GENESIS HEALTHCARE, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented. Historical results may not indicate future performance. Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in Item 1A. "Risk Factors," of this report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included in this report. Business Overview Genesis is a healthcare services holding company that through its subsidiaries owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. We have an administrative service company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. We provide inpatient services through 341 skilled nursing, assisted/senior living and behavioral health centers located in 24 states. Revenues of our owned, leased and otherwise consolidated centers constitute approximately 86% of our revenues. We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% of our revenues. We provide an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of our revenues. Going Concern Considerations OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions. Our primary focus as the effects of COVID-19 began to impactthe United States was the health and safety of our patients, residents, employees and 55 Table of Contents their respective families. We implemented various measures to provide the safest possible environment within our sites of service during this pandemic and will continue to do so.The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation's economy, the healthcare industry and our businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system acrossthe United States . A significant number of our facilities and operations are geographically located and highly concentrated in markets with close proximity to areas ofthe United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 is having and will likely continue to have a material and adverse effect on our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase
in our expenditures. We performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management's plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of our plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.
In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future 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 within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.
In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:
? We applied for and received government-sponsored financial relief related to
the pandemic;
We are utilizing the Coronavirus Aid, Relief, and Economic Security Act of 2020
? (CARES Act) payroll tax deferral program to delay payment of a portion of
payroll taxes incurred through
2021 and the remaining 50% to be repaid in
While we vigorously advocate, for ourselves and the skilled nursing industry,
? regarding the need for additional government-sponsored funding, we continue to
explore and to take advantage of existing government-sponsored funding programs
implemented to support businesses impacted by COVID-19;
? We continue to seek and implement measures to adapt our operational model to
function for the long-term in a COVID-19 environment;
We have pursued, and will continue to pursue, creative and accretive
? opportunities to sell assets and enter into joint venture structures in order
to provide liquidity;
We executed a series of transactions, as described at Note 23 - "Subsequent
? Events - Restructuring Transactions," that are expected to improve our
liquidity position; and
We are exploring and evaluating a number of strategic and other alternatives to
? manage and to improve our liquidity position, in order to address the maturity
of material indebtedness and other obligations over the twelve-month period
following the date the financial statements are issued.
These measures and other plans and initiatives of ours are designed to provide
us with adequate liquidity to meet our obligations for at least the twelve-month
period following the date our financial statements are issued. However, such
plans and initiatives are dependent on factors that are beyond our control or
may not be available on terms acceptable to us, or at all. Accordingly,
management determined it could not be certain that the plans and initiatives
would be effectively implemented within one year after the date the financial
statements are issued. Further, even if we receive additional funding support
from government sources and/or are able to execute successfully all of our plans
and initiatives, given the unpredictable nature of, and the operating challenges
presented by, the COVID-19 virus, our operating plans and resulting cash flows
together with our cash and cash equivalents and other sources of liquidity
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may not be sufficient to fund operations for the twelve-month period following
the date the financial statements are issued. Such events and circumstances
could force us to seek reorganization under the
Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.
Significant Transactions and Events
COVID-19
TheCenters for Disease Control and Prevention (CDC ) has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19. In addition, our employees are at risk of contracting or spreading the disease due to the nature of the work environment when caring for patients. In an effort to prevent the introduction of COVID-19 into our facilities, and to help control further exposure to infections within communities, we have implemented policies restricting visitors at all of our facilities except for essential healthcare personnel and for families and friends, under certain compassionate care circumstances, such as but not exclusively, end-of-life situations. We also implemented policies for screening employees and anyone permitted to enter the building, implemented in-room only dining, activities programming and therapy. Our policy is to follow government guidance to minimize further exposure, including personal protection protocols, restricting new admissions, and isolating patients. Due to the vulnerable nature of our patients, we expect many of these restrictions will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed. Notwithstanding these restrictions and our other response efforts, the virus has had, and likely will continue to have, introduction to, and transmission within, certain facilities due to the easily transmissible nature of COVID-19. COVID-19 has materially and adversely affected our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures serve to outline the estimated impact of COVID-19 on our business throughDecember 31, 2020 , as well as further developments through the filing date of this Annual Report on Form 10-K, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19. Operations Our first report of a positive case of COVID-19 in one of our facilities occurred onMarch 16, 2020 . Since that time, 292 of our 341 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 71% of the patient and resident positive COVID-19 cases in our facilities have occurred in the states ofConnecticut ,Maryland ,Massachusetts ,Pennsylvania ,New Jersey ,New Mexico , andWest Virginia , which correspond to many of the largest community outbreak areas across the country. Our facilities in these seven states represent 60% of our total operating beds. Our occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious. Net Revenues Our net revenues for the year endedDecember 31, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. Our skilled nursing facility operating occupancy decreased from 88.2% for the three months endedMarch 31, 2020 to 76.6% for the year endedDecember 31, 2020 . However, the revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as 57
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discussed below. See "Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue - COVID-19 Regulatory and Reimbursement Relief."
After considering a commensurate reduction in related and direct operating expenses, we estimate lost revenue caused by COVID-19 reduced earnings by approximately$185.9 million for the year endedDecember 31, 2020 . The ongoing impact of COVID-19 on our occupancy and net revenues will depend on future developments, which are highly uncertain and cannot be predicted, including the pace of recovery in occupancy, the future scope and severity of COVID-19 and the actions taken by public and private entities in response to the pandemic. Operating Expenses
Our operating expenses for the year endedDecember 31, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the year endedDecember 31, 2020 , we estimate we incurred approximately$257.9 million of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs, the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate. We are not reasonably able to predict the total amount of costs we will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.
COVID-19 Vaccinations Programs
InDecember 2020 , theU.S. Food and Drug Administration approved the use of COVID-19 vaccines, which have begun to be distributed and administered widely throughoutthe United States , including to our patients, residents, and employees. TheCDC has recommended that the initial phase of the vaccine programs prioritize healthcare personnel and residents of long-term care facilities, with states holding the ultimate authority to determine the recipients of the vaccines. As ofMarch 12, 2021 , all of our eligible patients, residents and employees have been provided the opportunity to receive a vaccination. Over 80% of patients and residents and over 60% of eligible employees have received both doses of the COVID-19 vaccine. We plan to continue participating in COVID-19 vaccine programs, including the federalPharmacy Partnership for Long-Term Care Program. Restructuring Transactions The Investment Agreement
On
(a) The Notes
In accordance with the terms of the Investment Agreement, onMarch 2, 2021 (the Initial Closing Date), the Investor purchased for$50.0 million a convertible promissory note of FC-GEN (the Initial Note), which is convertible into 69,500,755 baskets of securities (Conversion Baskets), each comprised of one Class A common unit of FC-GEN (Class A Unit) and one Class C common stock of Genesis (ClassC Share ), subject to adjustment, which represent 25% of our fully diluted share capital (the Initial Closing). Under the Investment Agreement, the Investor has an option exercisable on or prior toMarch 31, 2021 to purchase for$25.0 million (the Supplemental Purchase) a second convertible promissory note (the Supplemental Note), which is convertible into 34,594,079 Conversion Baskets which, together with the Conversion Baskets issuable upon conversion of the Initial Note, represent 33.3% of our fully diluted share capital as of the Initial Closing Date, subject to certain adjustments (the Second Closing). The conversion of the Notes are subject to, among other things, receipt of certain regulatory approvals. 58 Table of Contents
The number of Conversion Baskets issuable upon conversion assumes that the Welltower Shares (as defined below) have been issued. If such Welltower Shares have not been issued in part or in full, the Investor would receive a lesser amount of Conversion Baskets upon conversion and be issued the remainder of the Conversion Baskets upon the issuance of the Welltower Shares or the remainder of the Welltower Shares, as applicable. (b) The ReGen Warrant Under the Investment Agreement, upon the closing of the Supplemental Purchase, the Investor will receive a warrant (the ReGen Warrant) to purchase baskets of Class A Units and ClassC Shares , with each such basket consisting of one Class A Unit and one ClassC Share , subject to adjustment pursuant to the terms of the ReGen Warrant (together, the Exercise Basket) at an exercise price equal to$1.00 per Exercise Basket, subject to adjustment pursuant to the terms of the ReGen Warrant. The ReGen Warrant will be exercisable for 55,600,604 Exercise Baskets (subject to certain adjustments) by the Investor during the term commencing on the date of the Second Closing and ending on the third anniversary of the Second Closing. (c) Governance Matters In accordance with the terms of the Investment Agreement, the board of directors (the Board) has fixed the size of the Board at seven (7) members. In accordance with the terms of the Investment Agreement, at the Initial Closing, two directors resigned from the Board and the vacancies were filled with two directors selected by the Investor (each, an Investor Director). Any change in the size of the Board from seven (7) must be approved by (i) the Independent Committee at any time prior to the one year anniversary of the Investment Agreement and (ii) the Investor, if the change is made at a time when the Investor is entitled to elect one Investor Director to the Board. EffectiveMarch 2, 2021 ,Robert Fish resigned as Chairman of the Board andDavid Harrington , an Investor Director, was appointed as Chairman. So long as the Investor is entitled to two seats on the Board, one of the Investor Directors will be the Chairman.Mr. Fish continues to be CEO as well as a director on
the Board. In the event that the Second Closing occurs, we are obligated to cause an additional director who is not an Investor Director (a Non-Investor Director) to resign from the Board and for the vacancy to be filled with an Investor Director. In the event that the Second Closing occurs, the Investor will continue to be entitled to designate three Investor Directors to the Board so long as the Investor and its Affiliates beneficially own in the aggregate at least 75% of the Class A Units and ClassC Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing (the 3 Director Beneficial Ownership Requirement). If at any time the 3 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate two Investor Directors to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 50% of the Class A Units and ClassC Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 75% of the Class A Units and ClassC Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 2 Director Beneficial Ownership Requirement) and the Investor will cause one Investor Director then on the Board to resign. If at any time the 2 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate one Investor Director to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 25% of the Class A Units and ClassC Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 25% of the Class A Units and ClassC Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 1 Director Beneficial Ownership Requirement) and the Investor will cause any Investor Director(s) then on the Board in excess of one to resign. If at any time the 1 Director Beneficial Ownership Requirement is not met, the Investor will not be entitled to designate any Investor Directors to the Board and the Investor will cause all Investor Directors then on the Board to resign. Until the one year anniversary of the date of the Investment Agreement, the Investor will cause all Investor Directors to recuse themselves from any meetings of the Board or any committee thereof regarding any related party transaction involving the Investor. In accordance with the terms of the Investment Agreement, so long as the 1 Director Beneficial Ownership Requirement is satisfied, the Investor has the right to designate an observer to the Board (the Observer), who (i) may attend meetings of the Board but may not vote or otherwise participate in them and (ii) is bound to confidentiality obligations as set forth in the Investment Agreement. 59 Table of Contents
In accordance with the terms of the Investment Agreement, we have formed an independent committee of the Board comprised of up to three (3) directors (the Independent Committee), each of whom must be a Non-Investor Directors and qualify as an independent director under the listing standards of the NYSE except that the CEO as of the Initial Closing Date may serve on the Independent Committee if he is a director. The initial Independent Committee is comprised ofJames McKeon ,James Bloem andRobert Fish . At any time prior to the one year anniversary of the date of the Investment Agreement: (i) the size of the Independent Committee may not be changed, (ii) none of the initial directors on the Independent Committee may be removed therefrom, except and only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be, (iii) a vacancy on the Independent Committee, arising for any reason, may be filled only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be and (iv) in the event of the death, resignation or removal of any Non-Investor Director as a member of the Board, the Independent Committee shall fill such vacancy, except that the Investor shall fill the vacancy resulting from the resignation of a Non-Investor Director in connection with the Second Closing. The Independent Committee has the authority to enforce our rights under the Investment Agreement and will make all determinations therefor regarding the performance and exercise of any rights or obligations of us or our subsidiaries. Further, the Independent Committee has the authority to approve certain related party transactions involving the Investor. The Independent Committee must also approve (i) any amendment to our Bylaws that limits or reduces the authority of the Independent Committee and (ii) any amendment to certain sections of the Investment Agreement that affects the governance of us or the rights of ours or Independent Committee. The Independent Committee will be disbanded at the one year anniversary of the Investment Agreement.
The Investment Agreement further provides that the Investor may not convert Class A Units that would be issued upon conversion of the Initial Note or Supplemental Note or exercise of the ReGen Warrant into shares of Class A common stock of us (the Class A Shares).
The Waiver Agreement
The Investment Agreement requires us to use reasonable best efforts to (i) delist the Class A Shares from the NYSE, (ii) deregister the Class A Shares under the Exchange Act, and (iii) suspend any Exchange Act reporting obligations in respect of the Class A Shares (collectively, the Delisting and Deregistration). In connection with the Delisting and Deregistration, onMarch 2, 2021 , we entered into a Waiver Agreement (the Waiver Agreement) with certain stockholders of us (the Waiving Holders) who are parties to the Registration Rights Agreement, dated as ofAugust 18, 2014 , by and among us and the stockholders signatory thereto (the Registration Rights Agreement). Under the Waiver Agreement, the Waiving Holders have agreed to waive the provisions of the Registration Rights Agreement that require that we maintain a shelf registration statement, provide the stockholders party thereto with demand registration rights and file with theSecurities and Exchange Commission (theSEC ) reports required under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act. In the event that subsequent to the completion of the Delisting and Deregistration, the Class A Shares are both registered under the Exchange Act and listed on a national securities exchange, the Waiver Agreement automatically becomes null and void. The Transaction Agreement OnMarch 2, 2021 (the Effective Date), we entered into a Transaction Agreement (together with the exhibits and schedules thereto, the Transaction Agreement) with Welltower, pursuant to which we have agreed to support Welltower in connection with the sale to third party purchasers of Welltower's interests in certain facilities that our leases from Welltower (the Facilities), terminate the leases on 51 of its facilities leased from Welltower and transition operations to new operators (the New Operators) in return for an$86 million payment; the$86 million will be used to repay our obligations to Welltower which shall occur incrementally over time upon the transition of the Facilities. In connection therewith, we have agreed to transfer management and/or operations of such Facilities to designated replacement operators (the Transitions), subject to the retention of certain liabilities related thereto by us, the assumption of certain liabilities by the New Operators and the delivery of certain indemnities by Welltower relating to the Transitions. The Transaction Agreement further provides that, upon our satisfying certain conditions, including transition of the Facilities, in consideration for our undertaking the transactions contemplated in the section below entitled "The Welltower Warrant and Shares" (a) an additional approximately$170 million of outstanding unsecured indebtedness owed to Welltower will be written off and (b) our obligations in respect of the yet outstanding secured and unsecured indebtedness will be restructured (the Debt Write-Down). 60
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Concurrently with the Debt Write-Down, we will issue a warrant to Welltower for our purchase of shares in us and Class A Shares, in each case as more particularly described below.
(a) The Welltower Warrant and Shares
Pursuant to the Transaction Agreement, concurrently with the debt restructure, we will (i) issue to a subsidiary of Welltower (TRS Holdco) a warrant (the Welltower Warrant) to purchase 900,000 Class A Shares at an exercise price equal to$1.00 per share, which Welltower Warrant will be exercisable by TRS Holdco during the period commencing on the date which is six months following the issuance date of the Welltower Warrant (the Issuance Date), and ending on the date which is five years following the Issuance Date; and (ii) issue to Welltower Class A Shares (the Welltower Shares) representing 20% of the indirect ownership of FC-GEN, provided that such issuance will be subject to dilution from new capital (including the Initial Note and the Supplemental Note). (b) The Term Loan Amendments Pursuant to the Transaction Agreement, we and Welltower have agreed to certain amendments (the Term Loan Amendments) to the Term Loan Agreement, dated as ofJuly 29, 2016 (as may be amended, restated, amended and restated, extended, supplemented or otherwise modified from time to time, including as amended by the Term Loan Amendments, the Term Loan Agreement), among us,FC-GEN Operations Investment, LLC , as the borrower (the Term Borrower), certain other subsidiaries of us party thereto,Markglen, Inc. (the Welltower Lender) andOHI Mezz Lender, LLC and any other lender from time to time party thereto and Welltower, as administrative agent and collateral agent. Among other things, the Term Loan Agreement (i) provides that all interest payable on the term loans of the Welltower Lender (the Welltower Term Loans) may be paid in-kind at the option of us, (ii) extends the maturity of the term loans toJanuary 1, 2024 , (iii) removes the financial covenants (except for the covenant with respect to capital expenditures), (iv) includes additional negative covenants restricting, among other things, asset sales and the issuance of capital stock by certain subsidiaries of us and (v) permits us and our subsidiaries to enter into certain other transactions, including the Transitions and the transactions contemplated by the Transaction Agreement. The Term Loan Amendments to the Term Loan Agreement are effective as of the Effective Date. However, if we have not completed any Transitions bySeptember 1, 2021 , then several of the Term Loan Amendments (including the changes that permit all interest payable on the Welltower Term Loans to be paid in-kind) will no longer be effective. Moreover, if we do not complete Transitions with respect to 85% of the Facilities bySeptember 1, 2021 , then a portion of the interest payable with respect to the Welltower Term Loans will require interest to be paid with cash instead of in-kind until the Transitions are completed.
(c) The Asset Based Lending Facility
On the Effective Date, we also entered into an Amendment No. 7 (the ABL
Amendment) to the Fourth Amended and Restated Credit Agreement, dated as of
Among other things, the ABL Amendment, permits us and our subsidiaries to enter into certain transactions, including, among other things, the Transitions, the Term Loan Amendments and certain other transactions contemplated by the Transaction Agreement.
Tax Benefit Preservation Plan
OnMarch 11, 2021 , we entered into a Tax Benefits Preservation Plan (the Plan) withEquiniti Trust Company as rights agent (the Rights Agent), and our Board of Directors declared a dividend distribution of one right (a Right) for each outstanding share of our common stock, par value$0.001 per share, to stockholders of record at the close of business onMarch 11, 2021 (the Record Date). Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from us a unit consisting of one one-hundredth 61 Table of Contents of a share (a Unit) of Series A Junior Participating Preferred Stock, par value$0.001 per share (the Series A Preferred Stock), at a purchase price of$4.50 per Unit, subject to adjustment (the Purchase Price). The Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets (Tax Benefits) by deterring any person from becoming the beneficial owner of 4.9% or more of the shares of our Common Stock then outstanding. The Right will be triggered upon the acquisition of 4.9% or more of our outstanding common stock or future acquisitions by any existing holder of 4.9% or more of our outstanding common stock. If a person or group acquires 4.9% or more of our common stock, all rights holders, except the acquirer, will be entitled to acquire, at the then exercise price of a Right, that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the Right. In connection with the adoption of the Plan, the Board of Directors approved the Certificate of Designation, Preferences, and Rights of Series A Preferred Stock, which designates the rights, preferences and privileges of 4,000,000 shares of a series of our preferred stock, par value$0.001 per share, designated as Series A Junior Participating Preferred Stock. Strategic PartnershipsNewGen Partnership OnFebruary 1, 2020 , we transitioned operational responsibility for 19 facilities in the states ofCalifornia ,Washington andNevada to a partnership withNew Generation Health, LLC (theNewGen Partnership ). We sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for$78.7 million . Net transaction proceeds were used by us to repay indebtedness, including prepayment penalties, of$33.7 million , fund our initial 50% equity contribution and working capital requirement of$14.9 million , and provide financing to the partnership of$9.0 million . We recorded a gain on sale of assets and transition of leased facilities of$58.8 million and loss on early extinguishment of debt of$1.0 million . Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. OnMay 15, 2020 , we transitioned operational responsibility for four additional leased facilities inCalifornia to theNewGen Partnership . The four facilities generated annual revenues of$55.0 million and pre-tax loss of$0.5 million . OnOctober 1, 2020 , we transitioned operational responsibility for one additional leased facility in the state ofWashington to theNewGen Partnership . The facility generated annual revenues of$12.3 million and pre-tax income of$0.2 million . Subsequent to the transition of these five facilities, we have applied the equity method of accounting for our 50% interest in these operations. OnFebruary 1, 2021 , we sold the real estate and operations of two skilled nursing facilities inCalifornia andNevada to theNewGen Partnership for a price of$19.2 million , which represented the outstanding HUD insured loans as of the closing date. The associated asset and loan balances were presented as held for sale in the consolidated balance sheet atDecember 31, 2020 . The facilities generated annual revenues of$15.7 million and pre-tax income of$1.7 million . We recorded a long-lived asset impairment charge of$0.7 million associated with one of the facilities during the year endedDecember 31, 2020 . We are assessing the full impact these sales will have on our consolidated financial statements. We do not hold a controlling financial interest in theNewGen Partnership . As such, we have applied the equity method of accounting for our 50% interest in theNewGen Partnership . Our investment in theNewGen Partnership ,$25.1 million , is included within other long-term assets in the consolidated balance sheet
as ofDecember 31, 2020 .Cascade Partnership OnJuly 2, 2020 , we sold one facility to an affiliate ofCascade Capital Group, LLC (Cascade) for$26.1 million , using proceeds from the sale to retireU.S. Department of Housing and Urban Development (HUD) financed debt of$10.5 million , pay aggregate prepayment penalties and other closing costs of$1.0 million , and partially fund our investment in a partnership with Cascade (theCascade Partnership ). Cascade also acquired eight facilities that we operated under a master lease agreement with Second Spring Healthcare Investments (Second Spring). We continue to operate all nine of these facilities subject to a new master lease agreement with affiliates of theCascade Partnership . The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of$20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. The master 62
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lease agreement includes a fixed price option to purchase the nine facilities for$251.6 million that is exercisable fromJuly 2023 throughJune 2025 . We executed a promissory note with theCascade Partnership for$20.3 million , which was subsequently converted into a 49% membership interest in theCascade Partnership .The Cascade Partnership is a VIE of which we are the primary beneficiary. Consequently, we have consolidated all of the accounts of theCascade Partnership in the accompanying consolidated financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation.The Cascade Partnership acquired its nine skilled nursing facilities from the Company and Second Spring for an aggregate purchase price of$223.6 million . The initial consolidation primarily resulted in property and equipment of$208.6 million , non-recourse debt of$190.3 million , net of debt issuance costs, and noncontrolling interests of$21.2 million .Next Partnership
OnJanuary 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 byNext Healthcare (Next), a related party. See Note 16 - "Related Party Transactions." In conjunction with the facility sales, we received aggregate annual rent credits of$17.2 million . We will continue to operate these facilities pursuant to a master lease with theNext Partnership . The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of$19.5 million , with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the net price paid by the partnership to acquire the facilities from Welltower. We have concluded theNext Partnership qualifies as a VIE and we are the primary beneficiary. As such, we have consolidated all of the accounts of theNext Partnership in the accompanying consolidated financial statements. The ROU assets and lease obligations related to theNext Partnership lease agreement have been fully eliminated in our consolidated financial statements.The Next Partnership acquired 22 skilled nursing facilities for a purchase price of$252.5 million but immediately sold seven of these facilities for$79.0 million . The initial consolidation of the remaining 15 facilities resulted in property and equipment of$173.5 million , non-recourse debt of$165.7 million , net of debt issuance costs, and non-controlling interest of$18.5 million .Vantage Point Partnership
OnSeptember 12, 2019 , Welltower and Second Spring sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership ), in which we invested$37.5 million for an approximate 30% membership interest. The remaining membership interest is held by Vantage PointCapital, LLC (Vantage Point) for an investment of$85.3 million consisting of an equity investment of$8.5 million and a formation loan of$76.8 million . In conjunction with the facility sales, we received aggregate annual rent credits of$30.3 million . We will continue to operate these facilities pursuant to a new master lease with theVantage Point Partnership . The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of approximately$33.1 million , with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require us to acquire its membership interests in theVantage Point Partnership . The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default. We have concluded theVantage Point Partnership qualifies as a VIE and we are the primary beneficiary. As such, we have consolidated all of the accounts of theVantage Point Partnership in the accompanying financial statements. The ROU assets and lease obligations related to theVantage Point Partnership lease agreement have been fully eliminated in our consolidated financial statements.The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of$339.2 million . The initial consolidation primarily resulted in property and equipment of$339.2 million , non-recourse debt of$306.1 million , net of debt issuance costs, and non-controlling interest of$8.5 million . During the third quarter of 2019, we sold the real property of seven skilled nursing facilities and one assisted/senior living facility located inGeorgia ,New Jersey ,Virginia , andMaryland to affiliates of Vantage Point for an aggregate purchase price of$91.8 million , using the majority of the proceeds to acquire our interest in theVantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested. Three of the facilities were subject to real estate loans and two were subject to loans
insured
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by theU.S. Department of Housing and Urban Development (HUD). See Note 9 - "Property and Equipment" and Note 12 - "Long-Term Debt - Real Estate Loans" and "Long-Term Debt - HUD Insured Loans." We also divested the operations of an additional leased skilled nursing facility located inGeorgia , marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of$84.1 million and annual pre-tax net income of$2.6 million . The divestitures resulted in an aggregate gain of$57.8 million . OnJanuary 10, 2020 , Welltower sold the real estate of one skilled nursing facility located inMassachusetts to theVantage Point Partnership . The sale represents the final component of the transaction. As a result of theJanuary 10, 2020 transaction, we will receive an annual rent credit of$0.7 million under its master lease with Welltower and recorded a gain of$0.2 million as a result of the lease termination.The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of$9.1 million . The consolidation of this additional skilled nursing facility primarily resulted in property and equipment of$9.1 million , non-recourse debt of$7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from theSeptember 12, 2019 closing. We operate all 19 facilities owned by theVantage Point Partnership .
Divestiture of Non-Strategic Facilities
2020 Divestitures
In addition to the 24 facilities transitioned into the
During the first quarter of 2020, we sold four owned skilled nursing facilities and divested the operations of one leased senior/assisted living facility. Additionally, Omega Healthcare Investors, Inc. (Omega) sold the real estate of one skilled nursing facility located inMassachusetts that we leased under a master lease agreement, but had closed onJuly 1, 2019 . The facilities generated annual revenues of$55.2 million and pre-tax income of$0.5 million . The sales resulted in aggregate proceeds of$82.6 million , of which,$49.6 million was used to repay indebtedness. We recognized an aggregate gain on the sale of the facilities of$27.4 million and a loss on early extinguishment of debt of$3.0 million . During the second quarter of 2020, we sold three owned skilled nursing facilities and divested the operations of 12 leased skilled nursing facilities. The facilities generated annual revenues of$136.1 million and pre-tax loss of$1.8 million . The sales resulted in aggregate proceeds of$45.8 million , of which,$22.7 million was used to repay indebtedness. We recognized an aggregate gain on the sale of the facilities of$16.1 million and a loss on early extinguishment of debt of$1.4 million . During the third quarter of 2020, we sold one owned skilled nursing facility and several rehab clinics. The facility generated annual revenues of$9.9 million and pre-tax income of$0.2 million . The sale resulted in proceeds of$10.5 million , of which,$5.5 million was used to repay indebtedness. We recognized a gain on the sale of the facility and rehab clinics of$5.5 million . During the fourth quarter of 2020, we sold five owned facilities and divested the operations of 13 leased skilled nursing facilities. The facilities generated annual revenues of$173.9 million and pre-tax loss of$8.8 million . The sales resulted in aggregate proceeds of$40.9 million , of which,$22.4 million was used to repay indebtedness. We recognized an aggregate gain on the sale and divestitures of$10.8 million and a loss on early extinguishment of debt of
$2.4 million . 2019 Divestitures
In addition to the nine divestitures noted in the
During the first quarter of 2019, we divested the operations of nine facilities located inNew Jersey andOhio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenues of$90.2 million and annual pre-tax net loss of$6.0 million . We recognized a loss on exit reserves of$3.5 million . We also completed the closure of one facility located inOhio . The facility generated annual revenues of$7.7 million and pre-tax net loss of$1.6 million . The closure resulted in a loss of$0.2 million . 64 Table of Contents During the second quarter of 2019, we sold the real property and divested the operations of five skilled nursing facilities inCalifornia for a sale price of$56.5 million . Loan repayments of$41.8 million were paid on the facilities at closing. We incurred prepayment penalties and other closing costs of$2.4 million at settlement. The facilities generated annual revenues of$53.0 million and pre-tax net income of$1.6 million . The divestiture resulted in a gain of$25.0 million . We also divested the operations of one behavioral health center located inCalifornia upon the lease's expiration in the second quarter of 2019. The center generated annual revenues of$3.1 million and pre-tax net loss of$0.3 million . The divestiture resulted in a loss of$0.1 million . In addition, we divested the operations of three leased skilled nursing facilities. Two of the facilities were located inConnecticut and subject to the Welltower Master Lease, while the third was located inOhio . The facilities generated annual revenues of$24.7 million and pre-tax net loss of$2.9 million . The divestitures resulted in a loss of$1.1 million . During the third quarter of 2019, we divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility. Nine of the facilities were located inOhio , marking an exit from the inpatient business in this state, while the remaining three were located inMassachusetts ,Utah , andIdaho . Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of$1.9 million , with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of$75.6 million and pre-tax loss of$4.6 million . The divestitures resulted in a loss of$3.5 million . In addition, we sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility inCalifornia for an aggregate sale price of$11.5 million . Loan repayments of$9.6 million were paid on the facilities at closing. The facilities generated annual revenues of$10.4 million and pre-tax net income of less than$0.1 million . The divestiture resulted in an aggregate gain of$0.6 million . During the fourth quarter of 2019, we sold the real property of seven facilities inTexas for a sales price of$20.1 million . The operations of these facilities were divested in 2018. The net proceeds were used principally to repay the indebtedness of the facilities. We recognized a net gain of$3.3 million associated with the sale of the facilities. We recognized a gain on early extinguishment of debt of$2.6 million associated with the write off of the debt premiums and issuance costs on the underlying HUD loans. Also during the fourth quarter of 2019, we divested the operations of two leased skilled nursing facilities. The facility generated annual revenues of$28.1 million and pre-tax net loss of$1.7 million . The divestitures resulted in a loss of$1.3 million , which was primarily attributable to exit costs. Lease Transactions Gains, losses and termination charges associated with master lease terminations and amendments are recorded as non-recurring charges. These amendments and terminations resulted in net gains of$98.6 million and of$95.8 million for the years endedDecember 31, 2020 and 2019, respectively. These gains are included in other income on the consolidated statements of operations. Below is a summary of the more material lease transactions.NewGen Partnership As noted above, we transitioned the operations of 18 leased skilled nursing, behavioral health and assisted living facilities to theNewGen Partnership during the year endedDecember 31, 2020 . In total, the lease transitions resulted in a net reduction to operating lease ROU assets and obligations of$17.0 million and$26.8 million , respectively, and a gain of$19.7 million , which includes proceeds from the sale of leasehold rights. Welltower During the year endedDecember 31, 2020 , we amended the Welltower Master Lease several times to reflect the lease termination of one facility and rent credits associated with the sale of previously closed locations. We received annual rent credits of approximately$1.1 million . In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of$31.4 million and$51.2 million , respectively, and a gain of$19.8 million . During the year endedDecember 31, 2019 , we amended the Welltower Master Lease several times to reflect the lease termination of 30 facilities, including the 15 facilities sold to and now leased from theNext Partnership . As a result of the lease termination on the 30 facilities, we received annual rent credits of approximately$25.9 million . For those facilities remaining under the WelltowerMaster Lease , we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain 65
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threshold. Lease modification analyses were performed at each amendment date and as ofDecember 31, 2019 , all facilities subject to the Welltower Master Lease were classified as operating leases. In total, the amendments resulted in a net reduction to finance lease ROU assets and obligations of$11.7 million and$22.4 million , respectively, a net reduction to operating lease ROU assets and obligations of$112.8 million and$150.4 million , respectively and a gain of$48.3 million . Omega
During the year endedDecember 31, 2020 , we amended the Omega Master Lease several times to reflect the lease termination of five facilities. We received annual rent credits of approximately$2.6 million . In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of$16.0 million and$24.6 million , respectively, and a gain of$8.6 million . During the year endedDecember 31, 2019 , we amended our master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of$1.9 million . In conjunction with the lease termination, finance lease ROU assets and lease obligations of$10.1 million and$16.8 million , respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by$164.6 million and$181.3 million , respectively. The lease termination and remeasurement resulted in an aggregate gain of$23.4 million . In addition, we recorded a gain of$1.9 million in the reassessment of the assumed timing of a variable rent buyout. During the year endedDecember 31, 2019 , we amended our master lease with Omega to reflect the inclusion of nine skilled nursing facilities and one assisted living facility inNew Mexico andArizona . These facilities were previously leased from Omega, following the terms of a separate lease agreement, and all facilities were classified as operating leases. There was no change in base rent for the 10 facilities upon addition to the master lease. The lease assessment and measurement resulted in operating lease classification with a$10.6 million ROU asset and lease liability gross up. In addition, we received$15.0 million as a short-term note payable. See Note 12 - "Long-Term Debt - Notes Payable." Second Spring OnMarch 12, 2021 , Second Spring sold the real estate of 16 of the 21 skilled nursing facilities, in which we operate and lease from Second Spring, to affiliates of Cascade. We continue to operate all 16 centers under an interim master lease, with a reduced monthly lease rate. As part of the transaction, we entered into operations transfer agreements with two prospective new operators and anticipate transferring operations of the facilities as early asMay 1, 2021 . Upon transfer, we will receive a payment of$9.3 million from Cascade, and$13.8 million of facility related liabilities will be assumed by the new operators or reimbursed to us. We have signed operations transfer agreements for four of the facilities and expect to transfer those operations upon the receipt of licensure approval. No definitive plans have been determined as to the fifth remaining facility. The 21 facilities leased from Second Spring generated annual revenues of$276.4 million and pre-tax loss of$35.3 million during the year endedDecember 31, 2020 . The ROU assets and lease obligations associated with the facilities were$174.0 million and$189.0 million , respectively, as ofDecember 31, 2020 . We are evaluating the accounting for these transactions, which is expected to be finalized later in 2021 upon the satisfaction of certain conditions and the related timing. During the year endedDecember 31, 2020 , we amended our master lease several times with Second Spring to reflect the lease termination of 22 facilities subject to the lease and received annual rent credits of$41.2 million . In conjunction with the lease termination, operating lease ROU assets and lease obligations of$304.0 million and$340.1 million , respectively, were written off. The lease termination and remeasurement resulted in a gain of$36.1 million . During the year endedDecember 31, 2019 , we amended our master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of$28.4 million . In conjunction with the lease termination, finance lease ROU assets and lease obligations of$5.9 million and$8.8 million , respectively, were written off and operating lease ROU assets and lease obligations of$202.7 million and$205.4 million , respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from
finance leases to operating
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leases and the corresponding ROU assets and liabilities were increased by $54.4
million and $33.3 million , respectively. The lease termination and remeasurement
resulted in an aggregate gain of $26.9 million .
Other Lease Transactions
During the year ended December 31, 2020 , we amended three master lease
agreements to reflect the lease termination of a combined 13 facilities from the
master lease agreements. In conjunction with the lease terminations, operating
lease ROU assets and lease obligations of $59.6 million and $64.0 million ,
respectively, were written off, resulting in a gain of $4.4 million .
During the year ended December 31, 2020 , we extended the lease agreements of
several facilities and offices resulting in an increase in ROU assets and lease
liabilities of $28.0 million .
During the year ended December 31, 2019 , we amended a master lease agreement for
19 skilled nursing facilities. The amendment extended the lease term by five
years through October 31, 2026 , removed our option to purchase certain
facilities under the lease and adjusted certain financial covenants. We had
previously determined that the renewal option period was not reasonably certain
of exercise. Upon execution of the amendment, the operating lease ROU assets and
obligations were remeasured, resulting in an increase of $77.2 million to both
operating lease ROU assets and obligations.
During the year ended
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America (U.S. GAAP), which requires us to consolidate company financial information and make informed estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in our consolidated financial statements relate to valuation of revenues and accounts receivable, self-insurance reserves, income taxes, leases and impairments of long-lived assets. Actual results could differ from those estimates. Revenue Recognition We generate revenues, primarily by providing healthcare services to our customers. We applyFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) in determining the amount and timing of revenue recognition. Under Topic 606, revenues are recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled from patients, third-party payors (including government programs and insurers) and others, in exchange for those goods and services. Amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues. Performance obligations are determined based on the nature of the services provided. The majority of our healthcare services are highly interrelated and represent multiple inputs to deliver the combined output for which a customer has entered into a contract with us. As such, the bundle of services is treated as a single performance obligation satisfied over time as services are rendered. We also provide certain ancillary services, such as activities, meals, security, housekeeping and assistance in the activities of daily living, including barber and beauty services. Separate and distinct performance obligations exist relative to the performance of the non-medical ancillary services. As such, revenues from ancillary services are recognized at a point in time, if and
when
those services are rendered.
We determine the transaction price based on contractually agreed-upon amounts or
rates, adjusted for estimates of variable consideration, such as implicit price
concessions. We utilize the expected value method to determine the amount of
variable consideration that should be included to arrive at the transaction
price, using contractual agreements and historical reimbursement experience
within each payor type. We constrain the transaction price, such that net
revenues are recorded only to the extent that it is probable that a significant
reversal in the amount of the cumulative revenue recognized will not occur in
the future. If actual amounts of consideration ultimately received differ from
our estimates, we adjust these estimates, which would affect net revenues in the
period such variances become known. We do not adjust the promised amount of
consideration for the effects of a significant financing
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component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.
We are entitled to compensation for the value of the services provided, as they are performed, so we recognize the related revenue in the statements of operations as the services are performed. Since we have performed our obligation under the contract, we have unconditional rights to the consideration recorded and, therefore, classify those billed and unbilled rights as accounts receivable. Payments that we receive from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. See Note 5 - "Net Revenues and Accounts Receivable." Self-Insurance Reserves We provide for self-insurance reserves for both general and professional liabilities and workers' compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported. Estimated losses from asserted and incurred but not reported claims are accrued based on our estimate of the ultimate costs of the claims, which include costs associated with litigating and settling claims, and the relationship of past reported incidents to eventual claim payments. All relevant information, including our own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims. The reserves for loss for workers' compensation claims are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability claims are recorded on an undiscounted basis. Estimated insurance recoveries related to recorded liabilities are reflected as assets in our consolidated balance sheets when the receipt of such amounts is deemed to be probable. See Note 21 - "Commitments and Contingencies - Loss Reserves For Certain Self-Insured Programs - General andProfessional Liability and Workers' Compensation." Income Taxes Our effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. We account for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized. The recognition and measurement of a tax position is based on management's best judgment given the facts, circumstances and information available at the reporting date. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period. We evaluate, on a quarterly basis, our ability to realize deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of pre-tax earnings, our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. We record accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement
of operations. Leases
We lease skilled nursing facilities and assisted/senior living facilities, as well as certain office space, land, and equipment. We evaluate at contract inception whether a lease exists and recognizes a lease liability and right-of-use (ROU) asset for all leases with a term greater than 12 months. Leases are classified as either finance or operating. While many of our facilities are subject to master lease
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agreements, leases are assessed, classified, and measured at the facility level.
All lease liabilities are measured as the present value of the future lease payments using a discount rate, which is generally our incremental borrowing rate for collateralized borrowings. The future lease payments used to measure the lease liability include both fixed and variable payments that depend on a rate or index, as well as the exercise price of any options to purchase the underlying asset that have been deemed reasonably certain of being exercised. Future lease payments for optional renewal periods that are not reasonably certain of being exercised are excluded from the measurement of the lease liability. Regarding variable payments that depend on a rate or index, the lease liability is measured using the applicable rate or index as of lease commencement and is only remeasured under certain circumstances, such as a change in the lease term. Lease incentives serve to reduce the amount of future lease payments included in the measurement of the lease liability. For all leases, the ROU asset is initially derived from the measurement of the lease liability and adjusted for certain items, such as initial direct costs and lease incentives received. ROU assets are subject to long-lived asset impairment testing. Amortization of finance lease ROU assets, which is generally recognized on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset, is included within depreciation and amortization expense in the consolidated statements of operations. Interest expense associated with finance lease liabilities is included within interest expense in the consolidated statements of operations. Operating lease expense is recognized on a straight-line basis over the lease term and included within lease expense in the consolidation statements of operations. The lease term is determined based on the date we acquire control of the leased premises through the end of the lease term. Optional renewals periods are not initially included in the lease term unless they are deemed to be reasonably certain of being exercised at lease commencement. For further discussion, see Note 10 - "Leases."
Impairment of Long-Lived Assets
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less costs to sell. See Note 19 - "Asset Impairment Charges."
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:
"ActualPatient 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. "AvailablePatient 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.
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"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
"Skilled Mix" refers collectively to Medicare and Insurance payor sources. "Therapist Efficiency" is computed by dividing billable labor minutes related to patient care and customer value added services by total labor minutes for the period.
Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results:
Year ended December 31,
2020 2019
Financial Results (in thousands)
Financial Performance Measures:
Net revenues (GAAP) $ 3,906,223 $ 4,565,834
Net (loss) income attributable to Genesis Healthcare, Inc.
(GAAP) (58,963) 14,619
EBITDA (Non-GAAP) 136,295 312,779
Adjusted EBITDA (Non-GAAP) 206,829 199,027
Valuation Measure:
Adjusted EBITDAR (Non-GAAP) $ 573,168
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INPATIENT SEGMENT:
Year ended December 31,
2020 2019
Occupancy Statistics - Inpatient
Available licensed beds in service at end of period 35,864 43,252
Available operating beds in service at end of period 34,525
41,370
Available patient days based on licensed beds 13,127,083
15,777,465
Available patient days based on operating beds 12,615,911
15,119,996
Actual patient days 10,037,688
13,252,851
Occupancy percentage - licensed beds 76.5 % 84.0 % Occupancy percentage - operating beds 79.6 %
87.7 %
Skilled mix 17.8 % 18.3 %
Average daily census 27,425 36,309
Revenue per patient day (skilled nursing facilities)
Medicare Part A $ 574 $ 535
Insurance 496 462
Private and other 369 366
Medicaid 259 236Medicaid (net of provider taxes) 236
215
Weighted average (net of provider taxes)$ 305 $ 282 Patient days by payor (skilled nursing facilities) Medicare 1,012,184 1,318,793 Insurance 661,325 961,329 Total skilled mix days 1,673,509 2,280,122 Private and other 561,767 732,888 Medicaid 7,149,917 9,466,310 Total Days 9,385,193 12,479,320 Patient days as a percentage of total patient days (skilled nursing facilities) Medicare 10.8 % 10.6 % Insurance 7.0 % 7.7 % Skilled mix 17.8 % 18.3 % Private and other 6.0 % 5.9 % Medicaid 76.2 % 75.8 % Total 100.0 % 100.0 % Facilities at end of period Skilled nursing facilities Leased 227 278 Owned 9 29 Joint Venture 71 38 Managed 12 12
Total skilled nursing facilities 319
357
Total licensed beds 38,489
43,195
Assisted/Senior living facilities: Leased 19 21 Owned 1 1 Joint Venture 2 1 Managed - 1
Total assisted/senior living facilities 22
24
Total licensed beds 1,704 1,941
Total facilities 341 381
Total Jointly Owned and Managed- (Unconsolidated) 36
13
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REHABILITATION THERAPY SEGMENT*:
Year ended December 31,
2020 2019
Revenue mix %:
Company-operated 33.4 % 35.8 %Non-affiliated and affiliated third party 66.6 % 64.2 % Sites of service (at end of period) 1,056 1,155 Revenue per site$ 579,877 $ 620,016 Therapist efficiency % 60.5 % 68.0 %
* Excludes respiratory therapy services.
Reasons for Non-GAAP Financial Disclosure
The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). A Non-GAAP Financial Measure is a numerical measure of a registrant's value, historical or future financial performance, financial position and cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles inthe United States . We have provided reconciliations of the Non-GAAP Financial Measures to the most directly comparable GAAP financial measures. We believe the presentation of Non-GAAP Financial Measures provides useful information to investors regarding our results of operations because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these Non-GAAP Financial Measures: ? allow investors to evaluate our performance from management's perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;
? facilitate comparisons with prior periods and reflect the principal basis on which management monitors financial performance;
? facilitate comparisons with the performance of others in the post-acute industry;
? provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our company; and
? allow investors to view our financial performance and condition in the same manner as our significant landlords and lenders require us to report financial information to them in connection with determining our compliance with financial covenants. We use two Non-GAAP Financial Measures primarily (EBITDA and Adjusted EBITDA) as performance measures and believe that the GAAP financial measure most directly comparable to these two Non-GAAP Financial Measures is net (loss) income attributable toGenesis Healthcare, Inc. We use one Non-GAAP Financial Measure (Adjusted EBITDAR) as a valuation measure and believe that the GAAP financial measure most directly comparable to this Non-GAAP Financial Measure is net (loss) income attributable toGenesis 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 72
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these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore the extent to which they may or may not be eligible for incentive compensation awards. We also use Non-GAAP Financial Measures in our annual budget process. We believe these Non-GAAP Financial Measures facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors' historical operating performance. The presentation of these Non-GAAP Financial Measures is consistent with our past practice and we believe these measures further enable investors and analysts to compare current non-GAAP measures with non-GAAP measures presented in prior periods. Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business. These costs include our lease expense (only in the case of Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, loss (gain) on early extinguishment of debt, transaction costs, long-lived asset impairment charges, estimated impact of COVID-19, federal and state income tax (benefit) expense, the operating results of our divested businesses and the loss attributable to non-controlling interests. Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributable toGenesis Healthcare, Inc. as an important measure of its financial performance because it provides the most complete measure of our performance. Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies. Non-GAAP Financial Measures do not represent net (loss) income, 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) income attributable toGenesis 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:
Loss (gain) on early extinguishment of debt. We recognize losses or gains on
the early extinguishment of debt when we refinance our debt prior to its
? original term, requiring us to write-off any unamortized deferred financing
fees. We exclude the effect of gains or losses recorded on the early
extinguishment of debt because we believe these gains and losses do not
accurately reflect the underlying performance of our operating businesses.
Other income. We primarily use this income statement caption to capture gains
? and losses on the sale or disposition of assets. We exclude the effect of such
gains and losses because we believe they do not accurately reflect the
underlying performance of our operating businesses.
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Transaction costs. In connection with our restructuring, acquisition anddisposition 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 excluded from EBITDA.
Severance and restructuring. We exclude severance costs from planned reduction
in force initiatives associated with restructuring activities intended to
? adjust our cost structure in response to changes in the business environment.
We believe these costs do not reflect the underlying performance of our
operating businesses. We do not exclude severance costs that are not associated
with such restructuring activities.
(Income) loss of newly acquired, constructed or divested businesses. 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 losses associated with the wind-down of such
divested facilities as not indicative of the performance of our ongoing operating businesses.
Stock-based compensation. We exclude stock-based compensation expense because
? it does not result in an outlay of cash and such non-cash expenses do not
reflect the underlying operating performance of our operating businesses.
Estimated impact of COVID-19. We excluded the net impact of the COVID-19
pandemic on our revenues and expenses for the year ended
to the extraordinary nature of the virus and its impact across the globe. We
view the incremental expenses, lost revenue and government relief grants as not
indicative of the underlying potential long-term performance of our operating
businesses. Our estimate of the pandemic's impact on earnings for the year
ended
funding received to address escalating expenses and lost revenue; (2)
? incremental expenses incurred as a result of the pandemic; and (3) the net
impact of lost revenue, after considering a resulting reduction in operating
expenses. For the year ended
under the CARES Act and additional funding provided by certain states totaling
approximately
incremental expenses incurred in connection with the COVID-19 pandemic of
approximately
the estimated net impact of lost revenue offset by any resulting reduction in
operating expenses, of approximately$186.0 million .
Regulatory defense and related costs. We exclude the costs of investigating and
defending the inherited legal matters associated with prior transactions. We
? also exclude costs of disputed settlements with state agencies. We believe
these costs are non-recurring in nature as they will no longer be recognized
following the final settlement of these matters. Also, we do not believe the
excluded costs reflect the underlying performance of our operating businesses.
Other non-recurring costs. In the year ended
?
and the partial recovery of receivables written down in 2018.
Adjusted EBITDAR
We use Adjusted EBITDAR as one measure in determining the value of our business
and the value of prospective acquisitions or divestitures. Adjusted EBITDAR is
also a commonly used measure to estimate the enterprise value of businesses in
the healthcare and other industries. In addition, financial covenants in our
lease agreements use Adjusted EBITDAR as a measure of compliance. The
adjustments made and previously described in the computation of Adjusted EBITDA
are also made when computing Adjusted EBITDAR.
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Supplemental Information
We provide supplemental information about certain capital costs we believe are beneficial to an investor's understanding of our capital structure and cash flows. This supplemental information includes (1) cash interest payments on our recourse and HUD guaranteed indebtedness (2) cash rent payments made to partially owned real estate joint ventures that is eliminated in consolidation, net of any distributions returned to us, and (3) total cash lease payments made pursuant to operating leases and finance leases. This supplemental information is used by us to evaluate our leverage, fixed charge coverage and cash flow. This supplemental information is consistent with information used by our major creditors in evaluating compliance with financial covenants contained in our material lease and loan agreements.
The following table provides a reconciliation of net (loss) income attributable
to
Year ended December 31,
2020 2019
Net (loss) income attributable to Genesis Healthcare, Inc.$ (58,963) $ 14,619 Adjustments to compute EBITDA: Net loss attributable to noncontrolling interests (44,404) (7,145) Depreciation and amortization expense 107,833 123,159 Interest expense 135,439 180,392 Income tax (benefit) expense (3,610) 1,754 EBITDA 136,295 312,779 Adjustments to compute Adjusted EBITDA: Loss (gain) on early extinguishment of debt
8,979 (122)
Other income (202,272) (173,505)
Transaction costs 34,279 26,362
Long-lived asset impairments 179,000 16,937
Severance and restructuring 1,530 4,705(Income) loss of newly acquired, constructed, or divested businesses
(7,529) 4,883
Stock-based compensation 6,480 7,309
Estimated impact of COVID-19 50,067 -Regulatory defense and related costs
- 804
Other non-recurring income - (1,125)
Adjusted EBITDA $ 206,829 $ 199,027
Lease expense 366,339 387,063
Adjusted EBITDAR $ 573,168
Supplemental information:Cash interest payments on recourse and HUD debt
$ 62,648 $ 84,360 Cash payments made to partially owned real estate joint ventures, net of distributions received
55,920 22,270
Total cash lease payments made pursuant to operating leases and
finance leases $ 353,340 $ 408,230
Results of Operations
Same-store Presentation
We define our same-store inpatient operations as those skilled nursing and
assisted/senior living centers which have been operated by us, in a
steady-state, for each comparable period in this Results of Operations
discussion. We exclude from that definition those skilled nursing and
assisted/senior living facilities recently acquired that were not operated by us
for the entire period, as well as those that were divested prior to or during
the most recent period presented. In cases where we are developing new skilled
nursing or assisted/senior living centers, those operations are excluded from
our "same-store" inpatient operations until the revenue driven by operating
patient census is stable in the comparable periods.
Since the nature of our rehabilitation therapy services operations experiences a
high volume of both new and terminated contracts in an annual cycle, and the
scale and significance of those contracts can be very different to both the
revenue and operating expenses of
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that business, a same-store presentation based solely on the contract or gym count does not provide an accurate depiction of the business. Accordingly, we do not reference same-store figures in this MD&A with regard to that business. The volume of services delivered in our other services businesses can also be affected by strategic transactional activity. To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion.
Year Ended
A summary of our results of operations for the year endedDecember 31, 2020 as compared with the same period in 2019 follows (in thousands, except percentages): Year ended December 31, 2020 2019 Increase / (Decrease) Revenue Revenue Revenue Revenue Dollars Percentage Dollars Percentage Dollars Percentage Revenues: Inpatient services:
Skilled nursing facilities$ 3,254,715 83.4 % $
3,857,793 84.4 %
79,314 2.0 % 93,054 2.0 % (13,740) (14.8) %
Administration of third party facilities 7,866 0.2 % 8,310 0.2 % (444) (5.3) %
Elimination of administrative services (3,040) (0.1) % (3,125) (0.1) % 85 2.7 %
Inpatient services, net 3,338,855 85.5 % 3,956,032 86.5 % (617,177) (15.6) %
Rehabilitation therapy services: Total therapy services 622,601 15.9 %
738,124 16.2 % (115,523) (15.7) % Elimination of intersegment rehabilitation therapy services
(221,397) (5.7) % (275,578) (6.0) % 54,181 19.7 %
Third party rehabilitation
therapy services, net 401,204 10.2 % 462,546 10.2 % (61,342) (13.3) %
Other services:
Total other services 263,806 6.8 % 198,920 4.4 % 64,886 32.6 %
Elimination of intersegment other
services (97,642) (2.5) % (51,664) (1.1) % (45,978) (89.0) % Third party other services, net
166,164 4.3 % 147,256 3.3 % 18,908 12.8 %
Net revenues $ 3,906,223 100.0 % $ 4,565,834 100.0 % $ (659,611) (14.4) %
Year ended December 31,
2020 2019 Increase / (Decrease)
Margin Margin
Dollars Percentage Dollars Percentage Dollars Percentage EBITDA: Inpatient services
$ 229,829 6.9 %$ 371,210 9.4 %$ (141,381) (38.1) % Rehabilitation therapy services 92,086 14.8 %
92,469 12.5 % (383) (0.4) % Other services 21,271 8.1 % 12,456 6.3 % 8,815 70.8 % Corporate and eliminations (206,891) - % (163,356) - % (43,535) (26.7) % EBITDA$ 136,295 3.5 %$ 312,779 6.9 %$ (176,484) (56.4) % 76 Table of Contents A summary of our condensed consolidating statement of operations follows (in thousands): Year ended December 31, 2020 Rehabilitation Inpatient Therapy Other Services Services Services Corporate Eliminations Consolidated Net revenues$ 3,341,895 $ 622,601 $ 263,806 $ -$ (322,079) $ 3,906,223 Salaries, wages and benefits 1,593,013 501,093 162,094 - - 2,256,200 Other operating expenses 1,482,488 31,431 79,194 - (322,542) 1,270,571
General and administrative costs - - - 175,057 - 175,057 Lease expense 362,384 1,019 1,739 1,197 - 366,339 Depreciation and amortization expense 91,084 6,731 825 9,457 (264) 107,833 Interest expense 57,634 27 38 82,460 (4,720) 135,439 Loss on early extinguishment of debt -
- - 8,979 - 8,979 Investment income - - - (8,709) 4,720 (3,989) Other (income) loss (203,100) 621 207 - - (202,272) Transaction costs - - - 34,279 - 34,279
Long-lived asset impairments 179,000 - - - - 179,000 Federal and state stimulus - COVID-19 other income (301,719) (3,649) (699) - - (306,067) Equity in net income of unconsolidated affiliates - - - (7,091) (1,078) (8,169) Income (loss) before income tax benefit 81,111 85,328 20,408 (295,629) 1,805 (106,977) Income tax benefit - - - (3,610) - (3,610) Net income (loss)$ 81,111 $ 85,328$ 20,408 $ (292,019) $ 1,805 $ (103,367) Year ended December 31, 2019 Rehabilitation Inpatient Therapy Other Services Services Services Corporate Eliminations Consolidated Net revenues$ 3,959,157 $ 738,124 $ 198,676 $ 244 $ (330,367) $ 4,565,834 Salaries, wages and benefits 1,761,273 601,196 122,541 - - 2,485,010 Other operating expenses 1,599,549 44,088 62,104 - (330,894) 1,374,847
General and administrative costs - - - 144,471 - 144,471 Lease expense 382,897 1,297 1,463 1,406 - 387,063 Depreciation and amortization expense 99,529 12,230 720 10,775 (95) 123,159 Interest expense 83,887 55 35 97,831 (1,416) 180,392 Income on early extinguishment of debt -
- - (122) - (122) Investment income - - - (8,712) 1,416 (7,296) Other (income) loss (172,709) (926) 112 18 - (173,505) Transaction costs - - - 26,362 - 26,362
Long-lived asset impairments 16,937 - - - - 16,937 Equity in net loss (income) of unconsolidated affiliates - - - 4,091 (4,803) (712) Income (loss) before income tax benefit 187,794 80,184 11,701 (275,876) 5,425 9,228 Income tax expense - - - 1,754 - 1,754 Net income (loss)$ 187,794 $ 80,184$ 11,701 $ (277,630) $ 5,425 $ 7,474 Net Revenues
Net revenues for the year ended
Inpatient Services - Revenue decreased$617.2 million , or 15.6%, for the year endedDecember 31, 2020 as compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, inpatient services revenue decreased$106.1 million , or 3.4%, excluding 107 divested facilities that were underperforming or subject to portfolio management strategies and the acquisition or development of two additional facilities. The same-store revenue decrease is net of$30.0 million related to a new provider tax program in the state ofNew Mexico , which was only enacted for the fourth quarter in 2019,$8.4 million due to the removal of the impact of sequestration on Medicare rates during the pandemic, and an additional$24.0 million of the decrease in the year endedDecember 31, 2020 is attributed to the transition from the resource utilization group based reimbursement to the Patient-Driven Payment Model (PDPM) reimbursement methodology in the fourth quarter of fiscal 2019. Giving effect to these factors, we estimate the remaining same-store inpatient revenue decrease of$168.5 million in the year endedDecember 31, 2020 compared with the same period in 2019 is due to the impact of COVID-19, partially offset by increasing payor rates, primarily in our Medicaid population, reflecting a trend that was observed before COVID-19 impacted our operations. While census was adversely 77
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impacted by admission holds and declining in-house census as the pandemic progressed, average payor rates increased as acuity of the in-house census increased with treatment of the population testing positive for the virus. COVID-19 has disrupted, and will likely continue to disrupt, this favorable overall census trend and may have an unpredictable impact on the skilled mix of our inpatient facilities as a result of the temporary change to patient coverage criteria. For an expanded discussion regarding the factors influencing our census trends, see Item 1, "Business - Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue" in this Form 10-K, as well as the Key Performance and Valuation Measures in this Management's Discussion and Analysis of Financial Condition and Results of Operations for quantification of the census trends
and revenue per patient day.
Rehabilitation Therapy Services - Revenue decreased$61.3 million , or 13.3% for the year endedDecember 31, 2020 as compared with the same period in 2019. Of that decrease,$48.1 million is due to lost contract business, offset by$21.7 million attributed to new contracts. COVID-19 began to impact the skilled nursing customers of our rehabilitation services at an accelerating rate byMarch 2020 and continued throughDecember 31, 2020 , resulting in a decrease of revenue of$14.9 million in the year endedDecember 31, 2020 as compared with the same period in 2019. The remaining decrease of$20.0 million is principally due to reduced volume of services provided to existing customers and amended customer pricing terms in connection with the implementation of PDPM. Other Services - Revenue increased$18.9 million , or 12.8% for the year endedDecember 31, 2020 as compared with the same period in 2019. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO. In the year endedDecember 31, 2020 and 2019, the ACO recognized revenue of$10.3 million and$6.6 million , respectively under the MSSP. The MSSP recognition in the year endedDecember 31, 2020 included$10.3 million related to the 2019 MSSP program, however, due to the unpredictable impact COVID-19 is having on our operating results and metrics applied in the MSSP, we cannot recognize any gain share relative to 2020 at this time. Revenue in our physician services business decreased$6.7 million in the year endedDecember 31, 2020 as compared with the same period in 2019, all of which is attributed to reduced census volumes from the impact of COVID-19 on the inpatient business. Revenue of our staffing services business increased$11.8 million in the year endedDecember 31, 2020 as compared with the same period in 2019. The 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 nearly 50% in the year endedDecember 31, 2020 as compared with the same period in 2019, its revenue from external customers has only increased 14.7% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, which we believe will enable our organization to meet the evolving demands of post-acute care in light of the COVID-19 impact on our various lines of business. The remaining increase in revenue of$10.1 million principally pertains to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental revenue in year endedDecember 31, 2019 . EBITDA
EBITDA for the year endedDecember 31, 2020 decreased by$176.5 million , or 56.4% as compared with the same period in 2019. Excluding the impact of loss (gain) on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and Federal and state stimulus - COVID-19 other income, EBITDA decreased$332.2 million , or 182.1% when compared with the same period in 2019. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead. Inpatient Services - EBITDA decreased$141.4 million , or 38.1% in the year endedDecember 31, 2020 as compared with the same period in 2019. Excluding the impact of other (income) loss, long-lived asset impairments and Federal and state stimulus - COVID-19 other income, EBITDA as adjusted decreased$311.4 million , or 144.6% when compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, the inpatient EBITDA as adjusted decreased$276.4 million . Same-store staffing costs, net of nursing agency and other purchased services and adjusted for the impact of COVID-19, increased$127.1 million . Wages and purchased services include supplemental premium pay rates and bonuses to insure we could attract adequate staff to address our clinical needs during the pandemic. Nursing wage inflation increased 13.8% while non-nursing wage inflation increased 7.4% in the year endedDecember 31, 2020 as compared with the same period in 2019. Same-store lease expense decreased$13.5 million , primarily due to lease amendments in 2019 resulting in certain financing leases being reclassified as operating leases in addition to our real estate joint venture transactions which resulted in previously leased centers being financed with joint-venture debt. Our self-insurance programs, including general and professional liability, workers' compensation and health insurance benefits, resulted in a decrease of$18.1 million of EBITDA as adjusted in the year endedDecember 31, 2020 as
compared
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with the same period in 2019, which is net of an incremental$29.8 million provision for workers compensation loss specific to COVID-19 related claims in the 2020 period. Prior to the COVID-19 pandemic our self-insurance programs were performing as anticipated and within normal claims reporting patterns of our same-store operations recently. The provisions for general and professional liability recorded in both the year endedDecember 31, 2020 and the comparable period in 2019 reflect continued favorable claims development. We have not changed our reserving methodology or assumptions for any COVID-19 specific professional liability exposures. Our self-insured health benefit plans have seen reduced expenses principally due to other medical care settings limiting non-emergency services during the COVID-19 pandemic. The introduction of the new provider tax program inNew Mexico resulted in an increase of EBITDA of$21.5 million compared to the same period in 2019 before the program was enacted. EBITDA increased$8.4 million due to the removal of the impact of federal sequestration on Medicare rates during the pandemic, which is set to expire at the end ofMarch 2021 absent further extension by the federal government. The remaining$174.6 million decrease in EBITDA, as adjusted, of the segment is principally due to the negative effects COVID-19 has had on our business, partially offset with reduced therapy services cost due to the implementation of PDPM. See "Significant Transactions and Events - COVID-19." Rehabilitation Therapy Services - EBITDA decreased by$0.4 million or 0.4% for the year endedDecember 31, 2020 as compared with the same period in 2019. Excluding the impact of Federal and state stimulus - COVID-19 other income, EBITDA as adjusted decreased$2.5 million when compared with the same period in 2019. Lost therapy contracts exceeded new contracts by$7.7 million in the year endedDecember 31, 2020 as compared with the same period in 2019. COVID-19 resulted in a decrease of EBITDA of$4.8 million in the year endedDecember 31, 2020 . The remaining increase of$10.0 million is principally attributed to a reduction in overhead costs to right size our operating model under PDPM. Therapist efficiency declined to 60.5% in the year endedDecember 31, 2020 compared with 68.0% in the comparable period in the prior year. This decline in therapist efficiency is expected to be temporary as we have adjusted staffing and service models to address the clinical needs of our skilled nursing customers impacted by COVID-19. Other Services - EBITDA increased$8.8 million or 70.8% for the year endedDecember 31, 2020 as compared with the same period in 2019. Excluding the impact of Federal and state stimulus - COVID-19 other income, EBITDA as adjusted increased$8.2 million when compared with the same period in 2019. The EBITDA of our ACO increased$2.3 million in the year endedDecember 31, 2020 as compared with the same period in 2019. In the 2020 period, our ACO recognized$10.3 million for the 2019 program performance based on actual results achieved. The EBITDA of our staffing services business increased$2.7 million in the year endedDecember 31, 2020 as compared with the same period in 2019, principally due to growth in its services with affiliated customers, partially offset with pricing reductions to those affiliated customers. The EBITDA of our physician services business decreased$4.1 million . The physician services business has been negatively impacted by COVID-19 reducing patient encounters due to reduced skilled nursing census across the industry and increased costs to support practitioners. The remaining increase in EBITDA of$7.3 million principally relates to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental income in the year endedDecember 31, 2019 .
Corporate and Eliminations - EBITDA decreased$43.5 million or 26.7% in the year endedDecember 31, 2020 as compared with the same period in 2019. EBITDA of our corporate function includes loss on early extinguishment of debt and losses associated with transactions that are outside of the scope of our reportable segments. These and other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed$17.0 million of the net decrease in EBITDA. Corporate overhead costs, net of fee income, increased$30.3 million , or 21.0%, in the year endedDecember 31, 2020 as compared with the same period in 2019. This increase is principally due to investments in information technology and related upgrades, as well as unallocated corporate cost associated with our COVID-19 response. The remaining increase in EBITDA of$3.8 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments. Other income - 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 year endedDecember 31, 2020 principally represents gains on sales of real estate and leasehold rights in the period. See also Note 18 - "Other Income." Transaction costs - In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the years endedDecember 31, 2020 and 2019 were$34.3 million and$26.4 million , respectively. 79 Table of Contents Long-lived asset impairments - In the years endedDecember 31, 2020 and 2019, we recognized impairments of property and equipment and right-of-use (ROU) assets of$179.0 million and$16.9 million , respectively. The current year's impairment charges were primarily driven by the impact of COVID-19 on the facilities' operations. For more information about the conditions of the business which contributed to these impairments, see Note 19 - "Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life." Federal and state stimulus - COVID 19 - other income - During the year endedDecember 31, 2020 we recognized$267.0 million of relief grants from CARES Act funds administered by HHS. The grants are primarily related to the skilled nursing care provided through our Inpatient Services segment. Grants received are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for health care related expenses, including costs of infection control, or lost revenues that are attributable to COVID-19. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. Additionally, we recognized$39.1 million of provider relief in the year endedDecember 31, 2020 as supplied by the various states in which we operate. These programs, like those administered directly by HHS, are intended to address the financial hardships of the pandemic. The qualifications of each program vary state by state, but most are focused on the cost of the COVID-19 response, with few state programs addressing lost revenue. Other Expense The following discussion applies to the expense categories between EBITDA and income (loss) of all reportable segments and corporate and eliminations in our consolidating statement of operations for the year endedDecember 31, 2020 as compared with the same period in 2019. Depreciation and amortization - Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance leased ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased$15.3 million in the year endedDecember 31, 2020 as compared with the same period in 2019. On a same-store basis, depreciation and amortization decreased$16.4 million in the year endedDecember 31, 2020 as compared with the same period in 2019. In the inpatient services segment,$10.1 million of the decrease is principally due to reduction in the amortization of right to use assets in our continuing lease portfolio, with the remaining$6.3 million reduction principally due to completion of amortization of certain contract rights in our rehabilitation therapy services in the 2019 period. Interest expense - Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations. Interest expense decreased$45.0 million in the year endedDecember 31, 2020 as compared with the same period in 2019. On a same-store basis, interest expense is down$31.8 million in the year endedDecember 31, 2020 as compared with the same period in 2019. An increase of$22.4 million of interest expense is attributed to consolidating debt and the associated interest expense of three real-estate partnerships over the course of 2019 and 2020, which were determined to be variable interest entities (VIEs) of which we are the primary beneficiary. See Note 1 - "General Information - Basis of Presentation" and Note 12 - "Long-Term Debt." Cash interest decreased$14.3 million in the year endedDecember 31, 2020 as compared with the same period in 2019 as a result of a reduction in outstanding borrowings under our revolving credit facility, primarily due to the timing of the Medicare Advance payments received in addition to other phases of CARES Act relief funding. Borrowing levels are expected to increase over the period the Medicare Advance is required to be recouped in 2021. The remaining decrease in interest expense of$39.9 million is principally due to lease amendments entered in 2019 and early 2020 that resulted in modifications to the accounting for certain leases, converting them from financing leases with interest expense to operating leases presented as lease expense. Income tax expense (benefit) - For the year endedDecember 31, 2020 , we recorded income tax benefit of$3.6 million from continuing operations representing an effective tax rate of 3.4% compared to an income tax expense of$1.8 million from continuing operations, representing an effective tax rate of 19.0% for the same period 2019. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on ourBermuda captive insurance company's discounted unpaid loss reserve. In assessing the requirement for, and amount of, a valuation allowance, 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. 80 Table of Contents
Net Loss Attributable to
The following discussion applies to categories between net income (loss) and net income (loss) attributable toGenesis Healthcare, Inc. in our consolidated statements of operations for the year endedDecember 31, 2020 as compared with the same period in 2019. Net loss attributable to noncontrolling interests - Following the combination ofSkilled andFC-GEN Operations Investment, LLC (FC-GEN), noncontrolling economic interest was recorded as noncontrolling interest in the financial statements of the combined entity. The 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 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 9.2 million Class C common stock reducing the initial, approximately 42% noncontrolling economic interest to 33.1% atDecember 31, 2020 . For the years endedDecember 31, 2020 and 2019, (loss) income of($39.8) million and$2.8 million , respectively, has been attributed to the Class C common stock. In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable toGenesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the years endedDecember 31, 2020 and 2019, loss of($4.6) million and($9.9) million , respectively, has been attributed to these unaffiliated third parties.
Liquidity and Capital Resources
The following table presents selected data from our consolidated statements of cash flows (in thousands):
Year ended December 31,
2020 2019
Net cash provided by (used in) operating activities
$ (7,166) Net cash used in investing activities (33,532)
(387,003)
Net cash (used in) provided by financing activities (94,785)
377,699
Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents
187,414 (16,470)
Beginning of period 125,806 142,276
End of period $ 313,220 $ 125,806
Net cash provided by operating activities in the year ended December 31, 2020 of
$315.7 million increased by $322.9 million compared with the same period in
2019. The year ended December 31, 2020 include receipt of Medicare advances of
$155.8 million and $92.2 million from the deferral of payroll taxes under the
CARES Act. The remaining increase in cash provided by operating activities is
attributed to a combination of state and federal COVID-19 grants, offset by the
cost and lost revenue caused by COVID-19 and the timing of payments.
Net cash used in investing activities in the year ended December 31, 2020 was
$33.5 million , compared to cash used in investing activities of $387.0 million
in the year ended December 31, 2019 . Cash used for routine capital expenditures
for the year ended December 31, 2020 decreased from the same period in the prior
year by $7.1 million . Net purchases of marketable securities of $15.4 million in
2020 exceeded net proceeds on maturity or sale of marketable securities of $0.9
million in 2019, resulting in a net increase in cash used of $16.3 million . In
the year ended December 31, 2020 , there were asset purchases of $207.3 million
primarily as a result of the acquisition of eight skilled nursing facilities by
the consolidated Cascade Partnership and one skilled nursing facility by the
consolidated Vantage Point Partnership compared to asset sales of $259.5 million
comprised primarily of the real property of 19 owned facilities and leasehold
rights of 13 leased facilities. In the year ended December 31, 2019 , there were
asset purchases of $252.5 million as a result of the consolidation of the Next
Partnership and its acquisition of 22 skilled nursing facilities and asset sale
proceeds of $79.0 million resulting from the simultaneous sale of seven skilled
nursing facilities. In the year ended December 31, 2019 , there were asset
purchases of $339.2 million as a result of the consolidation of the Vantage
Point Partnership and its acquisition of 18 skilled nursing facilities. See
Significant Transaction and Events for a summary of asset purchases and sales.
The year ended December 31, 2019 also included $66.9 million in proceeds from
the sale of seven facilities in California , $91.7 million in proceeds from the
sale of eight facilities in Georgia , New Jersey , Virginia and Maryland and $20.2
million from the sale of seven facilities in Texas . The year ended December 31,
2019 also included the receipt of a $12.0 million payment of a note receivable.
The year ended December 31, 2020 provided cash of $12.8 million on the receipt
of restricted deposits compared to payments of restricted deposits of $3.8
million in the same period in the prior year. The year ended December 31, 2020
included cash used of $17.5 million for an investment in a new joint
81
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venture and cash used of$9.0 million extending the new joint venture a loan as described in "Significant Transaction and Events." The remaining incremental use of cash from investing activities of$13.5 million in the year endedDecember 31, 2020 as compared with the same period in 2019 is principally due to a payoff of a note receivable in 2019 of$12.0 million . Net cash used in financing activities in the year endedDecember 31, 2020 was$94.8 million compared to net cash provided by financing activities of$377.7 million in the year endedDecember 31, 2019 . The net increase in cash used by financing activities of$472.5 million is principally attributed to debt repayments exceeding debt borrowings in the year endedDecember 31, 2020 as compared to the same period in 2019. In the year endedDecember 31, 2020 , we had proceeds from the issuance of debt of$228.7 million , consisting primarily of$193.5 million by the consolidatedCascade Partnership ,$7.3 million by the consolidatedVantage Point Partnership and$26.1 million in HUD refinancings by our consolidatedNext Partnership . In the year endedDecember 31, 2019 , we received proceeds from the issuance of debt of$538.5 million , consisting primarily of$479.4 from the consolidation of theNext Partnership andVantage Point Partnership ,$41.7 million due to the refinancing of three facilities within theNext Partnership with HUD financing and$15.0 million due to a short-term loan from Omega. Repayment of long-term debt in the year endedDecember 31, 2020 was$191.8 million compared to$199.6 million in the same period of the prior year. In the year endedDecember 31, 2020 , we repaid$93.2 million in HUD-insured loans,$41.3 million in MidCap Real Estate Loans,$9.1 million in Welltower Real Estate Loans,$15.0 million in a short-term note payable and$24.5 million in term loan paydowns associated with the consolidatedNext Partnership . In the year endedDecember 31, 2019 , we repaid$39.8 million in MidCap Real Estate Loans and$65.6 million in HUD-insured loans using proceeds from the sale of 19 facilities; reduced the term loan facility of the ABL Credit Facilities by$40.0 million while increasing the revolving credit facilities by the same amount; and theNext Partnership reduced its term loan by$38.8 million refinancing three facilities through HUD. The remaining decrease in cash used to repay long-term debt of$6.7 million relates to a decrease in routine debt payments. In the year endedDecember 31, 2020 , we had net repayments under the revolving credit facilities of$136.0 million as compared with net borrowings under the revolving credit facilities of$30.3 million under the revolving credit facilities in the same period in 2019. In the year endedDecember 31, 2020 , we received contributions from a noncontrolling interest for$21.7 million primarily resulting from the consolidation of theCascade Partnership . In the year endedDecember 31, 2019 , we received contributions from a noncontrolling interest for$18.5 million and$8.5 million resulting from the consolidation of the aforementionedNext Partnership andVantage Point Partnership , respectively. The remaining net decrease in cash used in financing activities of$1.1 million in the year endedDecember 31, 2020 compared to the same period in 2019 is primarily due to a reduction in debt issuance and settlement costs partially offset by an increase in repayments of finance lease obligations. Our primary sources of liquidity are cash on hand, cash flows from operations, borrowings under our asset based lending facilities (ABL Credit Facilities) and the receipt of government-sponsored financial support in response to the COVID-19 pandemic.
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.
AtDecember 31, 2020 , we had total liquidity of$284.5 million consisting of cash on hand of$244.7 million and available borrowings under our ABL Credit Facilities of$39.8 million . During the year endedDecember 31, 2020 , we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities. 82 Table of Contents COVID-19 Impact on Liquidity We have taken, and will continue to take, actions to enhance and to preserve our liquidity in response to the pandemic. During the year endedDecember 31, 2020 , our usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the CARES Act. Specifically, in the second quarter of 2020, we applied for and received$156.8 million of advanced Medicare payments and from April throughDecember 2020 , received approximately$275.4 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, we have elected to implement the CARES Act payroll tax deferral program, which preserved, on an interest free basis,$92.2 million of cash, representing the employer portion of payroll taxes incurred betweenMarch 27, 2020 andDecember 31, 2020 . The advance Medicare payments of$156.8 million , which are also interest free, are expected to be recouped betweenApril 2021 andFebruary 2022 , while one-half of the payroll tax deferral amount will become due on each ofDecember 31, 2021 andDecember 31, 2022 . In addition to relief funding under the CARES Act, funding has been committed by a number of states in which we operate, currently estimated at$124.7 million . We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses, continuing to evaluate our capital structure, pursuing strategic liquidity enhancing transactions and seeking further government-sponsored financial relief related to the pandemic. We cannot provide assurance that such efforts will be successful or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic.
Strategic PartnershipsNext Partnership
OnJanuary 31, 2019 , Welltower sold the real estate of 15 facilities to theNext Partnership , of which we acquired a 46% membership interest for$16.0 million . The remaining interest is held by Next, a related party. See Note 16 - "Related Party Transactions." In conjunction with the facility sales, we received aggregate annual rent credits of$17.2 million . We continue to operate these facilities pursuant to a new master lease with theNext Partnership . The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of$19.5 million , with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.Vantage Point Partnership
OnSeptember 12, 2019 , Welltower and Second Spring sold the real estate of four and 14 facilities, respectively, to theVantage Point Partnership , in which we invested$37.5 million for an approximate 30% membership interest. The remaining membership interest is held by Vantage Point for an investment of$85.3 million consisting of an equity investment of$8.5 million and a formation loan of$76.8 million . In conjunction with the facility sales, we received aggregate annual rent credits of$30.3 million . We continue to operate these facilities pursuant to a new master lease with theVantage Point Partnership . The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of approximately$33.1 million , with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require us to acquire its membership interests in theVantage Point Partnership . The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.NewGen Partnership OnFebruary 1, 2020 , we transitioned operational responsibility for 19 facilities in the states ofCalifornia ,Washington andNevada to a partnership with NewGen. We sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for$78.7 million . Net transaction proceeds were used by us to repay indebtedness, including prepayment penalties, of$33.7 million , fund our initial 50% equity contribution and working capital requirement of$14.9 million , and provide financing to the partnership of$9.0 million . We recorded a gain on sale of assets and transition of leased facilities of$58.8 million and loss on early extinguishment of debt of$1.0 million . Concurrently, the facilities have 83
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entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. OnMay 15, 2020 , we transitioned operational responsibility for four additional leased facilities inCalifornia to theNewGen Partnership . The four facilities generated annual revenues of$55.0 million and pre-tax loss of$0.5 million . OnOctober 1, 2020 , we transitioned operational responsibility for one additional leased facility in the state ofWashington to theNewGen Partnership . The facility generated annual revenues of$12.3 million and pre-tax income of$0.2 million .
We do not hold a controlling financial interest in theNewGen Partnership . As such, we have applied the equity method of accounting for our 50% interest in theNewGen Partnership . Our investment in theNewGen Partnership ,$25.1 million , is included within other long-term assets in the consolidated balance sheet
as ofDecember 31, 2020 .Cascade Partnership
OnJuly 2, 2020 , we sold one facility to an affiliate of Cascade for$26.1 million , using proceeds from the sale to retire HUD financed debt of$10.5 million , pay aggregate prepayment penalties and other closing costs of$1.0 million , and partially fund our investment in theCascade Partnership . Cascade also acquired eight facilities that we operated under a master lease agreement with Second Spring. We continue to operate all nine of these facilities subject to a new master lease agreement with affiliates of Cascade. The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of$20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. We also obtained a fixed price option to purchase the nine facilities for$251.6 million that is exercisable fromJuly 2023 throughJune 2025 . We executed a promissory note with Cascade for$20.3 million , which was subsequently converted into a 49% membership interest in theCascade Partnership . We also hold a subordinated equity interest in theCascade Partnership of$10.0 million . Other Financing Activities
Mortgages and other secured debt (non-recourse) refinancings
During the years endedDecember 31, 2020 and 2019, a portion of theNext Partnership's term loan facility was refinanced via five new HUD insured loans with an aggregate initial principal balance of$67.8 million . The loans mature on dates ranging fromJanuary 1, 2055 throughJune 1, 2055 and bear interest at fixed rates ranging from 2.79% to 3.15%. Proceeds were principally used to repay a portion of the term loan associated with theNext Partnership and fees. The loans had an aggregate outstanding principal balance of$67.0 million and$41.7 million atDecember 31, 2020 and 2019, respectively.
Divestiture of Non-Strategic Facilities
Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 98 skilled nursing facilities, five assisted/senior living facilities and six behavioral outpatient clinics in 18 states sinceJanuary 1, 2019 , including:
The sale and lease termination of nine skilled nursing facilities located in
?
subject to a master lease agreement with Welltower. A loss was recognized
totaling
The closure of one skilled nursing facility located in
? 2019. The facility remains subject to a master lease agreement. A loss was
recognized totaling
? The lease expiration of one behavioral health center located in
The sale and lease termination of two skilled nursing facilities located in
?
Welltower. A loss was recognized totaling
? The sale of five owned skilled nursing facilities located in
1, 2019. A gain was recognized totaling
? The sale and lease termination of one skilled nursing facility located in
on
The closure of one skilled nursing facility located in
? 2019. The facility remained subject to a master lease agreement with Omega
until its sale onJanuary 31, 2020 . A loss was recognized totaling$0.2 million . 84 Table of Contents
The sale and lease termination of three skilled nursing facilities located in
?
recognized totaling
The sale and lease termination of six skilled nursing facilities located in
?
state. A loss was recognized totaling
? The sale of one owned assisted/senior living facility located in
? The sale and lease termination of one skilled nursing facility located in
on
? The sale of one owned skilled nursing facility located in
15, 2019. A gain was recognized totaling
The sale of one owned skilled nursing facility located in
? 15, 2019 and transfer of operations on
totaling
The sale of two owned skilled nursing facilities, one assisted/senior living
? facility and the lease termination of one skilled nursing facility located in
? The sale and lease termination of one skilled nursing facility located in
on
? The sale of one owned skilled nursing facility located in
? The sale of one owned skilled nursing facility located in
? The sale of one owned skilled nursing facility located in
The sale of one owned skilled nursing facility located in
? 27, 2019 and transfer of operations on
totaling
? The sale and lease termination of one skilled nursing facility located in
? The sale and lease termination of one skilled nursing facility located in New
Jersey on
? The sale of three owned skilled nursing facilities located in
and
The transition of operational responsibility for 19 facilities in the states of
? transaction included the sale of the real estate and operations of six skilled
nursing facilities and transfer of the leasehold rights to seven skilled
nursing, five behavioral health centers and one assisted living facility. A
gain was recognized totaling
? The sale of one owned skilled nursing facility located in
? The lease termination of one assisted/senior living facility located in
on
? The sale of three owned skilled nursing facilities located in
? The lease termination of two skilled nursing facilities located in
? The lease termination of six skilled nursing facilities located in
The transition of operational responsibility for four additional leased
? facilities in
totaling
? The lease termination of six skilled nursing facilities located in
? The sale of one owned skilled nursing facility located in
6, 2020. A gain was recognized totaling
? The transition of operational responsibility for one additional leased facility
in
? The lease termination of two skilled nursing facilities located inConnecticut onOctober 15, 2020 . 85 Table of Contents
? The sale of the real property and divestiture of the operations of five skilled
nursing facilities in
? The lease termination of one skilled nursing facility located in
on
? The sale of one skilled nursing facility in
living facility inCalifornia to NewGen onFebruary 1, 2021 . Financial 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 may apply, the default could have a significant adverse impact on our financial position.
AtDecember 31, 2020 , we were not in compliance with or had not received waivers with respect to the financial covenants contained in certain of our leases because certain of our other material lease agreements and material debt agreements contain cross-default provisions that are triggered if we are in default of such leases. The lease and debt obligations associated with these agreements have been classified as current liabilities. As of the date of this Form 10-K filing, all rent and debt service payments have been made timely and no material creditors have pursued remedies with respect to breaches of financial covenants. The ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on our ability to remain in compliance with or return to compliance with our financial covenants throughMarch 16, 2022 . Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to timely meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued. Our ability to maintain compliance with financial covenants required by our debt and lease agreements depends in part on management's ability to increase revenues and control costs and receive adequate government-sponsored financial support in response to the COVID-19 pandemic as well as possible waivers, deferrals and/or adjustments of debt and lease terms. 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 debt and lease covenant requirements.
There can be no assurance that the confluence of these and other factors will not impede our ability to meet covenants required by our debt and lease agreements in the future.
Concentration of Credit Risk
We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations, as we, resulting in a concentration of risk. These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions. Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in our rehabilitation therapy services business where it has approximately 150 distinct customers, many being chain operators with more than one location. One of our customers, a related party, comprises$30.5 million , or approximately 44%, of the outstanding contract receivables in the rehabilitation services business atDecember 31, 2020 . See Note 16 - "Related Party Transactions." A future adverse event impacting this customer or other large customers, resulting in their insolvency or other economic distress would have a material impact on us. 86 Table of Contents
Liquidity and Going Concern Considerations
We performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management's plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of our plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.
In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future 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 within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.
In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:
? We applied for and received government-sponsored financial relief related to
the pandemic;
We are utilizing the CARES Act payroll tax deferral program to delay payment of
? a portion of payroll taxes incurred through
repaid in
While we vigorously advocate, for ourselves and the skilled nursing industry,
? regarding the need for additional government-sponsored funding, we continue to
explore and to take advantage of existing government-sponsored funding programs
implemented to support businesses impacted by COVID-19;
? We continue to seek and implement measures to adapt our operational model to
function for the long-term in a COVID-19 environment;
We have pursued, and will continue to pursue, creative and accretive
? opportunities to sell assets and enter into joint venture structures in order
to provide liquidity; and
We are exploring and evaluating a number of strategic and other alternatives to
? manage and to improve our liquidity position, in order to address the maturity
of material indebtedness and other obligations over the twelve-month period
following the date the financial statements are issued. These measures and other plans and initiatives of ours are designed to provide us with adequate liquidity to meet our obligations for at least the twelve-month period following the date our financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond our control or may not be available on terms acceptable to us, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if we receive additional funding support from government sources and/or are able to execute successfully all of our plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, our operating plans and resulting cash flows together with our cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events and circumstances could force us to seek reorganization under theU.S. Bankruptcy Code. Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. AtDecember 31, 2020 , we were not in compliance with or had not received waivers with respect to the financial covenants contained in certain of our leases containing cross-default provisions with other material lease agreements and material debt agreements. The lease and debt obligations associated with these agreements have been classified as current liabilities. Otherwise, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern. 87 Table of Contents Risk and Uncertainties The ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on our ability to remain in compliance with our financial covenants throughMarch 16, 2022 . Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.
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 ofDecember 31, 2020 , we are subject to lease guaranty agreements on six of the facilities leased by theNewGen Partnership , under which it guarantees all payments and performance obligations of the tenants. As ofDecember 31, 2020 , the six leases have undiscounted cash rent obligations remaining of$84.7 million . As ofDecember 31, 2019 , 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.
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