GENESIS HEALTHCARE, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented and should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1, "Financial Statements" in this Quarterly Report on Form 10-Q. As used in this MD&A, the words "we," "our," "us" and the "Company," and similar terms, refer collectively toGenesis Healthcare, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. This MD&A should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in our Annual Report (defined below). All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as "may," "will," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue," "pursue," "plans" or "prospect," or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about the Company's expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , particularly in Item 1A, "Risk Factors," which was filed with theSEC onMarch 16, 2020 (the Annual Report), as well as others that are discussed in this Quarterly Report on Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements. Business Overview Genesis is a healthcare services holding company that, through its subsidiaries, owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business. We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. AtMarch 31, 2020 , we provided inpatient services through 376 skilled nursing, senior/assisted living and behavioral health centers located in 26 states. Revenues of our owned, leased and otherwise consolidated inpatient businesses constitute approximately 87% of our revenues. We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 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.
Significant Transactions and Events
COVID-19 OnMarch 11, 2020 , theWorld Health Organization (WHO) declared the 2019 novel coronavirus (COVID-19) a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having 38 Table of Contents
other underlying health conditions. According to the WHO, up to half of the
COVID-19 related deaths in European countries were individuals residing in
long-term care facilities, similar to the ones we operate in
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, our 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 protocol 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. 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 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. 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 due to the prevalence of chronic medical conditions. In addition, our employees are at higher risk of contracting or spreading the disease due to the nature of the work environment when caring for patients. InMarch 2020 , in an effort to prevent the introduction of COVID-19 into our facilities, and to help control further exposure to infections within communities, we implemented policies restricting visitors at all of our facilities except for essential healthcare personnel and certain 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. Upon confirmation of a positive COVID-19 exposure at a facility, we follow government guidance to minimize further exposure, including implementing 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 occupancy 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 throughMarch 31, 2020 , as well as further developments through the filing date of this Quarterly Report on Form 10-Q, including the impact of emergency legislation, temporary changes to regulations and reimbursement 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, 187 of our 361 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 84% of the patient and resident positive COVID-19 cases have occurred in our facilities located in the states ofNew Jersey ,Connecticut ,Massachusetts ,Pennsylvania andMaryland , which correspond to many of the largest community outbreak areas across the country. Our facilities in these five states represent 43% of our total operating beds. Starting in lateFebruary 2020 , our occupancy began to decrease following efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of COVID-19 cases in their communities. Occupancy was further decreased by implementation of self-imposed admission bans in those facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed 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 We estimate that our net revenues for the three months endedMarch 31, 2020 were not materially impacted by COVID-19 because revenue lost from a decline in occupancy was offset by changes in payor mix and approximately$6 million of COVID-19 related Medicaid reimbursement relief provided by several states in which we operate. 39 Table of Contents The decline in occupancy continued through lateMay 2020 , resulting in our skilled nursing facility operating occupancy decreasing from 88.2% for the three months endedMarch 31, 2020 to 81.9% for the month endedApril 30, 2020 . Operating occupancy for the month endedMay 31, 2020 is projected to be approximately 76%. The impact of COVID-19 on our net revenue for the remainder of 2020 will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the scope and severity of COVID-19 and the actions taken by public and private entities in response to the pandemic. Operating Expenses Beginning in earlyMarch 2020 , we began to incur increases in our 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 three months endedMarch 31, 2020 , we incurred approximately$7 million of incremental operating expense to prepare for and respond to the pandemic. Increases in cost primarily stemmed from elevated 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, medical equipment, food service supplies for staff, enhanced cleaning and environmental sanitation costs and the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Such costs have escalated followingMarch 31, 2020 , and we also expect such costs to include increased workers compensation expense, health plan expense and consulting costs. We estimate that our operating expenses for the month endedApril 30, 2020 grew approximately$21 million due to the COVID-19 pandemic. We are not reasonably able to predict the total amount of costs we will incur related to the pandemic and to what extent such costs will be borne by or offset by actions taken by public and private entities in response to the pandemic. Strategic PartnershipsVantage Point Partnership OnJanuary 10, 2020 , Welltower, Inc. (Welltower) sold the real estate of one skilled nursing facility located inMassachusetts to theVantage Point Partnership . The sale represents the final component of a transaction that occurred onSeptember 12, 2019 , whereby we acquired an approximately 30% membership interest in the real estate of 18 facilities previously leased from Welltower and Second Spring Healthcare Investments. As a result of theJanuary 10, 2020 transaction, we will receive an annual rent credit of$0.7 million from 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 will continue to operate the facility under the master lease agreement with theVantage Point Partnership along with the other 18 facilities.NewGen Partnership OnFebruary 1, 2020 , we transitioned operational responsibility for 19 facilities in the states ofCalifornia ,Washington andNevada toNew Generation Health, LLC (NewGen). We sold the real estate and operations of six skilled nursing facilities and transferred the leasehold rights to 13 skilled nursing, behavioral health and assisted living facilities for$78.7 million . Net transaction proceeds were used by us to repay indebtedness, including prepayment fees, 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. Subsequent toFebruary 1, 2020 , we have applied the equity method of accounting for our 50% interest in these operations.
On
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Divestiture of Non-Strategic Facilities
OnJanuary 31, 2020 , Omega sold the real estate of one skilled nursing facility located inMassachusetts . We leased the facility under a master lease agreement, but closed the facility onJuly 1, 2019 . The sale resulted in a gain on the lease termination of$0.2 million and an annual rent credit of$0.4 million . OnFebruary 1, 2020 , we sold two owned skilled nursing facilities inNorth Carolina and one owned skilled nursing facility inMaryland for$61.8 million . Proceeds were used to retire$29.1 million of HUD financed debt. The three facilities generated revenues of$38.7 million and pre-tax income of$0.5 million . The transactions resulted in a gain on sale of$24.5 million and loss on early extinguishment of debt of$2.6 million . OnFebruary 26, 2020 , we completed the sale of one owned HUD-insured skilled nursing facility inCalifornia for$20.8 million . The facility had been classified as an asset held for sale as ofDecember 31, 2019 . Proceeds were used to retire$20.5 million of HUD financed debt. The facility generated revenues of$14.0 million and pre-tax loss of$0.1 million . See Note 14 - "Assets Held for Sale." The transactions resulted in a gain on sale of$3.0 million and loss on early extinguishment of debt of$0.4 million .
On
OnApril 1, 2020 , we sold two owned skilled nursing facilities inNew Jersey and one owned skilled nursing facility inMaryland for$45.8 million . Proceeds were used to retire$15.2 million of HUD financed debt and$7.5 million of MidCap Real Estate Loans. The three facilities generated annual revenues of$35.8 million and pre-tax income of$0.0 million . The transactions resulted in a gain on sale of$21.8 million and loss on early extinguishment of debt of$1.4 million . All three skilled nursing facilities were classified as assets held for sale as ofMarch 31, 2020 . See Note 14 - "Assets Held For Sale."
On
OnApril 20, 2020 , we divested the operations of four skilled nursing facilities inFlorida and two skilled nursing facilities inMaryland that were subject to a master lease with Second Spring Healthcare Investments. The six facilities generated annual revenues of$62.0 million and pre-tax loss of$2.3 million . The lease termination resulted in an annual rent credit of$8.5 million .
Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue
COVID-19 Regulatory and Reimbursement Relief
OnMarch 18, 2020 , the Families First Coronavirus Response Act was enacted, which provides a temporary 6.2% increase to each qualifying state's Medicaid Federal Medical Assistance Percentage (FMAP) effectiveJanuary 1, 2020 . The temporary FMAP increase will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by theU.S. Department of Health and Human Services (HHS), including any extensions or termination. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporarily increased FMAP is claimed. For the three months endedMarch 31, 2020 , we recognized approximately$6 million of additional FMAP reimbursement relief provided by several states in which we operate. SinceMarch 31, 2020 , a number of additional states in which we operate have implemented incremental FMAP related reimbursement provisions and other forms of support to assist providers, resulting in an additional$21 million of estimated incremental FMAP funding commitments as of the filing date of this Quarterly Report on Form 10-Q. We cannot predict the extent to which further FMAP funding programs will be implemented in the states in which we operate. In further response to the pandemic, onMarch 27, 2020 , the President signed into law the bipartisan Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act allocates$100 billion to aPublic Health and Social Services Emergency Fund to "reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus." Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are 41
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not compensated by another source. The secretary of the HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.
The impacts to us of certain provisions of the CARES Act are summarized below.
· Temporary suspension of certain patient coverage criteria and documentation and
care requirements. The CARES Act and a series of temporary waivers and guidance
issued by the
Medicare patient coverage criteria as well as certain documentation and care
requirements. These accommodations are intended to ensure patients have access
to care notwithstanding the burdens placed on healthcare providers due to the
COVID-19 pandemic. We believe these regulatory actions could contribute to an
increase in census volumes and skilled mix that may not otherwise have
occurred, but cannot provide any assurance as to the impact on our businesses.
· Relief Funds. During April and May 2020 , we received $180 million of reliefgrants from CARES Act funds administered by the 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 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
the relief funds as revenue.
· Medicare Accelerated and Advanced Payment Program. During
requested and received
Payment Program administered by CMS, which was temporarily expanded by the
CARES Act. Under the program, we received an interest-free advancement of 100%
of our Medicare payment amount for a three-month period. Repayments of advanced
payments are required to begin 120 days after their issuance through offsets of
new Medicare claims, and all advanced payments are due 210 days following their
issuance. Repayment of the advances we received will begin in
we will classify the cash receipts as a current liability.
· Payroll Tax Deferral. Under the CARES Act, we may elect to defer payment, on an
interest free basis, of the employer portion of social security payroll taxes
incurred from
amount will become due on each of
elected to utilize this deferral program to delay payment of approximately
million of the employer portion of payroll taxes estimated to be incurred
between
be classified as a liability.
· Temporary Suspension of Medicare Sequestration. The Budget Control Act of 2011
requires a mandatory, across the board reduction in federal spending, called a
sequestration. Medicare fee for service claims with dates of service or dates
of discharge on or after
payments. All Medicare rate payments and settlements have incurred this
mandatory reduction and it will continue to remain in place through at least
2023, unless
Act will temporarily suspend the automatic 2.0% reduction of Medicare claim
reimbursements for the period of
we estimate will increase our revenue $8 million over this time period.
· Employee Retention Tax Credit. We are evaluating our eligibility to claim the
employee retention tax credit under the CARES Act for certain of our employees.
The refundable tax credit is available to employers that fully or partially
suspend operations during any calendar quarter in 2020 due to orders from an
appropriate governmental authority limiting commerce, travel, or group meetings
due to COVID-19, and is equal to 50% of qualified wages paid after
2020 through
services as a result of such orders of a government authority. There can be no
assurances that we will qualify for the program, or the amount of any
refundable tax credit that will be available.
Further, the Paycheck Protection Program and Health Care Enhancement Act was
signed into law on April 24, 2020 . Congress appropriated $75 billion for
healthcare providers through the Paycheck Protection Program and Health Care
Enhancement Act. HHS is distributing this money through the Provider Relief
Fund , and these payments do not need to be repaid. While we believe that the
relief funds received by us to date under the CARES Act have primarily benefited
Medicare providers as opposed to Medicaid providers and have provided limited
support to our rehabilitation therapy services segment, we cannot predict the
extent to which any of our businesses will receive any such additional funds,
and to what extent the financial impact of receiving such funds would
42Table of Contents
effectively offset any shortfall in funds received to date as compared to the escalation in our costs and lost revenue as a result of the broad implications of the pandemic.
COVID-19 Reporting Requirements
OnApril 19, 2020 , CMS announced new regulatory requirements that will require skilled nursing homes report cases of COVID-19 directly to theCDC . This information must be reported in accordance with existing privacy regulations and statues. In addition, skilled nursing homes are required to inform residents, their families and representatives of COVID-19 cases in their facilities; this notification is required to take place by5 PM the next calendar day following the occurrence of a single confirmed infection of COVID-19, or of three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another. Further, theCDC will be providing a reporting tool to skilled nursing homes that will support Federal efforts to collect nationwide data to assist in COVID-19 surveillance and response. There could be civil monetary penalties for not meeting these reporting requirements. OnApril 30, 2020 , CMS announced that it would be convening an independent commission to conduct comprehensive assessments of nursing home responses to the COVID-19 pandemic. The commission will consist of skilled nursing facility residents, families, resident/patient advocates, industry experts, clinicians, medical ethicists, administrators, academicians, infection control and prevention professionals, state and local authorities, and other experts. The commission is expected to develop recommendations specific to (1) protecting residents from COVID-19 and improving the responsiveness of care delivery; (2) strengthening regulations to enable rapid and effective identification and mitigation of COVID-19 transmissions in nursing homes; and (3) enhancing enforcement strategies to improve compliance with infection control policies. Recommendations from the commission will be delivered to CMS and may be incorporated into the regulatory framework applicable to nursing facilities.
Proposed Rule - Medicare Annual Market Basket for Fiscal Year 2021
The proposed rule provides for a net market basket increase for skilled nursing facilities of 2.3 percent beginningOctober 1, 2020 . This market basket update reflects a full market basket increase of 2.7 percentage points, no forecast error correction was incurred, and a 0.4 percentage point multifactor productivity adjustment. CMS estimates that the net market basket update would increase Medicare skilled nursing facility payments by approximately$784 million in fiscal year 2021.
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. 43 Table of Contents "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 toGenesis 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:
Three months ended March 31,
2020 2019
Financial Results (in thousands)
Financial Performance Measures:
Net revenues (GAAP) $ 1,092,250 $ 1,161,640
Net income (loss) attributable to Genesis Healthcare, Inc.
(GAAP) 33,508 (15,263)
EBITDA (Non-GAAP) 100,130 64,680
Adjusted EBITDA (Non-GAAP) 42,859 54,436
Valuation Measure:
Adjusted EBITDAR (Non-GAAP) $ 140,879
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INPATIENT SEGMENT:
Three months ended March 31,
2020 2019
Occupancy Statistics - Inpatient
Available licensed beds in service at end of period 40,601 47,271
Available operating beds in service at end of period 38,834 45,306
Available patient days based on licensed beds 3,693,851 4,313,860
Available patient days based on operating beds 3,530,644 4,135,173
Actual patient days 3,114,081 3,591,045
Occupancy percentage - licensed beds 84.3 % 83.2 %
Occupancy percentage - operating beds 88.2 % 86.8 %
Skilled mix 18.4 % 19.0 %
Average daily census 34,221 39,901
Revenue per patient day (skilled nursing facilities)
Medicare Part A $ 565 $ 526
Insurance 480 454
Private and other 369 358
Medicaid 246 230
Medicaid (net of provider taxes) 224 211
Weighted average (net of provider taxes) $ 294 $ 278
Patient days by payor (skilled nursing facilities)
Medicare 310,295 366,784
Insurance 228,769 279,584
Total skilled mix days 539,064 646,368
Private and other 184,270 189,621
Medicaid 2,213,879 2,556,143
Total Days 2,937,213 3,392,132
Patient days as a percentage of total patient days
(skilled nursing facilities)
Medicare 10.6 % 10.8 %
Insurance 7.8 % 8.2 %
Skilled mix 18.4 % 19.0 %
Private and other 6.3 % 5.6 %
Medicaid 75.3 % 75.4 %
Total 100.0 % 100.0 %
Facilities at end of period
Skilled nursing facilities
Leased 265 314
Owned 19 42
Joint Venture 57 20
Managed 12 12
Total skilled nursing facilities 353 388
Total licensed beds 42,552 47,050
Assisted/Senior living facilities:
Leased 19 20
Owned 1 3
Joint Venture 2 1
Managed 1 2
Total assisted/senior living facilities 23 26
Total licensed beds 1,829 2,209
Total facilities 376 414
Total Jointly Owned and Managed- (Unconsolidated) 32 14
REHABILITATION THERAPY SEGMENT*:
Three months ended March 31,
2020 2019
Revenue mix %:
Company-operated 34.3 % 36.6 %
Non-affiliated 65.7 % 63.4 %
Sites of service (at end of period) 1,137 1,237
Revenue per site $ 140,598 $ 149,821
Therapist efficiency % 70.9 % 68.1 %
--------------------------------------------------------------------------------
* Excludes respiratory therapy services.
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Reasons for Non-GAAP Financial Disclosure
The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). A Non-GAAP Financial Measure is a numerical measure of a registrant's historical or future financial performance, financial position and cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles 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 income (loss) 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 Measures is net income (loss) 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 these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore the extent to which they may or may not be eligible for incentive compensation awards. We also use Non-GAAP Financial Measures in our annual budget process. We believe these Non-GAAP Financial Measures facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors' historical operating performance. The presentation of these Non-GAAP Financial Measures is consistent with our past practice and we believe these measures further enable investors and analysts to compare current Non-GAAP measures with Non-GAAP measures presented in prior periods. Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business. These costs include our lease expense (only in the case of Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses on early extinguishment of debt, transaction costs, long-lived asset 46
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impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributable to noncontrolling interests. Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributable toGenesis Healthcare, Inc. as an important measure of our financial performance because it provides the most complete measure of our performance. Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies. Non-GAAP Financial Measures do not represent net income (loss), as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.
We use the following Non-GAAP Financial Measures that we believe are useful to investors as key valuation and operating performance measures:
EBITDA We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (interest expense) and our asset base (depreciation and amortization expense) from our operating results. In addition, financial covenants in our debt agreements use EBITDA as a measure of compliance. Adjustments to EBITDA We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with GAAP net loss attributable 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 on early extinguishment of debt. We recognize gains or losses on the early
extinguishment of debt when we refinance our debt prior to its original term,
requiring us to write-off any unamortized deferred financing fees. We exclude
the effect of gains or losses recorded on the early extinguishment of debt
because we believe these gains and losses do not accurately reflect the
underlying performance of our operating businesses.
· Other income. We primarily use this income statement caption to capture gains
and losses on the sale or disposition of assets. We exclude the effect of such
gains and losses because we believe they do not accurately reflect the
underlying performance of our operating businesses.
· Transaction costs. In connection with our restructuring, acquisition and
disposition transactions, we incur costs consisting of investment banking,
legal, transaction-based compensation and other professional service costs. We
exclude restructuring, acquisition and disposition related transaction costs
expensed during the period because we believe these costs do not reflect the
underlying performance of our operating businesses.
· Long-lived asset impairments. We exclude non-cash long-lived asset impairment
charges because we believe including them does not reflect the ongoing
performance of our operating businesses. Additionally, such impairment charges
represent accelerated depreciation expense, and depreciation expense is also
excluded from EBITDA.
· 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.
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· Income (loss) of newly acquired, constructed or divested businesses. The
acquisition and construction of new businesses is an element of our growth
strategy. Many of the businesses we acquire have a history of operating losses
and continue to generate operating losses in the months that follow our
acquisition. Newly constructed or developed businesses also generate losses
while in their start-up phase. We view these losses as both temporary and an
expected component of our long-term investment in the new venture. We adjust
these losses when computing Adjusted EBITDA in order to better analyze the
performance of our mature ongoing business. The activities of such businesses
are adjusted when computing Adjusted EBITDA until such time as a new business
generates positive Adjusted EBITDA. The divestiture of underperforming or
non-strategic facilities is also an element of our business strategy. We
eliminate the results of divested facilities beginning in the quarter in which
they become divested. We view the income or losses associated with the
wind-down of such divested facilities as not indicative of the performance of
our ongoing operating business.
· Stock-based compensation. We exclude stock-based compensation expense because
it does not result in an outlay of cash and such non-cash expenses do not
reflect the underlying performance of our operating businesses.
· Impact of COVID-19. We excluded the net impact of the COVID-19 pandemic on our
revenues and expenses for the three months ended
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.
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.
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.
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See the reconciliation of net income (loss) attributable to
Three months ended March 31,
2020 2019
Net income (loss) attributable to Genesis
Healthcare, Inc. $ 33,508 $ (15,263)
Adjustments to compute EBITDA: Net income (loss) attributable to noncontrolling interests 5,173
(9,819)
Depreciation and amortization expense 25,988
38,195
Interest expense 36,240
51,516
Income tax (benefit) expense (779) 51 EBITDA 100,130
64,680
Adjustments to compute Adjusted EBITDA: Loss on early extinguishment of debt 4,039 - Other income (84,832) (16,917) Transaction costs 5,591 1,261 Long-lived asset impairments 9,700 - Severance and restructuring 355 1,446 (Income) loss of newly acquired, constructed, or divested businesses (1,921) 1,879 Stock-based compensation 1,894 2,087 Impact of COVID-19 7,903 - Adjusted EBITDA$ 42,859 $ 54,436 Lease Expense 98,020 94,061 Adjusted EBITDAR$ 140,879 Supplemental information: Cash interest payments on recourse and HUD debt$ 19,380 $
22,449
Cash payments made to partially owned real estate joint ventures, net of distributions received 12,700 - Total cash lease payments made pursuant to operating leases and finance leases$ 93,346 $ 107,628 Results of Operations Same-store Presentation We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare. We are also focused on "right-sizing" our operations to fit that new environment and to divest underperforming and non-strategic assets, many of which were consolidated as part of larger acquisitions in recent years to achieve the net overall growth strategy. We define our same-store inpatient operations as those skilled nursing and assisted/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 high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of that business, a same-store presentation based solely on the contract or gym count does not provide an accurate depiction of the business. Accordingly, we do not reference same-store figures in this MD&A with regard to that business. The volume of services delivered in our other services businesses can also be affected by strategic transactional activity. To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion. 49 Table of Contents
Impact of COVID-19 on Results of Operations
The COVID-19 pandemic will impact the comparability of our 2020 financial results with those of other periods. That reduced comparability will be highlighted in the discussion of our results of operations, separate from our same-store presentation. For more information about the COVID-19 pandemic and its impact on our results of operations and financial position, see "COVID-19" described more fully in this MD&A.
Three Months Ended
A summary of our unaudited results of operations for the three months endedMarch 31, 2020 as compared with the same period in 2019 follows (in thousands, except percentages): Three months ended March 31, 2020 2019 Increase / (Decrease) Revenue Revenue Revenue Revenue Dollars Percentage Dollars Percentage Dollars Percentage Revenues: Inpatient services: Skilled nursing facilities$ 929,873 85.1 % $
982,396 84.6 %
21,822 2.0 % 23,649 2.0 % (1,827) (7.7) %
Administration of third party facilities 2,041 0.2 % 2,247 0.2 % (206) (9.2) %
Elimination of administrative services (786) (0.1) % (800) - % 14 1.8 %
Inpatient services, net 952,950 87.2 % 1,007,492 86.8 % (54,542) (5.4) %
Rehabilitation therapy services: Total therapy services 164,796 15.1 %
195,071 16.8 % (30,275) (15.5) % Elimination of intersegment rehabilitation therapy services
(59,327) (5.4) % (74,231) (6.4) % 14,904 20.1 %
Third party rehabilitation
therapy services, net 105,469 9.7 % 120,840 10.4 % (15,371) (12.7) %
Other services:
Total other services 54,823 5.0 % 42,118 3.6 % 12,705 30.2 %
Elimination of intersegment other
services (20,992) (1.9) % (8,810) (0.8) % (12,182) (138.3) % Third party other services, net
33,831 3.1 % 33,308 2.8 % 523 1.6 %
Net revenues $ 1,092,250 100.0 % $ 1,161,640 100.0 % $ (69,390) (6.0) %
Three months ended March 31,
2020 2019 Increase / (Decrease)
Margin Margin
Dollars Percentage Dollars Percentage Dollars Percentage
EBITDA:
Inpatient services $ 125,598 13.2 % $ 73,473 7.3 % $ 52,125 70.9 %
Rehabilitation therapy services 21,413 13.0 % 26,768 13.7 % (5,355) (20.0) % Other services
727 1.3 % (322) (0.8) % 1,049 325.8 %
Corporate and eliminations (47,608) - % (35,239) - % (12,369) (35.1) %
EBITDA $ 100,130 9.2 % $ 64,680 5.6 % $ 35,450 54.8 %
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A summary of our unaudited condensed consolidating statement of operations
follows (in thousands):
Three months ended March 31, 2020
Rehabilitation
Inpatient Therapy Other
Services Services Services Corporate Eliminations Consolidated
Net revenues $ 953,736 $ 164,796 $ 54,039 $ 784 $ (81,105) $ 1,092,250
Salaries, wages and benefits 411,042 134,569 34,922 - - 580,533
Other operating expenses 395,526 8,502 17,683 - (81,230) 340,481
General and administrative costs - - - 39,617 - 39,617
Lease expense 96,982 312 427 299 - 98,020
Depreciation and amortization expense 21,634 1,686 198 2,489 (19) 25,988
Interest expense 13,566 14 10 23,830 (1,180) 36,240
Loss on early extinguishment of debt - - - 4,039 - 4,039
Investment income - - - (2,336) 1,180 (1,156)
Other (income) loss (85,112) - 280 - - (84,832)
Transaction costs - - - 5,591 - 5,591
Long-lived asset impairments 9,700 - - - - 9,700
Equity in net income of unconsolidated affiliates - - - 188 (61) 127
Income (loss) before income tax benefit 90,398 19,713 519 (72,933) 205 37,902
Income tax benefit - - - (779) - (779)
Net income (loss) $ 90,398 $ 19,713 $ 519 $ (72,154) $ 205 $ 38,681
Three months ended March 31, 2019
Rehabilitation
Inpatient Therapy Other
Services Services Services Corporate Eliminations Consolidated
Net revenues $ 1,008,292 $ 195,071 $ 42,065 $ 53 $ (83,841) $ 1,161,640
Salaries, wages and benefits 456,762 157,092 28,556 - - 642,410
Other operating expenses 401,932 10,957 13,489 - (83,840) 342,538
General and administrative costs - - - 35,532 - 35,532
Lease expense 92,966 330 342 423 - 94,061
Depreciation and amortization expense 31,872 3,164 174 2,985 - 38,195
Interest expense 27,040 14 9 24,453 - 51,516
Investment income - - - (1,864) - (1,864)
Other income (16,841) (76) - - - (16,917)
Transaction costs - - - 1,261 - 1,261
Equity in net (income) loss of unconsolidated
affiliates - - - (524) 463 (61)
Income (loss) before income tax expense 14,561 23,590 (505) (62,213) (464) (25,031)
Income tax expense - - - 51 - 51
Net income (loss) $ 14,561 $ 23,590 $ (505) $ (62,264) $ (464) $ (25,082)
Net Revenues
Net revenues for the three months ended
Inpatient Services - Revenue decreased$54.5 million , or 5.4%, in the three months endedMarch 31, 2020 as compared with the same period in 2019. On a same-store basis, inpatient services revenue increased$52.9 million , or 6.1%, excluding 68 divested underperforming facilities and the acquisition or development of 2 additional facilities. Included in the same-store revenue increase is$9.9 million related to a new provider tax program in the state ofNew Mexico , which was not in place for the corresponding period in 2019. An additional$12.3 million of the increase in the three months endedMarch 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. During the three months endedMarch 31, 2020 , and more specifically during the month of March, the inpatient service revenues were negatively impacted by COVID-19, resulting in a reduction of$0.8 million as compared with the same period in 2019. The remaining$31.2 million same-store increase is due to increasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the skilled mix of our inpatient facilities. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings. While overall census recovered as compared with the preceding year, the skilled mix continued to decline. For the three months endedMarch 31, 2020 , we saw overall same-store occupancy rates exceed that of the same period in 2018 by nearly 120 basis points. However, at the 51
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same time, same-store skilled mix for the three months ended
For an expanded discussion regarding the factors influencing our operating census and challenges to our ability to grow inpatient service revenues, see Item 1, "Business - Industry Trends" in our Annual Report on Form 10-K filed with theSEC , "Key Performance and Valuation Measures" in this MD&A for quantification of the census trends and revenue per patient day as well as "COVID-19" in this MD&A. Rehabilitation Therapy Services - Revenue decreased$15.4 million , or 12.7% comparing the three months endedMarch 31, 2020 with the same period in 2019. Of that decrease,$7.3 million is due to lost contract business, offset by$6.9 million attributed to new contracts. COVID-19 began to impact the skilled nursing customers of our rehabilitation services at an accelerating rate byMarch 2020 , resulting in a decrease of revenue of$2.9 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. The remaining decrease of$12.1 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$0.5 million , or 1.6% in the three months endedMarch 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 ourAccountable Care Organization (ACO). In the three months endedMarch 31, 2020 and 2019, the ACO did not recognize any revenue under the Medicare Shared Savings Program (MSSP). We are participating in the MSSP in 2020; however, uncertainty around how the 2020 MSSP will perform in light of COVID-19 precludes us from recognizing any savings to the Medicare program at this stage. Revenue in our physician services business increased$1.5 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. The remaining decrease of revenue of$1.0 million is in our staffing services business, which has shifted its focus to developing its services to our affiliated nursing facilities and therapy gyms. While the staffing business gross revenue has increased over 43% in the three months endedMarch 31, 2020 as compared with the same period in 2019, its revenue from external customers has decreased 9.1% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and, if successful, it will provide a benefit to our inpatient and rehabilitation therapy segments to combat a historically strong labor market and accelerating wage pressures. EBITDA EBITDA for the three months endedMarch 31, 2020 increased by$35.5 million , or 54.8%, as compared with the three months endedMarch 31, 2019 . Excluding the impact of loss on early extinguishment of debt, other (income) loss, transaction costs and long-lived asset impairments, EBITDA decreased$14.4 million , or 29.4% 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 increased by$52.1 million , or 70.9% for the three months endedMarch 31, 2020 as compared with the same period in 2019. Excluding the impact of other (income) loss and long-lived asset impairments, EBITDA as adjusted decreased$6.4 million , or 11.4% when compared with the same period in 2019. On a same-store basis, the inpatient EBITDA as adjusted increased$3.9 million . Of that same-store increase, lease expense increased$4.3 million , primarily due to lease amendments in 2019 resulting in certain financing leases being reclassified as operating leases. Our self-insurance programs, including general and professional liability, workers' compensation and health insurance benefits, resulted in a decrease of$5.3 million EBITDA as adjusted in the three months endedMarch 31, 2020 as compared with the same period in 2019. While our self-insurance programs are performing as anticipated and within normal claims reporting patterns of our same-store operations, the provision for general and professional liability recorded in the comparable period in 2019 reflects the favorable claims development and accelerated claims settlement initiative in the prior year. COVID-19 has resulted in same-store reduction in EBITDA of$4.4 million as a result of the impact on our operating census and escalating costs of caring for our skilled nursing patients in buildings with a COVID-19 positive population. Same-store staffing costs, net of nursing agency and other purchased services and adjusted for the impact of COVID-19, increased$30.3 million . Nursing wage inflation increased 5.7% while non-nursing wage inflation increased 2.7% in the three months endedMarch 31, 2020 as compared with the same period in 2019. The introduction of the new provider tax program inNew Mexico resulted in an increase of EBITDA of$4.7 million compared to the same period in 2019 before the program was enacted. The remaining$41.5 million increase in EBITDA, as adjusted, of the segment is attributed to ongoing expense management, reduced therapy services cost due to the implementation of PDPM and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix of our inpatient facilities described above under "Net Revenues." 52 Table of Contents Rehabilitation Therapy Services - EBITDA decreased by$5.4 million , or 20.0%, for the three months endedMarch 31, 2020 as compared with the same period in 2019. Lost therapy contracts exceeded new contracts by$1.6 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. COVID-19 resulted in a decrease of EBITDA of$2.4 million in the three months endedMarch 31, 2020 . The remaining decrease of$1.4 million is principally attributed to reduced service volume and pricing to existing customers related to the implementation of PDPM, partially offset by overhead cost reductions. Therapist efficiency improved to 70.9% in the three months endedMarch 31, 2020 compared with 68.1% in the comparable period in the prior year. Other Services - EBITDA increased$1.0 million , or 325.8%, for the three months endedMarch 31, 2020 as compared with the same period in 2019. The EBITDA of our staffing services business increased$1.1 million in the three months endedMarch 31, 2020 as compared with the same period in 2019, principally due to growth in its services with affiliated customers. The remaining decrease of$0.1 million pertains to our physician services business. Corporate and Eliminations - EBITDA decreased$12.4 million , or 35.1%, for the three months endedMarch 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$8.4 million of the net decrease in EBITDA. Corporate overhead costs increased$4.1 million , or 11.5%, in the three months endedMarch 31, 2020 as compared with the same period in 2019. This increase is principally due to investments in information technology and related upgrades. The remaining increase in EBITDA of$0.1 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments. Other (income) loss - Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other (income) loss for the three months endedMarch 31, 2020 principally represents gains on sales of real estate and leasehold rights in the period. See also Note 12 - "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 three months endedMarch 31, 2020 and 2019 were$5.6 million and$1.3 million , respectively. Long-lived asset impairments - In the three months endedMarch 31, 2020 , we recognized impairments of property and equipment and right-of-use (ROU) assets of$9.7 million . For more information about the conditions of the business which contributed to these impairments, see "Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue" and "Financial Condition and Liquidity Considerations" in this MD&A, as well as Note 13 - "Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life." Other Expense The following discussion applies to the consolidated expense categories between EBITDA and net income (loss) of all reportable segments, corporate and eliminations in our consolidating statement of operations for the three months endedMarch 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 lease ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased$12.2 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. On a same-store basis, depreciation and amortization decreased$10.8 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. In the inpatient services segment,$9.9 million of the decrease is principally due to prior year acceleration offset by current year acceleration related to multiple lease transactions. The remaining$0.9 million of decrease is principally due to asset impairments and assets reaching the end of their depreciable term. 53 Table of Contents 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. Interest expense decreased$15.3 million in the three months endedMarch 31, 2020 as compared with the same period 2019. On a same-store basis, interest expense is down$12.3 million in the three months endedMarch 31, 2020 as compared with the same period in 2019. An increase of$4.1 million of interest expense is attributed to consolidating debt and the associated interest expense of two real-estate partnerships in 2019, 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 9 - "Long-Term Debt." The remaining decrease in interest expense of$16.4 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 benefit - For the three months endedMarch 31, 2020 , we recorded income tax benefit of$0.8 million from continuing operations representing an effective tax rate of (2.1)% compared to an income tax benefit of$0.1 million from continuing operations, representing an effective tax rate of (0.2)% for the same period in 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. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As ofMarch 31, 2020 , we have determined that the valuation allowance is still necessary.
Net Income (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 three months endedMarch 31, 2020 as compared with the same period in 2019. Net income (loss) attributable to noncontrolling interests - OnFebruary 2, 2015 ,FC-GEN Operations Investment, LLC (FC-GEN) combined withSkilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 8.5 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 33.7%. For the three months endedMarch 31, 2020 and 2019, income (loss) of$5.9 million and$(10.3) million , respectively, has been attributed to the Class C common stock. In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable toGenesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the three months endedMarch 31, 2020 and 2019, (loss) income of$(0.7) million and$0.4 million , respectively, has been attributed to these unaffiliated third parties.
Liquidity and Capital Resources
Cash Flow and Liquidity
The following table presents selected data from our consolidated statements of
cash flows (in thousands):
Three months ended March 31,
2020 2019
Net cash provided by operating activities $ 15,250 $ 12,146
Net cash provided by (used in) investing activities 114,936 (203,419)
Net cash (used in) provided by financing activities (134,439) 147,501
Net decrease in cash, cash equivalents and restricted
cash and equivalents (4,253) (43,772)
Beginning of period 125,806 142,276
End of period $ 121,553 $ 98,504
Net cash provided by operating activities in the three months ended March 31,
2020 increased $3.1 million compared with the same period in 2019. The three
months ended March 31, 2020 are highlighted by a decrease in cash used of $26.0
million for
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payments on accounts payable and other accrued expenses and other partially
offset by a decrease in cash provided of
Net cash provided by investing activities in the three months endedMarch 31, 2020 was$114.9 million compared to net cash used in investing activities of$203.4 million in the three months endedMarch 31, 2019 . Routine capital expenditures for the three months endedMarch 31, 2020 decreased by$2.3 million as compared with the same period in the prior year. Net sales and maturities of marketable securities of$7.1 million in 2020 exceeded net purchases of marketable securities of$6.4 million in 2019, resulting in a net change in cash provided of$13.5 million . In the three months endedMarch 31, 2020 , there were asset purchases of$9.1 million as a result of the acquisition of one skilled nursing facility by the consolidatedVantage Point Partnership as described in "Significant Transaction and Events - Strategic Partnerships -Vantage Point Partnership " compared to asset sales of$161.4 million comprised of the real property of 10 owned facilities and leasehold rights of 13 leased facilities described in "Significant Transaction and Events - Strategic Partnerships -NewGen Partnership ". In the three months endedMarch 31, 2019 , there were asset purchases of$252.5 million by the consolidatedNext 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. The three months endedMarch 31, 2020 also included cash used of$14.9 million for an investment in a new joint venture and cash used of$9.0 million extending the new joint venture a loan as described in "Significant Transaction and Events - Strategic Partnerships -NewGen Partnership ." The remaining incremental source of cash in the three months endedMarch 31, 2020 as compared to the same period in the prior year of$0.7 million was due primarily to restricted deposit activity. Net cash used in financing activities in the three months endedMarch 31, 2020 was$134.4 million compared to net cash provided by financing activities of$147.5 million in the three months endedMarch 31, 2019 . The net increase in cash used in financing activities of$281.9 million is principally attributed to debt repayments exceeding debt borrowings in the three months endedMarch 31, 2020 as compared to the same period in 2019. In the three months endedMarch 31, 2020 , we had proceeds from the issuance of debt of$7.3 million by the consolidatedVantage Point Partnership . In the three months endedMarch 31, 2019 , we had proceeds from the issuance of debt of$170.6 million primarily from the consolidatedNext Partnership . Repayment of long-term debt in the three months endedMarch 31, 2020 was$89.7 million compared to$4.5 million in the same period of the prior year. In the three months endedMarch 31, 2020 , we repaid$59.3 million in HUD-insured loans,$14.1 million inMidCap Real Estate Loans,$9.0 million in Welltower Real Estate Loans and$6.0 million in a short-term note payable using proceeds from the sale of 10 facilities. The remaining decrease in cash used to repay long-term debt of$3.2 million relates to a decrease in routine debt payments. In the three months endedMarch 31, 2020 , we had net repayments under the revolving credit facilities of$50.1 million as compared with$31.7 million of net repayments under the revolving credit facilities in the same period in 2019. In the three months endedMarch 31, 2020 , we paid debt issuance costs of$0.2 million from the consolidatedVantage Point Partnership . In the three months endedMarch 31, 2019 , we paid debt issuance costs of$3.7 million from the consolidatedNext Partnership . In the three months endedMarch 31, 2019 , we received contributions from a noncontrolling interest for$18.5 million resulting from the aforementionedNext Partnership .
Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our asset based lending facilities (ABL Credit Facilities).
The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allow 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.
AtMarch 31, 2020 , we had total liquidity of$94.4 million consisting of cash on hand of$62.3 million and available borrowings under our ABL Credit Facilities of$32.1 million . During the three months endedMarch 31, 2020 , we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities. COVID-19 Impact on Liquidity We have taken, and will continue to take, actions to enhance and preserve our liquidity in response to the pandemic. SinceMarch 31, 2020 , our historical sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the CARES Act. Specifically, inApril 2020 , we applied for and received$158 million of advanced Medicare payments and in April andMay 2020 we received approximately$180 million of relief grants. In addition, we have elected to implement the CARES Act payroll tax deferral program, which is expected to preserve on an interest free basis 55 Table of Contents approximately$90 million of cash representing the employer portion of payroll taxes estimated to be incurred betweenMarch 27, 2020 andDecember 31, 2020 . The advance Medicare payments, which are also interest free, will be repaid betweenAugust 2020 andNovember 2020 , 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$27 million . We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses, continuing to evaluate our capital structure 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. Financing Activities
Divestiture of Non-Strategic Facilities
Consistent with our strategy to divest assets in non-strategic markets, we have exited 39 inpatient operations, including 32 skilled nursing facilities, two assisted/senior living facilities and five behavioral health centers in eight states beginningJanuary 1, 2020 throughMay 15, 2020 , including:
· 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 center and one assisted living facility.
· 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 California to NewGen on May 15, 2020 .
Financial Covenants
The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate
Loans (collectively, the Credit Facilities) each contain a number of financial,
affirmative and negative covenants, including a maximum leverage ratio, a
minimum interest coverage ratio, a minimum fixed charge coverage ratio and
minimum liquidity. At March 31, 2020 , we were in compliance with all of the
financial covenants contained in the Credit Facilities.
We have master lease agreements with Welltower, Omega and Second Spring
Healthcare Investments (collectively, the Master Lease Agreements). Our Master
Lease Agreements each contain a number of financial, affirmative and negative
covenants, including a maximum leverage ratio, a minimum fixed charge coverage
ratio, and minimum liquidity. At March 31, 2020 , we were in compliance with the
covenants contained in the Master Lease Agreements.
We have two master lease agreements with Cindat Best Years Welltower JV LLC
involving 28 of our facilities. We did not meet certain financial covenants
contained in one of the master lease agreements involving two of our facilities
at March 31, 2020 . On May 4, 2020 , we received a waiver for these covenant
breaches through July 1, 2021 . At March 31, 2020 , we are in compliance with the
financial covenants contained in the other master lease agreement.
At March 31, 2020 , we did not meet certain financial covenants contained in one
lease related to two of our facilities. We are, and expect to continue to be,
current in the timely payment of our obligations under such leases. These leases
do not have cross-default provisions, nor do they trigger cross-default
provisions in any of our other loan or lease agreements. We will continue to
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work with the related credit parties to amend such leases and the related
financial covenants. We do not believe the breach of such financial covenants
has a material adverse impact on us at
Our ability to maintain compliance with our covenants depends in part on management's ability to increase revenue and control costs, and the extent to which our efforts and the impact of government-sponsored financial relief related to the COVID-19 pandemic aqequately offset lost revenue and higher costs caused by the pandemic. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with our quarterly covenant compliance requirements. Should we fail to comply with our covenants at a future measurement date, we would, absent necessary and timely waivers and/or amendments, be in default under certain of our existing credit agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on our financial position. Concentration of Credit Risk We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations as we are, resulting in a concentration of risk. These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engage in similar business activities or have 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 we have over 140 distinct customers, many being chain operators with more than one location. One customer, which is a related party of ours, comprises$30.1 million , or approximately 36%, of the gross outstanding contract receivables in the rehabilitation services business atMarch 31, 2020 . See Note 11 - "Related Party Transactions." A future adverse event impacting this customer or several other large customers resulting in their insolvency or other economic distress would have a material impact on us.
Financial Condition and Liquidity Considerations
The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (May 27, 2020 ). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due beforeMay 27, 2021 . Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about our ability to continue as a going concern for 12 months following the date of issuance of these financial statements (May 27, 2020 ). Our results of operations continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years and more recently by the COVID-19 pandemic. This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers. In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment and with respect to COVID-19, we have access to certain grants and subsidy programs by federal and state governments. These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments, persists. We expect to continue to pursue cost mitigation and other strategies in response to the operating environment and liquidity requirements. Although we are and project to be in compliance with all of our material debt and lease covenants throughMay 27, 2021 , the ongoing uncertainty related to the impact of the COVID-19 pandemic and ongoing healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with the covenants. Should we fail to comply with our debt and lease covenants at a future measurement date we could, absent necessary and timely waivers and/or amendments, be in default under 57 Table of Contents
certain of our existing debt and lease agreements. To the extent any cross-default provisions apply, the default could have a more significant impact on our financial position.
Risk and Uncertainties Although we are in compliance and project to be in compliance with our material debt and lease covenants, the ongoing uncertainty related to the impact of the COVID-19 pandemic and ongoing healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with our covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010, among others.
There can be no assurance that the confluence of these and other factors will not impede our ability to meet our debt and lease covenants in the future.
Off-Balance Sheet Arrangements
As ofMarch 31, 2020 , we were subject to two lease guarantees whereby we guarantee all payments and performance obligations of two facilities leased by theNewGen Partnership . As ofMarch 31, 2020 , the two leases have undiscounted cash rent obligations remaining of$29.4 million . As ofDecember 31, 2019 , we were 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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