25,161             -                 -           680,604
Other operating expenses                               428,398              12,891       29,353             -          (99,578)           371,064
General and administrative costs                             -                   -            -        35,482                 -            35,482
Lease expense                                           31,732                   -          316           318                 -            32,366
Depreciation and amortization expense                   46,472               3,147          172         3,247                 -            53,038
Interest expense                                        91,106                  14            9        24,566                 -           115,695
Investment income                                            -                   -            -       (2,178)                 -           (2,178)
Other income                                          (20,207)                   -            -             -                 -          (20,207)
Transaction costs                                            -                   -            -        11,361                 -            11,361
Long-lived asset impairments                            32,390                   -            -             -                 -            32,390
Goodwill and identifiable intangible asset
impairments                                                929                   -            -             -                 -               929
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -         (523)               371             (152)
(Loss) income before income tax benefit               (35,713)              23,271      (8,097)      (72,210)             (372)          (93,121)
Income tax benefit                                           -                   -            -       (1,220)                 -           (1,220)
(Loss) income from continuing operations           $  (35,713)    $         23,271    $ (8,097)$ (70,990)$        (372)$     (91,901)





                                                                               Three months ended September 30, 2017
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services     Corporate      Eliminations      Consolidated
Net revenues                                       $ 1,130,005$        244,471$  42,778$      123$    (101,925)$    1,315,452
Salaries, wages and benefits                           507,075             205,232       27,097             -                 -           739,404
Other operating expenses                               464,894              21,429       15,689             -         (101,926)           400,086
General and administrative costs                             -                   -            -        41,420                 -            41,420
Lease expense                                           37,895                (14)          302           487                 -            38,670
Depreciation and amortization expense                   51,666               3,497          167         4,060                 -            59,390
Interest expense                                       103,306                  14            9        21,102                 -           124,431
Investment income                                            -                   -            -       (1,596)                 -           (1,596)
Other loss                                               2,379                   -            -             -                 -             2,379
Transaction costs                                            -                   -            -         1,056                 -             1,056
Customer receivership and other related charges              -                 297            -             -                 -               297
Long-lived asset impairment charges                    161,483               1,881            -             -                 -           163,364
Goodwill and identifiable intangible asset
impairments                                            360,046                   -            -             -                 -           360,046
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -         (571)               502              (69)
(Loss) income before income tax expense              (558,739)              12,135        (486)      (65,835)             (501)         (613,426)
Income tax expense                                           -                   -            -         1,596                 -             1,596
(Loss) income from continuing operations           $ (558,739)    $         12,135    $   (486)$ (67,431)$        (501)$    (615,022)






Net Revenues


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




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



                                       56

--------------------------------------------------------------------------------

  Table of Contents



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



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



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



EBITDA



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



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



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



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

                                       57
--------------------------------------------------------------------------------

  Table of Contents



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



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



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



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



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



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



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



Other Expense


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




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

                                       58

--------------------------------------------------------------------------------

  Table of Contents



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



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



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



Net Loss Attributable to Genesis Healthcare, Inc.

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




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



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

                                       59

--------------------------------------------------------------------------------

  Table of Contents




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

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




                                                           Nine months ended September 30,
                                                         2018                         2017                 Increase / (Decrease)
                                                 Revenue       Revenue        Revenue       Revenue
                                                 Dollars      Percentage      Dollars      Percentage      Dollars      Percentage
Revenues:
Inpatient services:
Skilled nursing facilities                     $ 3,190,065          84.0 % 

$ 3,404,181 84.0 % $ (214,116) (6.3) % Assisted/Senior living facilities

                   71,220           1.9 %       72,262           1.8 %      (1,042)         (1.4) %
Administration of third party facilities             6,577           0.2 %        6,841           0.2 %        (264)         (3.9) %
Elimination of administrative services             (2,254)             - %      (1,139)             - %      (1,115)          97.9 %
Inpatient services, net                          3,265,608          86.1 %  

3,482,145 86.0 % (216,537) (6.2) %


Rehabilitation therapy services:
Total therapy services                             685,672          18.1 %  

743,605 18.4 % (57,933) (7.8) % Elimination intersegment rehabilitation therapy services

                                 (263,890)         (7.0) %  

(287,599) (7.1) % 23,709 (8.2) % Third party rehabilitation therapy services 421,782 11.1 %

    456,006          11.3 %     (34,224)         (7.5) %

Other services:
Total other services                               146,830           3.9 %      133,168           3.3 %       13,662          10.3 %
Elimination intersegment other services           (43,517)         (1.1) %  

(25,459) (0.6) % (18,058) 70.9 % Third party other services

                         103,313           2.8 %      107,709           2.7 %      (4,396)         (4.1) %

Net revenues                                   $ 3,790,703         100.0 %  $ 4,045,860         100.0 %  $ (255,157)         (6.3) %







                                                        Nine months ended September 30,
                                                      2018                         2017                 Increase / (Decrease)
                                                             Margin                       Margin
                                              Dollars      Percentage      

Dollars Percentage Dollars Percentage EBITDA: Inpatient services

                          $   323,995           9.9 %  $ 

(126,921) (3.6) % $ 450,916 (355.3) % Rehabilitation therapy services

                  81,090          11.8 %       20,126           2.7 %      60,964          302.9 %
Other services                                  (6,733)         (4.6) %            5           0.0 %     (6,738)    (134,760.0) %
Corporate and eliminations                    (146,819)             - %    (134,185)             - %    (12,634)            9.4 %
EBITDA                                      $   251,533           6.6 %  $ (240,975)         (6.0) %  $  492,508        (204.4) %






                                       60
--------------------------------------------------------------------------------

  Table of Contents



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




                                                                                Nine months ended September 30, 2018
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services      Corporate      Eliminations      Consolidated
Net revenues                                       $ 3,267,862$        685,672$ 146,714$       116$    (309,661)$    3,790,703
Salaries, wages and benefits                         1,477,153             562,875       82,100              -                 -         2,122,128
Other operating expenses                             1,323,423              41,707       70,310              -         (309,661)         1,125,779
General and administrative costs                             -                   -            -        114,404                 -           114,404
Lease expense                                           95,660                   -          959            929                 -            97,548
Depreciation and amortization expense                  147,552               9,479          509         10,496                 -           168,036
Interest expense                                       277,753                  41           27         70,866                 -           348,687
Loss on early extinguishment of debt                         -                   -            -          9,785                 -             9,785
Investment income                                            -                   -            -        (4,856)                 -           (4,856)
Other (income) loss                                   (42,438)                   -           78              -                 -          (42,360)
Transaction costs                                            -                   -            -         26,567                 -            26,567
Long-lived asset impairments                            88,008                   -            -              -                 -            88,008
Goodwill and identifiable intangible asset
impairments                                              2,061                   -            -              -                 -             2,061
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -        (1,029)             1,135               106
(Loss) income before income tax benefit              (101,310)              71,570      (7,269)      (227,046)           (1,135)         (265,190)
Income tax benefit                                           -                   -            -        (1,759)                 -           (1,759)
(Loss) income from continuing operations           $ (101,310)    $         71,570    $ (7,269)$ (225,287)$      (1,135)$    (263,431)









                                                                                Nine months ended September 30, 2017
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services      Corporate      Eliminations      Consolidated
Net revenues                                       $ 3,483,284$        743,605$ 132,718$       450$    (314,197)$    4,045,860
Salaries, wages and benefits                         1,597,007             619,928       86,365              -                 -         2,303,300
Other operating expenses                             1,365,896              65,074       45,451              -         (314,198)         1,162,223
General and administrative costs                             -                   -            -        127,657                 -           127,657
Lease expense                                          110,661                   -          897          1,446                 -           113,004
Depreciation and amortization expense                  159,483              11,110          506         12,887                 -           183,986
Interest expense                                       309,948                  42           28         63,455                 -           373,473
Loss on early extinguishment of debt                         -                   -            -          2,301                 -             2,301
Investment income                                            -                   -            -        (4,097)                 -           (4,097)
Other loss (income)                                     15,112                 732            -          (242)                 -            15,602
Transaction costs                                            -                   -            -          7,862                 -             7,862
Customer receivership and other related charges              -              35,864            -              -                 -            35,864
Long-lived asset impairments                           161,483               1,881            -              -                 -           163,364
Goodwill and identifiable intangible asset
impairments                                            360,046                   -            -              -                 -           360,046
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -        (1,702)             1,411             (291)
(Loss) income before income tax expense              (596,352)               8,974        (529)      (209,117)           (1,410)         (798,434)
Income tax expense                                           -                   -            -          5,683                 -             5,683
(Loss) income from continuing operations           $ (596,352)    $          8,974    $   (529)$ (214,800)$      (1,410)$    (804,117)




Net Revenues


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




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

                                       61

--------------------------------------------------------------------------------

  Table of Contents



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



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



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



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





EBITDA



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



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



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

                                       62
--------------------------------------------------------------------------------

  Table of Contents



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



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



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



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



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



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



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



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



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

                                       63

--------------------------------------------------------------------------------

  Table of Contents



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



Other Expense


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




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



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



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



Net Loss Attributable to Genesis Healthcare, Inc.

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




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

                                       64

--------------------------------------------------------------------------------

  Table of Contents





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



Liquidity and Capital Resources



Cash Flow and Liquidity



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






                                                                Nine months ended September 30,
                                                                   2018                  2017
Net cash provided by operating activities                    $         14,066      $          67,358
Net cash (used in) provided by investing activities                  (54,877)                 53,367
Net cash provided by (used in) financing activities                   110,273              (117,575)

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

                                                   69,462                  3,150
Beginning of period                                                    58,638                 63,460
End of period                                                $        128,100      $          66,610




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



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



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

                                       65

--------------------------------------------------------------------------------

  Table of Contents



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


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

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




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



Restructuring Transactions



Overview



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



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


Asset Based Lending Facilities




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



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



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

                                       66

--------------------------------------------------------------------------------

  Table of Contents



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



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



Term Loan Amendment



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



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


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

Welltower Master Lease Amendment




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



Omnibus Agreement



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



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



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



                                       67
--------------------------------------------------------------------------------

  Table of Contents


Welltower Real Estate Loans Amendment




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



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



MidCap Real Estate Loans



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



Sabra Master Leases


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



Other Financing Activities



HUD Insured Refinancings


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

Divestiture of Non-Strategic Facilities




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



· The closure of one skilled nursing facility located in Massachusetts on

February 28, 2018 that was subject to a master lease agreement with

Welltower. A loss was recognized totaling $0.3 million.

· The sale of five skilled nursing facilities located in Massachusetts and

Kentucky on April 1, 2018 that were subject to a master lease agreement with

Sabra. A gain was recognized totaling $0.3 million.

· The lease expiration of one skilled nursing facility located in California on

    June 1, 2018. A loss was recognized totaling $0.9 million.


                                       68
--------------------------------------------------------------------------------

  Table of Contents


· The sale and lease termination of eight skilled nursing facilities located in

Pennsylvania and four skilled nursing facilities located in New Jersey on June

1, 2018 and June 13, 2018, respectively. These skilled nursing facilities were

subject to a master lease agreement with Second Spring Healthcare Investments

(Second Spring). A gain was recognized totaling $14.9 million.

· The lease expiration of one behavioral outpatient clinic located in California

on July 1, 2018. A loss was recognized totaling $0.2 million.

· The sale and lease termination of three skilled nursing facilities located in

Indiana and Maryland on August 1, 2018 that were subject to a master lease

agreement with Welltower. A gain was recognized totaling $29.8 million.

· The sale and lease termination of one skilled nursing facility located in

Pennsylvania on August 1, 2018 that was subject to a master lease agreement

with Second Spring. A loss was recognized totaling $0.8 million.

· The sale and lease termination of one skilled nursing facility located in Texas

on August 1, 2018. A loss was recognized totaling $3.8 million.

· The sale and lease termination of one skilled nursing facility located in Ohio

on September 7, 2018. No gain or loss was recognized.

· The sale of 15 owned skilled nursing facilities and lease termination of one

skilled nursing facility located in Texas on October 1, 2018. A loss was

recognized totaling $4.8 million.

· The sale of seven owned skilled nursing facilities located in Texas on November

1, 2018.

· The sale and lease termination of two skilled nursing facilities in Idaho on

November 1, 2018.

· The sale and lease termination of two skilled nursing facilities in Montana on

November 1, 2018.

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





 Financial Covenants



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



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


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

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




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



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

                                       69

--------------------------------------------------------------------------------

  Table of Contents


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

Concentration of Credit Risk




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



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



Financial Condition and Liquidity Considerations




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



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



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



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



                                       70
--------------------------------------------------------------------------------

  Table of Contents



Risk and Uncertainties


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




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



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



Contractual Obligations



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






                                                                                                       More than
                                              Total          1 Yr.       2-3 Yrs.       4-5 Yrs.         5 Yrs.
Asset based lending facilities             $    539,998$ 117,799$    55,423$   366,776    $          -
Term loan agreements                            219,467        9,056        210,411              -               -
Real estate loans                               405,347       23,890         50,747        330,710               -
HUD insured loans                               297,372        9,930         19,860         19,860         247,722
Notes payable                                   103,313       10,287         76,164         16,862               -
Mortgages and other secured debt
(recourse)                                       13,978       12,836          1,142              -               -
Mortgages and other secured debt
(non-recourse)                                   23,397        2,453          4,932          4,265          11,747
Financing obligations                         7,933,920      236,208        486,526        488,149       6,723,038
Capital lease obligations                     3,651,967       86,885        173,338        181,024       3,210,720
Operating lease obligations                     893,935      118,433        

234,506 176,661 364,335

                                           $ 14,082,695$ 627,777    $ 

1,313,049 $ 1,584,307$ 10,557,562

© Edgar Online, source Glimpses

share with twitter share with LinkedIn share with facebook
share via e-mail
0
Latest news on GENESIS HEALTHCARE, INC.
10/16Genesis HealthCare Enters Into Investment to Buy Back Real Estate Historicall..
GL
08/09GENESIS HEALTHCARE : Management's Discussion and Analysis of Financial Condition..
AQ
08/08GENESIS HEALTHCARE : 2Q Earnings Snapshot
AQ
08/08GENESIS HEALTHCARE, INC. : Results of Operations and Financial Condition, Regula..
AQ
08/08Genesis Healthcare Reports Solid Second Quarter 2019 Results
GL
07/22Genesis HealthCare to Release Second Quarter 2019 Results on August 8, 2019
GL
07/10GENESIS HEALTHCARE : Three Genesis HealthCare Centers Earn 2019 Silver National ..
AQ
07/08Three Genesis HealthCare Centers Earn 2019 Silver National Quality Awards
GL
06/25GENESIS HEALTHCARE : CFO Sells $14,945.58 in Stock
AQ
06/11JOHNSON & JOHNSON : Genmab, Janssen in Cancer-Drug Licensing Deal
DJ
More news