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MarketScreener Homepage  >  Equities  >  Nyse  >  Genesis Healthcare Inc    GEN

GENESIS HEALTHCARE INC

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

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08/09/2019 | 11:38am 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, 2018, particularly in Item
1A, "Risk Factors," which was filed with the SEC on March 18, 2019 (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 June 30, 2019, we
provided inpatient services through 407 skilled nursing, senior/assisted living
and behavioral health centers located in 29 states. Revenues of our owned,
leased and otherwise consolidated inpatient businesses constitute approximately
87% of our revenues.



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



Recent Transactions and Events



Next Partnership



On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15
facilities to a real estate partnership (Next Partnership), of which we acquired
a 46% membership interest for $16.0 million.  The remaining interest is held by
Next Healthcare (Next), a related party.  See Note 11 - "Related Party
Transactions." We will continue to operate these facilities pursuant to a new
master lease with the Next Partnership.  The term of the master lease is 15
years with two five-year renewal options available. We

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will pay annual rent of $19.5 million, with no rent escalators for the first
five years and an escalator of 2% beginning in the sixth lease year and
thereafter. We also obtained a fixed price purchase option to acquire all of the
real property of the facilities. The purchase option is exercisable between
lease years five and seven, reducing in price each successive year down to a 10%
premium over the original purchase price.



In accordance with U.S. generally accepted accounting principles (U.S. GAAP), we
have concluded the Next Partnership qualifies as a  variable interest entity
(VIE) and that we are the primary beneficiary. As such, we have consolidated all
of the accounts of the Next Partnership in the accompanying financial
statements.  The Next Partnership acquired 22 skilled nursing facilities for a
purchase price of $252.5 million but immediately sold seven of these facilities
for $79.0 million.  The initial consolidation of the remaining 15 facilities
resulted in property and equipment of $173.5 million, non-recourse debt of
$165.7 million, net of debt issuance costs, and non-controlling interest of
$18.5 million. We have not finalized the analysis of the consideration and
purchase price allocation and will continue to review during the measurement
period.  The impact of consolidation on the accompanying consolidated statement
of operations was not material for the six months ended June 30, 2019 apart from
non-recurring transaction costs of $5.3 million.



Divestiture of Non-Strategic Facilities

Between January 31, 2019 and February 7, 2019, we divested nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenue of $90.2 million and annual pre-tax net loss of $6.0 million. We recognized a loss on exit reserves of $3.3 million.




On April 1, 2019, we divested the operations of one behavioral health center
located in California upon the lease's expiration. The center generated annual
revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture
resulted in a loss of $0.1 million.



On May 1, 2019, we divested the operations of two skilled nursing facilities
located in Connecticut that were subject to the Welltower Master Lease. The
facilities generated annual revenues of $18.0 million and pre-tax net loss of
$1.6 million. The divestiture resulted in a loss of $0.8 million.



On May 1, 2019, we divested the real property and operations of five skilled
nursing facilities in California for a sale price of $56.5 million. See Note 7 -
"Property and Equipment." Loan repayments of $41.8 million were paid on the
facilities at closing, as discussed in Note 9 - "Long-Term Debt - Real Estate
Loans" and "Long-Term Debt - HUD Insured Loans." The Company incurred prepayment
penalties and other closing costs of $2.4 million at settlement. The facilities
generated annual revenues of $53.0 million and pre-tax net income of $1.6
million. The divestiture resulted in a gain of $25.0 million.



On June 30, 2019, we divested the operations of one skilled nursing facility in
Ohio. The facility generated annual revenues of $6.7 million and pre-tax net
loss of $1.3 million.  We recognized a loss of $0.3 million on the exit of
operations.



On July 1, 2019, we completed the closure of one skilled nursing facility in
Massachusetts that remains subject to a master lease with Omega. The facility
generated annual revenues of $5.4 million and pre-tax net loss of $1.7
million. The closure resulted in a loss on exit of $0.2 million recognized in
the six months ended June 30, 2019.



On July 1, 2019, we divested the operations of three skilled nursing facilities
located in Ohio that were subject to a master lease with Omega Healthcare
Investors, Inc. (Omega).  The facilities generated annual revenues of $21.6
million and pre-tax net loss of $0.3 million.    The divestiture resulted in a
loss of $0.8 million recognized in the six months ended June 30, 2019. Upon
divestiture, we received an annual rent credit of $1.9 million.



On August 1, 2019, we divested the operations of six leased skilled nursing
facilities located in Ohio, marking an exit from the inpatient business in this
state. The facilities generated annual revenues of $39.2 million and pre-tax net
loss of $1.9 million.



On August 1, 2019, we divested the operations and sold the real property of one
assisted/senior living facility located in California for a sale price of $4.7
million. The facility generated annual revenues of $2.7 million and pre-tax net
loss of $0.2 million. The facility has been classified as an asset held for sale
at June 30, 2019. See Note 14 - "Assets Held for Sale."



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On August 1, 2019, we divested the operations of one leased skilled nursing facility in Utah. The facility generated annual revenues of $4.7 million and pre-tax net loss of $0.6 million.

We are currently assessing the impact that the August 1, 2019 divestitures will have on our consolidated financial statements.



Acquisitions



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



Lease Amendments



Between January 31, 2019 and February 7, 2019, we amended the Welltower Master
Lease several times to reflect the lease termination of 24 facilities, including
the 15 facilities sold and now leased from the Next Partnership.  As a result of
the lease termination on the 24 facilities,  we received annual rent credits of

$23.4 million from Welltower. ROU assets and lease obligations of $221.3 million and $241.6 million, respectively, were written off resulting in a gain of $20.3 million.




On March 8, 2019, we amended a master lease agreement for 19 skilled nursing
facilities. The amendment extended the lease term by five years through October
31, 2026, removed our option to purchase certain facilities under the lease and
adjusted certain financial covenants. In conjunction with the amendment, one
facility located in Ohio was closed. The facility generated annual revenues of
$7.7 million and pre-tax net loss of $1.6 million. The divestiture resulted in a
loss of $0.2 million.


On May 1, 2019, we amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million.

ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off resulting in a gain of $0.5 million.

Gains and losses associated with transactions, such as divestitures, acquisitions and lease amendments, are included in other income in the consolidated statements of operations. See Note 12 - "Other Income."

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

Five-Star Quality Rating System




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



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



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Centers for Medicare and Medicaid Services Final Rules




On July 30, 2019, CMS released a final rule for skilled nursing facilities
prospective payment services (SNF PPS) for fiscal year 2020 Medicare Part A
services.  The final rule made revisions from the proposed rule for the Patient
Driven Payment Model (PDPM) market basket increase and additional modifications
to the skilled nursing facility Quality Reporting Program (QRP). PDPM will
replace the existing case-mix classification methodology, the Resource
Utilization Groups, Version IV (RUG-IV) at the beginning of fiscal year 2020.
The final rule addresses specific issue areas, discussed below, related to the
fiscal year 2020 requirements.



Skilled Nursing Facility Medicare Part A Payment Rates

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

Patient-Driven Payment Model (PDPM)




CMS has finalized the implementation of PDPM in a budget neutral manner and has
updated the unadjusted federal per diems and related case mix groups (CMGs) and
related Case Mix Indices (CMIs).    To achieve budget neutrality, the unadjusted
PDPM CMIs were multiplied by 1.46 so the total estimated payments under PDPM
would be equal to the total actual payments under RUG-IV.



CMS has updated the PDPM payment year by refreshing fiscal year 2017 data with fiscal year 2018 data and applying a standardization multiplier and a budget neutrality multiplier for each of the PDPM rate components.




Under CMIs, there are differences between RUG-IV and PDPM in terms of patient
classifications and billing. CMS has reflected these differences by modifying
the PDPM case mixed adjusted federal rates and associated indexes through the
application of a CMI multiplier for each PDPM Group.



PDPM utilizes a combination of six components to determine the amount of the per
diem payment. Five of the components are case-mix adjusted, meaning they are
intended to cover the utilization of skilled nursing facility resources that
vary according to patient characteristics. These components are as
follows: physical therapy (PT), occupational therapy (OT), speech-language
pathology (SLP), non-therapy ancillary (NTA) services, and nursing. The sixth
component is non-case-mix adjusted, meaning it is intended to cover those
skilled nursing facility resources that do not vary by patient. The PT, OT, and
NTA components are also subject to a variable adjustment factor that serves to
adjust the per diem payment over the course of the patient's stay. PT and OT
services have variable per diem adjustments beginning on the 21st day of the
Medicare stay and further adjusted every seven days thereafter. NTA services
have variable per diem adjustments beginning on the 4th day of the Medicare
stay. PDPM utilizes patient specific, data-driven characteristics to classify
patients into payment groups within each of the six components, which are used
as the basis for the payment amount.



Group Therapy Under PDPM



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



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



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




The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act)
imposed new data reporting requirements for certain Post-Acute-Care (PAC)
providers. The IMPACT Act requires that each skilled nursing facility submit
their quality measures data.  Beginning with fiscal year 2018, and each
subsequent year, if a skilled nursing facility does not submit required quality
data, their payment rates for the year are reduced by 2.0% for that fiscal year.
Application of the 2.0% reduction

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may result in payment rates for a fiscal year being less than the preceding
fiscal year. In addition, reporting-based reductions to the market basket
increase factor will not be cumulative; they will only apply for the fiscal year
involved. A skilled nursing facility will receive a notification letter from its
Medicare administrator contractor if it was non-compliant with the Quality
Reporting Program reporting requirements and is subject to the payment
reduction.



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.  CMS has finalized the decision to adopt
two Transfer of Health Information quality measures and standardized patient
assessment data elements that skilled nursing facilities would be required to
begin reporting with respect to admissions and discharges that occur on or after
October 1, 2020. 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. 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.  Lastly, CMS has finalized the proposal to publicly
display the quality measure, Drug Regimen Review Conducted With Follow-Up for
Identified Issues- PAC SNF QRP.



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




Under the SNF-VBP Program, CMS began to withhold 2.0% of Medicare payments
starting October 1, 2018, to fund the incentive payment pool and will
redistribute 60% of the withheld payments back to skilled nursing
facilities. All skilled nursing facilities will receive an incentive multiplier
to apply to each of their RUG rates for the fiscal year that will provide an
incentive payment, a full RUG payment, or a reduction.  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. Of the 2.0%
withheld under the SNF-VBP Program, we expect to retain 1.3% based on
performance.



In the fiscal year 2020 final rule, most elements of the program remain the
same. The final rule reiterates the decision to transition to fiscal year data
from calendar year data for baseline and performance year calculations for FY
2020 SNF VBP Program, estimation of 2022 benchmarks and finalized the proposal
to rename the future skilled nursing facility readmission measure without
actually changing the measurement itself. Two changes that were proposed for the
fiscal year 2020 program that have been finalized under the final rule include
(1) the change of the phase one correction process to a 30-day deadline and (2)
the suppression of data for facilities with fewer than 25 eligible stays for a
baseline or performance period. CMS has finalized the following related to the
VBP Score Reports: if a skilled nursing facility has fewer than 25 eligible
stays during the baseline period for a program year, CMS would not display the
baseline Risk Standard Readmission Rate (RSRR) or improvement score, though CMS
would still display the performance period RSRR, achievement score and total
performance score if the skilled nursing facility had sufficient data during the
performance period; (2) if a skilled nursing facility has fewer than 25 eligible
stays during the performance period for a program year and receives an assigned
skilled nursing facility performance score as a result, CMS would report the
assigned skilled nursing facility performance score and would not display the
performance period RSRR, the achievement score or improvement score; and (3) if
a skilled nursing facility has zero eligible cases during the performance period
for a program year, CMS would not display any information for that skilled
nursing facility.



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



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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.



Proposed Rule



On July 16, 2019, CMS announced a proposed rule to remove requirements of
participation identified as unnecessary, obsolete, or excessively burdensome on
long-term care facilities. The rule is part of the agency's five-part approach
to ensuring a high-quality long-term care facility system that focuses on
strengthening requirements for such facilities, working with states to enforce
statutory and regulatory requirements, increasing transparency of facility
performance, and promoting improved health outcomes for facility residents.



This proposed rule would increase facilities' ability to devote their resources
to improving resident care. This would be achieved by the elimination or
reduction in the hours and resources that clinicians and providers spend on
obsolete and redundant requirements that could impede or divert resources away
from the provision of high-quality resident care. Many of the proposed
provisions would simplify and/or streamline the Medicare health and safety
standards long-term care facilities must meet in order to serve their residents.
Importantly, in identifying opportunities for reducing burden, CMS would
maintain resident health and safety standards.



In order to give facilities enough time to respond to these proposed changes,
CMS also proposes to delay the implementation of certain Phase 3 quality
assurance and performance improvement program and compliance and ethics related
requirements that are

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directly impacted by the proposed changes in the regulation to one year following the effective date of this proposed rule, if finalized, to avoid confusion and promote transparency.

CMS will accept comments on the proposed rule through September 16, 2019.

Key Performance and Valuation Measures

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

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




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



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



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



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



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



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



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



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

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

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

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



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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 June 30,           Six months ended June 30,
                                                          2019               2018               2019             2018
Financial Results (in thousands)
Net revenues                                          $    1,145,052$ 1,272,360$   2,306,692$ 2,573,432
EBITDA                                                        72,098          117,707             136,778         175,921
Adjusted EBITDAR                                             156,019          163,326             304,516         313,943
Adjusted EBITDA                                               61,433          131,215             115,869         248,761
Net loss attributable to Genesis Healthcare, Inc.            (4,819)         (39,612)            (20,082)       (108,150)




INPATIENT SEGMENT:




                                                  Three months ended June 30,           Six months ended June 30,
                                                     2019               2018               2019             2018
Occupancy Statistics - Inpatient
Available licensed beds in service at end of
period                                                   46,353           52,303              46,353          52,303
Available operating beds in service at end
of period                                                44,408           50,182              44,408          50,182
Available patient days based on licensed
beds                                                  4,213,333        4,759,573           8,378,173       9,466,843
Available patient days based on operating
beds                                                  4,036,602        4,567,679           8,027,459       9,087,860
Actual patient days                                   3,496,046        3,840,181           6,977,410       7,681,223
Occupancy percentage - licensed beds                       83.0 %           80.7 %              83.3 %          81.1 %
Occupancy percentage - operating beds                      86.6 %           84.1 %              86.9 %          84.5 %
Skilled mix                                                18.2 %           18.9 %              18.6 %          19.6 %
Average daily census                                     38,418           42,200              38,549          42,438
Revenue per patient day (skilled nursing
facilities)
Medicare Part A                                 $           528     $        528      $          526     $       526
Insurance                                                   454              461                 456             458
Private and other                                           364              337                 361             335
Medicaid                                                    231              223                 231             223
Medicaid (net of provider taxes)                            211              204                 211             204
Weighted average (net of provider taxes)        $           277     $        274      $          278     $       275
Patient days by payor (skilled nursing
facilities)
Medicare                                                344,916          400,370             704,651         834,094
Insurance                                               252,272          285,935             518,739         591,221
Total skilled mix days                                  597,188          686,305           1,223,390       1,425,315
Private and other                                       193,603          227,920             379,838         454,823
Medicaid                                              2,505,024        2,726,538           4,975,038       5,405,661
Total Days                                            3,295,815        3,640,763           6,578,266       7,285,799
Patient days as a percentage of total
patient days (skilled nursing facilities)
Medicare                                                   10.5 %           11.0 %              10.7 %          11.4 %
Insurance                                                   7.7 %            7.9 %               7.9 %           8.2 %
Skilled mix                                                18.2 %           18.9 %              18.6 %          19.6 %
Private and other                                           5.9 %            6.3 %               5.8 %           6.2 %
Medicaid                                                   75.9 %           74.8 %              75.6 %          74.2 %
Total                                                     100.0 %          100.0 %             100.0 %         100.0 %
Facilities at end of period
Skilled nursing facilities
Leased                                                      311              341                 311             341
Owned                                                        37               44                  37              44
Joint Venture                                                20                5                  20               5
Managed *                                                    12               35                  12              35
Total skilled nursing facilities                            380              425                 380             425
Total licensed beds                                      46,108           52,232              46,108          52,232
Assisted/Senior living facilities:
Leased                                                       21               19                  21              19
Owned                                                         3                4                   3               4
Joint Venture                                                 1                1                   1               1
Managed                                                       2                2                   2               2
Total assisted/senior living facilities                      27               26                  27              26
Total licensed beds                                       2,233            2,209               2,233           2,209
Total facilities                                            407              451                 407             451

Total Jointly Owned and Managed-
(Unconsolidated)                                             14               15                  14              15




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REHABILITATION THERAPY SEGMENT**:







                                 Three months ended June 30,             Six months ended June 30,
                                   2019                2018                2019               2018
Revenue mix %:
Company-operated                          36 %                37 %                36 %               37 %
Non-affiliated                            64 %                63 %                64 %               63 %
Sites of service (at end
of period)                             1,203               1,424               1,203              1,424
Revenue per site              $      153,373$      158,619$      302,642$      315,914
Therapist efficiency %                    73 %                68 %                72 %               68 %


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

* 2018 includes 20 facilities located in Texas for which the real estate was 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 business unit and the employees responsible for business unit
performance. Consequently, we use these Non-GAAP Financial

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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.




 ·  Other income.  We primarily use this income statement caption to capture gains

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

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

underlying performance of our operating businesses.




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· 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.



· 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 that 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.



· Loss (income) 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.



· 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 underlying performance of our operating

    businesses.



· Other non-recurring costs. In the three and six months ended June 30, 2019

and June 30, 2018, we excluded an insurance recovery and costs related to the

hurricane events of fiscal year 2017. We do not believe the excluded costs

    reflect the performance of our ongoing operating business.




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Adjusted EBITDA



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 June 30,             Six months ended June 30,
                                          2019                2018                2019              2018

Net loss attributable to Genesis
Healthcare, Inc.                     $       (4,819)$      (39,612)$    (20,082)$  (108,150)
Adjustments to compute EBITDA:
Net loss attributable to
noncontrolling interests                     (4,164)            (23,245)           (13,983)         (63,380)
Depreciation and amortization
expense                                       28,268              63,495             66,463          114,998
Interest expense                              52,975             117,955            104,491          232,992
Income tax benefit                             (162)               (886)              (111)            (539)
EBITDA                               $        72,098$       117,707            136,778          175,921
Adjustments to compute Adjusted
EBITDA:
(Gain) loss on early
extinguishment of debt                          (24)               (501)               (24)            9,785
Other income                                (23,413)            (22,220)           (40,330)         (22,152)
Transaction costs                              8,823               3,112             10,084           15,207
Long-lived asset impairments                     900              27,257                900           55,617
Goodwill and identifiable
intangible asset impairments                       -               1,132                  -            1,132
Severance and restructuring                      673               3,493              2,119            6,333
Loss (income) of newly acquired,
constructed, or divested
businesses                                       865               (925)              2,744            2,175
Stock-based compensation                       1,748               2,129              3,835            4,556
Regulatory defense and related
costs                                              -                  31                  -              140
Other non-recurring costs                      (237)                   -              (237)               47
Adjusted EBITDA                      $        61,433$       131,215

$ 115,869$ 248,761


Additional lease payments not
included in GAAP lease expense       $        11,302$        74,564$      24,869$    152,496
Total cash lease payments made
pursuant to operating leases,
finance leases and financing
obligations                                  105,888             106,675            213,516          217,678




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.  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):



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                                        Three months ended June 30,             Six months ended June 30,
                                          2019                2018                2019              2018

Net loss attributable to Genesis
Healthcare, Inc.                     $       (4,819)$      (39,612)$    (20,082)$  (108,150)
Adjustments to compute Adjusted
EBITDAR:
Net loss attributable to
noncontrolling interests                     (4,164)            (23,245)           (13,983)         (63,380)
Depreciation and amortization
expense                                       28,268              63,495             66,463          114,998
Interest expense                              52,975             117,955            104,491          232,992
Income tax benefit                             (162)               (886)              (111)            (539)
Lease expense                                 94,586              32,111            188,647           65,182
(Gain) loss on early
extinguishment of debt                          (24)               (501)               (24)            9,785
Other income                                (23,413)            (22,220)           (40,330)         (22,152)
Transaction costs                              8,823               3,112             10,084           15,207
Long-lived asset impairments                     900              27,257                900           55,617
Goodwill and identifiable
intangible asset impairments                       -               1,132                  -            1,132
Severance and restructuring                      673               3,493              2,119            6,333
Loss (income) of newly acquired,
constructed, or divested
businesses                                       865               (925)              2,744            2,175
Stock-based compensation                       1,748               2,129              3,835            4,556
Regulatory defense and related
costs                                              -                  31                  -              140
Other non-recurring costs                      (237)                   -              (237)               47
Adjusted EBITDAR                     $       156,019$       163,326$     304,516$    313,943




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.



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Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018




A summary of our unaudited results of operations for the three months ended
June 30, 2019 as compared with the same period in 2018 follows (in thousands,
except percentages):




                                                          Three months ended June 30,
                                                      2019                         2018                 Increase / (Decrease)
                                              Revenue       Revenue        Revenue       Revenue
                                              Dollars      Percentage      Dollars      Percentage      Dollars      Percentage
Revenues:
Inpatient services:
Skilled nursing facilities                  $   964,541          84.2 %  $ 

1,065,310 83.7 % $ (100,769) (9.5) % Assisted/Senior living facilities

                23,702           2.1 %       23,742           1.9 %         (40)         (0.2) %
Administration of third party facilities          2,054           0.2 %        2,300           0.2 %        (246)        (10.7) %
Elimination of administrative services            (799)           (0) %        (743)         (0.1) %         (56)           7.5 %
Inpatient services, net                         989,498          86.4 %    

1,090,609 85.7 % (101,111) (9.3) %


Rehabilitation therapy services:
Total therapy services                          192,906          16.8 %     

234,674 18.4 % (41,768) (17.8) % Elimination of intersegment rehabilitation therapy services

                (71,971)         (6.3) %     (88,887)         (7.0) %       16,916        (19.0) %
Third party rehabilitation
therapy services, net                           120,935          10.5 %      145,787          11.4 %     (24,852)        (17.0) %

Other services:
Total other services                             45,489           4.0 %       42,946           3.4 %        2,543           5.9 %
Elimination of intersegment other
services                                       (10,870)         (0.9) %     

(6,982) (0.5) % (3,888) 55.7 % Third party other services, net

                  34,619           3.1 %       35,964           2.9 %      (1,345)         (3.7) %

Net revenues                                $ 1,145,052         100.0 %  $ 1,272,360         100.0 %  $ (127,308)        (10.0) %





                                                       Three months ended June 30,
                                                    2019                        2018               Increase / (Decrease)
                                                          Margin                      Margin
                                           Dollars      Percentage     Dollars      Percentage     Dollars      Percentage
EBITDA:
Inpatient services                        $   87,649           8.9 %  $  

124,687 11.4 % $ (37,038) (29.7) % Rehabilitation therapy services

               25,586          13.3 %      32,328          13.8 %     (6,742)        (20.9) %
Other services                                 1,248           2.7 %       1,036           2.0 %         212          20.5 %
Corporate and eliminations                  (42,385)             - %    (40,344)             - %     (2,041)           5.1 %
EBITDA                                    $   72,098           6.3 %  $  117,707           9.3 %  $ (45,609)        (38.7) %




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





                                                                                 Three months ended June 30, 2019
                                                                  Rehabilitation
                                                   Inpatient         Therapy           Other
                                                    Services         Services        Services     Corporate      Eliminations      Consolidated
Net revenues                                       $  990,297$        192,906$  45,325$      164$     (83,640)$    1,145,052
Salaries, wages and benefits                          442,028             154,855       29,276             -                 -           626,159
Other operating expenses                              389,637              12,130       14,402             -          (83,641)           332,528
General and administrative costs                            -                   -            -        35,562                 -            35,562
Lease expense                                          93,557                 335          338           356                 -            94,586
Depreciation and amortization expense                  22,328               3,112          174         2,654                 -            28,268
Interest expense                                       29,051                  13            8        23,903                 -            52,975
Gain on early extinguishment of debt                        -                   -            -          (24)                 -              (24)
Investment income                                           -                   -            -       (2,143)                 -           (2,143)
Other (income) loss                                  (23,474)                   -           61             -                 -          (23,413)
Transaction costs                                           -                   -            -         8,823                 -             8,823
Long-lived asset impairments                              900                   -            -             -                 -               900
Equity in net loss (income) of unconsolidated
affiliates                                                  -                   -            -         1,910           (1,934)              (24)
Income (loss) before income tax benefit                36,270              22,461        1,066      (70,877)             1,935           (9,145)
Income tax benefit                                          -                   -            -         (162)                 -             (162)
Income (loss) from continuing operations           $   36,270    $         22,461    $   1,066$ (70,715)$        1,935$      (8,983)





                                                                                  Three months ended June 30, 2018
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services     Corporate      Eliminations      Consolidated
Net revenues                                       $ 1,091,352$        234,674$  42,926$       20$     (96,612)$    1,272,360
Salaries, wages and benefits                           489,778             187,946       28,030             -                 -           705,754
Other operating expenses                               439,224              14,400       13,544             -          (96,613)           370,555
General and administrative costs                             -                   -            -        39,046                 -            39,046
Lease expense                                           31,494                   -          316           301                 -            32,111
Depreciation and amortization expense                   56,750               3,138          168         3,439                 -            63,495
Interest expense                                        93,028                  13            9        24,905                 -           117,955
Gain on early extinguishment of debt                         -                   -            -         (501)                 -             (501)
Investment income                                            -                   -            -       (1,631)                 -           (1,631)
Other income                                          (22,220)                   -            -             -                 -          (22,220)
Transaction costs                                            -                   -            -         3,112                 -             3,112
Long-lived asset impairment charges                     27,257                   -            -             -                 -            27,257
Goodwill and identifiable intangible asset
impairments                                              1,132                   -            -             -                 -             1,132
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -         (352)               390                38
(Loss) income before income tax benefit               (25,091)              29,177          859      (68,299)             (389)          (63,743)
Income tax benefit                                           -                   -            -         (886)                 -             (886)
(Loss) income from continuing operations           $  (25,091)    $         29,177    $     859$ (67,413)$        (389)$     (62,857)




Net Revenues


Net revenues for the three months ended June 30, 2019 decreased by $127.3 million, or 10.0%, as compared with the three months ended June 30, 2018.




Inpatient Services - Revenue decreased $101.1 million, or 9.3%, in the three
months ended June 30, 2019 as compared with the same period in 2018.  On a
same-store basis, inpatient services revenue increased $13.0 million, or 1.4%,
excluding 68 divested underperforming facilities and the acquisition or
development of 12 additional facilities. This same-store increase is due to
increasing census volume and payor rates, primarily in our Medicaid population,
partially offset by continued decline in the skilled mix of our inpatient
facilities. For the past several years, census and skilled mix trends have been
affected by healthcare reforms resulting in lower lengths of stay among our
skilled patient population and lower admissions caused by initiatives among
acute care providers, managed care payors and conveners to divert certain
skilled nursing referrals to home health or other community-based care
settings. While overall census is recovering as compared with the preceding
year, the skilled mix continued to deteriorate. We believe population
demographics will present opportunities in the near future to recapture census,
and to some extent skilled mix, where it was lost through reform measures. As
recently as the fourth fiscal quarter of 2018, we saw the decline of overall
occupancy rates moderate and approximate those of the comparable period in 2017,
and in the three months ended June 30, 2019, we saw

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overall occupancy rates exceed that of the same period in 2018 by 250 basis points. However, at the same time, skilled mix in the three months ended June 30, 2019 lagged the same period in 2018 by 70 basis points.




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 $24.9 million, or 17.0%
comparing the three months ended June 30, 2019 with the same period in 2018. Of
that decrease, $20.8 million is due to lost contract business, offset by $6.2
million attributed to new contracts. The remaining decrease of $10.3 million is
principally due to reduced volume of services provided to existing customers,
and partially offset with higher rates to existing contract customers.



Other Services - Revenue decreased $1.3 million, or 3.7% in the three months
ended June 30, 2019 as compared with the same period in 2018. 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 has shifted its
focus to developing its services to our affiliated nursing facilities and
therapy gyms. While the staffing business gross revenue has increased 8.8% in
the three months ended June 30, 2019 as compared with the same period in 2018,
its revenue from external customers has decreased 6.7% over that same
period. Further penetration of the internal staffing needs is a strategic goal
for our staffing business, and provides a great benefit to our inpatient and
rehabilitation therapy segments as record low unemployment nationally makes
recruiting difficult.



EBITDA



EBITDA for the three months ended June 30, 2019 decreased by $45.6 million, or
38.7%, as compared with the three months ended June 30, 2018.  Excluding the
impact of (gain) loss on early extinguishment of debt, other (income) loss,
transaction costs, long-lived asset impairments, and goodwill and identifiable
intangible asset impairments, EBITDA decreased $68.1 million, or 53.8% when
compared with the same period in 2018. The contributing factors for this net
decrease are described in our discussion below of segment results and corporate
overhead.

Inpatient Services - EBITDA decreased by  $37.0 million, or 29.7% for the three
months ended June 30, 2019 as compared with the same period in 2018.  Excluding
the impact of other (income) loss, long-lived asset impairments and goodwill and
identifiable intangible asset impairments, EBITDA as adjusted decreased $65.8
million, or 50.3% when compared with the same period in 2018. On a same-store
basis, the inpatient EBITDA as adjusted decreased $53.9 million. Of that
same-store decline, lease expense increased $61.5 million, principally resulting
from the adoption of Financial Accounting Standards Board Accounting Standards
Codification Topic 842, Leases (Topic 842) effective January 1, 2019. The impact
to our financial position and statements of operation from the adoption of this
accounting standard is more fully described in Note 1 - "General Information -
Recently Adopted Accounting Pronouncements." See also Note 8 - "Leases." Our
self-insurance programs, including general and professional liability, workers'
compensation and health insurance benefits, resulted in an increase of $7.9
million EBITDA as adjusted in the three months ended June 30, 2019 as compared
with the same period in 2018. While our self-insurance programs are performing
as anticipated with reduced volumes related to the implementation of our
portfolio optimization strategies, we are also seeing reduced pressures
particularly in our general and professional liability claims experience. The
reduction in the provision for general and professional liability for the three
months ended June 30, 2019 as compared with the same period in 2018 is the
result of favorable prior year claim development and lower current year loss
exposures. The favorable development is due to the combination of the ongoing
impact of tort reform, claim settlements, and other risk management
initiatives. Offsetting some of the positive trends in professional liability
experience, self-insured health benefits on the same-store population saw an
increase over the prior year quarter due to some singularly large claims that
presented early in 2019. Same-store staffing costs, net of nursing agency and
other purchased services, increased $4.1 million. Nursing wage inflation
increased 4.1%, while non-nursing wage inflation increased 2.5% in the three
months ended June 30, 2019 as compared with the same period in 2018,
respectively. The remaining $3.8 million increase in EBITDA, as adjusted, of the
segment is attributed to ongoing expense management and increased census volume
in our skilled nursing facilities, partially offset by the continued pressures
on skilled mix of our inpatient facilities described above under "Net Revenues."



Rehabilitation Therapy Services - EBITDA decreased by  $6.7 million, or 20.9%,
for the three months ended June 30, 2019 as compared with the same period in
2018.  Of this decrease, $4.4 million is principally attributed to reduced
revenue volume and pricing from existing customers, and partially offset with
overhead cost reductions and reductions of start-up losses in our operations

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in China. Higher costs of labor was largely offset with therapist efficiency
which improved to 72.7% in the three months ended June 30, 2019 compared with
68.2% in the comparable period in the prior year.  In addition, EBITDA decreased
by $2.3 million due to lost therapy contracts exceeding new contracts in the
three months ended June 30, 2019 as compared with the same period in 2018.



Other Services -  EBITDA increased $0.2 million, or 20.5%, for the three months
ended June 30, 2019 as compared with the same period in 2018.  The EBITDA of our
staffing services business was generally flat comparing these periods. The
marginal increase in our physician services business was principally driven by
increased physician and nurse practitioner encounters, coupled with improved
reimbursement rates, partially offset by increased administrative costs of
practice management, including support of our accountable care organization.



Corporate and Eliminations - EBITDA decreased $2.0 million, or 5.1%, for the
three months ended June 30, 2019 as compared with the same period in 2018.
EBITDA of our corporate function includes gain on early extinguishment of debt
and 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 $6.2 million of the net decrease in EBITDA. Corporate
overhead costs decreased $3.5 million, or 8.9%, in the three months ended June
30, 2019 as compared with the same period in 2018. This decrease is principally
due to the focus on cost containment to address market pressures on our
business. The remaining increase in EBITDA of $0.7 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 for the three months ended June 30, 2019 principally represents non-cash
gains on leases exited or modified in the 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 June 30, 2019
and 2018 were $8.8 million and $3.1 million, respectively.



Long-lived asset impairments - In the three months ended June 30, 2019 and 2018,
we recognized impairments of property and equipment of $0.9 million and $27.3
million, respectively.  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 13 - "Asset Impairment
Charges - Long-Lived Assets with a Definite Useful Life."



Other Expense



The following discussion applies to the consolidated expense categories between
consolidated EBITDA and income (loss) from continuing operations of all
reportable segments, corporate and eliminations in our consolidating statement
of operations for the three months ended June 30, 2019 as compared with the same
period in 2018.


Depreciation and amortization - Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization

 of finance lease ROU assets. Our rehabilitation therapy services and other
services have identifiable intangible assets which amortize over the estimated
life of those identifiable assets. Depreciation and amortization expense
decreased $35.2 million in the three months ended June 30, 2019 as compared with
the same period in 2018.  On a same-store basis, depreciation and amortization
decreased $28.0 million in the three months ended June 30, 2019 as compared with
the same period in 2018. Of this decrease, approximately $16.5 million resulted
from the adoption of Topic 842, which was effective on January 1, 2019 for
us. The impact to our financial position and statements of operation from the
adoption of this accounting standard is more fully described in Note 1 -
"General Information - Recently Adopted Accounting Pronouncements" and Note 8 -
"Leases." In the inpatient services segment, $9.3 million of the decrease is
principally due to prior year acceleration related to multiple lease
transactions. The remaining $2.2 million of decrease is principally due to asset
impairments and assets reaching the end of their depreciable term.



Interest expense - Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations. Interest expense

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decreased $65.0 million in the three months ended June 30, 2019 as compared with
the same period 2018.  On a same-store basis, interest expense is down $58.7
million in the three months ended June 30, 2019 as compared with the same period
in 2018. Of this decrease, approximately $62.4 million resulted from the
adoption of Topic 842, which was effective on January 1, 2019 for us. The impact
to our financial position and statements of operation from the adoption of this
accounting standard is more fully described in Note 1 - "General Information -
Recently Adopted Accounting Pronouncements" and Note 8 - "Leases."  The
remaining increase of $3.7 million is principally the result of consolidating
debt and associated interest expense of a real-estate partnership in the first
quarter of 2019, which was determined to be a VIE. See Note 1 - "General
Information - Basis of Presentation."



Income tax benefit - For three months ended June 30, 2019, we recorded income
tax benefit of $0.2 million from continuing operations representing an effective
tax rate of 1.8% compared to an income tax benefit of $0.9 million from
continuing operations, representing an effective tax rate of 1.4% for the same
period in 2018. There is a full valuation allowance against our deferred tax
assets, excluding our deferred tax asset on our Bermuda captive insurance
company's discounted unpaid loss reserve. Previously, in assessing the
requirement for, and amount of, a valuation allowance in accordance with the
standard, we determined it was more likely than not we would not realize our
deferred tax assets and established a valuation allowance against the deferred
tax assets. As of June 30, 2019, we have determined that the valuation allowance
is still necessary.


Net Loss Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for three months ended June 30, 2019 as compared with the same period in 2018.




Net loss attributable to noncontrolling interests - On February 2, 2015, FC-GEN
Operations Investment, LLC (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 7.8 million Class C common stock, leaving a remaining direct noncontrolling
economic interest of approximately 34.2%. For the three months ended
June 30, 2019 and 2018, a loss of $2.0 million and $23.7 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 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 June 30, 2019 and
2018,  (loss) income of $(2.2) million and $0.5 million, respectively, has been
attributed to these unaffiliated third parties.



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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018




A summary of our unaudited results of operations for the six months ended
June 30, 2019 as compared with the same period in 2018 follows (in thousands,
except percentages):




                                                            Six months ended June 30,
                                                       2019                         2018                 Increase / (Decrease)
                                               Revenue       Revenue        Revenue       Revenue
                                               Dollars      Percentage      Dollars      Percentage      Dollars      Percentage
Revenues:
Inpatient services:
Skilled nursing facilities                   $ 1,946,937          84.3 %  $ 

2,160,612 84.0 % $ (213,675) (9.9) % Assisted/Senior living facilities

                 47,351           2.1 %       47,246           1.8 %          105           0.2 %
Administration of third party facilities           4,301           0.2 %        4,552           0.2 %        (251)         (5.5) %
Elimination of administrative services           (1,599)             - %      (1,470)             - %        (129)           8.8 %
Inpatient services, net                        1,996,990          86.6 %    

2,210,940 86.0 % (213,950) (9.7) %


Rehabilitation therapy services:
Total therapy services                           387,977          16.8 %    

471,251 18.3 % (83,274) (17.7) % Elimination of intersegment rehabilitation therapy services

                (146,202)         (6.3) %    (181,633)         (7.1) %       35,431        (19.5) %
Third party rehabilitation
therapy services, net                            241,775          10.5 %      289,618          11.2 %     (47,843)        (16.5) %

Other services:
Total other services                              87,607           3.8 %       85,774           3.3 %        1,833           2.1 %
Elimination of intersegment other
services                                        (19,680)         (0.9) %    

(12,900) (0.5) % (6,780) 52.6 % Third party other services, net

                   67,927           2.9 %       72,874           2.8 %      (4,947)         (6.8) %

Net revenues                                 $ 2,306,692         100.0 %  $ 2,573,432         100.0 %  $ (266,740)        (10.4) %





                                                          Six months ended June 30,
                                                     2019                        2018                Increase / (Decrease)
                                                           Margin                       Margin
                                            Dollars      Percentage      

Dollars Percentage Dollars Percentage EBITDA: Inpatient services

                         $  161,122           8.1 %  $   

222,130 10.0 % $ (61,008) (27.5) % Rehabilitation therapy services

                52,354          13.5 %       54,658          11.6 %     (2,304)         (4.2) %
Other services                                    926           1.1 %        1,183           1.4 %       (257)        (21.7) %
Corporate and eliminations                   (77,624)             - %    (102,050)             - %      24,426        (23.9) %
EBITDA                                     $  136,778           5.9 %  $   175,921           6.8 %  $ (39,143)        (22.3) %




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




                                                                                   Six months ended June 30, 2019
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services      Corporate      Eliminations      Consolidated
Net revenues                                       $ 1,998,589    $       

387,977 $ 87,390$ 217$ (167,481)$ 2,306,692 Salaries, wages and benefits

                           898,790             311,947       57,832              -                 -         1,268,569
Other operating expenses                               791,569              23,087       27,891              -         (167,481)           675,066
General and administrative costs                             -                   -            -         71,094                 -            71,094
Lease expense                                          186,523                 665          680            779                 -           188,647
Depreciation and amortization expense                   54,200               6,276          348          5,639                 -            66,463
Interest expense                                        56,091                  27           17         48,356                 -           104,491
Gain on early extinguishment of debt                         -                   -            -           (24)                 -              (24)
Investment income                                            -                   -            -        (4,007)                 -           (4,007)
Other (income) loss                                   (40,315)                (76)           61              -                 -          (40,330)
Transaction costs                                            -                   -            -         10,084                 -            10,084
Long-lived asset impairments                               900                   -            -              -                 -               900
Equity in net loss (income) of unconsolidated
affiliates                                                   -                   -            -          1,386           (1,471)              (85)
Income (loss) before income tax benefit                 50,831              46,051          561      (133,090)             1,471          (34,176)
Income tax benefit                                           -                   -            -          (111)                 -             (111)
Income (loss) from continuing operations           $    50,831    $         46,051    $     561$ (132,979)$        1,471$     (34,065)






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                                                                                   Six months ended June 30, 2018
                                                                   Rehabilitation
                                                    Inpatient         Therapy           Other
                                                    Services          Services        Services      Corporate      Eliminations      Consolidated
Net revenues                                       $ 2,212,410    $       

471,251 $ 85,721$ 53$ (196,003)$ 2,573,432 Salaries, wages and benefits

                           996,808             387,777       56,939              -                 -         1,441,524
Other operating expenses                               895,025              28,816       26,878              -         (196,004)           754,715
General and administrative costs                             -                   -            -         78,921                 -            78,921
Lease expense                                           63,928                   -          643            611                 -            65,182
Depreciation and amortization expense                  101,080               6,332          337          7,249                 -           114,998
Interest expense                                       186,647                  27           18         46,300                 -           232,992
Loss on early extinguishment of debt                         -                   -            -          9,785                 -             9,785
Investment income                                            -                   -            -        (2,678)                 -           (2,678)
Other (income) loss                                   (22,230)                   -           78              -                 -          (22,152)
Transaction costs                                            -                   -            -         15,207                 -            15,207
Long-lived asset impairments                            55,617                   -            -              -                 -            55,617
Goodwill and identifiable intangible asset
impairments                                              1,132                   -            -              -                 -             1,132
Equity in net (income) loss of unconsolidated
affiliates                                                   -                   -            -          (506)               764               258
(Loss) income before income tax benefit               (65,597)              48,299          828      (154,836)             (763)         (172,069)
Income tax benefit                                           -                   -            -          (539)                 -             (539)
(Loss) income from continuing operations           $  (65,597)    $         48,299    $     828$ (154,297)$        (763)$    (171,530)




Net Revenues


Net revenues for the six months ended June 30, 2019 decreased by $266.7 million, or 10.4%, as compared with the six months ended June 30, 2018.




Inpatient Services - Revenue decreased $214.0 million, or 9.7%, in the six
months ended June 30, 2019 as compared with the same period in 2018.  On a
same-store basis, inpatient services revenue increased $14.1 million, or 0.7%,
excluding 74 divested underperforming facilities and the acquisition or
development of 12 additional facilities. This same-store increase is due to
increasing census volume and payor rates, primarily in our Medicaid population,
partially offset by continued decline in the skilled mix of our inpatient
facilities. For the past several years, census and skilled mix trends have been
affected by healthcare reforms resulting in lower lengths of stay among our
skilled patient population and lower admissions caused by initiatives among
acute care providers, managed care payors and conveners to divert certain
skilled nursing referrals to home health or other community-based care
settings. While overall census is recovering as compared with the preceding
year, the skilled mix continued to deteriorate. We believe population
demographics will present opportunities in the near future to recapture census
where it was lost through reform measures. As recently as the fourth fiscal
quarter of 2018, we saw the decline of overall occupancy rates moderate and
approximate those of the comparable period in 2017, and in the six months ended
June 30, 2019, we saw overall occupancy rates exceed that of the same period in
2018 by 240 basis points. However, at the same time, skilled mix in the six
months ended June 30, 2019 lagged the same period in 2018 by 100 basis points.



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 $47.8 million, or 16.5%
comparing the six months ended June 30, 2019 with the same period in 2018.  Of
that decrease, $45.6 million is due to lost contract business, offset by $11.5
million attributed to new contracts. The remaining decrease of $13.7 million is
principally due to reduced volume of services provided to existing customers,
and partially offset with higher rates to existing contract customers.



Other Services - Revenue decreased $4.9 million, or 6.8% in the six months
ended June 30, 2019 as compared with the same period in 2018.  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 has shifted its
focus to developing its services to our affiliated nursing facilities and
therapy gyms. While the staffing business gross revenue has increased 4.9% in
the six months ended June 30, 2019 as compared with the same period in 2018, its
revenue from external customers has decreased 9.1% over that same
period. Further penetration of the internal staffing needs is a strategic goal
for our staffing business, and provides a great benefit to our inpatient and
rehabilitation therapy segments as record low unemployment nationally makes
recruiting difficult.



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EBITDA



EBITDA for the six months ended June 30, 2019 decreased by $39.1 million, or
22.3%, as compared with the six months ended June 30, 2018. Excluding the impact
of (gain) loss on early extinguishment of debt, other (income) loss, transaction
costs, long-lived asset impairments, and goodwill and identifiable intangible
asset impairments, EBITDA decreased $128.1 million, or 54.4% when compared with
the same period in 2018. The contributing factors for this net decrease are
described in our discussion below of segment results and corporate overhead.




Inpatient Services - EBITDA decreased by $61.0 million, or 27.5% for the six
months ended June 30, 2019 as compared with the same period in 2018.  Excluding
the impact of other (income) loss, long-lived asset impairments and goodwill and
identifiable intangible asset impairments, EBITDA as adjusted decreased $134.9
million, or 52.6% when compared with the same period in 2018. On a same-store
basis, the inpatient EBITDA as adjusted decreased $114.6 million. Of that
same-store decline, lease expense increased $122.0 million, principally
resulting from the adoption of Topic 842, which became effective on January 1,
2019. The impact to our financial position and statements of operation from the
adoption of this accounting standard is more fully described in Note 1 -
"General Information - Recently Adopted Accounting Pronouncements." See also
Note 8 - "Leases." Our self-insurance programs, including general and
professional liability, workers' compensation and health insurance benefits,
resulted in an increase of $6.3 million EBITDA as adjusted in the six months
ended June 30, 2019 as compared with the same period in 2018. While our
self-insurance programs are performing as anticipated with reduced volumes
related to the implementation of our portfolio optimization strategies and
within normal claims reporting patterns of our same-store operations, we are
also seeing reduced pressures particularly in our general and professional
liability claims experience. The reduction in the provision for general and
professional liability for the six months ended June 30, 2019 as compared with
the same period in 2018 is the result of favorable prior year claim development
and lower current year loss exposures. The favorable development is due to the
combination of the ongoing impact of tort reform, claim settlements, and other
risk management initiatives. Offsetting some of the positive trends in
professional liability experience, self-insured health benefits on the
same-store population saw an increase over the prior year quarter due to some
singularly large claims that presented early in 2019. Same-store staffing costs,
net of nursing agency and other purchased services, increased $6.1
million. Nursing wage inflation increased 3.9% while non-nursing wage inflation
increased 1.6% in the six months ended June 30, 2019 as compared with the same
period in 2018, respectively. The remaining $7.2 million increase in EBITDA, as
adjusted, of the segment is attributed to ongoing expense management and
increased census volume in our skilled nursing facilities, partially offset by
the continued pressures on skilled mix of our inpatient facilities described
above under "Net Revenues."



Rehabilitation Therapy Services - EBITDA decreased by $2.3 million, or 4.2%, for
the six months ended June 30, 2019 as compared with the same period in 2018.
Lost therapy contracts exceeded new contracts by $5.9 million in the six months
ended June 30, 2019 as compared with the same period in 2018. The remaining
increase of $3.6 million is principally attributed to overhead cost reductions
and reductions of start-up losses in our operations in China, partially offset
with reduced service volume and pricing to existing customers. Higher costs of
labor was largely offset with therapist efficiency which improved to 72.2% in
the six months ended June 30, 2019 compared with 67.9% in the comparable period
in the prior year.



Other Services - EBITDA decreased $0.3 million, or 21.7%, for the six months
ended June 30, 2019 as compared with the same period in 2018.   The EBITDA of
our staffing services business was generally flat comparing these periods. This
decrease in our physician services business was principally driven by increased
administrative costs of practice management, including support of our
accountable care organization, partially offset with increased physician and
nurse practitioner encounters.



Corporate and Eliminations - EBITDA increased $24.4 million, or 23.9%, for the
six months ended June 30, 2019 as compared with the same period in 2018.  EBITDA
of our corporate function includes (gain) loss on early extinguishment of debt
and 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 $14.9 million of the net increase in EBITDA. Corporate
overhead costs decreased $7.8 million, or 9.9%, in the six months ended June 30,
2019 as compared with the same period in 2018. This decrease is principally due
to the focus on cost containment to address market pressures on our business.
The remaining increase in EBITDA of $1.7 million is primarily the result of an
increase in investment earnings from our unconsolidated affiliates accounted for
on the equity method and other investments.



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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 six months ended June 30, 2019 principally represents non-cash gain on leases exited or modified in the 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 six months ended June 30, 2019 and
2018 were $10.1 million and $15.2 million, respectively.



Long-lived asset impairments - In the six months ended June 30, 2019 and 2018,
we recognized impairments of property and equipment of $0.9 million and $55.6
million, respectively. 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 13 - "Asset Impairment
Charges - Long-Lived Assets with a Definite Useful Life."



Other Expense



The following discussion applies to the consolidated expense categories between
consolidated EBITDA and income (loss) from continuing operations of all
reportable segments, corporate and eliminations in our consolidating statement
of operations for the six months ended June 30, 2019 as compared with the same
period in 2018.



Depreciation and amortization - Each of our reportable segments and corporate
overhead have depreciating property, plant and equipment, including amortization
of finance lease ROU assets. Our rehabilitation therapy services and other
services have identifiable intangible assets which amortize over the estimated
life of those identifiable assets. Depreciation and amortization expense
decreased $48.5 million in the six months ended June 30, 2019 as compared with
the same period in 2018.  On a same-store basis, depreciation and amortization
decreased $38.0 million in the six months ended June 30, 2019 as compared with
the same period in 2018. Of this decrease, approximately $32.7 million resulted
from the adoption of Topic 842, which was effective on January 1, 2019 for
us. The impact to our financial position and statements of operation from the
adoption of this accounting standard is more fully described in Note 1 -
"General Information - Recently Adopted Accounting Pronouncements" and Note 8 -
"Leases." In the inpatient services segment, $2.6 million of the decrease is
principally due to prior year acceleration offset by current year acceleration
related to multiple lease transactions. The remaining $2.7 million of decrease
is principally due to asset impairments and assets reaching the end of their
depreciable term.



Interest expense - Interest expense includes the cash interest and non-cash
adjustments required to account for our debt instruments, as well as the expense
associated with leases accounted for as finance leases or financing
obligations. Interest expense decreased $128.5 million in the six months
ended June 30, 2019 as compared with the same period 2018.  On a same-store
basis, interest expense is down $116.2 million in the six months ended June 30,
2019 as compared with the same period in 2018. Of this decrease, approximately
$122.4 million resulted from the adoption of Topic 842, which was effective on
January 1, 2019 for us. The impact to our financial position and statements of
operation from the adoption of this accounting standard is more fully described
in Note 1 - "General Information - Recently Adopted Accounting Pronouncements"
and Note 8 - "Leases."  The remaining increase of $8.3 million is principally
the result of higher rates of interest incurred in the six months ended June 30,
2019 on the debt instruments impacted by the financial restructuring, which was
not fully realized in the prior year period, in addition to consolidating debt
and the associated interest expense of a real-estate partnership in the first
quarter of 2019, which was determined to be a VIE. See Note 1 - "General
Information - Basis of Presentation" and Note 9 - "Long-Term Debt."



Income tax benefit - For the six months ended June 30, 2019, we recorded income
tax benefit of $0.1 million from continuing operations representing an effective
tax rate of 0.3% compared to an income tax benefit of $0.5 million from
continuing operations, representing an effective tax rate of 0.3% for the same
period in 2018.  There is a full valuation allowance against our deferred tax
assets, excluding our deferred tax asset on our Bermuda captive insurance
company's discounted unpaid loss reserve. Previously, in assessing the
requirement for, and amount of, a valuation allowance in accordance with the
standard, we determined it was more likely than not we would not realize our
deferred tax assets and established a valuation allowance against the deferred
tax assets. As of June 30, 2019, we have determined that the valuation allowance
is still necessary.



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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 six months ended June 30, 2019 as compared with the same period in 2018.




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 7.8 million Class C common stock,
leaving a remaining direct noncontrolling economic interest of
approximately 34.2%. For the six months ended June 30, 2019 and 2018, a loss of
$12.2 million and $64.4 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 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 six months ended June 30, 2019 and
2018,  (loss) income of $(1.8) million and $1.0 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):




                                                               Six months ended June 30,
                                                                  2019              2018
Net cash provided by operating activities                    $        36,081$   11,469
Net cash used in investing activities                              (162,208)       (35,082)
Net cash provided by financing activities                             

80,642 108,047 Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents

(45,485)         84,434
Beginning of period                                                  142,276         58,638
End of period                                                $        96,791$  143,072




Net cash provided by operating activities in the six months ended June 30, 2019
increased $24.6 million compared with the same period in 2018.  The six months
ended June 30, 2019 are highlighted by an increase in cash provided of $38.4
million for the collection of outstanding accounts receivable partially offset
by an increase in cash used of $10.7 million for payments on accounts payable
and other accrued expenses and other.



Net cash used in investing activities in the six months ended June 30, 2019 was
$162.2 million compared to net cash used in investing activities of $35.1
million in the six months ended June 30, 2018.  Routine capital expenditures for
the six months ended June 30, 2019 increased by $9.4 million as compared with
the same period in the prior year. In the six months ended June 30, 2019, there
were asset purchases of $252.5 million as a result of the consolidation of the
Next Partnership and its acquisition of 22 skilled nursing facilities and asset
sale proceeds of $79.0 million resulting from the simultaneous sale of seven
skilled nursing facilities as described in "Recent Transaction and Events - Next
Partnership."  The six months ended June 30, 2019 also included $55.4 million in
proceeds from the sale of five skilled nursing facilities in California. In
comparison, the six months ended June 30, 2018 had no asset purchases or
sales. The remaining incremental source of cash in the six months ended June 30,
2019 as compared to the same period in the prior year of $0.4 million was due
primarily to net joint venture investment and restricted deposit activity.



Net cash provided by financing activities in the six months ended June 30, 2019
was $80.6 million compared to net cash provided by financing activities of
$108.0 million in the six months ended June 30, 2018. The net decrease in cash
provided by financing activities of $27.4 million is principally attributed to
debt repayments exceeding debt borrowings in the six months ended June 30, 2019
as compared to the same period in 2018. In the six months ended June 30, 2019,
we had proceeds from the issuance of debt of $170.6 million primarily resulting
from the consolidation of the Next Partnership. In the six months ended June 30,
2018,

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we had proceeds from the issuance of debt of $562.4 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 expanded Term Loan Agreement and $10.9
million from the refinancing of a bridge loan with a HUD insured loan. Repayment
of long-term debt in the six months ended June 30, 2019 was $90.0 million
compared to $457.4 million in the same period of the prior year. In the six
months ended June 30, 2019, we repaid $27.7 million in MidCap Real Estate Loans
and $14.2 million in HUD-insured loans using proceeds from the sale of five
skilled nursing facilities in California and reduced the term loan facility of
the ABL Credit Facilities by $40.0 million while increasing the revolving credit
facilities by the same amount. In the six months ended June 30, 2018, we paid
$363.2 million in the retirement of our terminated 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. The remaining decrease in cash used to repay long-term debt of $6.4
million relates to a decrease in routine debt payments. In the six months ended
June 30, 2019, we had net repayments under the revolving credit facilities of
$10.9 million as compared with $20.8 million of net borrowings under the
revolving credit facilities in the same period in 2018. In the six months ended
June 30, 2019, we paid debt issuance costs of $3.7 million resulting from the
consolidation of the Next Partnership. In the six months ended June 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. In the six months ended June 30, 2019, we received contributions
from a noncontrolling interest for $18.5 million resulting from the
consolidation of the aforementioned Next Partnership. The remaining net increase
in cash used in financing activities of $2.7 million in the six months ended
June 30, 2019 compared to the same period in 2018 is primarily due to an
increase in distributions to noncontrolling interests and repayments of finance
lease obligations offset by a reduction in debt settlement costs.



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

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




At June 30, 2019, we had total liquidity of $74.3 million consisting of cash on
hand of $42.7 million and available borrowings under our ABL Credit Facilities
of $31.6 million. During the six months ended June 30, 2019, we maintained
liquidity sufficient to meet our working capital, capital expenditure and
development activities.



Financing Activities



Welltower Loan Extensions



On May 9, 2019, we entered into two loan amendments with Welltower to (1) extend
the maturity date of the Term Loan Agreement from July 29, 2020 to November 30,
2021 and (2) extend the maturity date of one of the notes payable from October
30, 2020 to December 15, 2021.



ABL Credit Facilities Amendment




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



Divestiture of Non-Strategic Facilities




Consistent with our strategy to divest assets in non-strategic markets, we have
exited 31 inpatient operations, including 29 skilled nursing facilities, one
assisted/senior living facility and one behavioral health center in six states
beginning January 1, 2019 through August 1, 2019, including:



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

New Jersey and Ohio between January 31, 2019 and February 7, 2019 that were

subject to a master lease agreement with Welltower. A loss was recognized

totaling $3.3 million.

· The closure of one skilled nursing facility located in Ohio on February 26,

2019. The facility remains subject to a master lease agreement. A loss was

    recognized totaling $0.2 million.


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· The lease expiration of one behavioral health center located in California on

April 1, 2019. A loss was recognized totaling $0.1 million.

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

Connecticut on May 1, 2019 that were subject to a master lease agreement with

Welltower. A loss was recognized totaling $0.8 million.

· The sale of five owned skilled nursing facilities located in California on May

1, 2019. A gain was recognized totaling $25.0 million.

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

on June 30, 2019. A loss was recognized totaling $0.3 million.

· The closure of one skilled nursing facility located in Massachusetts on July 1,

2019. The facility remains subject to a master lease agreement with Omega. A

loss was recognized totaling $0.2 million.

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

Ohio on July 1, 2019 that were subject to a master lease with Omega. A loss

was recognized totaling $0.8 million.



 ·  The sale and lease termination of six skilled nursing facilities located in
    Ohio on August 1, 2019,  marking an exit from the inpatient business in this
    state.

· The sale of one owned assisted/senior living facility located in California on

August 1, 2019.

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

    in Utah on August 1, 2019.




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 June 30, 2019, we were in compliance with all
of the financial covenants contained in the Credit Facilities.



We have master lease agreements with Welltower, Sabra Health Care REIT, Inc.,
Omega and Second Spring Healthcare Investments (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 June 30, 2019, we
were in compliance with the covenants contained in the Master Lease Agreements.



We have two master lease agreements with Cindat Best Years Welltower JV LLC
involving 28 of our facilities. We did not meet certain financial covenants
contained in one of the master lease agreements involving nine of our facilities
at June 30, 2019. We received a waiver for these covenant breaches. At June 30,
2019, we are in compliance with the financial covenants contained in the other
master lease agreement.



At June 30, 2019, we did not meet certain financial covenants contained in three
leases related to five of our facilities. We are and expect to continue to be
current in the timely payment of our obligations under such leases. These leases
do not have cross default provisions, nor do they trigger cross default
provisions in any of our other loan or lease agreements. We will continue to
work with the related credit parties to amend such leases and the related
financial covenants. We do not believe the breach of such financial covenants
has a material adverse impact on us at June 30, 2019.



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



Concentration of Credit Risk



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

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Management assesses its exposure to loss on accounts at the customer level. The
greatest concentration of risk exists in our rehabilitation therapy services
business where it has over 160 distinct customers, many being chain operators
with more than one location. One customer, which is a related party of ours,
comprises $29.6 million, approximately 32%, of the gross outstanding contract
receivables in the rehabilitation services business at June 30, 2019.  See Note
11 - "Related Party Transactions."  One former customer comprises $9.1 million,
approximately 10%, of the gross outstanding contract receivables in the
rehabilitation services business at June 30, 2019. An adverse event impacting
the solvency of these large customers resulting in their insolvency or other
economic distress would have a material impact on us.



Financial Condition and Liquidity Considerations




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



In evaluating our ability to continue as a going concern, management considered
the conditions and events that could raise substantial doubt about our ability
to continue as a going concern for 12 months following the date our financial
statements were issued (August 9, 2019). 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 August 9, 2020. Based upon
such considerations, management determined that there are no known or knowable
conditions or events that raise substantial doubt about our ability to continue
as a going concern for 12 months following the date of issuance of these
financial statements (August 9, 2019).



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



During the six months ended June 30, 2019, we amended, or obtained waivers
related to, the financial covenants of all of our material debt and lease
agreements to account for these ongoing changes in our capital structure and
business conditions. Although we are and project to be in compliance with all of
our material debt and lease covenants through September 30, 2020, the ongoing
uncertainty related to the impact of healthcare reform initiatives may have an
adverse impact on our ability to remain in compliance with the covenants. 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 apply, the default could have a more significant impact
on our financial position.



Risk and Uncertainties



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, among others.



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

Off-Balance Sheet Arrangements

As of June 30, 2019 and December 31, 2018, we are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

© Edgar Online, source Glimpses

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