Genesis Healthcare, Inc. - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015.


☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-33459

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-3934755
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

101 East State Street
Kennett Square, Pennsylvania		19348
(Address of principal executive offices)		(Zip Code)

(610) 444-6350

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐
(do not check if smaller reporting company)

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 5, 2015, was:

Class A common stock, $0.001 par value – 73,591,665 shares

Class B common stock, $0.001 par value – 15,511,603 shares

Class C common stock, $0.001 par value – 64,449,380 shares

Table of Contents

Genesis Healthcare, Inc.

Form 10-Q

Index


		Page Number
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets — September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Operations — Three and nine months ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income (Loss) — Three and nine months ended September 30, 2015 and 2014	5
	Consolidated Statements of Stockholders’ Deficit – September 30, 2015, December 31, 2014 and 2013	6
	Consolidated Statements of Cash Flows — Nine months ended September 30, 2015 and 2014	7
	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	57

Part II.	Other Information

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosures	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

Signatures		60

Exhibit Index		61

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	September 30,		December 31,
	2015		2014

Assets:
Current assets:
Cash and cash equivalents	$	59,671	$	87,548
Restricted cash and investments in marketable securities		51,449		38,211
Accounts receivable, net of allowances for doubtful accounts of $171,889 and $133,529 at September 30, 2015 and December 31, 2014		759,305		605,830
Prepaid expenses		83,674		72,873
Other current assets		47,404		33,511
Deferred income taxes		2,657		58,213
Total current assets		1,004,160		896,186
Property and equipment, net of accumulated depreciation of $589,780 and $502,176 at September 30, 2015 and December 31, 2014		3,965,527		3,493,250
Restricted cash and investments in marketable securities		135,404		108,529
Other long-term assets		161,520		140,119
Deferred income taxes		191,276		160,531
Identifiable intangible assets, net of accumulated amortization of $62,550 and $42,661 at September 30, 2015 and December 31, 2014		219,028		173,112
Goodwill		444,446		169,681
Total assets	$	6,121,361	$	5,141,408
Liabilities and Stockholders' Deficit:
Current liabilities:
Current installments of long-term debt	$	12,453	$	12,518
Capital lease obligations		1,843		2,875
Financing obligations		1,026		1,138
Accounts payable		201,800		194,508
Accrued expenses		193,668		125,831
Accrued compensation		222,689		192,838
Self-insurance reserves		146,884		130,874
Total current liabilities		780,363		660,582
Long-term debt		1,036,882		525,728
Capital lease obligations		1,053,547		1,002,762
Financing obligations		2,993,670		2,911,200
Deferred income taxes		—		19,215
Self-insurance reserves		430,742		355,344
Other long-term liabilities		132,553		124,067
Commitments and contingencies
Stockholders’ deficit:
Class A common stock, (par $0.001, 175,000,000 shares authorized, issued and outstanding - 73,591,665 and 49,864,878 at September 30, 2015 and December 31, 2014, respectively)		74		50
Class B common stock, (par $0.001, 30,000,000 shares authorized, issued and outstanding - 15,511,603 and 0 at September 30, 2015 and December 31, 2014, respectively)		16		—
Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 64,449,380 and 0 at September 30, 2015 and December 31, 2014, respectively)		64		—
Additional paid-in-capital		293,330		143,492
Accumulated deficit		(466,112)		(603,254)
Accumulated other comprehensive income		327		515
Total stockholders’ deficit before noncontrolling interests		(172,301)		(459,197)
Noncontrolling interests		(134,095)		1,707
Total stockholders' deficit		(306,396)		(457,490)
Total liabilities and stockholders’ deficit	$	6,121,361	$	5,141,408

See accompanying notes to the unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net revenues	$	1,416,027	$	1,187,618	$	4,178,503	$	3,574,813
Salaries, wages and benefits		833,415		723,586		2,445,074		2,162,064
Other operating expenses		332,918		265,283		993,715		798,432
General and administrative costs		46,110		36,341		131,126		108,187
Provision for losses on accounts receivable		23,346		17,285		68,855		52,881
Lease expense		37,655		32,921		113,033		98,629
Depreciation and amortization expense		62,505		48,701		176,043		145,131
Interest expense		128,538		112,121		376,236		330,771
(Gain) loss on early extinguishment of debt		(3,104)		—		130		679
Investment income		(353)		(1,468)		(1,200)		(2,847)
Other loss (income)		38		30		(7,522)		(637)
Transaction costs		3,306		1,736		92,016		5,283
Skilled Healthcare loss contingency expense		30,000		—		31,500		—
Equity in net (income) loss of unconsolidated affiliates		(640)		207		(1,153)		(139)
Loss before income tax benefit		(77,707)		(49,125)		(239,350)		(123,621)
Income tax benefit		(16,726)		(6,518)		(26,793)		(9,368)
Loss from continuing operations		(60,981)		(42,607)		(212,557)		(114,253)
Gain (loss) from discontinued operations, net of taxes		39		(1,191)		(1,571)		(5,561)
Net loss		(60,942)		(43,798)		(214,128)		(119,814)
Less net loss (income) attributable to noncontrolling interests		31,990		(961)		53,424		(1,370)
Net loss attributable to Genesis Healthcare, Inc.	$	(28,952)	$	(44,759)	$	(160,704)	$	(121,184)
Loss per common share:
Basic and diluted:
Weighted-average shares outstanding for basic and diluted loss from continuing operations per share		89,213		49,865		84,615		49,865
Basic and diluted net loss per common share:
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(0.32)	$	(0.88)	$	(1.88)	$	(2.32)
Loss from discontinued operations		0.00		(0.02)		(0.02)		(0.11)
Net loss attributable to Genesis Healthcare, Inc.	$	(0.32)	$	(0.90)	$	(1.90)	$	(2.43)

See accompanying notes to the unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014

Net loss	$	(60,942)	$	(43,798)	$	(214,128)	$	(119,814)
Net unrealized gain (loss) on marketable securities, net of tax		15		(879)		48		(493)
Comprehensive loss		(60,927)		(44,677)		(214,080)		(120,307)
Less: comprehensive loss (income) attributable to noncontrolling interests		31,984		(961)		53,342		(1,370)
Comprehensive loss attributable to Genesis Healthcare, Inc.	$	(28,943)	$	(45,638)	$	(160,738)	$	(121,677)

See accompanying notes to the unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(IN THOUSANDS)

(UNAUDITED)


														Accumulated
														other						Total
	Class A Common Stock			Class B Common Stock			Class C Common Stock			Additional		Accumulated		comprehensive		Stockholders'		Noncontrolling		stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		paid-in capital		deficit		income (loss)		deficit		interests		deficit
Balance at December 31, 2013	49,865	$	50	—	$	—	—	$	—	$	161,452	$	(349,269)	$	1,068	$	(186,699)	$	2,818	$	(183,881)
Net loss	—		—	—		—	—		—		—		(253,985)		—		(253,985)		2,456		(251,529)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		(553)		(553)		—		(553)
Distributions to stockholders	—		—	—		—	—		—		(17,960)		—		—		(17,960)		—		(17,960)
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(3,567)		(3,567)
Balance at December 31, 2014	49,865	$	50	—	$	—	—	$	—	$	143,492	$	(603,254)		515	$	(459,197)	$	1,707	$	(457,490)
Combination share conversion	23,727		24	15,512		16	64,449		64		130,530		297,846		(154)		428,326		(80,186)		348,140
Net loss	—		—	—		—	—		—		—		(160,704)		—		(160,704)		(53,424)		(214,128)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		(34)		(34)		82		48
Share based compensation	—		—	—		—	—		—		26,467		—		—		26,467		—		26,467
Acquisition of a noncontrolling interest	—		—	—		—	—		—		(7,159)		—		—		(7,159)		7,159		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(9,433)		(9,433)
Balance at September 30, 2015	73,592	$	74	15,512	$	16	64,449	$	64	$	293,330	$	(466,112)	$	327	$	(172,301)	$	(134,095)	$	(306,396)

See accompanying notes to the unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Nine months ended September 30,
	2015		2014
Cash flows from operating activities
Net loss	$	(214,128)	$	(119,814)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Non-cash interest and leasing arrangements, net		69,525		64,681
Other non-cash charges and gains, net		(10,450)		4,029
Share based compensation		27,852		—
Depreciation and amortization		176,187		147,798
Provision for losses on accounts receivable		68,829		53,611
Equity in net income of unconsolidated affiliates		(1,153)		(139)
Provision for deferred taxes		(36,714)		(24,257)
Changes in assets and liabilities:
Accounts receivable		(102,226)		(40,664)
Accounts payable and other accrued expenses and other		17,329		119
Net cash (used in) provided by operating activities		(4,949)		85,364
Cash flows from investing activities:
Capital expenditures		(65,493)		(52,108)
Purchases of marketable securities		(27,519)		(27,195)
Proceeds on maturity or sale of marketable securities		19,703		25,291
Net change in restricted cash and equivalents		(12,303)		(12,601)
Sale of investment in joint ventures		26,358		—
Sales of assets		1,263		1,949
Purchases of assets		(11,598)		(1,816)
Other, net		1,656		(1,155)
Net cash used in investing activities		(67,933)		(67,635)
Cash flows from financing activities:
Borrowings under revolving credit facility		589,500		466,000
Repayments under revolving credit facility		(529,000)		(432,000)
Proceeds from issuance of long-term debt		361,101		960
Proceeds from tenant improvement draws under lease arrangements		2,033		5,121
Repayment of long-term debt		(351,420)		(13,799)
Debt issuance costs		(17,776)		(14,327)
Distributions to noncontrolling interests		(9,433)		(17,530)
Net cash provided by (used in) financing activities		45,005		(5,575)
Net (decrease) increase in cash and cash equivalents		(27,877)		12,154
Cash and equivalents:
Beginning of period		87,548		61,413
End of period	$	59,671	$	73,567
Supplemental cash flow information:
Interest paid	$	308,029	$	276,155
Taxes paid		18,983		5,584
Non-cash financing activities:
Capital leases	$	56,766	$	13,096
Financing obligations		27,500		66,380
Assumption of long-term debt		436,887		—

See accompanying notes to the unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1)General Information

Description of Business

Genesis Healthcare, Inc. is a healthcare services company that through its subsidiaries (collectively, the Company) owns and operates skilled nursing facilities, assisted living facilities, hospices, home health providers and a rehabilitation therapy business. The Company has an administrative service company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. The Company provides inpatient services through 509 skilled nursing, assisted living and behavioral health centers located in 34 states. Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 85% of its revenues.

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 12% of the Company’s revenues.

The Company provides an array of other specialty medical services, including management services, physician services, staffing services, hospice and home health services, and other healthcare related services, which comprise the balance of the Company’s revenues.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by U.S. GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the SEC) on Form 8-K on July 24, 2015. The accompanying consolidated balance sheet at December 31, 2014 was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

Certain prior year amounts have been reclassified to conform to current period presentation, the effect of which was not material.

The Company’s financial position at September 30, 2015 includes the impact of the Combination (as defined in Note 3 – “Significant Transactions and Events – The Combination with Skilled”), which has been accounted for as a reverse acquisition using the acquisition method effective February 2, 2015.

Recent Accounting Pronouncements

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. The Company is still evaluating the effect, if any, ASU 2014-09 will have on the Company’s consolidated financial condition and results of operations.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02), which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new guidance excludes money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940 and similar entities from the U.S. GAAP consolidation requirements. The adoption of ASU 2015-02 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. If adopted in an interim period, this ASU must be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU No. 2015-02 is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, (ASU 2015-03) and in August 2015 issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-03 requires an entity to present debt issuance costs as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The costs will continue to be amortized to interest expense using the effective interest method. While ASU 2015-03 addresses costs related to term debt, ASU No. 2015-15 provides clarification regarding costs to secure revolving lines of credit, which are, at the outset, not associated with an outstanding borrowing. ASU 2015-15 provides commentary that the SEC staff would not object to an entity deferring and presenting costs associated with line-of-credit arrangements as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement. The adoption of ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. This ASU requires retrospective application to all prior periods presented in the financial statements. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The adoption of ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company is still evaluating the effect, if any, ASU 2015-16 will have on the Company’s consolidated financial condition and results of operations.

(2)Certain Significant Risks and Uncertainties

Revenue Sources

The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services segment derives approximately 80% of its revenue from Medicare and various state Medicaid programs.

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business. The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Accordingly, there can be no assurance that the impact of any future healthcare legislation or regulation will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations are and will continue to be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Laws and regulations governing the Medicare and Medicaid programs, and the Company’s business generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations. However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend against, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from participation in the Medicare and/or Medicaid programs. The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on February 20, 2015.

(3)Significant Transactions and Events

The Combination with Skilled

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled) entered into a Purchase and Contribution Agreement with FC-GEN Operations Investment, LLC (FC-GEN) pursuant to which the businesses and operations of FC-GEN and Skilled were combined (the Combination). On February 2, 2015, the Combination was completed.

The following diagram depicts the organizational structure of the Company at the time of the Combination:

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Upon completion of the Combination, the Company began operating under the name Genesis Healthcare, Inc. and the Class A common stock of the combined company continues to trade on the NYSE under the symbol “GEN”. Upon the closing of the Combination, the former owners of FC-GEN held 74.25% of the economic interests in the combined entity and the former shareholders of Skilled held the remaining 25.75% of the economic interests in the combined entity post-transaction, in each case on a fully-diluted, as-exchanged and as-converted basis. Under applicable accounting standards, FC-GEN was the accounting acquirer in the Combination, which was treated as a reverse acquisition. The acquisition method has been applied to the accounts of Skilled based on Skilled’s stock price (level 1 valuation technique - quoted prices in active markets for identical assets or liabilities) as of the acquisition date. The consideration has been allocated to the legacy Skilled business that was acquired on the acquisition date with the excess consideration over the fair value of the net assets acquired recognized as goodwill. As of the effective date of the Combination, FC-GEN’s assets and liabilities remained at their historical costs.

Because FC-GEN’s pre-transaction owners held an approximately 58% direct controlling interest in Skilled and a 74.25% economic and voting interest in the combined company, FC-GEN is considered to be the acquirer of Skilled for accounting purposes. Following the closing of the Combination, the combined results of Skilled and FC-GEN are consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The 42% direct noncontrolling economic interest is in the form of Class A common units of FC-GEN that are exchangeable on a 1 to 1 basis to public shares of the Company. The 42% direct noncontrolling economic interest will continue to decrease as Class A common units of FC-GEN are exchanged for public shares of the Company.

Consideration Price Allocation

The total Skilled consideration price of $348.1 million was allocated to Skilled’s net tangible and identifiable intangible assets based upon the estimated fair values at February 2, 2015. The excess of the consideration price over the estimated fair value of the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

consideration price to property, plant and equipment, identifiable intangible assets and deferred income taxes was based upon valuation data and estimates. The Company has not finalized the analysis of the consideration price allocation and will continue its review during the measurement period. The aggregate goodwill arising from the Combination is based upon the expected future cash flows of the Skilled operations. Goodwill recognized from the Combination is the result of (i) the expected savings to be realized from achieving certain economies of scale and (ii) anticipated long-term improvements in Skilled’s core businesses. The Company has estimated $79.8 million of pre-existing Skilled goodwill that is deductible for income tax purposes related to the Combination.

The consideration price and related allocation are summarized as follows (in thousands):


Accounts receivable	$	113,930
Deferred income taxes and other current assets		42,046
Property, plant and equipment		477,865
			Weighted
			Average Life
Identifiable intangible assets:			(Years)
Management contracts		30,900	3.5
Customer relationships		13,400	10.0
Favorable lease contracts		18,110	12.8
Trade names		3,400	Indefinite
Total identifiable intangible assets		65,810
Deferred income taxes and other assets		76,131
Accounts payable and other current liabilities		(119,556)
Long-term debt, including amounts due within one year		(428,453)
Unfavorable lease contracts		(11,480)
Deferred income taxes and other long-term liabilities		(142,082)
Total identifiable net assets		74,211
Goodwill		273,929
Net assets	$	348,140

Pro forma information

The acquired business contributed net revenues of $608.0 million and net loss of $17.9 million to the Company for the period from February 1, 2015 to September 30, 2015. The unaudited pro forma net effect of the Combination assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):


	Pro forma three months ended September 30,				Nine months ended September 30,
	2015 (1)		2014		2015		2014
Revenues		N/A	$	1,396,236	$	4,249,791	$	4,197,710
Loss attributable to Genesis Healthcare, Inc.		N/A		(20,424)		(57,813)		(53,656)

Loss per common share:
Basic		N/A	$	(0.23)	$	(0.65)	$	(0.60)
Diluted		N/A	$	(0.26)	$	(0.66)	$	(0.72)

(1)

Skilled’s financial results of operations are included fully in the three months ended September 30, 2015

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Combination for the periods presented. The unaudited results of operations includes transaction and financing costs totaling $88.8 million incurred by both the Company and Skilled in connection

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

with the Combination. These costs have been eliminated from the results of operations for the nine months ended September 30, 2015 for purposes of the pro forma financial presentation.

Related Party Transactions

On March 31, 2015, the Company sold its investment in FC PAC Holdings, LLC (FC PAC), an unconsolidated joint venture in which it held an approximate 5.4% interest, for $26.4 million. The Company recognized a gain on sale of $8.4 million recorded as other income on the statement of operations. FC PAC ownership includes affiliates of Formation Capital (Formation), a private equity sponsor of the Company prior to the Combination, and some of whom are members of the Company’s board of directors.

On July 1, 2015, the Company acquired 22 rehabilitation outpatient clinics from entities associated with Formation for a purchase price of $1.1 million. The acquisition was financed entirely with a promissory note.

Acquisition from Revera

On June 15, 2015, the Company announced that it had signed an asset purchase agreement with Revera Assisted Living, Inc., a leading owner, operator and investor in the senior living sector, to acquire 24 of its skilled nursing facilities along with its contract rehabilitation business for $240 million. The Company will acquire the real estate and operations of 20 of the skilled nursing facilities and add the facilities to an existing master lease agreement with Welltower Inc. (formerly known as Health Care REIT, Inc.), a publicly traded real estate investment trust, to operate the other four additional skilled nursing facilities. The transaction is expected to close by this calendar year-end, subject to additional due diligence, regulatory and licensing approvals, and other customary conditions.

(4)Earnings (Loss) Per Share

The Company has three classes of common stock. Classes A and B are identical in economic and voting interests. Class C has a 1:1 voting ratio with the other two classes, representing the voting interests of the approximate 42% noncontrolling interest of the legacy FC-GEN owners. See Note 3 – “Significant Transactions and Events – the Combination with Skilled”. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.

Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any.

The computations of basic and diluted EPS are consistent with any potentially dilutive adjustments to the numerator or denominator being anti-dilutive and therefore excluded from the dilutive calculation. A reconciliation of the

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(UNAUDITED)

numerator and denominator used in the calculation of basic and diluted net income per common share follows (in thousands, except per share data):


	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator:
Loss from continuing operations	$	(60,981)	$	(42,607)	$	(212,557)	$	(114,253)
Less: Net (loss) income attributable to noncontrolling interests		(31,990)		961		(53,424)		1,370
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(28,991)	$	(43,568)	$	(159,133)	$	(115,623)
Gain (loss) from discontinued operations, net of income tax		39		(1,191)		(1,571)		(5,561)
Net loss attributable to Genesis Healthcare, Inc.	$	(28,952)	$	(44,759)	$	(160,704)	$	(121,184)
Denominator:
Weighted average shares outstanding for basic and diluted net loss per share		89,213		49,865		84,615		49,865
Basic and diluted net loss per common share:
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(0.32)	$	(0.88)	$	(1.88)	$	(2.32)
Loss from discontinued operations, net of income tax		0.00		(0.02)		(0.02)		(0.11)
Net loss attributable to Genesis Healthcare, Inc.	$	(0.32)	$	(0.90)	$	(1.90)	$	(2.43)

The following were excluded from net income attributable to Genesis Healthcare, Inc. and the weighted-average diluted shares computation for the three and nine months ended September 30, 2015 and 2014, as their inclusion would have been anti-dilutive (in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	Net loss attributed to Genesis Healthcare, Inc.		Antidilutive shares	Net loss attributed to Genesis Healthcare, Inc.		Antidilutive shares	Net loss attributed to Genesis Healthcare, Inc.		Antidilutive shares	Net loss attributed to Genesis Healthcare, Inc.		Antidilutive shares
Exchange of restricted stock units of noncontrolling interests	$	(20,639)	64,461	$	—	—	$	(31,945)	56,906	$	—	—
Employee and director unvested restricted stock units		—	323		—	—		—	149		—	—

Because the Company is in a net loss position for the three and nine months ended September 30, 2015, the combined impact of the assumed conversion of the approximate 42% noncontrolling interest to common stock and the related tax implications, are anti-dilutive to EPS. As of September 30, 2015, there were 64,449,380 units attributed to the noncontrolling interests outstanding. See Note 3 – “Significant Transactions and Events – the Combination with Skilled.” There were no convertible instruments issued or outstanding as of September 30, 2014 that could be potentially dilutive to net loss for that period. On June 3, 2015, the shareholders approved the 2015 Omnibus Equity Incentive Plan, which provided for the grant of 3,825,420 restricted stock units to employees and 198,020 restricted stock units to non-employee directors. Because the Company is in a net loss position for the three and nine months ended September 30, 2015, the combined impact of the grant under the 2015 Omnibus Equity Incentive Plan to common stock and the related tax implications are anti-dilutive to EPS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(5)Segment Information

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments see Note 1 – “General Information – Description of Business.”

A summary of the Company’s segmented revenues follows:


	Three months ended September 30,
	2015				2014				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage

	(in thousands, except percentages)
Revenues:
Inpatient services:
Skilled nursing facilities	$	1,155,123	81.5	%	$	979,767	82.4	%	$	175,356	17.9	%
Assisted living facilities		36,635	2.6	%		26,958	2.3	%		9,677	35.9	%
Administration of third party facilities		2,225	0.2	%		2,539	0.2	%		(314)	(12.4)	%
Elimination of administrative services		(421)	—	%		(495)	—	%		74	(14.9)	%
Inpatient services, net		1,193,562	84.3	%		1,008,769	84.9	%		184,793	18.3	%

Rehabilitation therapy services:
Total therapy services		281,151	19.9	%		247,328	20.9	%		33,823	13.7	%
Elimination intersegment rehabilitation therapy services		(107,112)	(7.6)	%		(99,320)	(8.4)	%		(7,792)	7.8	%
Third party rehabilitation therapy services		174,039	12.3	%		148,008	12.5	%		26,031	17.6	%

Other services:
Total other services		58,804	4.1	%		38,508	3.2	%		20,296	52.7	%
Elimination intersegment other services		(10,378)	(0.7)	%		(7,667)	(0.6)	%		(2,711)	35.4	%
Third party other services		48,426	3.4	%		30,841	2.6	%		17,585	57.0	%

Total revenue	$	1,416,027	100.0	%	$	1,187,618	100.0	%	$	228,409	19.2	%

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(UNAUDITED)


	Nine months ended September 30,
	2015				2014				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
	(in thousands, except percentages)
Revenues:
Inpatient services:
Skilled nursing facilities	$	3,424,788	81.9	%	$	2,935,732	82.1	%	$	489,056	16.7	%
Assisted living facilities		106,497	2.5	%		79,654	2.2	%		26,843	33.7	%
Administration of third party facilities		7,724	0.2	%		7,790	0.2	%		(66)	(0.8)	%
Elimination of administrative services		(1,445)	—	%		(1,422)	—	%		(23)	1.6	%
Inpatient services, net		3,537,564	84.6	%		3,021,754	84.5	%		515,810	17.1	%

Rehabilitation therapy services:
Total therapy services		818,335	19.6	%		757,593	21.2	%		60,742	8.0	%
Elimination intersegment rehabilitation therapy services		(323,020)	(7.7)	%		(296,479)	(8.3)	%		(26,541)	9.0	%
Third party rehabilitation therapy services		495,315	11.9	%		461,114	12.9	%		34,201	7.4	%

Other services:
Total other services		172,759	4.1	%		112,700	3.2	%		60,059	53.3	%
Elimination intersegment other services		(27,135)	(0.6)	%		(20,755)	(0.6)	%		(6,380)	30.7	%
Third party other services		145,624	3.5	%		91,945	2.6	%		53,679	58.4	%

Total revenue	$	4,178,503	100.0	%	$	3,574,813	100.0	%	$	603,690	16.9	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of the Company’s unaudited condensed consolidated statement of operations follows:



	Three months ended September 30, 2015
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	1,193,983	$	281,151	$	58,501	$	303	$	(117,911)	$	1,416,027
Salaries, wages and benefits		568,888		228,801		35,726		—		—		833,415
Other operating expenses		413,055		19,513		18,260		—		(117,910)		332,918
General and administrative costs		—		220		1		45,889		—		46,110
Provision for losses on accounts receivable		18,514		5,120		341		(629)		—		23,346
Lease expense		36,577		28		589		461		—		37,655
Depreciation and amortization expense		53,384		3,904		349		4,868		—		62,505
Interest expense		106,433		14		11		22,123		(43)		128,538
Gain on extinguishment of debt		(3,104)		—		—		—		—		(3,104)
Investment income		(353)		—		—		(43)		43		(353)
Other loss		38		—		—		—		—		38
Transaction costs		119		—		—		3,187		—		3,306
Skilled Healthcare loss contingency expense		—		—		—		30,000		—		30,000
Equity in net (income) loss of unconsolidated affiliates		(443)		—		—		(628)		431		(640)
(Loss) income before income tax benefit		875		23,551		3,224		(104,925)		(432)		(77,707)
Income tax benefit		—		—		—		(16,726)		—		(16,726)
(Loss) income from continuing operations	$	875	$	23,551	$	3,224	$	(88,199)	$	(432)	$	(60,981)


	Three months ended September 30, 2014
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	1,009,265	$	247,328	$	38,263	$	245	$	(107,483)	$	1,187,618
Salaries, wages and benefits		494,109		205,017		24,460		—		—		723,586
Other operating expenses		344,934		15,470		12,363		—		(107,484)		265,283
General and administrative costs		—		—		—		36,341		—		36,341
Provision for losses on accounts receivable		12,368		4,765		150		2		—		17,285
Lease expense		32,452		44		204		221		—		32,921
Depreciation and amortization expense		41,569		2,771		232		4,129		—		48,701
Interest expense		95,250		—		280		16,716		(125)		112,121
Investment income		(1,211)		—		—		(382)		125		(1,468)
Other (income) loss		(46)		—		76		—		—		30
Transaction costs		—		—		—		1,736		—		1,736
Equity in net (income) loss of unconsolidated affiliates		(628)		—		—		—		835		207
(Loss) income before income tax benefit		(9,532)		19,261		498		(58,518)		(834)		(49,125)
Income tax benefit		—		—		—		(6,518)		—		(6,518)
(Loss) income from continuing operations	$	(9,532)	$	19,261	$	498	$	(52,000)	$	(834)	$	(42,607)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Nine months ended September 30, 2015
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	3,539,009	$	818,335	$	171,175	$	1,584	$	(351,600)	$	4,178,503
Salaries, wages and benefits		1,674,262		664,380		106,432		—		—		2,445,074
Other operating expenses		1,240,551		54,507		50,256		—		(351,599)		993,715
General and administrative costs		—		220		4		130,902		—		131,126
Provision for losses on accounts receivable		54,858		13,053		1,659		(715)		—		68,855
Lease expense		109,843		83		1,795		1,312		—		113,033
Depreciation and amortization expense		152,641		9,803		909		12,690		—		176,043
Interest expense		315,902		16		31		60,577		(290)		376,236
(Gain) loss on extinguishment of debt		(3,104)		—		—		3,234		—		130
Investment income		(1,131)		—		—		(359)		290		(1,200)
Other loss (income)		38		—		—		(7,560)		—		(7,522)
Transaction costs		540		—		—		91,476		—		92,016
Skilled Healthcare loss contingency expense		—		—		—		31,500		—		31,500
Equity in net (income) loss of unconsolidated affiliates		(1,266)		—		—		(1,262)		1,375		(1,153)
(Loss) income before income tax benefit		(4,125)		76,273		10,089		(320,211)		(1,376)		(239,350)
Income tax benefit		—		—		—		(26,793)		—		(26,793)
(Loss) income from continuing operations	$	(4,125)	$	76,273	$	10,089	$	(293,418)	$	(1,376)	$	(212,557)


	Nine months ended September 30, 2014
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	3,023,176	$	757,593	$	112,196	$	504	$	(318,656)	$	3,574,813
Salaries, wages and benefits		1,471,882		616,987		73,195		—		—		2,162,064
Other operating expenses		1,036,434		46,442		34,213		—		(318,657)		798,432
General and administrative costs		—		—		—		108,187		—		108,187
Provision for losses on accounts receivable		39,222		13,153		506		—		—		52,881
Lease expense		97,208		132		624		665		—		98,629
Depreciation and amortization expense		123,520		8,343		707		12,561		—		145,131
Interest expense		286,550		2		730		43,861		(372)		330,771
Loss on extinguishment of debt		—		—		—		679		—		679
Investment income		(2,050)		—		—		(1,170)		373		(2,847)
Other income		(47)		—		(590)		—		—		(637)
Transaction costs		—		(10)		—		5,293		—		5,283
Equity in net (income) loss of unconsolidated affiliates		(1,308)		—		—		—		1,169		(139)
(Loss) income before income tax benefit		(28,235)		72,544		2,811		(169,572)		(1,169)		(123,621)
Income tax benefit		—		—		—		(9,368)		—		(9,368)
(Loss) income from continuing operations	$	(28,235)	$	72,544	$	2,811	$	(160,204)	$	(1,169)	$	(114,253)

The following table presents the segment assets as of September 30, 2015 compared to December 31, 2014 (in thousands):


	September 30, 2015		December 31, 2014
Inpatient services	$	5,264,945	$	4,381,044
Rehabilitation services		428,502		322,268
Other services		87,428		44,814
Corporate and eliminations		340,486		393,282
Total assets	$	6,121,361	$	5,141,408

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents segment goodwill as of September 30, 2015 compared to December 31, 2014 (in thousands):


	September 30, 2015		December 31, 2014
Inpatient services	$	336,734	$	132,756
Rehabilitation services		68,440		25,097
Other services		39,272		11,828
Total goodwill	$	444,446	$	169,681

(6)Property and Equipment

Property and equipment consisted of the following as of September 30, 2015 and December 31, 2014 (in thousands):


	September 30, 2015		December 31, 2014
Land, buildings and improvements	$	612,273	$	225,536
Capital lease land, buildings and improvements		902,729		910,820
Financing obligation land, buildings and improvements		2,588,793		2,526,792
Equipment, furniture and fixtures		405,987		276,983
Construction in progress		45,525		55,295
Gross property and equipment		4,555,307		3,995,426
Less: accumulated depreciation		(589,780)		(502,176)
Net property and equipment	$	3,965,527	$	3,493,250

(7)Long-Term Debt

Long-term debt at September 30, 2015 and December 31, 2014 consisted of the following (in thousands):


	As of September 30,		As of December 31,
	2015		2014
Revolving credit facility	$	315,000	$	254,500
Term loan facility, net of original issue discount of $8,450 at September 30, 2015 and $11,375 at December 31, 2014		221,257		219,297
Real estate bridge loan		360,000		—
HUD insured loans		108,133		—
Mortgages and other secured debt (recourse)		14,104		14,488
Mortgages and other secured debt (non-recourse)		30,841		49,961
		1,049,335		538,246
Less: Current installments of long-term debt		(12,453)		(12,518)
Long-term debt	$	1,036,882	$	525,728

Revolving Credit Facilities

In connection with the Combination, on February 2, 2015 the Company entered into new revolving credit facilities and terminated its former revolving credit facilities. The new revolving credit facilities (the Revolving Credit Facilities) consist of a senior secured, asset-based revolving credit facility of up to $550 million under three separate tranches:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Tranche A-1, Tranche A-2 and FILO Tranche. Interest accrues at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin. The applicable margin is based on the level of commitments for all three tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.25% to 2.75%; (ii) for Tranche A-2 ranges from 3.00% to 2.50%; and (iii) for FILO Tranche is 5.00%. The Revolving Credit Facilities mature on February 2, 2020, provided that if the Term Loan Facility (defined below) or the Real Estate Bridge Loan (defined below) is not refinanced with longer term debt or their terms not extended prior to their current maturities of December 4, 2017 and August 27, 2017, respectively, the Revolving Credit Facilities will mature 90 days prior to such maturity date, as applicable. Borrowing levels under the Revolving Credit Facilities are limited to a borrowing base that is computed based upon the level of the Company’s eligible accounts receivable, as defined. In addition to paying interest on the outstanding principal borrowed under the Revolving Credit Facilities, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate ranges from 0.375% per annum to 0.50% depending upon the level of unused commitment.

Borrowings and interest rates under the three tranches were as follows at September 30, 2015:


			Weighted
			Average
Revolving credit facility	Borrowings		Interest
FILO tranche	$	25,000	5.51	%
Tranche A-1		215,000	4.17	%
Tranche A-2		75,000	3.31	%
	$	315,000	4.07	%

As of September 30, 2015, the Company had outstanding borrowings under the Revolving Credit Facilities of $315.0 million and had $99.7 million of drawn letters of credit securing insurance and lease obligations, leaving the Company with approximately $104.4 million of available borrowing capacity under the revolving credit facilities.

Term Loan Facility

Prior to the Combination, FC-GEN and certain of its subsidiaries became party to a five-year term loan facility (the Term Loan Facility). The Term Loan Facility is secured by a first priority lien on the membership interests in the Company and on substantially all of the Company’s and its subsidiaries’ assets other than collateral held on a first priority basis by the Revolving Credit Facilities lender. Borrowings under the Term Loan Facility bear interest at a rate per annum equal to the applicable margin plus, at the Company’s option, either (x) LIBOR or (y) a base rate determined by reference to the highest of (i) the lender defined prime rate, (ii) the federal funds rate effective plus one half of one percent and (iii) LIBOR described in subclause (x) plus 1.0%. LIBOR based loans are subject to an interest rate floor of 1.5% and base rate loans are subject to a floor of 2.5%. The Term Loan Facility matures on December 4, 2017. On September 25, 2014, FC-GEN entered into an amendment to the Term Loan Facility providing for changes to the financial covenants and other provisions allowing for and accommodating the Combination. On February 2, 2015, the amendment to the Term Loan Facility became effective. The Term Loan Facility currently has an outstanding principal balance of $229.7 million. Base rate borrowings under the Term Loan Facility bore interest of approximately 10.75% at September 30, 2015. One-month LIBOR borrowings under the Term Loan Facility bore interest of approximately 10.0% at September 30, 2015.

Principal payments for the nine months ended September 30, 2015 were $1.0 million. The Term Loan Facility amortizes at a rate of 5% per annum. The lenders have the right to elect ratable principal payments or defer principal recoupment until the end of the term.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Real Estate Bridge Loan

In connection with the Combination on February 2, 2015, the Company entered into a $360.0 million real estate bridge loan (the Real Estate Bridge Loan), which is secured by a mortgage lien on the real property of 67 facilities and a second lien on certain receivables of the operators of such facilities. The Real Estate Bridge Loan is subject to a 24-month term with two extension options of 90-days each and accrues interest at a rate equal to LIBOR, plus 6.75%, plus an additional margin that ranges up to 7.00% based on the aggregate number of days the Real Estate Bridge Loan is outstanding. The interest rate is also subject to a LIBOR interest rate floor of 0.5%. The Real Estate Bridge Loan bore interest of 8.75% at September 30, 2015. The Real Estate Bridge Loan is subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and / or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Real Estate Bridge Loan. The proceeds of the Real Estate Bridge Loan were used to repay Skilled’s first lien senior secured term loan, repay Skilled’s mortgage loans and asset based revolving credit facility with MidCap Financial with excess proceeds used to fund direct costs of the Combination with the Company. The Real Estate Bridge Loan has an outstanding principal balance of $360.0 million at September 30, 2015.

The Revolving Credit Facilities, the Term Loan and Real Estate Bridge Loan (collectively, the Credit Facilities) each contain a number of restrictive covenants that, among other things, impose operating and financial restrictions on the Company and its subsidiaries. The Credit Facilities also require the Company to meet defined financial covenants, including interest coverage ratio, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, all as defined in the applicable agreements. The Credit Facilities also contain other customary covenants and events of default. At September 30, 2015, the Company was in compliance with its covenants.

HUD Insured Loans

In connection with the Combination on February 2, 2015, the Company assumed certain obligations under 10 loans insured by HUD. The loans are secured by 10 of the Company's skilled nursing facilities that were acquired in the Combination. The HUD insured loans have an original amortization term of 30 to 35 years. On May 1, 2015, the Company acquired a facility in Texas and assumed its HUD insured loan totaling $8.4 million with a maturity date of January 1, 2049. As of September 30, 2015 the HUD insured loans have a combined aggregate principal balance of $108.1 million including a $14.6 million debt premium established in purchase accounting in connection with the Combination.

These mortgages have an average remaining term of 31 years with fixed interest rates ranging from 3.4% to 4.6% and a weighted average interest rate of 4.3%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required. Any further HUD insured mortgages will require additional HUD approval.

All HUD-insured mortgages are non-recourse loans to the Company. All mortgages are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of September 30, 2015, the Company has total escrow reserve funds of $6.7 million with the loan servicer that are reported within prepaid expenses.

Other Debt

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets. The loans are secured by the underlying real property and have fixed or variable rates of interest ranging from 1.9% to 6.0% at September 30, 2015, with maturity dates ranging from 2018 to 2020.

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Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures. The loans consist principally of revenue bonds and secured bank loans. Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest ranging from 2.5% to 22.2% at September 30, 2015, with maturity dates ranging from 2018 to 2034. Loans are labeled “non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements.

The maturity of total debt of $1,049.3 million at September 30, 2015 is as follows (in thousands):


Twelve months ending September 30,
2016	$	12,453
2017		372,621
2018		229,284
2019		3,938
2020		319,259
Thereafter		111,780
Total debt payments	$	1,049,335

(8)Leases and Lease Commitments

The Company leases certain facilities under capital and operating leases. Future minimum payments for the next five years and thereafter under such leases at September 30, 2015 are as follows (in thousands):


Twelve months ending September 30,	Capital Leases		Operating Leases
2016	$	96,509	$	140,243
2017		99,017		137,729
2018		96,442		133,891
2019		98,870		130,553
2020		101,374		131,080
Thereafter		3,404,033		287,973
Total future minimum lease payments		3,896,245	$	961,469
Less amount representing interest		(2,840,855)
Capital lease obligation		1,055,390
Less current portion		(1,843)
Long-term capital lease obligation	$	1,053,547

Capital Lease Obligations

The capital lease obligations represent the present value of minimum lease payments under such capital lease and cease use arrangements and bear imputed interest at rates ranging from 3.5% to 12.8% at September 30, 2015, and mature at dates ranging from 2015 to 2047.

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Deferred Lease Balances

At September 30, 2015 and December 31, 2014, the Company had $59.6 million and $47.8 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $37.1 million and $31.4 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheet. Favorable and unfavorable lease assets and liabilities, respectively, arise through the acquisition of leases in place which requires those contracts be recorded at their then fair value. The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets. A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with cost above market rates. These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis. At September 30, 2015 and December 31, 2014, the Company had $25.8 million and $20.6 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheet.

Lease Covenants

Certain lease agreements contain a number of restrictive covenants that, among other things and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries. These leases also require the Company to meet defined financial covenants, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio, a minimum consolidated fixed charge coverage and a minimum level of tangible net worth. At September 30, 2015, the Company was in compliance with its covenants under its lease arrangements.

In connection with the Combination on February 2, 2015, the Company and certain of its lessors amended the existing lease agreements. These amendments modified certain financial covenants to reflect the combined company.

(9)Financing Obligation

Future minimum payments for the next five years and thereafter under leases classified as financing obligations at September 30, 2015 are as follows (in thousands):


Twelve months ending September 30,
2016	$	267,771
2017		275,951
2018		283,820
2019		291,916
2020		300,237
Thereafter		9,793,332
Total future minimum lease payments		11,213,027
Less amount representing interest		(8,218,331)
Financing obligation	$	2,994,696
Less current portion		(1,026)
Long-term financing obligation	$	2,993,670

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(UNAUDITED)

(10)Income Taxes

Upon completion of the Combination, the Company effectively owns 58% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes. This is the Company’s only source of taxable income. The transaction did not materially impact the amount of income subject to corporate tax.

For the three months ended September 30, 2015, the Company recorded an income tax benefit of $16.7 million from continuing operations, representing an effective tax rate of 21.5%, compared to an income tax benefit of $6.5 million from continuing operations, representing an effective tax rate of 13.2%, for the same period in 2014.

For the nine months ended September 30, 2015, the Company recorded an income tax benefit of $26.8 million from continuing operations, representing an effective tax rate of 11.2%, compared to an income tax benefit of $9.4 million from continuing operations, representing an effective tax rate of 7.6%, for the same period in 2014.

The 8.3% and the 3.6% respective increase in the effective tax rate is attributable to the establishment of a valuation allowance against the insurance reserves deferred tax asset of its Cayman captive insurance company and the write-off of a portion of deferred tax assets on U.S. federal and state net operating losses. The write-off is a result of a more restrictive change of ownership limitation under IRC Section 382 by which a taxpayer is limited to a certain amount of net operating losses it can utilize in a given tax year and the insolvency of certain corporate subsidiaries that were converted to limited liability companies that will be treated as partnerships for income tax purposes.

Exchange Rights and Tax Receivable Agreement

Following the Combination, the owners of FC-GEN will have the right to exchange their membership interests in FC-GEN for shares of Class A Common Stock of the Company or cash, at the Company’s option. As a result of such exchanges, the Company’s membership interest in FC-GEN will increase and its purchase price will be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets. Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future. Any such increase would also decrease gain (or increase loss) on future dispositions of the effected assets. There have been no exchanges for the nine months ended September 30, 2015.

Concurrent with the Combination, the Company entered into a tax receivable agreement (TRA) with the owners of FC-GEN. The agreement provides for the payment by the Company to the owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA. Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:

the timing of exchanges—for instance, the increase in any tax deductions will vary depending on the fair value of the depreciable or amortizable assets of FC-GEN and its subsidiaries at the time of each exchange, which fair value may fluctuate over time;

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the price of shares of Company Class A Common Stock at the time of the exchange—the increase in any tax deductions, and the tax basis increase in other assets of FC-GEN and its subsidiaries is directly proportional to the price of shares of Company Class A Common Stock at the time of the exchange;

the amount and timing of the Company’s income—the Company is required to pay 90% of the deemed benefits as and when deemed realized. If FC-GEN does not have taxable income, the Company is generally not required (absent a change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit will have been actually realized. However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in payments under the TRA; and

future tax rates of jurisdictions in which the Company has tax liability.

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA. In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises. Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine. Although FC-GEN does not expect the IRS to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future payments. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.

The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.

In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.

(11)Commitments and Contingencies

Loss Reserves For Certain Self-Insured Programs

General and Professional Liability and Workers’ Compensation

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of twelve months and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a quarterly basis or more often when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

The Company utilizes third-party administrators (TPAs) to process claims and to provide it with the data utilized in its assessments of reserve adequacy. The TPAs are under the oversight of the Company’s in-house risk management and legal functions. These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns using a discount rate of approximately 1% for each policy period presented. The discount rate for the 2015 policy year is 0.78%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $5.6 million and $4.8 million as of September 30, 2015 and December 31, 2014, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

For the three months ended September 30, 2015 and 2014, the provision for general and professional liability risk totaled $28.6 million and $24.5 million, respectively. The provision for general and professional liability risks totaled $100.2 million and $75.5 million for the nine months ended September 30, 2015 and 2014, respectively. The reserves for general and professional liability were $346.2 million and $288.2 million as of September 30, 2015 and December 31, 2014, respectively.

For the three months ended September 30, 2015 and 2014, the provision for workers’ compensation risk totaled $18.8 million and $18.4 million, respectively. The provision for loss for workers’ compensation risks totaled $50.6 million and $43.7 million for the nine months ended September 30, 2015 and 2014, respectively. The reserves for workers’ compensation risks were $231.4 million and $198.0 million as of September 30, 2015 and December 31, 2014, respectively.

Health Insurance

The Company offers employees an option to participate in self-insured health plans. Health insurance claims are paid as they are submitted to the plans’ administrators. The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid. The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets. Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

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(UNAUDITED)

Legal Proceedings

The Company is a party to litigation and regulatory investigations arising in the ordinary course of business. Based on the Company’s evaluation of information currently available, with the exception of the specific matters noted below, management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company.

Creekside Hospice Litigation

On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the U.S. Department of Justice (the DOJ) informed the Company that its Civil Division was investigating Skilled, as well as its subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations. Those laws could have included the federal False Claims Act (FCA) and the Nevada False Claims Act (NFCA). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs.

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intends to take over the actions. The DOJ filed its complaint in intervention on November 25, 2014, against Creekside, Skilled Healthcare Group, Inc., and Skilled Healthcare, LLC, asserting, among other things, that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 did not meet Medicare requirements for reimbursement and are in violation of the civil False Claims Act. The DOJ is pursuing False Claims Act, NFCA, and federal common law claims remedies in an unspecified amount, with a request to treble provable damages and impose penalties per proved false claim in the amount ranging from $5,500 to $11,000 per claim, as applicable.

While the Company denies the allegations and will vigorously defend this action, including any portion of the action that the private party relators may continue to pursue, the Company has accrued $7.5 million as a contingent liability in connection with the matter. However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company or Creekside Hospice if the litigation defense were ultimately unsuccessful.

Therapy Matters Investigation

In February 2015, representatives of the DOJ informed the Company that they are investigating and may pursue legal action against the Company and certain of its subsidiaries including Hallmark Rehabilitation GP, LLC for alleged violations of the federal and state healthcare fraud and abuse laws and regulations related to the provision of therapy services at certain Skilled Healthcare facilities from 2005 through 2013 (the Therapy Matters Investigation). These laws could include the FCA and similar state laws. As noted above, the FCA provides for civil and administrative fines and penalties, including civil fines ranging from $5,500 to $11,000 per claim plus treble damages. Applicable state laws provide for similar penalties. Violations of these federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs. Any damages, fines, penalties, other sanctions and costs that the Company may incur as a result of any federal and/or state suit could be significant and could have a material and adverse effect on its results of operations and financial condition. The Company has had discussions with the DOJ regarding both the Therapy Matters Investigation and the Staffing Matters Investigation (defined below). The Company has accrued $30 million as a contingent liability in connection with those two matters. However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company if legal proceedings are commenced. At this time, the Company cannot predict what additional effect, if any, the investigation or any potential claims arising under applicable federal or state laws and regulations could have on the Company. While the Company will continue to cooperate with the government’s

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(UNAUDITED)

investigation of the matter, the Company intends to vigorously defend against any legal action that may be brought in the matter.

Staffing Matters Investigation

On February 10, 2015, the DOJ informed the Company that it intends to pursue legal action against the Company and certain of its subsidiaries related to staffing and certain quality of care allegations related to the issues adjudicated against the Company and those subsidiaries in a previously disclosed class action lawsuit that Skilled settled in 2010 (the Staffing Matters Investigation). The laws under which the DOJ could seek to pursue legal action could include the FCA and similar state laws. As noted above, violations of the FCA or similar state laws and regulations could subject the Company and/or its subsidiaries to severe monetary and other penalties and remedies. Any damages, fines, penalties, other sanctions and costs that the Company may incur as a result of any federal or state suit could be significant and could have a material and adverse effect on its results of operations and financial condition. As noted above, the Company has had discussions with the DOJ regarding both the Staffing Matters Investigation and the Therapy Matters Investigation. The Company has accrued $30 million as a contingent liability in connection with those two matters. However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company if legal proceedings are commenced. At this time, the Company cannot predict what additional effect, if any, the investigation or any potential claims arising under applicable federal or state laws and regulations could have on the Company. While the Company will continue to cooperate with the government's evaluation of the matter, the Company intends to vigorously defend against any legal action that may be brought in the matter.

(12)Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and equivalents, restricted cash, trade accounts receivable, investments in marketable securities, accounts payable, short and long-term debt and derivative financial instruments.

The Company’s financial instruments, other than its trade accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance. Certain of the Company’s financial instruments, including its interest rate cap arrangements, contain an off-balance-sheet risk.

Recurring Fair Value Measures

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


	Level 1 —		Quoted prices (unadjusted) in active markets for identical assets or liabilities.
	Level 2 —		Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
	Level 3 —		Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

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The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):


	Fair Value Measurements at Reporting Date Using
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	2015		(Level 1)		(Level 2)		(Level 3)
Cash and equivalents	$	59,671	$	59,671	$	—	$	—
Restricted cash and equivalents		51,728		51,728		—		—
Restricted investments in marketable securities		135,125		135,125		—		—
Total	$	246,524	$	246,524	$	—	$	—


	Fair Value Measurements at Reporting Date Using
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	2014		(Level 1)		(Level 2)		(Level 3)
Cash and equivalents	$	87,548	$	87,548	$	—	$	—
Restricted cash and equivalents		36,390		36,390		—		—
Restricted investments in marketable securities		110,350		110,350		—		—
Total	$	234,288	$	234,288	$	—	$	—

The Company places its cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument. The Company has not experienced any significant losses on such investments.

Debt Instruments

The table below shows the carrying amounts and estimated fair values of the Company’s primary long-term debt instruments:


	September 30, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value

Revolving credit facility	$	315,000	$	315,000	$	254,500	$	254,500
Term loan facility, net of original issue discount of $8,450 at September 30, 2015 and $11,375 at December 31, 2014		221,257		225,277		219,297		229,677
Real estate bridge loan		360,000		360,000		—		—
HUD insured loans		108,133		108,133		—		—
Mortgages and other secured debt (recourse)		14,104		14,104		14,488		14,488
Mortgages and other secured debt (non-recourse)		30,841		30,841		49,961		49,961
	$	1,049,335	$	1,053,355	$	538,246	$	548,626

The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented. The Company believes that the inputs to the pricing models qualify as Level 2 measurements.

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Non-Recurring Fair Value Measures

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test.

The following table presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):


			Impairment Charges -
	Carrying Value		Nine months ended
	September 30, 2015		September 30, 2015
Assets:
Property and equipment, net	$	3,965,527	$	—
Goodwill		444,446		—
Intangible assets		219,028		—

			Impairment Charges -
	Carrying Value		Nine months ended
	December 31, 2014		September 30, 2014
Assets:
Property and equipment, net	$	3,493,250	$	—
Goodwill		169,681		—
Intangible assets		173,112		—

The fair value of tangible and intangible assets is determined using a discounted cash flow approach, which is a significant unobservable input (Level 3). The Company estimates the fair value using the income approach (which is a discounted cash flow technique). These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates. The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows.

The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows.

The Company believes the estimates and assumptions used in the valuation methods are reasonable.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented and should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q. As used in this MD&A, the words “we,” “our,” “us” and the “Company,” and similar terms, refer collectively to Genesis Healthcare, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. This MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in the Form 8-K filed with the SEC on July 24, 2015, the Genesis audited financial statements for the year ended December 31, 2014 filed with the SEC on Form 8-K/A on February 26, 2015 and the financial information and MD&A as of September 30, 2014 contained in the Schedule 14C Information Statement filed in connection with the Combination (defined below) on January 9, 2015.

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans” or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on February 20, 2015, and in our subsequent quarterly and current reports filed with the SEC after that date, as well as others that are discussed in this Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

Business Overview

Genesis is a healthcare services company that through its subsidiaries owns and operates skilled nursing facilities, assisted living facilities, hospices, home health providers 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 509 skilled nursing, assisted living and behavioral health centers located in 34 states. Revenues of our owned, leased and otherwise consolidated centers constitute approximately 85% 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 12% of our revenues.

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

Recent Transactions

The Combination with Skilled

The following diagram depicts the organizational structure of us at the time of the Combination:

Upon completion of the Combination, we now operate under the name Genesis Healthcare, Inc. and the Class A common stock of the combined company continues to trade on the NYSE under the symbol “GEN”. Upon the closing of the Combination, the former owners of FC-GEN held 74.25% of the economic interests in the combined entity and the former shareholders of Skilled held the remaining 25.75% of the economic interests in the combined entity post-transaction, in each case on a fully-diluted, as-exchanged and as-converted basis. Under applicable accounting standards, FC-GEN was the accounting acquirer in the Combination, which was treated as a reverse acquisition. The acquisition method has been applied to the accounts of Skilled based on Skilled’s stock price (level 1 valuation technique - quoted prices in active markets for identical assets or liabilities) as of the acquisition date. The consideration has been allocated to the legacy Skilled business that was acquired on the acquisition date with the excess consideration over the fair value of the net assets acquired recognized as goodwill. As of the effective date of the Combination, FC-GEN’s assets and liabilities remained at their historical costs.

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accounting purposes. Following the closing of the Combination, the combined results of Skilled and FC-GEN are consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The 42% direct noncontrolling economic interest is in the form of Class A common units of FC-GEN that are exchangeable on a 1 to 1 basis to public shares of ours. The 42% direct noncontrolling economic interest will continue to decrease as Class A common units of FC-GEN are exchanged for public shares of ours.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09) which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. We are still evaluating the effect, if any, ASU 2014-09 will have on our consolidated financial condition and results of operations.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02), which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new guidance excludes money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940 and similar entities from the U.S. GAAP consolidation requirements. The adoption of ASU 2015-02 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. If adopted in an interim period, this ASU must be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU No. 2015-02 is not expected to have a material impact on our consolidated financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, (ASU 2015-03) and in August 2015 issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-03 requires an entity to present debt issuance costs as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The costs will continue to be amortized to interest expense using the effective interest method. While ASU 2015-03 addresses costs related to term debt, ASU No. 2015-15 provides clarification regarding costs to secure revolving lines of credit, which are, at the outset, not associated with an outstanding borrowing. ASU 2015-15 provides commentary that the SEC staff would not object to an entity deferring and presenting costs associated with line-of-credit arrangements as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement. The adoption of ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. This ASU requires retrospective application to all prior periods presented in the financial statements. The adoption of ASU 2015-03 is not expected to have a material impact on our consolidated financial condition and results of operations.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The adoption of ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. We are still evaluating the effect, if any, ASU 2015-16 will have on our consolidated financial condition and results of operations.

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Regulatory and other Governmental Actions Affecting Revenue

We derive a substantial portion of our revenue from government Medicare and Medicaid programs. In addition, our rehabilitation therapy services, for which we receive payment from private payors, is significantly dependent on Medicare and Medicaid funding, as those private payors are primarily funded or reimbursed by these programs. Medicare and Medicaid reimbursement rates and procedures are subject to change from time to time, which could materially impact our revenue.

On July 9, 2015, the Centers for Medicare & Medicaid Services (CMS) proposed a new mandatory Comprehensive Care for Joint Replacement (CCJR) model focusing on coordinated, patient-centered care. Under this proposed model, the hospital in which the hip or knee replacement takes place would be accountable for the costs and quality of care from the time of the surgery through 90 days after or an “episode” of care. Depending on the hospital’s quality and cost performance during the episode, the hospital would either earn a financial reward or be required to repay Medicare for a portion of the costs. This payment would give hospitals an incentive to work with physicians, home health agencies, and nursing facilities to make sure beneficiaries receive the coordinated care they need with the goal of reducing avoidable hospitalizations and complications. This proposed model would be in 75 geographic areas throughout the country and most hospitals in those regions would be required to participate. Following publication of a final rule and implementation of the CCJR program, our Medicare revenues derived from our affiliated skilled nursing facilities and other post-acute services related to lower extremity joint replacement hospital discharges could be increased or reduced in those geographic areas identified by CMS for mandatory participation in the bundled payment program.

On July 13, 2015, CMS released a proposed rule that would reform requirements for long-term care facilities, specifically skilled nursing facilities and nursing facilities, that participate in Medicare and Medicaid. The rule would reorder, clarify, and update regulations that the agency has not reviewed comprehensively since 1991. Under the proposed rule, facilities are required to 1) create interim care plans within 48 hours of admission; notify a resident’s physician after a change in status, engage in interdisciplinary care planning, have a practitioner assess the patient in-person prior to a transfer to the hospital, and improve clinical records to ensure providers have the necessary information to decide on hospitalization; 2) conduct comprehensive assessments of their staff and patient needs, apply current requirements for antipsychotic drugs to all psychotropic drugs, and require physicians to document their response to irregularities identified by consultant pharmacists; 3) conduct assessments of their resident population, implement and update periodically an infection prevention and control program, and establish an antibiotic stewardship program; 4) address requirements related to behavioral health services, ensuring facilities have adequate staffing to meet the needs of residents with mental illness and cognitive impairment; and 5) conduct assessments of their patient populations and related care needs to determine adequate staffing levels (i.e., number and skillsets) for nursing, behavioral health, and nutritional services. CMS estimates that these proposed regulations would cost facilities nearly $46.5 million in the first year and over $40.6 million in subsequent years. However, these amounts would vary considerably among organizations. In addition to the monetary costs, these regulations may create compliance issues, as state regulators and surveyors interpret requirements that are less explicit.

On July 30, 2015, CMS issued its final rule outlining fiscal year 2016 Medicare payment rates for skilled nursing facilities. CMS estimates that aggregate payments to skilled nursing facilities will increase by 1.2% for fiscal year 2016. This estimated increase reflected a 2.3% market basket increase, reduced by a 0.6% point forecast error adjustment and further reduced by a 0.5% multi-factor productivity adjustment required by the Patient Protection and Affordable Care Act. This final rule also identified a new skilled nursing facility value-based purchasing program and an all-cause all-condition hospital readmission measure.

On April 16, 2015, the President signed into law the H.R. 2 Medicare Access and State Children's Health Insurance Program (CHIP) Reauthorization Act of 2015. This bill includes a number of provisions, including replacement of the Sustainable Growth Rate (SGR) formula used by Medicare to pay physicians with new systems for establishing annual payment rate updates for physicians' services. In addition, it increases premiums for Part B and Part D of Medicare for beneficiaries with income above certain levels and makes numerous other changes to Medicare and Medicaid.

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Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. Congress has established annual caps that limit the amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services rendered to any Medicare beneficiary under Medicare Part B. The Deficit Reduction Act of 2005 added Sec. 1833(g)(5) of the Social Security Act and directed CMS to develop a process that allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary. Annual limitations on beneficiary incurred expenses for outpatient therapy services under Medicare Part B are commonly referred to as “therapy caps.” For physical therapy (PT) and speech-language pathology services (SLP) combined, the limit on incurred expenses is $1,940 in 2015. For occupational therapy (OT) services, the limit is $1,940 in 2015. On October 30, 2015, CMS issued final rules for calendar year 2016 resulting in therapy caps increasing to $1,960.

An “exceptions process” to the therapy caps was in effect through March 31, 2015 under the Protecting Access to Medicare Act of 2014. For claims furnished through March 31, 2015 that exceed the therapy caps, therapy service providers and suppliers may request an exception when one is appropriate. Manual policies relevant to the exceptions process apply only when exceptions to the therapy caps are in effect. The therapy exception process was again extended and the expected SGR of 21% to the Physician Fee Screen for outpatient therapy services was repealed through the H.R. 2 Medicare Access and CHIP Reauthorization Act of 2015. Under the act, the therapy cap exception went into effect on April 1, 2015 and extends through December 31, 2017.

A manual medical review process, as part of the therapy exceptions process, applies to therapy claims when a beneficiary’s incurred expenses exceed a threshold amount of $3,700 annually. Specifically, combined PT and SLP services that exceed $3,700 are subject to manual medical review, as well as OT services that exceed $3,700. A beneficiary’s incurred expenses apply towards the manual medical review thresholds in the same manner as it applies to the therapy caps. Manual medical review was in effect through a post-payment review system until March 31, 2015. As part of the Medicare Access and CHIP Reauthorization Act of 2015, the manual medical review process will be replaced with a new process to be developed by the Secretary of Health and Human Services.

For a discussion of historic adjustments and recent changes to the Medicare program and related reimbursement rates, please refer to those discussions included in our most recent Annual Report on Form 10-K, filed on February 20, 2015, as well as Part I, Item 1A, “Risk Factors” of that document. The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to predict the outcome of the legislative process. We also cannot predict the extent to which proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue and could adversely affect our business, financial condition and results of operations.

Key Financial Performance Indicators

In order to compare our financial performance between periods, we assess certain key performance indicators for each of our operating segments separately for the periods presented.

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

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

“Adjusted EBITDA” is defined as EBITDA adjusted for (1) the conversion to cash basis leases (2) newly acquired or constructed businesses with start-up losses and (3) other adjustments. 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 (1) the conversion to cash basis leases (2) newly acquired or constructed businesses with start-up losses and (3) other adjustments. See “Reasons for Non-GAAP Financial

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Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

“Available Patient Days” is defined as the number of available beds (or units in the case of an assisted 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 living center) over a period of time, divided by the number of calendar days in that period;

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

“EBITDAR” is defined as net income or loss before depreciation and amortization expense, interest expense, lease expense, loss (gain) on extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairment, income tax expense (benefit) and loss from discontinued operations. 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, but does not include managed care payors serving Medicaid residents, which are included in the Medicaid category;

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

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

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

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


	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(In thousands)				(In thousands)

Financial Results
Net revenues	$	1,416,027	$	1,187,618	$	4,178,503	$	3,574,813
EBITDAR		181,231		146,384		542,086		456,235
EBITDA		143,576		113,463		429,053		357,606
Adjusted EBITDAR		188,779		149,637		564,556		464,111
Adjusted EBITDA		67,205		36,619		204,187		128,590

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INPATIENT SEGMENT:


	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014

Occupancy Statistics - Inpatient
Available licensed beds in service at end of period		56,499			46,817			56,499			46,817
Available operating beds in service at end of period		55,036			45,454			55,036			45,454
Available patient days based on licensed beds		5,164,465			4,290,770			15,095,406			12,711,149
Available patient days based on operating beds		5,027,803			4,164,658			14,652,995			12,328,771
Actual patient days		4,324,403			3,706,574			12,751,587			11,014,125
Occupancy percentage - licensed beds		83.7	%		86.4	%		84.5	%		86.6	%
Occupancy percentage - operating beds		86.0	%		89.0	%		87.0	%		89.3	%
Skilled mix		20.6	%		21.1	%		21.8	%		21.8	%
Average daily census		47,004			40,289			46,709			40,345

Revenue per patient day (skilled nursing facilities)
Medicare Part A	$	503		$	490		$	502		$	491
Medicare total (including Part B)		545			528			540			529
Insurance		451			457			448			450
Private and other		263			314			295			318
Medicaid		216			213			216			213
Medicaid (net of provider taxes)		195			192			195			193
Weighted average (net of provider taxes)	$	266		$	267		$	270		$	270

Patient days by payor (skilled nursing facilities)
Medicare		538,503			507,110			1,691,696			1,575,033
Insurance		288,314			221,984			883,236			670,590
Total skilled mix days		826,817			729,094			2,574,932			2,245,623
Private and other		299,153			247,528			862,777			728,496
Medicaid		2,879,447			2,480,315			8,392,143			7,314,657
Total Days		4,005,417			3,456,937			11,829,852			10,288,776

Patient days as a percentage of total patient days (skilled nursing facilities)
Medicare		13.4	%		14.7	%		14.3	%		15.3	%
Insurance		7.2	%		6.4	%		7.5	%		6.5	%
Skilled mix		20.6	%		21.1	%		21.8	%		21.8	%
Private and other		7.5	%		7.2	%		7.3	%		7.1	%
Medicaid		71.9	%		71.7	%		70.9	%		71.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

Facilities at end of period
Skilled nursing facilities
Leased		383			358			383			358
Owned		33			2			33			2
Joint Venture		5			5			5			5
Managed *		32			14			32			14
Total skilled nursing facilities		453			379			453			379
Total licensed beds		54,545			46,160			54,545			46,160

Assisted living facilities:
Leased		30			28			30			28
Owned		22			1			22			1
Joint Venture		1			1			1			1
Managed		3			4			3			4
Total assisted living facilities		56			34			56			34
Total licensed beds		4,437			2,762			4,437			2,762
Total facilities		509			413			509			413

Total Jointly Owned and Managed— (Unconsolidated)		16			17			16			17

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REHABILITATION THERAPY SEGMENT:


	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014

Revenue mix %:
Company-operated		37	%		37	%		38	%		37	%
Non-affiliated		63	%		63	%		62	%		63	%
Sites of service (at end of period)		1,602			1,379			1,602			1,379
Revenue per site	$	168,797		$	170,912		$	497,731		$	521,110
Therapist efficiency %		68	%		66	%		69	%		69	%

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

Reasons for Non-GAAP Financial Disclosure

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

We believe the presentation of EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA 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 relationship each reporting period between our cash basis lease expense and the level of operating earnings available to fund lease expense; and

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

We use EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss). We use EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA as measures to assess the relative performance of our operating businesses, as well as the employees responsible for operating such businesses. EBITDAR, Adjusted EBITDAR,

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EBITDA and Adjusted EBITDA 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 the operating performance of the business unit and the employees responsible for business unit performance. Consequently, we use these non-GAAP measures to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards.

We also use EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA in our annual budget process. We believe these non-GAAP 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 EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA as financial measures to assess the performance of our business, the use of these non-GAAP 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 EBITDAR and Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses (gains) on extinguishment of debt, transaction costs, long-lived asset impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributed to non-controlling interests. Because EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA do not consider these important elements of our cost structure, a user of our financial information who relies on EBITDAR, Adjusted EBITDAR, EBITDA or Adjusted EBITDA 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) as an important measure of its financial performance because it provides the most complete measure of our performance.

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

The following tables provide reconciliations to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA from net income (loss) the most directly comparable financial measure presented in accordance with GAAP:

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GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	As reported		Adjustments						As adjusted
					Newly acquired
					or constructed
					businesses with
					start-up losses
	Three months		Conversion to		and newly				Three months
	ended September 30,		cash basis		divested		Other		ended September 30,
	2015		leases (a)		facilities (b)		adjustments (c)		2015

Net revenues	$	1,416,027	$	—	$	(10,750)	$	—	$	1,405,277
Salaries, wages and benefits		833,415		—		(6,616)		(477)		826,322
Other operating expenses		332,918		—		(6,340)		686		327,264
General and administrative costs		46,110		—		—		(5,194)		40,916
Provision for losses on accounts receivable		23,346		—		(357)		—		22,989
Lease expense		37,655		86,221		(2,302)		—		121,574
Depreciation and amortization expense		62,505		(33,502)		(3,020)		—		25,983
Interest expense		128,538		(105,057)		—		—		23,481
Gain on extinguishment of debt		(3,104)		—		—		3,104		—
Other income		38		—		(38)		—		—
Investment income		(353)		—		—		—		(353)
Transaction costs		3,306		—		(63)		(3,243)		—
Skilled Healthcare loss contingency expense		30,000		—		—		(30,000)		—
Equity in net income of unconsolidated affiliates		(640)		—		—		—		(640)
(Loss) income before income tax benefit	$	(77,707)	$	52,338	$	7,986	$	35,124	$	17,741
Income tax (benefit) expense		(16,726)		12,149		1,854		8,153		5,430
(Loss) income from continuing operations	$	(60,981)	$	40,189	$	6,132	$	26,971	$	12,311
(Gain) loss from discontinued operations, net of taxes		(39)		162		—		—		123
Net (loss) income attributable to noncontrolling interests		(31,990)		21,966		(351)		14,629		4,254
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(28,952)	$	18,061	$	6,483	$	12,342	$	7,934
Depreciation and amortization expense		62,505		(33,502)		(3,020)		—		25,983
Interest expense		128,538		(105,057)		—		—		23,481
Gain on extinguishment of debt		(3,104)		—		—		3,104		—
Other income		38		—		(38)		—		—
Transaction costs		3,306		—		(63)		(3,243)		—
Skilled Healthcare loss contingency expense		30,000		—		—		(30,000)		—
Income tax (benefit) expense		(16,726)		12,149		1,854		8,153		5,430
(Gain) loss from discontinued operations, net of taxes		(39)		162		—		—		123
Net (loss) income attributable to noncontrolling interests		(31,990)		21,966		(351)		14,629		4,254
EBITDA / Adjusted EBITDA	$	143,576	$	(86,221)	$	4,865	$	4,985	$	67,205
Lease expense		37,655		86,221		(2,302)		—		121,574
EBITDAR / Adjusted EBITDAR	$	181,231	$	—	$	2,563	$	4,985	$	188,779

(Loss) income per common share:
Diluted:
Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)		89,213								153,671
Diluted net (loss) income from continuing operations per share (e)	$	(0.32)							$	0.07

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GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	As reported		Adjustments						As adjusted
					Newly acquired
					or constructed
					businesses with
					start-up losses
	Three months		Conversion to		and newly
	ended September 30,		cash basis		divested		Other		Three months ended
	2014		leases (a)		facilities (b)		adjustments (c)		September 30, 2014

Net revenues	$	1,187,618	$	—	$	(3,533)	$	—	$	1,184,085
Salaries, wages and benefits		723,586		—		(3,444)		(308)		719,834
Other operating expenses		265,283		—		(1,744)		(1,290)		262,249
General and administrative costs		36,341		—		—		—		36,341
Provision for losses on accounts receivable		17,285		—		—		—		17,285
Lease expense		32,921		80,625		(528)		—		113,018
Depreciation and amortization expense		48,701		(33,232)		(41)		—		15,428
Interest expense		112,121		(99,188)		—		—		12,933
Other income		30		—		—		(30)		—
Investment income		(1,468)		—		—		—		(1,468)
Transaction costs		1,736		—		—		(1,736)		—
Equity in net loss of unconsolidated affiliates		207		—		—		—		207
(Loss) income before income tax benefit	$	(49,125)	$	51,795	$	2,224	$	3,364	$	8,258
Income tax (benefit) expense		(6,518)		5,190		194		345		(789)
(Loss) income from continuing operations	$	(42,607)	$	46,605	$	2,030	$	3,019	$	9,047
Loss (income) from discontinued operations, net of taxes		1,191		(621)		—		—		570
Net loss attributable to noncontrolling interests		961		—		—		—		961
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(44,759)	$	47,226	$	2,030	$	3,019	$	7,516
Depreciation and amortization expense		48,701		(33,232)		(41)		—		15,428
Interest expense		112,121		(99,188)		—		—		12,933
Other income		30		—		—		(30)		—
Transaction costs		1,736		—		—		(1,736)		—
Income tax (benefit) expense		(6,518)		5,190		194		345		(789)
Loss (income) from discontinued operations, net of taxes		1,191		(621)		—		—		570
Net loss attributable to noncontrolling interests		961		—		—		—		961
EBITDA / Adjusted EBITDA	$	113,463	$	(80,625)	$	2,183	$	1,598	$	36,619
Lease expense		32,921		80,625		(528)		—		113,018
EBITDAR / Adjusted EBITDAR	$	146,384	$	—	$	1,655	$	1,598	$	149,637

(Loss) income per common share:
Diluted:
Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)		49,865
Diluted net (loss) income from continuing operations per share (e)	$	(0.88)								Not calculated

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GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	As reported		Adjustments						As adjusted
					Newly acquired
					or constructed
					businesses with
					start-up losses
	Nine months		Conversion to		and newly				Nine months
	ended September 30,		cash basis		divested		Other		ended September 30,
	2015		leases (a)		facilities (b)		adjustments (c)		2015

Net revenues	$	4,178,503	$	—	$	(32,115)	$	388	$	4,146,776
Salaries, wages and benefits		2,445,074		—		(19,129)		(477)		2,425,468
Other operating expenses		993,715		—		(15,993)		(10,534)		967,188
General and administrative costs		131,126		—		—		(7,456)		123,670
Provision for losses on accounts receivable		68,855		—		(608)		—		68,247
Lease expense		113,033		254,566		(7,230)		—		360,369
Depreciation and amortization expense		176,043		(101,291)		(4,463)		—		70,289
Interest expense		376,236		(311,371)		(40)		—		64,825
Loss on extinguishment of debt		130		—		—		(130)		—
Other income		(7,522)		—		(38)		7,560		—
Investment income		(1,200)		—		—		—		(1,200)
Transaction costs		92,016		—		(63)		(91,953)		—
Skilled Healthcare loss contingency expense		31,500		—		—		(31,500)		—
Equity in net income of unconsolidated affiliates		(1,153)		—		—		—		(1,153)
(Loss) income before income tax benefit	$	(239,350)	$	158,096	$	15,449	$	134,878	$	69,073
Income tax (benefit) expense		(26,793)		36,697		3,586		31,308		44,798
(Loss) income from continuing operations	$	(212,557)	$	121,399	$	11,863	$	103,570	$	24,275
Loss from discontinued operations, net of taxes		1,571		1,082		—		—		2,653
Net (loss) income attributable to noncontrolling interests		(53,424)		29,591		2,088		27,911		6,166
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(160,704)	$	90,726	$	9,775	$	75,659	$	15,456
Depreciation and amortization expense		176,043		(101,291)		(4,463)		—		70,289
Interest expense		376,236		(311,371)		(40)		—		64,825
Loss on extinguishment of debt		130		—		—		(130)		—
Other income		(7,522)		—		(38)		7,560		—
Transaction costs		92,016		—		(63)		(91,953)		—
Skilled Healthcare loss contingency expense		31,500		—		—		(31,500)		—
Income tax (benefit) expense		(26,793)		36,697		3,586		31,308		44,798
Loss from discontinued operations, net of taxes		1,571		1,082		—		—		2,653
Net (loss) income attributable to noncontrolling interests		(53,424)		29,591		2,088		27,911		6,166
EBITDA / Adjusted EBITDA	$	429,053	$	(254,566)	$	10,845	$	18,855	$	204,187
Lease expense		113,033		254,566		(7,230)		—		360,369
EBITDAR / Adjusted EBITDAR	$	542,086	$	—	$	3,615	$	18,855	$	564,556

(Loss) income per common share:
Diluted:
Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)		84,615								153,671
Diluted net (loss) income from continuing operations per share (e)	$	(1.88)							$	0.27

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GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	As reported		Adjustments						As adjusted
					Newly acquired
					or constructed
					businesses with
					start-up losses
	Nine months		Conversion to		and newly
	ended September 30,		cash basis		divested		Other		Nine months ended
	2014		leases (a)		facilities (b)		adjustments (c)		September 30, 2014

Net revenues	$	3,574,813	$	—	$	(10,711)	$	1,166	$	3,565,268
Salaries, wages and benefits		2,162,064		—		(8,488)		(2,014)		2,151,562
Other operating expenses		798,432		—		(4,796)		(2,123)		791,513
General and administrative costs		108,187		—		—		—		108,187
Provision for losses on accounts receivable		52,881		—		—		—		52,881
Lease expense		98,629		238,505		(1,613)		—		335,521
Depreciation and amortization expense		145,131		(98,625)		(114)		—		46,392
Interest expense		330,771		(292,256)		—		—		38,515
Loss on extinguishment of debt		679		—		—		(679)		—
Other income		(637)		—		—		637		—
Investment income		(2,847)		—		—		—		(2,847)
Transaction costs		5,283		—		—		(5,283)		—
Equity in net income of unconsolidated affiliates		(139)		—		—		—		(139)
(Loss) income before income tax benefit	$	(123,621)	$	152,376	$	4,300	$	10,628	$	43,683
Income tax (benefit) expense		(9,368)		11,547		326		805		3,310
(Loss) income from continuing operations	$	(114,253)	$	140,829	$	3,974	$	9,823	$	40,373
Loss from discontinued operations, net of taxes		5,561		(2,585)		—		—		2,976
Net loss attributable to noncontrolling interests		1,370		—		—		—		1,370
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(121,184)	$	143,414	$	3,974	$	9,823	$	36,027
Depreciation and amortization expense		145,131		(98,625)		(114)		—		46,392
Interest expense		330,771		(292,256)		—		—		38,515
Loss on extinguishment of debt		679		—		—		(679)		—
Other income		(637)		—		—		637		—
Transaction costs		5,283		—		—		(5,283)		—
Income tax (benefit) expense		(9,368)		11,547		326		805		3,310
Loss from discontinued operations, net of taxes		5,561		(2,585)		—		—		2,976
Net income attributable to noncontrolling interests		1,370		—		—		—		1,370
EBITDA / Adjusted EBITDA	$	357,606	$	(238,505)	$	4,186	$	5,303	$	128,590
Lease expense		98,629		238,505		(1,613)		—		335,521
EBITDAR / Adjusted EBITDAR	$	456,235	$	—	$	2,573	$	5,303	$	464,111

(Loss) income per common share:
Diluted:
Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)		49,865
Diluted net (loss) income from continuing operations per share (e)	$	(2.32)								Not calculated

(a)

Our leases are classified as either operating leases, capital leases or financing obligations pursuant to applicable guidance under U.S. GAAP. We view the primary provisions and economics of these leases, regardless of their accounting treatment, as being nearly identical. Virtually all of our leases are structured with triple net terms, have fixed annual rent escalators and have long-term initial maturities with renewal options. Accordingly, in connection with our evaluation of our financial performance, we reclassify all of our leases to operating lease treatment and

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reflect lease expense on a cash basis. This approach allows us to better understand the relationship in each reporting period of our operating performance, as measured by EBITDAR and Adjusted EBITDAR, to the cash basis obligations to our landlords in that reporting period, regardless of the lease accounting treatment. This presentation and approach is also consistent with the financial reporting and covenant compliance requirements contained in all of our major lease and loan agreements. The following table summarizes the reclassification adjustments necessary to present all leases as operating leases on a cash basis:


	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)				(in thousands)
Lease expense:
Cash rent - capital leases	$	23,062	$	22,374	$	68,910	$	66,768
Cash rent - financing obligations		64,736		61,375		191,571		181,007
Non-cash - operating lease arrangements		(1,577)		(3,124)		(5,915)		(9,270)
Lease expense adjustments	$	86,221	$	80,625	$	254,566	$	238,505

Depreciation and amortization expense:
Capital lease accounting	$	(8,495)	$	(8,848)	$	(26,570)	$	(27,128)
Financing obligation accounting		(25,007)		(24,384)		(74,721)		(71,497)
Depreciation and amortization expense adjustments	$	(33,502)	$	(33,232)	$	(101,291)	$	(98,625)

Interest expense:
Capital lease accounting	$	(26,503)	$	(25,287)	$	(78,146)	$	(74,496)
Financing obligation accounting		(78,554)		(73,901)		(233,225)		(217,760)
Interest expense adjustments	$	(105,057)	$	(99,188)	$	(311,371)	$	(292,256)

Total pre-tax lease accounting adjustments	$	(52,338)	$	(51,795)	$	(158,096)	$	(152,376)

(b)

The acquisition and construction of new businesses has become an important 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 EBITDAR and Adjusted EBITDA in order to better evaluate the performance of our core business. The activities of such businesses are adjusted when computing Adjusted EBITDAR and Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA. The operating performance of new businesses are no longer adjusted when computing Adjusted EBITDAR and Adjusted EBITDA beginning the period in which a new business generates positive Adjusted EBITDA and all periods thereafter. The divestiture of underperforming or non-strategic facilities has also become an important element of our earnings optimization 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 non-recurring and not indicative of the performance of our core business.

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(c)

Other adjustments represent costs or gains associated with transactions or events that we do not believe are reflective of our core recurring operating business. The following items were realized in the periods presented:


	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(in thousands)				(in thousands)
Severance and restructuring (1)	$	742	$	507	$	3,121	$	2,213
Regulatory defense and related costs (2)		2,293		460		2,755		1,960
New business development costs (3)		—		631		—		1,130
Self-insurance adjustment (4)		—		—		10,500		—
Transaction costs (5)		3,243		1,736		91,953		5,283
Governmental investigation contingency expense (8)		30,000		—		31,500		—
(Gain) loss on early extinguishment of debt		(3,104)		—		130		679
Other income (6)		—		30		(7,560)		(637)
Stock based compensation (7)		1,950		—		2,479		—
Tax benefit from total adjustments		(8,153)		(345)		(31,308)		(805)
Total other adjustments	$	26,971	$	3,019	$	103,570	$	9,823

(1)

We incurred costs related to the termination, severance and restructuring of certain components of our business.

(2)

We incurred legal defense and other related costs in connection with certain matters in dispute or under appeal with regulatory agencies.

(3)

We incurred business development costs in connection with the evaluation and start-up of services outside our existing service offerings.

(4)

We incurred a self-insured program adjustment for the actuarially developed prior period GLPL and worker's compensation claims. We also recorded approximately $6.0 million of incremental development related to the first nine months of 2015, which has not been excluded from our non GAAP results.

(5)

We incurred costs associated with transactions including the combination with Skilled Healthcare Group, Inc. and other transactions.

(6)

We realized a net gain on the sale of certain assets in the nine months ended September 30, 2015.

(7) We incurred $2.5 million of non-cash stock-based compensation related to restricted stock units in the nine months ended September 30, 2015.

(8) We recognized $31.5 million of loss contingency expense associated with three Skilled Healthcare regulatory matters.

(d)

Assumes 153.7 million diluted weighted average common shares outstanding and common stock equivalents on a fully exchanged basis.

(e)

Pro forma adjusted income from continuing operations per share assumes a tax rate of 40%, and is computed as follows: Pro forma adjusted income before income taxes x (1 - 40% tax rate) / diluted weighted average shares on a fully exchanged basis.

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Results of Operations

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

A summary of our unaudited results of operations for the three months ended September 30, 2015 as compared with the same period in 2014 follows:


	Three months ended September 30,
	2015				2014				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage

	(in thousands, except percentages)
Revenues:
Inpatient services:
Skilled nursing facilities	$	1,155,123	81.5	%	$	979,767	82.4	%	$	175,356	17.9	%
Assisted living facilities		36,635	2.6	%		26,958	2.3	%		9,677	35.9	%
Administration of third party facilities		2,225	0.2	%		2,539	0.2	%		(314)	(12.4)	%
Elimination of administrative services		(421)	—	%		(495)	—	%		74	(14.9)	%
Inpatient services, net		1,193,562	84.3	%		1,008,769	84.9	%		184,793	18.3	%

Rehabilitation therapy services:
Total therapy services		281,151	19.9	%		247,328	20.9	%		33,823	13.7	%
Elimination intersegment rehabilitation therapy services		(107,112)	(7.6)	%		(99,320)	(8.4)	%		(7,792)	7.8	%
Third party rehabilitation therapy services		174,039	12.3	%		148,008	12.5	%		26,031	17.6	%

Other services:
Total other services		58,804	4.1	%		38,508	3.2	%		20,296	52.7	%
Elimination intersegment other services		(10,378)	(0.7)	%		(7,667)	(0.6)	%		(2,711)	35.4	%
Third party other services		48,426	3.4	%		30,841	2.6	%		17,585	57.0	%

Total revenue	$	1,416,027	100.0	%	$	1,187,618	100.0	%	$	228,409	19.2	%


	Three months ended September 30,
	2015				2014				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage

	(in thousands, except percentages)
EBITDAR:
Inpatient services	$	194,323	16.3	%	$	159,693	15.8	%	$	34,630	21.7	%
Rehabilitation therapy services		27,497	9.8	%		22,076	8.9	%		5,421	24.6	%
Other services		4,173	7.1	%		1,290	3.3	%		2,883	223.5	%
Corporate and eliminations		(44,762)	-	%		(36,675)	-	%		(8,087)	22.1	%

EBITDAR	$	181,231	12.8	%	$	146,384	12.3	%	$	34,847	23.8	%

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A summary of our unaudited condensed consolidating statement of operations follows:



	Three months ended September 30, 2015
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	1,193,983	$	281,151	$	58,501	$	303	$	(117,911)	$	1,416,027
Salaries, wages and benefits		568,888		228,801		35,726		—		—		833,415
Other operating expenses		413,055		19,513		18,260		—		(117,910)		332,918
General and administrative costs		—		220		1		45,889		—		46,110
Provision for losses on accounts receivable		18,514		5,120		341		(629)		—		23,346
Lease expense		36,577		28		589		461		—		37,655
Depreciation and amortization expense		53,384		3,904		349		4,868		—		62,505
Interest expense		106,433		14		11		22,123		(43)		128,538
(Gain) loss on extinguishment of debt		(3,104)		—		—		—		—		(3,104)
Investment income		(353)		—		—		(43)		43		(353)
Other loss		38		—		—		—		—		38
Transaction costs		119		—		—		3,187		—		3,306
Governmental investigation contingency expense		—		—		—		30,000		—		30,000
Equity in net (income) loss of unconsolidated affiliates		(443)		—		—		(628)		431		(640)
(Loss) income before income tax benefit		875		23,551		3,224		(104,925)		(432)		(77,707)
Income tax benefit		—		—		—		(16,726)		—		(16,726)
(Loss) income from continuing operations	$	875	$	23,551	$	3,224	$	(88,199)	$	(432)	$	(60,981)


	Three months ended September 30, 2014
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	1,009,265	$	247,328	$	38,263	$	245	$	(107,483)	$	1,187,618
Salaries, wages and benefits		494,109		205,017		24,460		—		—		723,586
Other operating expenses		344,934		15,470		12,363		—		(107,484)		265,283
General and administrative costs		—		—		—		36,341		—		36,341
Provision for losses on accounts receivable		12,368		4,765		150		2		—		17,285
Lease expense		32,452		44		204		221		—		32,921
Depreciation and amortization expense		41,569		2,771		232		4,129		—		48,701
Interest expense		95,250		—		280		16,716		(125)		112,121
Investment income		(1,211)		—		—		(382)		125		(1,468)
Other (income) loss		(46)		—		76		—		—		30
Transaction costs		—		—		—		1,736		—		1,736
Equity in net (income) loss of unconsolidated affiliates		(628)		—		—		—		835		207
(Loss) income before income tax benefit		(9,532)		19,261		498		(58,518)		(834)		(49,125)
Income tax benefit		—		—		—		(6,518)		—		(6,518)
(Loss) income from continuing operations	$	(9,532)	$	19,261	$	498	$	(52,000)	$	(834)	$	(42,607)

Prior to February 1, 2015, our results of operations exclude the revenue and expenses of Skilled’s businesses. For comparability, those revenue and expense variances attributed solely to the combination of Skilled’s businesses with ours, commencing on February 1, 2015, will be identified in the discussion of the results of operations. References to “legacy” businesses identify those businesses operating as either Skilled or Genesis, respectively, prior to the Combination.

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Total Revenues

Total revenue for the three months ended September 30, 2015 as compared with the same period in 2014 increased by $228.4 million. Of that increase, Skilled’s businesses contributed $225.5 million. The remaining increase of $2.9 million or 0.2% is described further in our discussion of segment revenues as follows.

Inpatient Services – Revenue increased $184.7 million, or 18.3%, in the three months ended September 30, 2015 as compared with the same period in 2014. Of this growth, $178.0 million is due to the Combination and $23.9 million is due to the acquisition or development of 11 facilities, offset by $12.4 million of revenue attributed to the divestiture of five underperforming facilities. The remaining decrease of $4.8 million, or 0.4%, is due to a decline in the occupancy of legacy Genesis inpatient facilities, partially offset by increased payment rates.

Rehabilitation Therapy Services – Revenue increased $33.8 million, or 13.7% comparing the three months ended September 30, 2015 with the same period in 2014. The Combination contributed $30.6 million of revenue growth, while the legacy Genesis rehabilitation business revenue increased $3.2 million, driven by new business contract revenue exceeding lost business contract revenue.

Other Services – Other services revenue increased $20.3 million, or 52.7% in the three months ended September 30, 2015 as compared with the same period in 2014. Of this increase, the Combination contributed $16.9 million through the hospice and home health businesses. The remaining increase of $3.4 million, or 8.8% was principally attributed to new business growth in our staffing services business line.

EBITDAR

EBITDAR for the three months ended September 30, 2015 increased by $34.8 million, or 23.8% when compared with the same period in 2014. Of that increase, Skilled’s businesses contributed an estimated $27.7 million after an estimated overhead allocation of 2.5% of its revenues for the eight month period following the Combination. The remaining increase of approximately $7.1 million or 4.8% is described further in our discussion of segment results and corporate overhead as follows.

Inpatient Services – EBITDAR increased in the three months ended September 30, 2015 as compared with the same period in 2014, by $34.6 million, or 21.7%. Of the increase, $29.7 million is attributed to the Combination and $4.6 million is due to the acquisition or development of 11 facilities, offset by a reduction of $0.8 million attributed to the divestiture or closure of five underperforming facilities.

Rehabilitation Therapy Services – EBITDAR of the rehabilitation therapy segment increased by $5.4 million or 24.6% comparing the three months ended September 30, 2015 with the same period in 2014. The Combination contributed $1.2 million, while the EBITDAR of the legacy Genesis rehabilitation therapy business EBITDAR increased another $4.2 million in the same period. This increase is attributed primarily to an increase in Therapist Efficiency from 66% in the 2014 quarter to 68% in the 2015 quarter. The net increase in business volume also contributed to the increase.

Other Services – EBITDAR increased $2.9 million in the three months ended September 30, 2015 as compared with the same period in 2014. Of that increase, the Combination contributed $2.4 million, principally through the addition of hospice and homecare businesses. The remaining $0.5 million of EBITDAR growth is attributed to the staffing services businesses.

Corporate and Eliminations — Corporate overhead costs increased $8.1 million, or 22.0%, in the three months ended September 30, 2015 as compared with the same period in 2014. This increase was largely due to the added overhead costs of Skilled.

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Other Expense

The following discussion applies to the consolidated expense categories between consolidated EBITDAR and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our unaudited condensed consolidating statement of operations for the three months ended September 30, 2015 as compared with the same period in 2014.

Lease expense — Lease expense represents the cash rents and non-cash adjustments required to account for operating leases. We have operating leases in each reportable segment, other services and corporate overhead, but the inpatient services business incurs the greatest proportion of this expense for those skilled nursing and assisted living facilities accounted for as operating leases. Lease expense increased $4.7 million in the three months ended September 30, 2015 as compared with the same period in the prior year. Of that increase, $5.6 million resulted from the Combination and $1.0 million from three new operating leases, with the decrease of $1.9 million principally due to our efforts to divest of underperforming leased facilities.

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. The majority of the $13.8 million increase in depreciation and amortization in the three months ended September 30, 2015 compared with the same period in the prior year, is attributed to the Combination.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our revolving credit facilities, term loan facility, real estate bridge loan and mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations. Interest expense increased $16.4 million in the three months ended September 30, 2015 as compared with the same period in the prior year. Of this increase, $9.3 million is attributed to the Combination and the associated real estate bridge loan and individual mortgages of Skilled’s skilled nursing and assisted living facilities. The remaining $7.1 million increase is primarily attributable to growth in interest pertaining to existing lease obligations and obligations incurred in connection with newly acquired or constructed facilities.

Skilled Healthcare loss contingency expense — For the three months ended September 30, 2015, we accrued $30.0 million for a contingent liability. We are engaged in discussions with representatives of the Department of Justice in an effort to reach mutually acceptable resolution of two investigations involving therapy matters and staffing matters related to Skilled’s business prior to the Combination. Discussions have progressed to a point where we believe it is appropriate to recognize an estimated loss contingency reserve. Recognition of the loss contingency reserve is not an admission of liability or fault by us or any of our subsidiaries. Because these discussions are ongoing, there can be no certainty about the timing or likelihood of a definitive resolution. As these discussions proceed and additional information becomes available, the amount of the estimated loss contingency reserve may need to be increased or decreased to reflect this new information.

Transaction costs — In the normal course of business, Genesis evaluates 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 month periods ended September 30, 2015 and 2014 were $3.3 million and $1.7 million, respectively, and of the amount in the 2015 period, the Combination contributed $1.9 million.

Income tax benefit — For the three months ended September 30, 2015, we recorded an income tax benefit of $16.7 million from continuing operations representing an effective tax rate of 21.5% compared to an income tax benefit of $6.5 million from continuing operations, representing an effective tax rate of 13.2% for the same period in 2014. The increase in the effective tax rate results principally from a higher percentage of Company profits becoming subject to corporate tax as a result of restructuring related to the Combination.

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Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

A summary of our unaudited results of operations for the nine months ended September 30, 2015 as compared with the same period in 2014 follows:


	Nine months ended September 30,
	2015				2014				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
	(in thousands, except percentages)
Revenues:
Inpatient services:
Skilled nursing facilities	$	3,424,788	81.9	%	$	2,935,732	82.1	%	$	489,056	16.7	%
Assisted living facilities		106,497	2.5	%		79,654	2.2	%		26,843	33.7	%
Administration of third party facilities		7,724	0.2	%		7,790	0.2	%		(66)	(0.8)	%
Elimination of administrative services		(1,445)	—	%		(1,422)	—	%		(23)	1.6	%
Inpatient services, net		3,537,564	84.6	%		3,021,754	84.5	%		515,810	17.1	%

Rehabilitation therapy services:
Total therapy services		818,335	19.6	%		757,593	21.2	%		60,742	8.0	%
Elimination intersegment rehabilitation therapy services		(323,020)	(7.7)	%		(296,479)	(8.3)	%		(26,541)	9.0	%
Third party rehabilitation therapy services		495,315	11.9	%		461,114	12.9	%		34,201	7.4	%

Other services:
Total other services		172,759	4.1	%		112,700	3.2	%		60,059	53.3	%
Elimination intersegment other services		(27,135)	(0.6)	%		(20,755)	(0.6)	%		(6,380)	30.7	%
Third party other services		145,624	3.5	%		91,945	2.6	%		53,679	58.4	%

Total revenue	$	4,178,503	100.0	%	$	3,574,813	100.0	%	$	603,690	16.9	%


	Nine months ended September 30,
	2015				2014				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
	(in thousands, except percentages)
EBITDAR:
Inpatient services	$	571,736	16.2	%	$	478,997	15.8	%	$	92,739	19.4	%
Rehabilitation therapy services		86,175	10.5	%		81,011	10.7	%		5,164	6.4	%
Other services		12,824	7.4	%		4,282	3.8	%		8,542	199.5	%
Corporate and eliminations		(128,649)	-	%		(108,055)	-	%		(20,594)	19.1	%

EBITDAR	$	542,086	13.0	%	$	456,235	12.8	%	$	85,851	18.8	%

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A summary of our unaudited condensed consolidating statement of operations follows:


	Nine months ended September 30, 2015
			Rehabilitation
	Inpatient		Therapy
	Services		Services		Other Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	3,539,009	$	818,335	$	171,175	$	1,584	$	(351,600)	$	4,178,503
Salaries, wages and benefits		1,674,262		664,380		106,432		—		—		2,445,074
Other operating expenses		1,240,551		54,507		50,256		—		(351,599)		993,715
General and administrative costs		—		220		4		130,902		—		131,126
Provision for losses on accounts receivable		54,858		13,053		1,659		(715)		—		68,855
Lease expense		109,843		83		1,795		1,312		—		113,033
Depreciation and amortization expense		152,641		9,803		909		12,690		—		176,043
Interest expense		315,902		16		31		60,577		(290)		376,236
Loss on extinguishment of debt		(3,104)		—		—		3,234		—		130
Investment income		(1,131)		—		—		(359)		290		(1,200)
Other income		38		—		—		(7,560)		—		(7,522)
Transaction costs		540		—		—		91,476		—		92,016
Governmental investigation contingency expense		—		—		—		31,500		—		31,500
Equity in net (income) loss of unconsolidated affiliates		(1,266)		—		—		(1,262)		1,375		(1,153)
(Loss) income before income tax benefit		(4,125)		76,273		10,089		(320,211)		(1,376)		(239,350)
Income tax benefit		—		—		—		(26,793)		—		(26,793)
(Loss) income from continuing operations	$	(4,125)	$	76,273	$	10,089	$	(293,418)	$	(1,376)	$	(212,557)


	Nine months ended September 30, 2014
			Rehabilitation
	Inpatient		Therapy
	Services		Services		Other Services		Corporate		Eliminations		Consolidated
	(In thousands)
Net revenues	$	3,023,176	$	757,593	$	112,196	$	504	$	(318,656)	$	3,574,813
Salaries, wages and benefits		1,471,882		616,987		73,195		—		—		2,162,064
Other operating expenses		1,036,434		46,442		34,213		—		(318,657)		798,432
General and administrative costs		—		—		—		108,187		—		108,187
Provision for losses on accounts receivable		39,222		13,153		506		—		—		52,881
Lease expense		97,208		132		624		665		—		98,629
Depreciation and amortization expense		123,520		8,343		707		12,561		—		145,131
Interest expense		286,550		2		730		43,861		(372)		330,771
Loss on extinguishment of debt		—		—		—		679		—		679
Investment income		(2,050)		—		—		(1,170)		373		(2,847)
Other income		(47)		—		(590)		—		—		(637)
Transaction costs		—		(10)		—		5,293		—		5,283
Equity in net (income) loss of unconsolidated affiliates		(1,308)		—		—		—		1,169		(139)
(Loss) income before income tax benefit		(28,235)		72,544		2,811		(169,572)		(1,169)		(123,621)
Income tax benefit		—		—		—		(9,368)		—		(9,368)
(Loss) income from continuing operations	$	(28,235)	$	72,544	$	2,811	$	(160,204)	$	(1,169)	$	(114,253)

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Total Revenues

Total revenue for the nine months ended September 30, 2015 as compared with the same period in 2014 increased by $603.7 million. Of that increase, Skilled’s businesses contributed $608.0 million. The remaining decrease of $4.3 million or 0.1% is described further in our discussion of segment revenues as follows.

Inpatient Services – Revenue increased $515.8 million, or 17.1%, in the nine months ended September 30, 2015 as compared with the same period in 2014. Of this growth, $473.4 million is due to the Combination and $68.8 million is due to the acquisition or development of 13 facilities, offset by $28.1 million of revenue attributed to the divestiture of five underperforming facilities. The remaining increase of $1.7 million, or 0.1%, is a decline in the occupancy of legacy Genesis facilities, partially offset by increased payment rates.

Rehabilitation Therapy Services – Revenue increased $60.7 million, or 8.0% comparing the nine months ended September 30, 2015 with the same period in 2014. The Combination contributed $88.1 million of revenue growth, while the legacy Genesis rehabilitation business revenue decreased $27.4 million, driven by lost business contract revenue exceeding new business contract revenue

Other Services – Other services revenue increased $60.1 million, or 53.3% in the nine months ended September 30, 2015 as compared with the same period in 2014. Of this increase, the Combination contributed $46.5 million through the hospice and home health businesses. The remaining increase of $13.6 million, or 12.1% was principally attributed to new business growth in our staffing services and physician services business lines.

EBITDAR

EBITDAR for the nine months ended September 30, 2015 increased by $85.9 million, or 18.8% when compared with the same period in 2014. Of that increase, Skilled’s businesses contributed an estimated $78.2 million after an estimated overhead allocation of 2.5% of its revenues for the eight month period following the Combination. The remaining increase of approximately $7.7 million or 1.9% is described further in our discussion of segment results and corporate overhead as follows.

Inpatient Services – EBITDAR increased in nine months ended September 30, 2015 as compared with the same period in 2014, by $92.7 million, or 19.4%. Of the increase, $81.1 million is attributed to the Combination and $11.1 million is due to the acquisition or development of 13 facilities, offset by a reduction of $1.5 million attributed to the divestiture or closure of five underperforming facilities. Additionally, the nine months ended September 30, 2015, compared with the same period in 2014, include an additional $15.7 million of GLPL claims development expense. This amount excludes the incremental expense associated with the Combination. The increased GLPL expense principally relates to prior year self-insured claims which were under reserved in those periods. The remaining EBITDAR increase of $17.7 million, or 3.7%, is principally attributable to the realization of cost reductions we began implementing in the quarter ended December 31, 2014.

Rehabilitation Therapy Services – EBITDAR increased $5.2 million comparing the nine months ended September 30, 2015 with the same period in 2014. The Combination contributed $5.6 million, while the EBITDAR of the legacy Genesis rehabilitation therapy business EBITDAR declined $0.4 million in the same period. This decrease is attributed primarily to lost business contract earnings exceeding new business contract earnings. Therapist Efficiency remained flat period over period at 69%.

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Other Services – EBITDAR increased $8.5 million in the nine months ended September 30, 2015 as compared with the same period in 2014. Of that increase, the Combination contributed $6.6 million, principally through the addition of hospice and homecare businesses. The remaining $1.9 million of EBITDAR growth is attributed to the physician services and staffing services businesses.

Corporate and Eliminations — Corporate overhead costs increased $20.6 million, or 19.1%, in the nine months ended September 30, 2015 as compared with the same period in 2014. This increase was largely due to the added overhead costs of Skilled.

Other Expense

The following discussion applies to the consolidated expense categories between consolidated EBITDAR and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our unaudited condensed consolidating statement of operations for the nine months ended September 30, 2015 as compared with the same period in 2014.

Lease expense — Lease expense represents the cash rents and non-cash adjustments required to account for operating leases. We have operating leases in each reportable segment, other services and corporate overhead, but the inpatient services business incurs the greatest proportion of this expense for those skilled nursing and assisted living facilities accounted for as operating leases. Lease expense increased $14.4 million in the nine months ended September 30, 2015 as compared with the same period in the prior year. Of that increase, $15.8 million resulted from the Combination and $3.1 million from three new operating leases, with the decrease of $4.5 million principally due to our efforts to divest of underperforming leased facilities.

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Of the $30.9 million increase in depreciation and amortization in the nine months ended September 30, 2015 compared with the same period in the prior year, the Combination accounts for $22.9 million. The remaining increase of $8.0 million is primarily attributable to Genesis’ ongoing capital expenditure program and newly acquired or constructed facilities.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our revolving credit facilities, term loan facility, real estate bridge loan and mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations. Interest expense increased $45.5 million in the nine months ended September 30, 2015 as compared with the same period in the prior year. Of this increase, $23.8 million is attributed to the Combination and the associated real estate bridge loan and individual mortgages of Skilled’s skilled nursing and assisted living facilities. The remaining $21.7 million increase is primarily attributable to growth in interest pertaining to existing lease obligations and obligations incurred in connection with newly acquired or constructed facilities.

Other income — On March 31, 2015, we sold our investment in FC PAC Holdings, LLC, an unconsolidated joint venture in which we held an approximate 5.4% interest, for $26.4 million. The gain from that sale represents the majority of the net gain recognized in the nine months ended September 30, 2015. During the nine months ended September 30, 2014, we sold a medical office building and clinic for a net gain of $0.7 million.

Skilled Healthcare loss contingency expense – For the nine months ended September 30, 2015, we accrued $31.5 million for a contingent liability. We are engaged in discussions with representatives of the Department of Justice in an effort to reach mutually acceptable resolution of two investigations involving therapy matters and staffing matters related to Skilled’s business prior to the Combination. Discussions have progressed to a point where we believe it is appropriate to recognize an estimated loss contingency reserve, which explains $30.0 million of the charge in the 2015 period. Additionally, in the nine months ended September 30, 2015, we increased the loss contingency reserve for the Creekside hospice matter by $1.5 million, adjusting the reserve originally established by Skilled to $7.5 million.

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Recognition of the loss contingency reserve is not an admission of liability or fault by us or any of our subsidiaries. Because these discussions are ongoing, there can be no certainty about the timing or likelihood of a definitive resolution. As these discussions proceed and additional information becomes available, the amount of the estimated loss contingency reserve may need to be increased or decreased to reflect this new information.

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the nine month periods ended September 30, 2015 and 2014 were $92.0 million and $5.3 million, respectively, and of the amount in the 2015 period, the Combination contributed $88.8 million.

Income tax benefit — For the nine months ended September 30, 2015, we recorded an income tax benefit of $26.8 million representing an effective tax rate of 11.2% compared to an income tax benefit of $9.4 million from continuing operations, representing an effective tax rate of 7.6% for the same period in 2014. The increase in the effective tax rate results principally from a higher percentage of Company profits becoming subject to corporate tax as a result of restructuring related to the Combination.

Liquidity and Capital Resources

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


	Nine months ended September 30,
	2015		2014

Net cash (used in) provided by operating activities	$	(4,949)	$	85,364
Net cash used in investing activities		(67,933)		(67,635)
Net cash provided by (used in) financing activities		45,005		(5,575)

Net (decrease) increase in cash and equivalents		(27,877)		12,154
Beginning of period		87,548		61,413

End of period	$	59,671	$	73,567

Net cash used in operating activities in the nine months ended September 30, 2015 of $4.9 million was unfavorably impacted by funded transaction costs of approximately $66.6 million. Adjusted for transaction costs, net cash provided by operating activities in the nine months ended September 30, 2015 would have been approximately $61.7 million. Net cash provided by operating activities in the nine months ended September 30, 2014 of $85.4 million was unfavorably impacted by funded transaction costs of approximately $5.3 million. Adjusted for funded transaction costs, net cash provided by operating activities in the nine months ended September 30, 2014 would have been $90.7 million. The $29.0 million reduction in cash provided by operating activities before funded transaction costs in the 2015 period as compared to the 2014 period is attributed to growth of accounts receivable balances of the Skilled businesses through the nine months ended September 30, 2015, and the impact of unfavorable timing of labor related expense payments.

Net cash used in investing activities in the nine months ended September 30, 2015 was $67.9 million, compared to a use of cash of $67.6 million in the nine months ended September 30, 2014. The nine months ended September 30, 2015, as compared with the same period in 2014, included the receipt of $27.6 million of asset and investment in joint venture sale proceeds partially offset by $11.6 million of outlays for the purchases of skilled nursing facilities, rehabilitation therapy clinics and a deposit on the announced Revera acquisition. The remaining incremental use of cash from investing activities in the nine months ended September 30, 2015 as compared with the same period in 2014 is principally due to incremental routine capital expenditures of $15.6 million.

Net cash provided by financing activities was $45.0 million in the nine months ended September 30, 2015 compared to a use of $5.6 million in the nine months ended September 30, 2014. The net increase in cash provided by

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financing activities of $50.6 million is principally attributed to $26.5 million of net incremental borrowings under the revolving credit facilities, net proceeds on the refinancing of Skilled’s real estate and prepayment of capital lease obligations of $19.4 million, and $8.1 million of reduced distributions to noncontrolling interests, offset with $3.4 million of incremental debt issuance costs funded in the 2015 period. The increase in debt issuance costs is attributed to the financing costs incurred in connection with the financing activities associated with the Combination.

At September 30, 2015, we had cash and cash equivalents of $59.7 million and available borrowings under our revolving credit facilities of $104.4 million after taking into account $99.7 million of letters of credit drawn against our revolving credit facilities. Our available cash is held in accounts at third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to its invested cash or cash equivalents will not be impacted by adverse conditions in the financial markets. During the nine months ended September 30, 2015, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.

We entered into agreements and term sheets with our major REIT partners in connection with a series of facility acquisitions, divestitures, closures and rent-prepayments. The transactions currently contemplated involve 21 facility acquisitions and 12 facility divestitures or closures. The aggregate invested capital is estimated at $295 million, including $256 million of facility acquisitions, resulting in $35 million in annual rent reductions. We intend to finance approximately 60% of the total cost via mortgage financing, with the balance financed with non-core asset sale proceeds and/or capital raising activities. We expect the majority of the transactions will close in stages during 2016. To date, consummated REIT transactions include four facility divestitures and rent-prepayments and one facility acquisition, which resulted in no material impact to EBITDAR and $6.3 million in annual rent reductions.

In connection with an initiative to participate in the Chinese market, we recently opened a health and wellness Vitality Center in Phoenix City, Zengcheng, China, the first of its kind in China. We plan to open a second facility, Qinhuangdao Spring of Power Center, an in-patient rehabilitation center with the potential for 300 licensed beds in the second quarter of 2016. Also, on April 9, 2015, we signed a memorandum of understanding with intent to enter into a joint venture agreement with BangEr Orthopedic Hospital Group to open post-acute in-patient and out-patient rehab services in each of its 11 hospitals in China. The first hospital located in Yuhan opened on October 1, 2015.

Off Balance Sheet Arrangements

We had outstanding letters of credit of $99.7 million under our letter of credit sub-facility on our revolving credit facilities as of September 30, 2015. These letters of credit are principally pledged to landlords and insurance carriers as collateral. We are not involved in any other 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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Contractual Obligations

The following table sets forth our contractual obligations, including principal and interest, but excluding non-cash amortization of discounts or premiums established on these instruments, as of September 30, 2015 (in thousands):


									More than
	Total		1 Yr.		2-3 Yrs.		4-5 Yrs.		5 Yrs.
Revolving credit facilities	$	370,556	$	12,821	$	25,641	$	332,094	$	—
Term loan facility		276,873		35,002		241,871		—		—
Real estate bridge loan		412,821		37,228		375,593		—		—
HUD insured loans		169,476		5,463		10,926		10,926		142,161
Mortgages and other secured debt (recourse)		15,208		1,059		12,041		2,108		—
Mortgages and other secured debt (non-recourse)		34,783		1,802		14,691		2,617		15,673
Financing obligations		11,213,027		267,771		559,771		592,153		9,793,332
Capital lease obligations		3,896,245		96,509		195,459		200,244		3,404,033
Operating lease obligations		961,469		140,243		271,620		261,633		287,973
	$	17,350,458	$	597,898	$	1,707,613	$	1,401,775	$	13,643,172

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.

Interest Rate Exposure—Interest Rate Risk Management

Our term loan facility, real estate bridge loan and revolving credit facilities expose us to variability in interest payments due to changes in interest rates. As of September 30, 2015, there is no derivative financial instrument in place to limit that exposure.

The table below presents the principal amounts, weighted-average interest rates and fair values by year of expected maturity to evaluate Genesis’ expected cash flows and sensitivity to interest rate changes:


	Twelve Months Ending September 30,
	2016			2017			2018			2019			2020			Thereafter			Total		Fair Value

Fixed-rate debt	$	2,445		$	2,545		$	2,649		$	3,373		$	3,694		$	98,096		$	112,802	$	127,441
Average interest rate (1)		4.0	%		4.0	%		4.1	%		4.0	%		2.7	%		4.2	%
Variable-rate debt (2)	$	13,381		$	373,411		$	226,720		$	—		$	315,000		$	—		$	928,512	$	932,532
Average interest rate (1)		9.5	%		9.8	%		9.3	%		—	%		3.5	%		—	%

(1)

Based on one month LIBOR of 0.19% on September 30, 2015.

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(2)

Excludes unamortized original issue discounts and debt premiums which amortize through interest expense on a non-cash basis over the life of the instrument.

The new revolving credit facilities consist of a senior secured, asset-based revolving credit facility of up to $550 million under three separate tranches: Tranche A-1, Tranche A-2 and FILO Tranche. Interest accrues at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin. The applicable margin is based on the level of commitments for all three tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.25% to 2.75%; (ii) for Tranche A-2 ranges from 3.00% to 2.50%; and (iii) for FILO Tranche is 5.00%. The applicable margin with respect to base rate borrowings for Tranche A-1, Tranche A-2 and FILO were 2.25%, 2.00%, and 4.00%, respectively, at September 30, 2015. The applicable margin with respect to LIBOR borrowings for Tranche A-1, Tranche A-2 and FILO were 3.25%, 3.00%, and 5.00%, respectively, at September 30, 2015.

Borrowings under the term loan facility bear interest at a rate per annum equal to the applicable margin plus, at our option, either (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, or (2) a base rate determined by reference to the highest of (a) the lender defined prime rate, (b) the federal funds rate effective plus one half of one percent and (c) LIBOR described in sub clause (1) plus 1.0%. LIBOR based loans are subject to an interest rate floor of 1.5% and base rate loans are subject to a floor of 2.5%. The applicable margin with respect to LIBOR borrowings was 8.5% at September 30, 2015.

Borrowings under the real estate bridge loan bear interest at a rate per annum equal to the sum of (1) LIBOR, defined as greater of (a) 0.50% per annum or (b) the one-month duration LIBOR for an amount comparable to loan amount according to a lender approved reference bank, (2) the applicable margin and (3) 675 basis points (BPS). The applicable margin escalates every 90 days after the initial 149 days of the two year term. The margin ranges from 0 BPS to 650 BPS in the initial term, 675 and up to 700 BPS if a second renewal term is opted for. The applicable interest rate on this loan was 8.75% as of September 30, 2015.

A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $9.0 million increase in our annual interest expense.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act as of the end of the period covered by this report. Based upon their evaluation, the

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Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and were effective at that reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 11, “Commitments and Contingencies—Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on February 20, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a)Exhibits.


Number		Description


10.1	Amendment No. 1 dated July 26, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.2	Amendment No. 2 dated July 30, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor

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10.3	Amendment No. 3 dated October 14, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.4	Amendment No. 4 dated October 16, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.5	Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
10.6	First Amendment dated September 11, 2015 to Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
10.7	Second Amendment dated October 27, 2015 to Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

________________


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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		GENESIS HEALTHCARE, INC.

Date:	November 6, 2015	By	/S/ GEORGE V. HAGER, JR.
			George V. Hager, Jr.
			Chief Executive Officer

Date:	November 6, 2015	By	/S/ THOMAS DIVITTORIO
			Thomas DiVittorio
			Chief Financial Officer
			(Principal Financial Officer and Authorized Signatory)

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EXHIBIT INDEX


Number		Description


10.1	Amendment No. 1 dated July 26, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.2	Amendment No. 2 dated July 30, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.3	Amendment No. 3 dated October 14, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.4	Amendment No. 4 dated October 16, 2015 to Asset Purchase Agreement dated as of June 11, 2015 by and among Revera Assisted Living, Inc. and its affiliates named therein as Sellers, 101 Development Group, LLC as Buyer and Genesis Healthcare, Inc. as Guarantor
10.5	Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
10.6	First Amendment dated September 11, 2015 to Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
10.7	Second Amendment dated October 27, 2015 to Eighteenth Amended and Restated Master Lease Agreement, dated August 1, 2015, between FC-GEN Real Estate, LLC and Genesis Operations LLC
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

________________


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