Genesis Healthcare, Inc. - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

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, 2019.

☐ 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, $0.001 par value per share

GEN

New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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


Large accelerated filer ☐	Accelerated Filer ☒	Emerging growth company ☐

Non-accelerated filer ☐	Smaller reporting company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 7, 2019, was:

Class A common stock, $0.001 par value – 107,734,326 shares

Class B common stock, $0.001 par value – 744,396 shares

Class C common stock, $0.001 par value – 56,326,680 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, 2019 and December 31, 2018	3
	Consolidated Statements of Operations — Three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Loss) — Three and nine months ended September 30, 2019 and 2018	5
	Consolidated Statements of Stockholders’ Deficit — Three and nine months ended September 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows — Nine months ended September 30, 2019 and 2018	8
	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	70

Part II.	Other Information

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults Upon Senior Securities	70

Item 4.	Mine Safety Disclosures	70

Item 5.	Other Information	71

Item 6.	Exhibits	71

Signatures		72

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, 2019		December 31, 2018
Assets:
Current assets:
Cash and cash equivalents	$	34,837	$	20,865
Restricted cash and equivalents		42,807		73,762
Restricted investments in marketable securities		35,950		35,631
Accounts receivable		545,259		622,717
Prepaid expenses		81,661		82,747
Other current assets		39,014		36,528
Assets held for sale		4,740		3,375
Total current assets		784,268		875,625
Property and equipment, net of accumulated depreciation of $417,437 and $976,802 at September 30, 2019 and December 31, 2018, respectively		957,218		2,887,554
Finance lease right-of-use assets, net of accumulated amortization of $22,420 at September 30, 2019		37,685		—
Operating lease right-of-use assets		2,416,914		—
Restricted cash and equivalents		50,425		47,649
Restricted investments in marketable securities		93,044		100,522
Other long-term assets		120,738		125,595
Deferred income taxes		5,617		5,867
Identifiable intangible assets, net of accumulated amortization of $73,610 and $99,160 at September 30, 2019 and December 31, 2018, respectively		90,079		119,082
Goodwill		85,642		85,642
Assets held for sale		32,517		16,087
Total assets	$	4,674,147	$	4,263,623
Liabilities and Stockholders' Deficit:
Current liabilities:
Current installments of long-term debt	$	121,745	$	122,531
Current installments of finance lease obligations		2,738		2,171
Current installments of operating lease obligations		137,574		—
Current installments of financing obligations		—		2,001
Accounts payable		254,443		234,786
Accrued expenses		219,120		227,813
Accrued compensation		153,488		172,726
Self-insurance reserves		137,111		149,545
Current portion of liabilities held for sale		1,020		639
Total current liabilities		1,027,239		912,212
Long-term debt		1,420,952		1,082,933
Finance lease obligations		39,676		967,942
Operating lease obligations		2,697,496		—
Financing obligations		—		2,732,939
Deferred income taxes		5,499		6,281
Self-insurance reserves		427,069		453,993
Liabilities held for sale		45,314		25,942
Other long-term liabilities		76,125		126,247
Commitments and contingencies
Stockholders’ deficit:
Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 107,534,292 and 101,235,935 at September 30, 2019 and December 31, 2018, respectively)		108		101
Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at September 30, 2019 and December 31, 2018, respectively)		1		1
Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 56,526,680 and 59,700,801 at September 30, 2019 and December 31, 2018, respectively)		56		60
Additional paid-in-capital		249,063		270,408
Accumulated deficit		(998,900)		(1,609,828)
Accumulated other comprehensive income (loss)		610		(262)
Total stockholders’ deficit before noncontrolling interests		(749,062)		(1,339,520)
Noncontrolling interests		(316,161)		(705,346)
Total stockholders' deficit		(1,065,223)		(2,044,866)
Total liabilities and stockholders’ deficit	$	4,674,147	$	4,263,623

See accompanying notes to 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,
	2019		2018		2019		2018
Net revenues	$	1,123,705	$	1,217,271	$	3,430,397	$	3,790,703
Salaries, wages and benefits		620,493		680,604		1,889,062		2,122,128
Other operating expenses		339,441		371,064		1,014,507		1,125,779
General and administrative costs		35,930		35,482		107,024		114,404
Lease expense		100,018		32,366		288,665		97,548
Depreciation and amortization expense		34,932		53,038		101,395		168,036
Interest expense		37,099		115,695		141,590		348,687
Loss on early extinguishment of debt		2,460		—		2,436		9,785
Investment income		(2,071)		(2,178)		(6,078)		(4,856)
Other income		(131,811)		(20,207)		(172,141)		(42,360)
Transaction costs		12,941		11,361		23,025		26,567
Long-lived asset impairments		16,037		32,390		16,937		88,008
Goodwill and identifiable intangible asset impairments		—		929		—		2,061
Equity in net (income) loss of unconsolidated affiliates		(93)		(152)		(178)		106
Income (loss) before income tax benefit		58,329		(93,121)		24,153		(265,190)
Income tax benefit		(569)		(1,220)		(680)		(1,759)
Net income (loss)		58,898		(91,901)		24,833		(263,431)
Less net (income) loss attributable to noncontrolling interests		(12,801)		33,773		1,182		97,153
Net income (loss) attributable to Genesis Healthcare, Inc.	$	46,097	$	(58,128)	$	26,015	$	(166,278)
Earnings (loss) per common share:
Basic:
Weighted-average shares outstanding for basic net income (loss) per share		109,123		102,489		106,581		100,461
Basic net income (loss) per common share attributable to Genesis Healthcare, Inc.	$	0.42	$	(0.57)	$	0.24	$	(1.66)

Diluted:
Weighted-average shares outstanding for diluted net income (loss) per share		166,002		102,489		164,583		100,461
Diluted net income (loss) per common share attributable to Genesis Healthcare, Inc.	$	0.40	$	(0.57)	$	0.21	$	(1.66)

See accompanying notes to 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,
	2019		2018		2019		2018
Net income (loss)	$	58,898	$	(91,901)	$	24,833	$	(263,431)
Net unrealized gain (loss) on marketable securities, net of tax		98		(468)		1,216		(529)
Comprehensive income (loss)		58,996		(92,369)		26,049		(263,960)
Less: comprehensive (income) loss attributable to noncontrolling interests		(12,830)		33,945		838		97,479
Comprehensive income (loss) attributable to Genesis Healthcare, Inc.	$	46,166	$	(58,424)	$	26,887	$	(166,481)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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		(loss) income		deficit		interests		deficit
Balance at December 31, 2018	101,236	$	101	744	$	1	59,701	$	60	$	270,408	$	(1,609,828)	$	(262)	$	(1,339,520)	$	(705,346)	$	(2,044,866)
Net loss	—		—	—		—	—		—		—		(15,263)		—		(15,263)		(9,819)		(25,082)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		397		397		99		496
Share based compensation	—		—	—		—	—		—		2,087		—		—		2,087		—		2,087
Issuance of common stock	100		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	3,081		3	—		—	(3,081)		(3)		(18,175)		—		—		(18,175)		18,175		—
Distributions to noncontrolling interests	—		—	—		—	—		—		64		—		—		64		(1,202)		(1,138)
Contributions from noncontrolling interests	—		—	—		—	—		—		—		—		—		—		18,500		18,500
Cumulative effect of accounting change	—		—	—		—	—		—		—		584,913		—		584,913		340,129		925,042
Balance at March 31, 2019	104,417	$	104	744	$	1	56,620	$	57	$	254,384	$	(1,040,178)	$	135	$	(785,497)	$	(339,464)	$	(1,124,961)
Net loss	—		—	—		—	—		—		—		(4,819)		—		(4,819)		(4,164)		(8,983)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		406		406		216		622
Share based compensation	—		—	—		—	—		—		1,748		—		—		1,748		—		1,748
Issuance of common stock	2,996		3	—		—	—		—		(3)		—		—		—		—		—
Conversion of common stock among classes	—		—	—		—	—		—		(7,842)		—		—		(7,842)		7,842		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(1,405)		(1,405)
Balance at June 30, 2019	107,413	$	107	744	$	1	56,620	$	57	$	248,287	$	(1,044,997)	$	541	$	(796,004)	$	(336,975)	$	(1,132,979)
Net income	—		—	—		—	—		—		—		46,097		—		46,097		12,801		58,898
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		69		69		29		98
Share based compensation	—		—	—		—	—		—		1,878		—		—		1,878		—		1,878
Issuance of common stock	28		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	93		1	—		—	(93)		(1)		(1,081)		—		—		(1,081)		1,081		—
Distributions to noncontrolling interests	—		—	—		—	—		—		(21)		—		—		(21)		(1,628)		(1,649)
Contributions from noncontrolling interests	—		—	—		—	—		—		—		—		—		—		8,531		8,531
Balance at September 30, 2019	107,534	$	108	744	$	1	56,527	$	56	$	249,063	$	(998,900)	$	610	$	(749,062)	$	(316,161)	$	(1,065,223)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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		(loss) income		deficit		interests		deficit
Balance at December 31, 2017	97,101	$	97	744	$	1	61,561	$	61	$	290,573	$	(1,374,597)	$	(362)	$	(1,084,227)	$	(595,905)	$	(1,680,132)
Net loss	—		—	—		—	—		—		—		(68,538)		—		(68,538)		(40,135)		(108,673)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		(214)		(214)		(124)		(338)
Share based compensation	—		—	—		—	—		—		2,427		—		—		2,427		—		2,427
Issuance of common stock	40		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	830		1	—		—	(830)		(1)		(8,635)		—		—		(8,635)		8,635		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(14)		(14)
Balance at March 31, 2018	97,971	$	98	744	$	1	60,731	$	60	$	284,365	$	(1,443,135)	$	(576)	$	(1,159,187)	$	(627,543)	$	(1,786,730)
Net loss	—		—	—		—	—		—		—		(39,612)		—		(39,612)		(23,245)		(62,857)
Net unrealized gain (loss) on marketable securities, net of tax	—		—	—		—	—		—		—		—		307		307		(30)		277
Share based compensation	—		—	—		—	—		—		2,130		—		—		2,130		—		2,130
Issuance of common stock	2,008		2	—		—	—		—		(2)		—		—		—		—		—
Conversion of common stock among classes	1,030		1	—		—	(1,030)		(1)		(20,283)		—		—		(20,283)		20,283		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(566)		(566)
Balance at June 30, 2018	101,009	$	101	744	$	1	59,701	$	59	$	266,210	$	(1,482,747)	$	(269)	$	(1,216,645)	$	(631,101)	$	(1,847,746)
Net loss	—		—	—		—	—		—		—		(58,128)		—		(58,128)		(33,773)		(91,901)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		(296)		(296)		(172)		(468)
Share based compensation	—		—	—		—	—		—		2,175		—		—		2,175		—		2,175
Issuance of common stock	117		—	—		—	—		1		—		—		—		1		—		1
Conversion of common stock among classes	—		—	—		—	—		—		(482)		—		—		(482)		482		—
Distributions to noncontrolling interests	—		—	—		—	—		—		(21)		—		—		(21)		(771)		(792)
Balance at September 30, 2018	101,126	$	101	744	$	1	59,701	$	60	$	267,882	$	(1,540,875)	$	(565)	$	(1,273,396)	$	(665,335)	$	(1,938,731)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Nine months ended September 30,
	2019		2018
Cash flows from operating activities
Net income (loss)	$	24,833	$	(263,431)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash interest and leasing arrangements, net		21,194		55,128
Other non-cash gain, net		(172,141)		(42,360)
Share based compensation		5,713		6,732
Depreciation and amortization expense		101,395		168,036
Operating lease right-of-use asset amortization		86,250		—
Provision for losses on accounts receivable		(1,005)		6,179
Equity in net (income) loss of unconsolidated affiliates		(178)		106
Benefit for deferred taxes		(1,774)		(2,305)
Long-lived asset impairments		16,937		88,008
Goodwill and identifiable intangible asset impairments		—		2,061
(Gain) loss on early extinguishment of debt		(263)		9,300
Changes in assets and liabilities:
Accounts receivable		64,614		48,667
Accounts payable and other accrued expenses and other		(63,186)		(62,055)
Operating lease obligations		(66,631)		—
Net cash provided by operating activities		15,758		14,066
Cash flows from investing activities:
Capital expenditures		(47,046)		(41,321)
Purchases of marketable securities		(47,896)		(63,534)
Proceeds on maturity or sale of marketable securities		56,725		50,913
Purchases of assets		(591,660)		—
Sales of assets		237,632		—
Restricted deposits		(1,224)		(873)
Other, net		435		(62)
Net cash used in investing activities		(393,034)		(54,877)
Cash flows from financing activities:
Borrowings under revolving credit facilities		3,522,000		2,987,000
Repayments under revolving credit facilities		(3,518,465)		(2,959,875)
Proceeds from issuance of long-term debt		480,906		563,747
Repayment of long-term debt		(133,913)		(462,063)
Repayment of finance lease obligations		(1,973)		—
Debt issuance costs		(8,325)		(16,678)
Debt settlement costs		—		(485)
Contributions from noncontrolling interests		27,031		—
Distributions to noncontrolling interests and stockholders		(4,192)		(1,373)
Net cash provided by financing activities		363,069		110,273
Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents		(14,207)		69,462
Cash, cash equivalents and restricted cash and equivalents:
Beginning of period		142,276		58,638
End of period	$	128,069	$	128,100
Supplemental cash flow information:
Interest paid	$	118,757	$	292,545
Net taxes paid		2,672		3,019
Non-cash investing and financing activities:
Finance lease obligations, net write-down due to lease activity	$	(930,582)	$	(83,390)
Assets subject to finance lease obligations, net (gross-up) write-down due to lease activity		(1,131,352)		64,456
Operating lease obligations, net gross-up due to lease activity		2,901,799		—
Assets subject to operating leases, net (gross-up) due to lease activity		(2,514,414)		—
Financing obligations, net write-down due to lease activity		(2,734,940)		(177,001)
Assets subject to financing obligations, net write-down due to lease activity		1,718,507		128,256

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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 or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. The Company has an administrative services 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. At September 30, 2019, the Company provides inpatient services through 384 skilled nursing, assisted/senior living and behavioral health centers located in 26 states. Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% 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. The Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of the Company’s revenues.

The Company provides an array of other specialty medical services, including management services, physician services, staffing 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 consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net income (loss) attributable to Genesis Healthcare, Inc. and net income (loss) attributable to noncontrolling interests in its consolidated statements of operations.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of control and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to the VIE. In the first quarter of 2019, the Company entered into a partnership that acquired the real property of 15 skilled nursing facilities that are leased to the Company. The partnership qualifies as a consolidated VIE. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership.” In the third quarter of 2019, the Company entered into a partnership that acquired the real property of 18 skilled nursing facilities that are leased to the Company. The partnership qualifies as a consolidated VIE. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.”

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q 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, 2018 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 18, 2019.

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Certain prior year disclosure amounts have been reclassified to conform to current period presentation.

Financial Condition and Liquidity Considerations

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

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements were issued (November 8, 2019). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before November 8, 2020. Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date of issuance of these financial statements (November 8, 2019).

The Company’s results of operations continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers. In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.

The Company expects to continue to pursue cost mitigation and other strategies in 2019 in response to the operating environment and liquidity requirements. During the nine months ended September 30, 2019, the Company amended, or obtained waivers related to, the financial covenants of all of its material debt and lease agreements to account for these ongoing changes in its capital structure and business conditions. Although the Company is and projects to be in compliance with all of its material debt and lease covenants through November 8, 2020, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with the covenants. Should the Company fail to comply with its debt and lease covenants at a future measurement date it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements. To the extent any cross-default provisions apply, the default could have a more significant impact on the Company’s financial position.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) established Accounting Standards Codification (ASC) Topic 842, Leases (Topic 842), by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

The Company adopted the new standard on January 1, 2019. The Company elected the option to apply the transition requirements in Topic 842 at the effective date of January 1, 2019 with the effects of initially applying Topic 842 recognized as a cumulative-effect adjustment to accumulated deficit in the period of adoption. Consequently, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’, which permit it to not reassess its prior conclusions about lease identification, lease classification and initial

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direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.

The adoption of the new standard had a material effect on the Company’s financial statements. The most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for real estate operating leases; (2) the derecognition of existing assets and liabilities for sale-leaseback transactions (including those arising from build-to-suit lease arrangements for which construction is complete and the Company is leasing the constructed asset) that historically did not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities.

Upon adoption, the Company:

Recognized operating lease liabilities of $0.6 billion based on the present value of the remaining minimum rental payments as determined in accordance with Topic 842 for leases that had historically been accounted for as operating leases under the previous leasing standards. The Company recognized corresponding ROU assets of approximately $0.5 billion based on the operating lease liabilities, adjusted for existing straight-line lease liabilities, existing assets and liabilities related to favorable and unfavorable terms of operating leases previously recognized in respect of business combinations, and the impairment of the ROU assets. The resulting net impact of $0.1 billion associated with this change in accounting was recognized as an increase to opening accumulated deficit as of January 1, 2019.

Derecognized existing financing obligations of $2.7 billion and existing property and equipment of $1.7 billion. The Company recognized new operating lease liabilities and corresponding ROU assets of $1.9 billion on its balance sheet for the associated leases. The resulting net impact of $1.0 billion associated with this change in accounting was recognized as a reduction to opening accumulated deficit as of January 1, 2019.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company does not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. See Note 8 – “Leases.”

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act (Tax Reform Act) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. The Company adopted the new standard on January 1, 2019. The adoption of ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Further, the FASB issued ASU 2019-04 and ASU 2019-05 to provide additional guidance on the credit losses standard. The standard is effective for fiscal years beginning after December 15, 2022, for smaller

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reporting companies, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

(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 78% of its revenue from Medicare and various state Medicaid programs. The following table depicts the Company’s inpatient services segment revenue by source for the three and nine months ended September 30, 2019 and 2018:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Medicare	19	%	21	%	20	%	22	%
Medicaid	59	%	58	%	58	%	57	%
Insurance	12	%	12	%	12	%	12	%
Private	8	%	8	%	8	%	8	%
Other	2	%	1	%	2	%	1	%
Total	100	%	100	%	100	%	100	%

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. 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. Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have an adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum 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, 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.

Concentration of Credit Risk

The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk.

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These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions.

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in the Company’s rehabilitation therapy services business where it has over 160 distinct customers, many being chain operators with more than one location. One customer, which is a related party of the Company, comprises $32.5 million, approximately 35%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2019. See Note 11 – “Related Party Transactions.” One former customer comprises $8.0 million, approximately 9%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2019. An adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on the Company.

The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Part II. Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on March 18, 2019, and in the Company’s Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.

Covenant Compliance

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

Although the Company is in compliance, and projects to remain in compliance, with the covenants required by its material debt and lease agreements, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with its financial covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010, among others.

The Company’s ability to maintain compliance with financial covenants required by its debt and lease agreements depends in part on management’s ability to increase revenues and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt and lease covenant requirements.

There can be no assurance that the confluence of these and other factors will not impede the Company’s ability to meet covenants required by its debt and lease agreements in the future.

(3) Significant Transactions and Events

Strategic Partnerships

Next Partnership

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which the Company acquired a 46% membership interest for $16.0 million. The remaining interest is held by Next Healthcare (Next), a related party. See Note 11 – “Related Party Transactions.” The Company will continue to operate these facilities pursuant to a new master lease with the Next Partnership. The term of the master lease is 15 years with two five-year renewal options available. The Company will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. The Company also obtained a fixed price purchase option to acquire

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all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.

In accordance with U.S. GAAP, the Company has concluded the Next Partnership qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Next Partnership in the accompanying financial statements. The ROU assets and lease obligations related to the Next Partnership lease agreement have been fully eliminated in the Company’s consolidated financial statements. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million. The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million. The Company has not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period. The impact of consolidation on the accompanying consolidated statement of operations was not material for the nine months ended September 30, 2019 apart from non-recurring transaction costs of $5.3 million.

Vantage Point Partnership

On September 12, 2019, Welltower and Second Spring Healthcare Investments (Second Spring) sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which the Company invested $37.5 million, consisting of an equity investment of $3.7 million, for an approximate 30% membership interest, and a formation loan of $33.7 million. The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million. In conjunction with the facility sales, the Company received aggregate annual rent credits of $30.3 million. The Company will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership. The term of the master lease is 15 years with two five-year renewal options available. The Company will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require the Company to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if the Company opts not to purchase the facilities or upon the occurrence of certain events of default.

In accordance with U.S. GAAP, the Company has concluded the Vantage Point Partnership qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements. The ROU assets and lease obligations related to the Vantage Point Partnership lease agreement have been fully eliminated in the Company’s consolidated financial statements. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million. The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million. The Company has not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period. Other than transaction costs of $11.0 million, the impact of consolidation on the accompanying consolidated statement of operations was not material for the three months ended September 30, 2019.

During the third quarter of 2019, the Company sold the real property of seven skilled nursing facilities and one senior/assisted living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire its interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested. Three of the facilities were subject to real estate loans and two were subject to HUD insured loans. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $58.2 million.

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Divestiture of Non-Strategic Facilities

California Divestitures

During the second quarter of 2019, the Company sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million. The Company also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million.

During the third quarter of 2019, the Company sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – HUD Insured Loans.” The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $1.0 million.

Other Divestitures

During the first quarter of 2019, the Company divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million. The Company recognized a loss on exit reserves of $3.3 million. The Company also completed the closure of one facility located in Ohio. The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

During the second quarter of 2019, the Company divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

During the third quarter of 2019, the Company divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility. Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $1.9 million.

Acquisitions

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

Lease Transactions

Welltower

During the first quarter, the Company amended the Welltower Master Lease several times to reflect the lease termination of 24 facilities, including the 15 facilities sold and now leased from the Next Partnership. As a result of the lease termination on the 24 facilities, the Company received annual rent credits of approximately $23.4 million. A lease modification analysis was performed

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and the remaining 49 facilities subject to the master lease were reclassified from finance leases to operating leases. Finance lease ROU assets and obligations of $61.5 million and $130.2 million, respectively, were written off. On a net basis, operating lease ROU assets and obligations of $159.8 million and $111.3 million, respectively, were written down, resulting in a gain of $20.3 million.

During the second quarter of 2019, the Company amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million. Operating lease ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off, resulting in a gain of $0.5 million.

During the third quarter of 2019, the Company amended the Welltower Master Lease to reflect the lease termination of four facilities and received annual rent credits of $1.9 million. Operating lease ROU assets and lease obligations of $102.0 million and $74.4 million, respectively, were written off, resulting in a gain of $27.6 million.

Omega

During the third quarter, the Company amended its master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $23.4 million.

Second Spring

During the third quarter, the Company amended its master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

Other

During the first quarter of 2019, the Company amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed the Company’s option to purchase certain facilities under the lease and adjusted certain financial covenants. The Company had previously determined that the renewal option period was not reasonably certain of exercise. Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

During the third quarter of 2019, the Company amended a master lease agreement to reflect the lease termination of six facilities subject to the lease. In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

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

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(4) Net Revenues and Accounts Receivable

Revenue Streams

Inpatient Services

The Company generates revenues primarily by providing services to patients within its facilities. The Company uses interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care. Many of the Company’s facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management, as well as standard services, such as room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. The Company assesses collectibility on all accounts prior to providing services.

Rehabilitation Therapy Services

The Company generates revenues by providing rehabilitation therapy services, including speech-language pathology, physical therapy, occupational therapy and respiratory therapy at its skilled nursing facilities and assisted/senior living facilities, as well as facilities of third-party skilled nursing operators and other outpatient settings. The majority of revenues generated by rehabilitation therapy services rendered are billed to contracted third party providers.

Other Services

The Company generates revenues by providing an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

Revenue Recognition

The Company generates revenues, primarily by providing healthcare services to its customers. Revenues are recognized when control of the promised good or service is transferred to its customers, in an amount that reflects the consideration to which the Company expects to be entitled from patients, third-party payors (including government programs and insurers) and others, in exchange for those goods and services.

Performance obligations are determined based on the nature of the services provided. The majority of the Company’s healthcare services represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance obligation satisfied over time as services are rendered. The Company also provides certain ancillary services which are not included in the bundle of services, and as such, are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known. Adjustments arising from a change in the transaction price were not significant for the three and nine months ended September 30, 2019 and 2018.

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The Company has elected a practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

The Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

Payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. The Company had no material contract liabilities or activity as of and for the three and nine months ended September 30, 2019 and 2018.

Disaggregation of Revenues

The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source. Payments are generally received within 30 to 60 days after billing. See Note 6 – “Segment Information.”

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The composition of net revenues by payor type and operating segment for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands):


	Three months ended September 30, 2019
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	187,493		$	22,643		$	—		$	210,136
Medicaid		572,100			560			—			572,660
Insurance		111,529			5,453			—			116,982
Private		77,440	(1)		66			—			77,506
Third party providers		—			85,051			17,285			102,336
Other		17,449	(2)		2,527	(2)		24,109	(3)		44,085
Total net revenues	$	966,011		$	116,300		$	41,394		$	1,123,705


	Three months ended September 30, 2018
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	216,382		$	22,756		$	—		$	239,138
Medicaid		613,539			545			—			614,084
Insurance		125,060			5,412			—			130,472
Private		85,148	(1)		139			—			85,287
Third party providers		—			99,851			17,995			117,846
Other		14,539	(2)		3,461	(2)		12,444	(3)		30,444
Total net revenues	$	1,054,668		$	132,164		$	30,439		$	1,217,271

(1)

Includes Assisted/Senior living revenue of $23.1 million and $24.0 million for the three months ended September 30, 2019 and 2018, respectively. Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.


	Nine months ended September 30, 2019
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	596,468		$	68,387		$	—		$	664,855
Medicaid		1,730,147			1,688			—			1,731,835
Insurance		351,228			16,603			—			367,831
Private		233,499	(1)		270			—			233,769
Third party providers		—			262,689			58,379			321,068
Other		51,659	(2)		8,438	(2)		50,942	(3)		111,039
Total net revenues	$	2,963,001		$	358,075		$	109,321		$	3,430,397


	Nine months ended September 30, 2018
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	700,202		$	68,861		$	—		$	769,063
Medicaid		1,854,706			1,584			—			1,856,290
Insurance		400,889			18,020			—			418,909
Private		258,887	(1)		391			—			259,278
Third party providers		—			319,015			63,500			382,515
Other		50,924	(2)		13,911	(2)		39,813	(3)		104,648
Total net revenues	$	3,265,608		$	421,782		$	103,313		$	3,790,703

(1)

Includes Assisted/Senior living revenue of $70.4 million and $71.2 million for the nine months ended September 30, 2019 and 2018, respectively. Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(5) 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 each of the other two classes, representing the voting interests of the noncontrolling interest of the legacy FC-GEN Operations Investment, LLC (FC-GEN) owners. 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 income (loss) attributable to Genesis Healthcare, Inc. by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net income (loss) plus the effect of any assumed conversions by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common stock.

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


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Numerator:
Net income (loss)	$	58,898	$	(91,901)	$	24,833	$	(263,431)
Less: Net (income) loss attributable to noncontrolling interests		(12,801)		33,773		1,182		97,153
Net income (loss) attributable to Genesis Healthcare, Inc.	$	46,097	$	(58,128)	$	26,015	$	(166,278)
Denominator:
Weighted-average shares outstanding for basic net income (loss) per share		109,123		102,489		106,581		100,461

Basic net income (loss) per common share attributable to Genesis Healthcare, Inc.	$	0.42	$	(0.57)	$	0.24	$	(1.66)

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


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Numerator:
Net income (loss)	$	58,898	$	(91,901)	$	24,833	$	(263,431)
Less: Net (income) loss attributable to noncontrolling interests		(12,801)		33,773		1,182		97,153
Net income (loss) attributable to Genesis Healthcare, Inc.	$	46,097	$	(58,128)	$	26,015	$	(166,278)
Plus: Assumed conversion of noncontrolling interests		20,179		—		8,060		—
Net income (loss) available to common stockholders after assumed conversions	$	66,276	$	(58,128)	$	34,075	$	(166,278)
Denominator:
Weighted-average common shares outstanding		109,123		102,489		106,581		100,461
Plus: Assumed conversion of noncontrolling interests		56,605		—		57,313		—
Plus: Unvested restricted stock units and stock warrants		274		—		689		—
Adjusted weighted-average common shares outstanding, diluted		166,002		102,489		164,583		100,461

Diluted net income (loss) per common share attributable to Genesis Healthcare, Inc.	$	0.40	$	(0.57)	$	0.21	$	(1.66)

The computation of diluted net income (loss) per common share excludes the effects of anti-dilutive shares attributable to the assumed conversion of noncontrolling interests, unvested restricted stock units under the 2015 Omnibus Equity Incentive Plan, and stock warrants, which were 60.6 million and 61.5 million for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, there were 56.5 million units attributable to the noncontrolling interests outstanding.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6) 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 (in thousands, except percentages):


	Three months ended September 30,
	2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	941,722	83.8	%	$	1,029,453	84.6	%	$	(87,731)	(8.5)	%
Assisted/Senior living facilities		23,057	2.1	%		23,974	2.0	%		(917)	(3.8)	%
Administration of third party facilities		1,980	0.2	%		2,025	0.2	%		(45)	(2.2)	%
Elimination of administrative services		(748)	(0.1)	%		(784)	(0.1)	%		36	(4.6)	%
Inpatient services, net		966,011	86.0	%		1,054,668	86.7	%		(88,657)	(8.4)	%

Rehabilitation therapy services:
Total therapy services		183,898	16.4	%		214,421	17.6	%		(30,523)	(14.2)	%
Elimination of intersegment rehabilitation therapy services		(67,598)	(6.0)	%		(82,257)	(6.8)	%		14,659	(17.8)	%
Third party rehabilitation therapy services, net		116,300	10.4	%		132,164	10.8	%		(15,864)	(12.0)	%

Other services:
Total other services		55,532	4.9	%		38,526	3.2	%		17,006	44.1	%
Elimination of intersegment other services		(14,138)	(1.3)	%		(8,087)	(0.7)	%		(6,051)	74.8	%
Third party other services, net		41,394	3.6	%		30,439	2.5	%		10,955	36.0	%

Net revenues	$	1,123,705	100.0	%	$	1,217,271	100.0	%	$	(93,566)	(7.7)	%


	Nine months ended September 30,
	2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	2,888,659	84.1	%	$	3,190,065	84.2	%	$	(301,406)	(9.4)	%
Assisted/Senior living facilities		70,408	2.1	%		71,220	1.9	%		(812)	(1.1)	%
Administration of third party facilities		6,281	0.2	%		6,577	0.2	%		(296)	(4.5)	%
Elimination of administrative services		(2,347)	(0.1)	%		(2,254)	(0.1)	%		(93)	4.1	%
Inpatient services, net		2,963,001	86.3	%		3,265,608	86.2	%		(302,607)	(9.3)	%

Rehabilitation therapy services:
Total therapy services		571,875	16.7	%		685,672	18.1	%		(113,797)	(16.6)	%
Elimination of intersegment rehabilitation therapy services		(213,800)	(6.2)	%		(263,890)	(7.0)	%		50,090	(19.0)	%
Third party rehabilitation therapy services, net		358,075	10.5	%		421,782	11.1	%		(63,707)	(15.1)	%

Other services:
Total other services		143,139	4.2	%		124,300	3.3	%		18,839	15.2	%
Elimination of intersegment other services		(33,818)	(1.0)	%		(20,987)	(0.6)	%		(12,831)	61.1	%
Third party other services, net		109,321	3.2	%		103,313	2.7	%		6,008	5.8	%

Net revenues	$	3,430,397	100.0	%	$	3,790,703	100.0	%	$	(360,306)	(9.5)	%

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A summary of the Company’s unaudited condensed consolidated statement of operations follows (in thousands):



	Three months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	966,759	$	183,898	$	55,515	$	17	$	(82,484)	$	1,123,705
Salaries, wages and benefits		437,508		152,793		30,192		—		—		620,493
Other operating expenses		394,115		11,779		16,421		—		(82,874)		339,441
General and administrative costs		—		—		—		35,930		—		35,930
Lease expense		98,987		320		384		327		—		100,018
Depreciation and amortization expense		29,263		2,934		176		2,559		—		34,932
Interest expense		12,363		14		9		24,713		—		37,099
Loss on early extinguishment of debt		—		—		—		2,460		—		2,460
Investment income		—		—		—		(2,071)		—		(2,071)
Other income		(131,811)		—		—		—		—		(131,811)
Transaction costs		—		—		—		12,941		—		12,941
Long-lived asset impairments		16,037		—		—		—		—		16,037
Equity in net loss (income) of unconsolidated affiliates		—		—		—		2,932		(3,025)		(93)
Income (loss) before income tax benefit		110,297		16,058		8,333		(79,774)		3,415		58,329
Income tax benefit		—		—		—		(569)		—		(569)
Income (loss) from continuing operations	$	110,297	$	16,058	$	8,333	$	(79,205)	$	3,415	$	58,898


	Three months ended September 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,055,452	$	214,421	$	38,463	$	63	$	(91,128)	$	1,217,271
Salaries, wages and benefits		480,345		175,098		25,161		—		—		680,604
Other operating expenses		428,398		12,891		20,902		—		(91,127)		371,064
General and administrative costs		—		—		—		35,482		—		35,482
Lease expense		31,732		—		316		318		—		32,366
Depreciation and amortization expense		46,472		3,147		172		3,247		—		53,038
Interest expense		91,106		14		9		24,566		—		115,695
Investment income		—		—		—		(2,178)		—		(2,178)
Other income		(20,207)		—		—		—		—		(20,207)
Transaction costs		—		—		—		11,361		—		11,361
Long-lived asset impairments		32,390		—		—		—		—		32,390
Goodwill and identifiable intangible asset impairments		929		—		—		—		—		929
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(523)		371		(152)
(Loss) income before income tax benefit		(35,713)		23,271		(8,097)		(72,210)		(372)		(93,121)
Income tax benefit		—		—		—		(1,220)		—		(1,220)
(Loss) income from continuing operations	$	(35,713)	$	23,271	$	(8,097)	$	(70,990)	$	(372)	$	(91,901)

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


	Nine months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,965,348	$	571,875	$	142,905	$	234	$	(249,965)	$	3,430,397
Salaries, wages and benefits		1,336,298		464,740		88,024		—		—		1,889,062
Other operating expenses		1,185,684		34,866		44,312		—		(250,355)		1,014,507
General and administrative costs		—		—		—		107,024		—		107,024
Lease expense		285,510		985		1,064		1,106		—		288,665
Depreciation and amortization expense		83,463		9,210		524		8,198		—		101,395
Interest expense		68,454		41		26		73,069		—		141,590
Loss on early extinguishment of debt		—		—		—		2,436		—		2,436
Investment income		—		—		—		(6,078)		—		(6,078)
Other (income) loss		(172,126)		(76)		61		—		—		(172,141)
Transaction costs		—		—		—		23,025		—		23,025
Long-lived asset impairments		16,937		—		—		—		—		16,937
Equity in net loss (income) of unconsolidated affiliates		—		—		—		4,318		(4,496)		(178)
Income (loss) before income tax benefit		161,128		62,109		8,894		(212,864)		4,886		24,153
Income tax benefit		—		—		—		(680)		—		(680)
Income (loss) from continuing operations	$	161,128	$	62,109	$	8,894	$	(212,184)	$	4,886	$	24,833


	Nine months ended September 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	3,267,862	$	685,672	$	124,184	$	116	$	(287,131)	$	3,790,703
Salaries, wages and benefits		1,477,153		562,875		82,100		—		—		2,122,128
Other operating expenses		1,323,423		41,707		47,780		—		(287,131)		1,125,779
General and administrative costs		—		—		—		114,404		—		114,404
Lease expense		95,660		—		959		929		—		97,548
Depreciation and amortization expense		147,552		9,479		509		10,496		—		168,036
Interest expense		277,753		41		27		70,866		—		348,687
Loss on early extinguishment of debt		—		—		—		9,785		—		9,785
Investment income		—		—		—		(4,856)		—		(4,856)
Other (income) loss		(42,438)		—		78		—		—		(42,360)
Transaction costs		—		—		—		26,567		—		26,567
Long-lived asset impairments		88,008		—		—		—		—		88,008
Goodwill and identifiable intangible asset impairments		2,061		—		—		—		—		2,061
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(1,029)		1,135		106
(Loss) income before income tax benefit		(101,310)		71,570		(7,269)		(227,046)		(1,135)		(265,190)
Income tax benefit		—		—		—		(1,759)		—		(1,759)
(Loss) income from continuing operations	$	(101,310)	$	71,570	$	(7,269)	$	(225,287)	$	(1,135)	$	(263,431)

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the segment assets as of September 30, 2019 compared to December 31, 2018 (in thousands):


	September 30, 2019		December 31, 2018
Inpatient services	$	4,224,275	$	3,735,778
Rehabilitation therapy services		297,097		329,687
Other services		47,798		36,240
Corporate and eliminations		104,977		161,918
Total assets	$	4,674,147	$	4,263,623

The following table presents segment goodwill as of September 30, 2019 compared to December 31, 2018 (in thousands):


	Inpatient		Rehabilitation Therapy Services		Other Services		Consolidated
Balance at December 31, 2018
Goodwill		351,470		73,814		11,828		437,112
Accumulated impairment losses		(351,470)		—		—		(351,470)
	$	—	$	73,814	$	11,828	$	85,642
Balance at September 30, 2019
Goodwill		351,470		73,814		11,828		437,112
Accumulated impairment losses		(351,470)		—		—		(351,470)
	$	—	$	73,814	$	11,828	$	85,642

(7) Property and Equipment

Property and equipment consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):


	September 30, 2019		December 31, 2018
Land, buildings and improvements	$	990,977	$	469,575
Finance lease land, buildings and improvements		—		693,546
Financing obligation land, buildings and improvements		—		2,274,211
Equipment, furniture and fixtures		380,907		417,684
Construction in progress		2,771		9,340
Gross property and equipment		1,374,655		3,864,356
Less: accumulated depreciation		(417,437)		(976,802)
Net property and equipment	$	957,218	$	2,887,554

On January 1, 2019, the Company derecognized net financing obligation land and buildings of $1.7 billion and reclassified net finance lease land and buildings of $0.6 billion to finance lease ROU assets within the consolidated balance sheets due to the adoption of Topic 842. See Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” Additionally, improvements of approximately $12.7 million and $73.6 million, which were historically associated with finance leases (referred to as “capital leases” prior to the adoption of Topic 842) and financing obligations, respectively, have been reclassified to “Land, buildings and improvements.”

During 2019, the Company classified eight facilities in California as assets held for sale. The property and equipment of these facilities was primarily classified in the “Land, buildings and improvements” line item. See Note 14 – “Assets Held for Sale.” Since this classification, the Company has sold the real property of seven of these facilities, resulting in a net reduction of property and equipment of $36.9 million. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – California Divestitures.” At September 30, 2019, net property and equipment of $16.3 million attributable to one California skilled nursing facility remains classified as held for sale.

During the first quarter of 2019, the Company consolidated the financial statements of the Next Partnership. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership.” The consolidation resulted in an increase to “Land, buildings and improvements” of $173.5 million.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the third quarter of 2019, the Company sold the real property of eight facilities and consolidated the property and equipment of the Vantage Point Partnership, as described in Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The sales resulted in a net reduction of property and equipment of $29.4 million, while the consolidation resulted in an increase of $339.2 million, both of which were primarily classified in the “Land, buildings and improvements” line item.

During the three and nine months ended September 30, 2019, the Company recorded long-lived asset impairment charges of $9.8 million and $10.7 million, respectively, on three skilled nursing facilities reducing property and equipment accordingly.

(8) Leases

The Company leases the majority of the skilled nursing facilities and assisted/senior living facilities used in its operations, most of which are subject to triple-net leases, meaning that in addition to rent, the Company is responsible for paying property taxes, insurance, and maintenance and repair costs. As of September 30, 2019, the Company leased approximately 78% of its centers; 44% were leased pursuant to master lease agreements with four landlords. The Company also leases certain office space, land, and equipment.

The Company’s real estate leases generally have initial lease terms of 10 to 15 years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional five to ten years or more. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term. The Company assesses renewal options using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, the majority of its leases’ terms do not include renewal periods for accounting purposes. For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the ROU asset and lease liability. The payment structure of the Company’s leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices. Leases with an initial term of 12 months or less are not recorded on the balance sheet; expense for these leases is recognized on a straight-line basis over the lease term as an other operating expense.

Certain leases include options for the Company to purchase the leased asset. For such leases, the Company assesses the likelihood of exercising the purchase option using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, purchase options are generally accounted for when a compelling economic reason to exercise the option exists. Certain leases include options to terminate the lease, the terms and conditions of which vary by contract. Such options allow the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The Company’s lease agreements do not contain any material residual value guarantees. The Company leases certain facilities from affiliates of related parties. See Note 11 – “Related Party Transactions.”

The Company makes certain assumptions in determining the discount rate. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate for collateralized borrowings, based on the information available at commencement date, in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach was utilized to group assets based on similar lease terms in a manner whereby the Company reasonably expects that the application does not differ materially from application to individual leases.

Subsequent to lease commencement date, the Company reassesses lease classification when there is a contract modification that is not accounted for as a separate contract, a change in lease term, or a change in the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. This reassessment is made using current facts, circumstances and conditions. As a result of a lease’s modification, the remaining consideration in the contract is reallocated to lease and non-lease components, as applicable, and the lease liability is remeasured using the applicable discount rate at the effective date of the modification. The remeasurement of the lease liability will result in adjustment to the corresponding ROU asset, unless the lease is fully or partially terminated, in which case, a gain or loss will be recognized.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Lease Transactions

During the nine months ended September 30, 2019, the Company amended, extended and terminated numerous facilities subject to several material lease agreements resulting in ROU asset and liability adjustments. See Note 3 – “Significant Transactions and Events – Lease Transactions.”

The maturity of total operating and finance lease obligations at September 30, 2019 is as follows (in thousands):


Year ending December 31,	Operating Leases		Finance Leases (1)
2019 (excluding nine months ended September 30, 2019)	$	94,983	$	1,888
2020		382,353		7,570
2021		385,990		7,379
2022		381,397		7,168
2023		380,751		6,927
Thereafter		3,411,293		42,564
Total lease payments		5,036,767		73,496
Less interest		(2,201,697)		(31,082)
Total lease obligations		2,835,070		42,414
Less current portion		(137,574)		(2,738)
Long-term lease obligations	$	2,697,496	$	39,676

(1)

Finance lease payments include $37.2 million related to options to extend lease terms that are reasonably certain of being exercised.

The Company’s future minimum commitments under finance leases (formerly capital leases), financing obligations, and operating leases as of December 31, 2018 were as follows (in thousands):


Year ending December 31,	Finance Leases		Financing Obligations		Operating Leases
2019	$	88,793	$	237,335	$	110,755
2020		89,397		242,052		109,391
2021		91,292		245,311		106,031
2022		93,281		242,214		84,003
2023		95,376		247,852		76,701
Thereafter		3,325,042		6,661,624		373,753
Total future minimum lease payments		3,783,181		7,876,388	$	860,634
Less amount representing interest		(2,813,068)		(5,141,448)
Total lease obligation		970,113		2,734,940
Less current portion		(2,171)		(2,001)
Long-term obligation	$	967,942	$	2,732,939


		Three months ended		Nine months ended
Lease Cost	Classification	September 30, 2019		September 30, 2019
Operating lease cost	Lease expense	$	100,018	$	288,665
Finance lease cost:
Amortization of finance lease right-of-use assets	Depreciation and amortization expense		1,734		15,222
Interest on finance lease obligations	Interest expense		4,299		48,931
Total finance lease expense			6,033		64,153
Variable lease cost	Other operating expenses		10,697		32,027
Short-term leases	Other operating expenses		5,980		18,596
Total lease cost		$	122,728	$	403,441

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides remaining lease term and discount rates by lease classification as of the three and nine months ended September 30, 2019:


Lease Term and Discount Rate	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases		13.4
Finance leases		8.1
Weighted-average discount rate
Operating leases		9.6%
Finance leases		7.2%

The following table includes supplemental lease information for the three and nine months ended September 30, 2019 (in thousands):


	Three months ended		Nine months ended
Other information	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease obligations
Operating cash flows from operating leases	$	98,521	$	270,449
Operating cash flows from finance leases		4,835		45,286
Financing cash flows from finance leases		702		1,973
Right-of-use assets obtained in exchange for new lease obligations
Operating leases		5,306		82,471
Finance leases		688		688

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 and a minimum consolidated fixed charge coverage. These leases include cross-default provisions with each other and certain material debt instruments.

The Company has master lease agreements with Welltower, Sabra Health Care REIT, Inc., Omega and Second Spring (collectively, the Master Lease Agreements). The Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity. At September 30, 2019, the Company is in compliance with the financial covenants contained in the Master Lease Agreements.

The Company has two master lease agreements with Cindat Best Years Welltower JV LLC (CBYW) involving 28 of its facilities. The Company did not meet certain financial covenants contained in one of the master lease agreements involving five of its facilities at September 30, 2019. On November 4, 2019, the Company received a waiver for these covenant breaches through January 1, 2021. At September 30, 2019, the Company is in compliance with the financial covenants contained in the other master lease agreement.

At September 30, 2019, the Company did not meet certain financial covenants contained in three leases related to five of its facilities. The Company is, and expects to continue to be, current in the timely payment of its obligations under such leases. These leases do not have cross default provisions, nor do they trigger cross default provisions in any of the Company’s other loan or lease agreements. The Company will continue to work with the related credit parties to amend such leases and the related financial covenants. The Company does not believe the breach of such financial covenants at September 30, 2019 will have a material adverse impact on it. The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

(9) Long-Term Debt

Long-term debt at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Asset based lending facilities, net of debt issuance costs of $9,295 and $11,335 at September 30, 2019 and December 31, 2018, respectively	$	384,866	$	419,289
Term loan agreements, net of debt issuance costs of $1,226 and $1,851 and debt premium balance of $5,473 and $8,446 at September 30, 2019 and December 31, 2018, respectively		193,380		184,652
Real estate loans, net of debt issuance costs of $4,224 and $5,360 and debt premium balance of $21,744 and $28,992 at September 30, 2019 and December 31, 2018, respectively		266,003		307,690
HUD insured loans, net of debt issuance costs of $2,936 and $5,247 and debt premium balance of $0 and $860 at September 30, 2019 and December 31, 2018, respectively		117,699		181,762
Notes payable		78,157		81,398
Mortgages and other secured debt (recourse)		5,450		4,190
Mortgages and other secured debt (non-recourse), net of debt issuance costs of $7,890 and $187 and debt premium balance of $1,447 and $1,520 at September 30, 2019 and December 31, 2018, respectively		497,142		26,483
		1,542,697		1,205,464
Less: Current installments of long-term debt		(121,745)		(122,531)
Long-term debt	$	1,420,952	$	1,082,933

Asset Based Lending Facilities

On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap). The agreement initially provided for a $555.0 million asset based lending facility comprised of (a) a $325.0 million first lien term loan facility, (b) a $200.0 million first lien revolving credit facility and (c) a $30.0 million delayed draw term loan facility (collectively, the ABL Credit Facilities). The commitments under the delayed draw term loan facility will be reduced to $20.0 million in the year 2020.

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

The ABL Credit Facilities have a five-year term set to mature on March 6, 2023. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans (each defined below), in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed. In accordance with U.S. GAAP, the Company has presented the entire revolving credit facility borrowings balance of $109.2 million in current installments of long-term debt at September 30, 2019. Despite this classification, the Company expects that it will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023. Cash proceeds of $50.4 million received under the ABL Credit Facilities remain in a restricted account. This amount is pledged to cash collateralize letters of credit. The Company has classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents on the consolidated balance sheets at September 30, 2019 and December 31, 2018.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate equals 0.5% per annum on the revolving credit facility and 2% on the delayed draw term loan facility.

The term loan facility and revolving credit facility include a termination fee equal to 2% if the loans are prepaid within the first year, 1% if the loans are prepaid after year one and before year two, and 0.5% thereafter. The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loans retirement or on the maturity date.

The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings. Financial covenants include a minimum consolidated fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity.

Borrowings and interest rates under the ABL Credit Facilities were as follows at September 30, 2019 (dollars in thousands):


					Weighted
					Average
ABL Credit Facilities	Commitment		Borrowings		Interest
Term loan facility	$	285,000	$	285,000	8.09	%
Revolving credit facility (Non-HUD)		168,000		49,630	8.09	%
Revolving credit facility (HUD)		72,000		29,530	8.09	%
Delayed draw term loan facility		30,000		30,000	13.09	%
	$	555,000	$	394,160	8.47	%

As of September 30, 2019, the Company had a total borrowing base capacity of $406.5 million with outstanding borrowings under the ABL Credit Facilities of $394.2 million, leaving the Company with approximately $12.3 million of available borrowing capacity under the ABL Credit Facilities.

Term Loan Agreements

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a term loan agreement, as amended, (the Term Loan Agreement) with an affiliate of Welltower and an affiliate of Omega. The Term Loan Agreement originally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million and later expanded to $160.0 million. The Term Loan Agreement was amended on May 9, 2019 to extend the maturity date from July 29, 2020 to November 30, 2021. The original Term Loan for $120.0 million bears interest at a rate equal to 10.0% per annum, with up to 5.0% per annum to be paid in kind. The additional Term Loan for $40.0 million bears interest at a rate equal to 14.0% per annum, with up to 9.0% per annum to be paid in kind. As of September 30, 2019, the Term Loans had an outstanding principal balance of $194.6 million, which includes a net debt premium balance of $5.5 million.

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions. The Term Loan Agreement is also secured by a junior lien on the assets that secure the ABL Credit Facilities on a first priority basis.

Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type. Financial covenants include four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures. The most restrictive financial covenant is the minimum interest coverage ratio which requires the Company to maintain a coverage ratio, as defined therein, of no less than 1.70 to 1.0 through December 31, 2020, and increasing to 1.80 to 1.0 thereafter.

Real Estate Loans

On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of September 30, 2019. The MidCap Real Estate Loans are secured by 12 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which were interest only in the first year, are subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments commenced, with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below). On May 1, 2019, the Company divested the real property and operations of five skilled nursing facilities in California, three of which were subject to the MidCap Real Estate Loans. The Company used the sale proceeds to repay $27.7 million on the MidCap Real Estate Loans. During the third quarter of 2019, the Company divested the real property of two skilled nursing facilities in New Jersey and one skilled nursing facility in Maryland that were subject to the MidCap Real Estate Loans and used the sale proceeds to repay $10.5 million on the loans. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The MidCap Real Estate Loans have an outstanding balance of $34.3 million at September 30, 2019.

On November 8, 2018, one of the MidCap Real Estate Loans was amended with an additional borrowing of $10.0 million. The proceeds were used to retire a maturing mortgage loan on a corporate office building. The office building has been added as collateral and the loan maturity remains March 30, 2023. The $10.0 million additional loan is subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 2.0%) plus an applicable margin of 6.25% with principal amortizing immediately and the balance due at maturity. During the third quarter of 2019, the Company repaid $1.6 million on this loan in conjunction with the aforementioned facility sales in New Jersey and Maryland. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The loan has an outstanding balance of $8.2 million at September 30, 2019.

The Company is subject to multiple real estate loan agreements with Welltower (Welltower Real Estate Loans). The Welltower Real Estate Loans are 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 Welltower Real Estate Loans. Each Welltower Real Estate Loan has a maturity date of January 1, 2022 and an annual interest rate of 12.0%, of which 7.0% will be paid in cash and 5.0% will be paid in kind. The Company agreed to make commercially reasonable efforts to secure commitments to repay no less than $105.0 million of the Welltower Real Estate Loan obligations. As of September 30, 2019, the Company has not yet secured the total required repayments or commitments. As a result, the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest. At September 30, 2019, the Welltower Real Estate Loans are secured by a mortgage lien on the real property and a second lien on certain receivables of the operators of the five remaining facilities subject to the Welltower Real Estate Loans. The Welltower Real Estate Loans contain a conversion option, whereby up to $50.0 million of the balance can be converted into Class A common stock of the Company or a 10-year note bearing 2% paid in kind interest. The conversion option is available to the Company upon the satisfaction of certain conditions, the most significant include: the raise of new capital and application thereof to existing Welltower debt instruments, the repayment of $105.0 million to Welltower, as described above, the partial repayment of the Term Loans, and the partial repayment of the Welltower Real Estate Loans, such that the remaining outstanding principal balance does not exceed $50.0 million. As of September 30, 2019, the Welltower Real Estate Loans have an outstanding principal balance of $227.7 million, which includes a debt premium balance of $21.7 million.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

HUD Insured Loans

As of September 30, 2019, the Company has 19 skilled nursing facility loans insured by the U.S. Department of Housing and Urban Development (HUD) with a combined aggregate principal balance of $167.6 million, which includes a debt premium balance of $2.8 million.

The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 29 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.4%. 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 thereafter. Any further HUD insured loans will require additional HUD approval.

All HUD insured loans are non-recourse loans to the Company. All loans 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, 2019, the Company has total escrow reserve funds of $15.6 million with the loan servicer that are reported within prepaid expenses.

During the nine months ended September 30, 2019, the Company sold the real property of three skilled nursing facilities and one assisted/senior living facility in California subject to HUD financing. The proceeds of which were used to retire HUD insured loans totaling $23.8 million. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – California Divestitures.” In addition, the Company sold one skilled nursing facility in New Jersey and one skilled nursing facility in Virginia. The proceeds of these two sales were used to retire HUD insured loans totaling $18.4 million. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.”

At September 30, 2019, the HUD insured loans of four skilled nursing facilities were classified as held for sale in the consolidated balance sheets. These loans had an aggregate principal balance of $46.3 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $4.6 million. The sale of the facilities is expected to be completed in 2019 or early 2020. See Note 14 – “Assets Held for Sale.”

Notes Payable

On January 17, 2018, the Company converted $19.6 million of its trade payables into a note payable. The note, as amended, will be repaid in equal monthly installments through December 2019 at an annual interest rate of 5.75% and has an outstanding balance of $2.0 million at September 30, 2019.

In connection with Welltower’s sale of 64 skilled nursing facilities to Second Spring on November 1, 2016, the Company issued a note totaling $51.2 million to Welltower. The note accrues cash interest at 3% and paid-in-kind interest at 7%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1. The note was amended on May 9, 2019 to extend the maturity date from October 30, 2020 to December 15, 2021. Upon the satisfaction of certain conditions, including the repayment of the Term Loans, repayment of the other note payable, noted below, to Welltower, and partial repayment of the Welltower Real Estate Loans, the outstanding note balance in excess of $6.0 million will be forgiven by Welltower. The note has an outstanding accreted balance of $62.1 million at September 30, 2019.

In connection with Welltower’s sale of 28 skilled nursing facilities to CBYW on December 23, 2016, the Company issued a note totaling $11.7 million to Welltower. The note accrues cash interest at 3% and paid-in-kind interest at 7%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15. The note matures on December 15, 2021, and has an outstanding accreted principal balance of $14.1 million at September 30, 2019.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 with a weighted average interest rate of 1.6% at September 30, 2019, with maturity dates ranging from 2019 to 2020.

Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures and VIEs. 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 with a weighted average interest rate of 7.2% at September 30, 2019. Maturity dates range from 2022 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 aggregate principal balance of these loans includes a $1.5 million debt premium on one debt instrument. In the nine months ended September 30, 2019, the Company consolidated the financial statements of the Next Partnership and the Vantage Point Partnership. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership” and Note 3 – “Significant Transactions and Events – Strategic Partnerships – Vantage Point Partnership.” The Next Partnership’s debt consists of a three-year term loan in the amount of $142.1 million and a 10-year mezzanine loan in the amount of $27.0 million. The Vantage Point Partnership’s debt consists of a 7-year term loan with available proceeds of $240.9 million, $233.6 million of which was drawn as of September 30, 2019, as well as a promissory note due to Vantage Point in the amount of $76.8 million due on September 12, 2028.

Debt Covenants

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, minimum liquidity and maximum capital expenditures. The Credit Facilities include cross-default provisions with each other and certain material lease agreements. At September 30, 2019, the Company was in compliance with its financial covenants contained in the Credit Facilities.

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

The maturity of total debt of $1,539.6 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at September 30, 2019 is as follows (in thousands):


Twelve months ended September 30,
2020	$	121,779
2021		5,411
2022		623,764
2023		341,338
2024		12,999
Thereafter		434,313
Total debt maturity	$	1,539,604

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(10)Income Taxes

The Company effectively owns 65.9% of FC-GEN, which is an entity taxed as a partnership for U.S. income tax purposes and the Company’s only source of taxable income. FC-GEN is subject to income taxes in several U.S. state and local jurisdictions. The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 65.9% ownership of FC-GEN.

For the three months ended September 30, 2019, the Company recorded income tax benefit of $0.6 million from continuing operations, representing an effective tax rate of (1.0%), compared to income tax benefit of $1.2 million from continuing operations, representing an effective tax rate of 1.3%, for the same period in 2018. The negative effective tax rate for the three months ended September 30, 2019 compared to the same period in 2018 is the result of US GAAP gain recorded upon the disposition of leased centers during this period in 2019 that is not recognized for US federal or state income taxes.

For the nine months ended September 30, 2019, the Company recorded income tax benefit of $0.7 million from continuing operations, representing an effective tax rate of (2.8%), compared to income tax benefit of $1.8 million from continuing operations, representing an effective tax rate of 0.7%, for the same period in 2018. The negative effective tax rate for the nine months ended September 30, 2019 compared to the same period in 2018 is the result of US GAAP gain recorded upon the disposition of leased centers during this period in 2019 that is not recognized for US federal or state income taxes.

The Company continues to assess the requirement for, and amount of, a valuation allowance in accordance with the “more likely than not” standard. Management had previously determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets. As of September 30, 2019, management has determined that the valuation allowance is still necessary.

The Company’s Bermuda captive insurance company is expected to produce a minimal U.S. federal taxable loss in 2019. The captive is expected to generate positive pre-tax income in future periods to off-set its deferred tax assets. The 2019 U.S. federal taxable loss cannot be carried back but can be carried forward indefinitely.

The Company provides rehabilitation therapy services within the People’s Republic of China and Hong Kong. At September 30, 2019, these business operations do not comprise a significant portion of the Company’s overall operating results. Management does not anticipate these operations will generate significant taxable income in the near term. The Company, through a wholly owned subsidiary, has made a minimal investment in the stock of a company providing rehabilitation therapy services in the country of India. The operations currently do not have a material effect on the Company’s effective tax rate.

Exchange Rights and Tax Receivable Agreement

The owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, 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 would increase and its purchase price would 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 result in a decreased gain (or increased loss) on future dispositions of the affected assets. There were exchanges of 3,174,106 FC-GEN units and Class C shares in the nine months ended September 30, 2019 equating to 3,174,661 Class A shares. The exchanges during the nine months ended September 30, 2019 resulted in a $14.3 million internal revenue code (IRC) Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN. There were exchanges of 1,860,592 FC-GEN units and Class C shares in the nine months ended September 30, 2018 equating to 1,860,912 Class A shares. The exchanges during the nine months ended September 30, 2018 resulted in a $9.5 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.

The Company is party to 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

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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;

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)Related Party Transactions

The Company provides rehabilitation services to certain facilities owned and operated by a customer in which certain members of the Company’s board of directors and board observers beneficially own a majority ownership interest in the aggregate. These

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services resulted in net revenues of $29.1 million and $88.9 million in the three and nine months ended September 30, 2019, respectively, as compared to net revenues of $30.6 million and $96.2 million in the three and nine months ended September 30, 2018, respectively. The services resulted in net accounts receivable balances of $32.5 million and $32.3 million at September 30, 2019 and December 31, 2018, respectively. In addition, the Company has a note receivable for $56.3 million due from the related party customer. The Company has posted a $55.0 million reserve against the note receivable and deems this reserve prudent given the delays in collection on account of this related party customer. Further, the reserve represents the judgment of management, and does not indicate a forgiveness of any amount of the outstanding accounts receivable owed by this related party customer. The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available.

Certain members of the Company’s board of directors and board observers indirectly beneficially hold ownership interests in FC Compassus LLC (Compassus) totaling less than 10% in the aggregate. The Company is party to certain immaterial preferred provider and affiliation agreements with Compassus. Separately, the Company has a note receivable balance of $22.1 million from Compassus outstanding at September 30, 2019. The note, which is comprised of principal of $12.0 million and accrued interest, is associated with the Company’s sale of its hospice and home health operations to Compassus, which was completed during 2016.

Prior to September 20, 2019, certain members of the Company’s board of directors and board observers indirectly beneficially held ownership interests in Trident USA totaling less than 10% in the aggregate. Effective September 20, 2019, no members of the Company’s board of directors and board observers indirectly beneficially hold any ownership interests in Trident USA. The Company is party to mobile radiology and laboratory/diagnostic services agreements with Trident USA. Fees for these services were $2.4 million and $6.2 million in the three and nine months ended September 30, 2019, respectively, compared to $3.4 million and $10.0 million in the three and nine months ended September 30, 2018, respectively.

Certain subsidiaries of the Company are subject to a lease and a purchase option of 12 centers in New Hampshire and Florida from 12 separate limited liability companies affiliated with Next (the Next Landlord Entities). The lease was effective June 1, 2018 and the initial annualized rent to be paid is $13.0 million. The purchase option will become exercisable in the fifth lease year. In addition, certain subsidiaries of the Company are subject to a lease and a purchase option of 15 centers in Pennsylvania, New Jersey, Connecticut, Massachusetts and West Virginia from 15 separate limited liability companies affiliated with the Next Landlord Entities. The Company owns a 46% membership interest in the Next Partnership. The lease was effective February 1, 2019 and the initial annualized rent to be paid is $19.5 million. The purchase option is exercisable for a period of time in the fifth, sixth and seventh lease years. See Note 3 – “Significant Transactions and Events – Strategic Partnerships – Next Partnership.” Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling approximately 4% in the aggregate. These members have earned acquisition fees, and may earn asset management fees and other fees with respect to the Next Landlord Entities.

As of September 30, 2019, Welltower held approximately 8.9% of the shares of the Company’s Class A Common Stock, representing approximately 5.8% of the voting power of the Company’s voting securities. The Company is party to a master lease with an affiliate of Welltower. The initial term of the master lease expires on January 31, 2037 and the Company has one eleven-year renewal option. Beginning January 1, 2019, annual rent escalators under the master lease were 2.0%. During the three and nine months ended September 30, 2019, the Company paid rent of approximately $17.9 million and $56.0 million, respectively, to Welltower. The Company holds options to purchase certain facilities subject to the master lease. At September 30, 2019, the Company leased 43 facilities from Welltower. The Company and certain of its affiliates are also party to certain debt instruments with Welltower. See Note 9 – “Long-Term Debt – Term Loan Agreements,” “Long-Term Debt – Real Estate Loans,” and “Long-Term Debt – Notes Payable.”

In the third quarter of 2018, the Company began providing rehabilitation services to five health care centers operated by affiliates of NSPR Centers, LLC (NSpire). Certain members of the Company’s board of directors and board observers beneficially own in the aggregate a majority of the ownership interests in NSpire. The Company recorded net revenues of $1.7 million and $5.2 million, respectively, for services provided to NSpire in the three and nine months ended September 30, 2019. The services resulted in net accounts receivable balances of $1.7 million and $1.1 million at September 30, 2019 and December 31, 2018, respectively.

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(UNAUDITED)

On September 15, 2019, the Company entered into a consulting agreement with one of the Company’s board observers. The consulting agreement has a term of one year and compensation of approximately $0.6 million. Services provided include sourcing, negotiating and assisting with closing of transactions and financing.

(12)Other Income

In the three and nine months ended September 30, 2019 and 2018, the Company completed multiple transactions, including the divestiture of numerous skilled nursing facilities and the termination or modification of certain lease agreements. See Note 3 – “Significant Transactions and Events.” These transactions resulted in a net (gain) loss recorded as other income in the consolidated statements of operations. The following table summarizes those net (gains) losses (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Gain on sale of owned assets	$	(63,645)	$	—	$	(90,992)	$	—
Loss recognized for exit costs associated with divestiture of operations		6,725		8,223		14,647		17,371
Gain on lease termination or modification		(74,891)		—		(95,796)		—
Gain on lease terminations and amendments - unamortized straight-lining, favorable and unfavorable lease balances		—		(76)		—		(12,013)
Gain on lease terminations and amendments - unamortized financing lease and capital lease obligations		—		(31,817)		—		(53,027)
Loss on lease termination settlement		—		3,463		—		3,463
Loss associated with lease extensions or newly leased operations, net		—		—		—		1,846
Total other income	$	(131,811)	$	(20,207)	$	(172,141)	$	(42,360)

(13)Asset Impairment Charges

Long-Lived Assets with a Definite Useful Life

In each quarter, the Company’s long-lived assets with a definite useful life are tested for impairment at the lowest levels for which there are identifiable cash flows. The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets. The cash flow period was based on the remaining useful lives of the primary asset in each long-lived asset group, principally a building or ROU asset in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. During the three and nine months ended September 30, 2019, the Company recognized impairment charges in the inpatient segment of $16.0 million and $16.9 million, respectively. During the three and nine months ended September 30, 2018, the Company recognized impairment charges in the inpatient segment totaling $32.4 million and $88.0 million, respectively.

(14)Assets Held for Sale

In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets. These assets are evaluated to determine whether they qualify as assets held for sale or discontinued operations. The assets and liabilities of a disposal group classified as held for sale shall be presented separately in the asset and liability sections, respectively, of the statement of financial position in the period in which they are identified only. Assets held for sale that qualify as discontinued operations are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the consolidated statements of operations.

In the year ended December 31, 2018, the Company identified a disposal group of seven skilled nursing facilities operated by the Company in the state of Texas that qualified as assets held for sale. The Company is party to a purchase and sale agreement, as amended, to sell the facilities for $20.1 million. Four of the facilities are subject to Welltower Real Estate Loans and three of the facilities are subject to HUD-insured loans. The disposal group does not meet the criteria as a discontinued operation. The sale of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

the real estate of the seven skilled nursing facilities is expected to close in 2019 and marks an exit from the inpatient business in Texas.

During the nine months ended September 30, 2019, the Company identified a disposal group of seven skilled nursing facilities and one assisted/senior living facility operated by the Company in the state of California that qualified as assets held for sale. The Company is party to a purchase and sale agreement, as amended, to sell the facilities for $88.8 million. As of September 30, 2019, seven of the facilities were sold. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities – California Divestitures.” The remaining facility is subject to a HUD-insured loan, so closing is subject to licensure and other regulatory approvals and is expected to occur in 2019 or early 2020. The disposal group does not meet the criteria as a discontinued operation.

In total, the Company has classified as assets held for sale in its consolidated balance sheets as of September 30, 2019 and December 31, 2018, the real property and other balances associated with eight facilities and seven facilities, respectively.

The following table sets forth the major classes of assets and liabilities included as part of the disposal groups (in thousands):


	September 30, 2019		December 31, 2018
Current assets:
Prepaid expenses	$	4,740	$	3,375
Long-term assets:
Property and equipment, net of accumulated depreciation of $5,840 and $3,640 at September 30, 2019 and December 31, 2018, respectively		32,517		16,087
Total assets	$	37,257	$	19,462
Current liabilities:
Current installments of long-term debt	$	1,020	$	639
Long-term liabilities:
Long-term debt		45,314		25,942
Total liabilities	$	46,334	$	26,581

(15)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 12 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 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 semi-annual basis or more frequently 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

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(UNAUDITED)

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 a combination of third-party administrators (TPAs), in-house adjusters, and legal counsel, along with systems designed to maintain and process claims, to provide it with the data utilized in its assessments of reserve adequacy. Where TPAs are utilized, they operate under the oversight of the Company’s in-house risk management and legal functions. These functions and systems 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 for the current policy year of 1.8%. 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 $9.5 million and $8.3 million as of September 30, 2019 and December 31, 2018, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

For the three months ended September 30, 2019 and 2018, the provision for general and professional liability risk totaled $16.1 million and $25.0, respectively. For the nine months ended September 30, 2019 and 2018, the provision for general and professional liability risk totaled $42.9 million and $79.2 million, respectively. The reduction in the provision for general and professional liability for the three and nine months ended September 30, 2019 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives. The reserves for general and professional liability were $393.2 million and $435.3 million as of September 30, 2019 and December 31, 2018, respectively.

For the three months ended September 30, 2019, and 2018, the provision for workers’ compensation risk totaled $14.0 million and $15.0 million, respectively. For the nine months ended September 30, 2019 and 2018, the provision for workers’ compensation risk totaled $42.7 million and $41.4 million, respectively. The reserves for workers’ compensation risks were $171.0 million and $168.3 million as of September 30, 2019 and December 31, 2018, 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. This accrual for incurred but not yet reported claims was $15.0 million and $16.6 million as of September 30, 2019 and December 31, 2018, respectively. 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.

Legal Proceedings

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, 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. However, the Company’s assessment of materiality may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

(16)Fair Value of Financial Instruments

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

The Company’s financial instruments, other than its 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.

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).

The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	September 30,		Identical Assets		Observable Inputs		Inputs
Assets:	2019		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	34,837	$	34,837	$	—	$	—
Restricted cash and equivalents		93,232		93,232		—		—
Restricted investments in marketable securities		128,994		43,829		85,165		—
Total	$	257,063	$	171,898	$	85,165	$	—


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
Assets:	2018		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	20,865	$	20,865	$	—	$	—
Restricted cash and equivalents		121,411		121,411		—		—
Restricted investments in marketable securities		136,153		40,699		95,454		—
Total	$	278,429	$	182,975	$	95,454	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company places its cash and cash equivalents, restricted 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. Many of the Company’s financial instruments have quoted prices but are traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fairly valued using other financial instruments, the parameters of which can be directly observed. These financial instruments have been reported as Level 2 measurements.

Debt Instruments

The table below shows the carrying amounts and estimated fair values, net of debt issuance costs and other non-cash debt discounts and premiums, of the Company’s primary long-term debt instruments (in thousands):


	September 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Asset based lending facilities	$	384,866	$	384,866	$	419,289	$	419,289
Term loan agreements		193,380		193,380		184,652		184,652
Real estate loans		266,003		266,003		307,690		307,690
HUD insured loans		117,699		117,699		181,762		180,950
Notes payable		78,157		78,157		81,398		81,398
Mortgages and other secured debt (recourse)		5,450		5,450		4,190		4,190
Mortgages and other secured debt (non-recourse)		497,142		497,142		26,483		26,483
	$	1,542,697	$	1,542,697	$	1,205,464	$	1,204,652

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 majority of the Company’s debt instruments contain variable rates that are based upon current market prices, or have been refinanced within the recent past. Consequently, management believes the carrying value of these debt instruments approximates fair value. The Company believes this approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements.

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 tables 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, 2019		September 30, 2019
Assets:
Property and equipment, net	$	957,218	$	10,696
Finance lease right-of-use assets, net		37,685		—
Operating lease right-of-use assets		2,416,914		6,241
Intangible assets, net		90,079		—
Goodwill		85,642		—

			Impairment Charges -
	Carrying Value		Nine months ended
	December 31, 2018		September 30, 2018
Assets:
Property and equipment, net	$	2,887,554	$	88,008
Intangible assets, net		119,082		2,061
Goodwill		85,642		—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The fair value allocation related to the Company’s acquisitions and the fair value of tangible and intangible assets related to the Company’s impairment analysis are 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 affect 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.

(17) Subsequent Events

On October 1, 2019, the Company divested or exited the operations of two skilled nursing facilities in New Jersey and California, which in total, generated annual revenues of $17.2 million and pre-tax net loss of $0.7 million. A loss on divestiture of the two operations totaling $0.7 million was recognized in the three and nine months ended September 30, 2019 and is included in other income in the consolidated statements of operations.

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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 consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in our Annual Report (defined below).

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans” or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 18, 2019 (the Annual Report), as well as others that are discussed in this Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

Business Overview

Genesis is a healthcare services company that through its subsidiaries owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business. We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. At September 30, 2019, we provided inpatient services through 384 skilled nursing, senior/assisted living and behavioral health centers located in 26 states. Revenues of our owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of our revenues.

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

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

Significant Transactions and Events

Strategic Partnerships

Next Partnership

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which we acquired a 46% membership interest for $16.0 million. The remaining interest is held by Next Healthcare

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(Next), a related party. See Note 11 – “Related Party Transactions.” We will continue to operate these facilities pursuant to a new master lease with the Next Partnership. The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.

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

Vantage Point Partnership

On September 12, 2019, Welltower and Second Spring Healthcare Investments (Second Spring) sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which we invested $37.5 million, consisting of an equity investment of $3.7 million, for an approximate 30% membership interest, and a formation loan of $33.7 million. The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million. In conjunction with the facility sales, we received aggregate annual rent credits of approximately $30.3 million. We will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership. The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require us to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.

In accordance with U.S. GAAP, we have concluded the Vantage Point Partnership qualifies as a VIE and we are the primary beneficiary. As such, we have consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements. The ROU assets and lease obligations related to the Vantage Point Partnership lease agreement have been fully eliminated in our consolidated financial statements. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million. The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million. We have not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period. Other than transaction costs of $11.0 million, the impact of consolidation on the accompanying consolidated statement of operations was not material for the three months ended September 30, 2019.

In order to raise capital for the Vantage Point Partnership investment, we sold the real property of seven skilled nursing facilities and one senior/assisted living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire our interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested. Three of the facilities were subject to real estate loans and two were subject to HUD insured loans. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” We also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $58.2 million.

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Divestiture of Non-Strategic Facilities

California Divestitures

During the second quarter of 2019, we sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” We incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million. We also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million.

During the third quarter of 2019, we sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing. See Note 7 – “Property and Equipment” and Note 9 – “Long-Term Debt – HUD Insured Loans.” The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $1.0 million.

Other Divestitures

During the first quarter of 2019, we divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million. We recognized a loss on exit reserves of $3.3 million. We also completed the closure of one facility located in Ohio. The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

During the second quarter of 2019, we divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

During the third quarter of 2019, we divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility. Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of approximately $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $1.9 million.

Acquisitions

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

Lease Transactions

Welltower

During the first quarter, we amended the Welltower Master Lease several times to reflect the lease termination of 24 facilities, including the 15 facilities sold and now leased from the Next Partnership. As a result of the lease termination on the 24 facilities, we received annual rent credits of approximately $23.4 million. A lease modification analysis was performed and the remaining 49 facilities subject to the master lease were reclassified from finance leases to operating leases. Finance lease ROU assets and obligations of $61.5 million and $130.2 million, respectively, were written off. On a net basis, operating lease ROU assets and obligations of $159.8 million and $111.3 million, respectively, were written down, resulting in a gain of $20.3 million.

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During the second quarter of 2019, we amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million. Operating lease ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off, resulting in a gain of $0.5 million.

During the third quarter of 2019, we amended the Welltower Master Lease to reflect the lease termination of four facilities and received annual rent credits of $1.9 million. Operating lease ROU assets and lease obligations of $102.0 million and $74.4 million, respectively, were written off, resulting in a gain of $27.6 million.

Omega

During the third quarter, we amended our master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $23.4 million.

Second Spring

During the third quarter, we amended our master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

Other

During the first quarter of 2019, we amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed our option to purchase certain facilities under the lease and adjusted certain financial covenants. We had previously determined that the renewal option period was not reasonably certain of exercise. Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

During the third quarter of 2019, we amended a master lease agreement to reflect the lease termination of six facilities subject to the lease. In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

Medicare Shared Savings Program

As the industry continues to migrate from fee-for-service to pay-for-value, our unique capabilities in the area of physician services has given us a competitive advantage in advancing participation in value-based programs.

In 2016, Genesis Healthcare ACO, LLC began participating in the Medicare Shared Savings Program (MSSP) through our Genesis Physician Services (GPS) division. GPS providers make more than half a million visits annually to both short- and long-stay patients, helping them improve overall healthcare quality and reduce unnecessary hospital readmissions. GPS is the only captive SNFist company in the industry and the only post-acute sponsored accountable care organization (ACO) in the United States.

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2018 Performance Year

During 2018, we managed approximately 6,400 Medicare fee for service beneficiaries under MSSP with annualized Medicare spend of more than $155.0 million. In 2018, the MSSP required us to save at least 3.2% of the total Medicare spend under management to share in up to 50% of the savings with the Centers for Medicare and Medicaid Services (CMS), while assuming no downside risk. In August 2019, we were informed by CMS that we reached the minimum savings rate set by CMS required for MSSP gain share. As a result, in the third quarter of 2019, we recognized MSSP income of approximately $1.7 million, net of expenses and provider distributions.

2019 Performance Year

During the first six months of 2019, we continued to operate under our first MSSP agreement with CMS. Effective July 1, 2019 through December 31, 2024, we entered into our second MSSP agreement with CMS. Under this agreement, we can share in up to 75% of the savings with CMS, but we are also at risk for 40% of any increase in cost above the defined targets, which is further capped at 15% of our annualized benchmark costs under management.

With nearly four years of participation under MSSP, we have gained valuable experience driving better outcomes and improved quality, managing episodic cost and developing in-house capabilities to predict program performance. Based upon the data available to us with respect to the 2019 performance year, we recognized $4.7 million of estimated MSSP income, net of expenses and provider distributions, for the period January 1, 2019 to September 30, 2019. The final reconciliation and settlement of the 2019 performance year is expected to be announced by CMS in the third quarter of 2020. We will continue to closely monitor and evaluate our estimated performance under the 2019 performance year and will adjust our estimated MSSP income accordingly.

Five-Star Quality Rating System

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

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

Centers for Medicare and Medicaid Services Final Rules

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

Skilled Nursing Facility Medicare Part A Payment Rates

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

Patient-Driven Payment Model (PDPM)

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

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

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

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

Group Therapy Under PDPM

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

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

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

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed new data reporting requirements for certain Post-Acute-Care (PAC) providers. The IMPACT Act requires that each skilled nursing facility submit their quality measures data. Beginning with fiscal year 2018, and each subsequent year, if a skilled nursing facility does not submit required quality data, their payment rates for the year are reduced by 2.0% for that fiscal year. Application of the 2.0% reduction may result in payment rates for a fiscal year being less than the preceding fiscal year. In addition, reporting-based reductions to the market basket increase factor will not be cumulative; they will only apply for the fiscal year involved. A skilled nursing facility will receive a notification letter from its Medicare administrator contractor if it was non-compliant with the Quality Reporting Program reporting requirements and is subject to the payment reduction.

Current performance measures mandated for the SNF QRP for fiscal year 2019 were established in the final SNF PPS rules adopted on August 4, 2017 (FY 2018 SNF PPS Rules). The final rules summarize these requirements, finalize adoption of a new measure removal factor for previously adopted SNF QRP measures, review the quality measures currently adopted for the fiscal year 2020 SNF QRP and finalize the intention to specify new measures to be adopted no later than October 1, 2019 for the fiscal year 2020 SNF QRP. CMS has finalized the decision to adopt two Transfer of Health Information quality measures and standardized patient assessment data elements that skilled nursing facilities would be required to begin reporting with respect to admissions and discharges that occur on or after October 1, 2020. The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing facilities affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals. Final fiscal year 2019 SNF PPS rules (FY 2019 SNF PPS Rules) specified that skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance. Lastly, CMS has finalized the proposal to publicly display the quality measure, Drug Regimen Review Conducted With Follow-Up for Identified Issues- PAC SNF QRP.

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

Under the SNF-VBP Program, CMS began to withhold 2.0% of Medicare payments starting October 1, 2018, to fund the

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incentive payment pool and will redistribute 60% of the withheld payments back to skilled nursing facilities. All skilled nursing facilities will receive an incentive multiplier to apply to each of their RUG rates for the fiscal year that will provide an incentive payment, a full RUG payment, or a reduction. All skilled nursing facilities receive two scores, one for achievement and the other for improvement of their hospital readmission measure over the designated reporting period. All skilled nursing facilities are ranked from high to low based on the higher of the two scores. The highest ranked facilities will receive the highest payments, and the lowest ranked facilities will receive payments that are less than what they otherwise would have received without the SNF-VBP Program. Of the 2.0% withheld under the SNF-VBP Program, we expect to retain 1.3% based on performance for the period of October 1, 2018 to September 30, 2019.

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

Decisions Regarding Skilled Nursing Facility Payment

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

Requirements of Participation

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

Changes finalized in this rule include:

Strengthening the rights of long-term care facility residents.

Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse.

Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents.

Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences.

Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services.

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Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use.

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

Phase 1: The regulations included in Phase 1 were implemented by November 28, 2016.

Phase 2: The regulations included in Phase 2 were implemented by November 28, 2017.

Phase 3: The regulations included in Phase 3 must be implemented by November 28, 2019.

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

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

Proposed Rule

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

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

In order to give facilities enough time to respond to these proposed changes, CMS also proposes to delay the implementation of certain Phase 3 quality assurance and performance improvement program and compliance and ethics related requirements that are directly impacted by the proposed changes in the regulation to one year following the effective date of this proposed rule, if finalized, to avoid confusion and promote transparency.

Key Performance and Valuation Measures

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

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

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

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

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

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

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

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

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

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

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

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

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

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


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Financial Results (in thousands)
Financial Performance Measures:
Net revenues (GAAP)	$	1,123,705	$	1,217,271	$	3,430,397	$	3,790,703
Net income (loss) attributable to Genesis Healthcare, Inc. (GAAP)		46,097		(58,128)		26,015		(166,278)
EBITDA (Non-GAAP)		130,360		75,612		267,138		251,533
Adjusted EBITDA (Non-GAAP)		34,683		113,520		150,552		362,281
Valuation Measure:
Adjusted EBITDAR (Non-GAAP)	$	134,701			$	439,217

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INPATIENT SEGMENT:


	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Occupancy Statistics - Inpatient
Available licensed beds in service at end of period		43,769			51,634			43,769			51,634
Available operating beds in service at end of period		41,912			49,553			41,912			49,553
Available patient days based on licensed beds		4,026,748			4,750,328			11,939,391			14,096,082
Available patient days based on operating beds		3,856,927			4,555,745			11,437,918			13,522,878
Actual patient days		3,367,241			3,838,454			10,011,691			11,424,759
Occupancy percentage - licensed beds		83.6	%		80.8	%		83.9	%		81.0	%
Occupancy percentage - operating beds		87.3	%		84.3	%		87.5	%		84.5	%
Skilled mix		17.6	%		17.9	%		18.4	%		19.1	%
Average daily census		36,600			41,722			36,673			41,849
Revenue per patient day (skilled nursing facilities)
Medicare Part A	$	523		$	522		$	525		$	525
Insurance		465			456			460			458
Private and other		368			337			367			336
Medicaid		233			223			232			223
Medicaid (net of provider taxes)		213			204			213			204
Weighted average (net of provider taxes)	$	277		$	270		$	279		$	274
Patient days by payor (skilled nursing facilities)
Medicare		319,656			378,968			999,535			1,203,234
Insurance		239,060			273,200			735,736			854,666
Total skilled mix days		558,716			652,168			1,735,271			2,057,900
Private and other		188,157			222,890			545,584			670,908
Medicaid		2,425,249			2,758,817			7,150,761			8,098,284
Total Days		3,172,122			3,633,875			9,431,616			10,827,092
Patient days as a percentage of total patient days (skilled nursing facilities)
Medicare		10.1	%		10.4	%		10.6	%		11.1	%
Insurance		7.5	%		7.5	%		7.8	%		8.0	%
Skilled mix		17.6	%		17.9	%		18.4	%		19.1	%
Private and other		5.9	%		6.1	%		5.8	%		6.2	%
Medicaid		76.5	%		76.0	%		75.8	%		74.7	%
Total		100.0	%		100.0	%		100.0	%		100.0	%
Facilities at end of period
Skilled nursing facilities
Leased		280			337			280			337
Owned		30			44			30			44
Joint Venture		38			5			38			5
Managed *		12			33			12			33
Total skilled nursing facilities		360			419			360			419
Total licensed beds		43,712			51,543			43,712			51,543
Assisted/Senior living facilities:
Leased		21			19			21			19
Owned		1			4			1			4
Joint Venture		1			1			1			1
Managed		1			2			1			2
Total assisted/senior living facilities		24			26			24			26
Total licensed beds		1,941			2,209			1,941			2,209
Total facilities		384			445			384			445

Total Jointly Owned and Managed— (Unconsolidated)		13			15			13			15

REHABILITATION THERAPY SEGMENT**:


	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenue mix %:
Company-operated		35.3	%		37.2	%		35.9	%		37.1	%
Non-affiliated		64.7	%		62.8	%		64.1	%		62.9	%
Sites of service (at end of period)		1,185			1,327			1,185			1,327
Revenue per site	$	149,357		$	152,273		$	459,411		$	476,010
Therapist efficiency %		70.5	%		67.5	%		71.6	%		67.8	%

* 2018 includes 20 facilities located in Texas for which the real estate was owned by Genesis

** Excludes respiratory therapy services.

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Reasons for Non-GAAP Financial Disclosure

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

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

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

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

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

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

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

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

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

Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business. These costs include our lease expense (only in the case of Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses on early extinguishment of debt, transaction costs, long-lived asset

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impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributable to noncontrolling interests. Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributable to Genesis Healthcare, Inc. as an important measure of our financial performance because it provides the most complete measure of our performance.

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

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

EBITDA

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

Adjustments to EBITDA

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

We adjust EBITDA for the following items:

Loss on early extinguishment of debt. We recognize gains or losses on the early extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees. We exclude the effect of losses or gains recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.

Other income. We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets. We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.

Transaction costs. In connection with our restructuring, acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs. We exclude restructuring, acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses.

Long-lived asset impairments. We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing performance of our operating businesses. Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is also excluded from EBITDA.

Goodwill and identifiable intangible asset impairments. We exclude non-cash goodwill and identifiable intangible asset impairment charges because we believe that including them does not reflect the ongoing operating performance of our operating businesses.

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Severance and restructuring. We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment. We believe these costs do not reflect the underlying performance of our operating businesses. We do not exclude severance costs that are not associated with such restructuring activities.

Loss of newly acquired, constructed or divested businesses. The acquisition and construction of new businesses is an element of our growth strategy. Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition. Newly constructed or developed businesses also generate losses while in their start-up phase. We view these losses as both temporary and an expected component of our long-term investment in the new venture. We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business. The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA. The divestiture of underperforming or non-strategic facilities is also an element of our business strategy. We eliminate the results of divested facilities beginning in the quarter in which they become divested. We view the income or losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating business.

Stock-based compensation. We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying performance of our operating businesses.

Regulatory defense and related costs. We exclude the costs of investigating and defending the inherited legal matters associated with prior transactions. We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect underlying performance of our operating businesses.

Other non-recurring costs. In the three and nine months ended September 30, 2019, we excluded an insurance recovery and costs related to the hurricane events of fiscal year 2017. In the three and nine months ended September 30, 2018, we excluded $8.5 million of costs attributable to the write down of receivables in our non-core physician services business and the impairment of unrealized incentives associated with a government program rewarding the meaningful use of technology in delivery of healthcare. This incentive was estimated to have been earned and recognized between 2015 and 2016 within our physician services line of business. We do not believe the excluded costs reflect the performance of our ongoing operating business.

Adjusted EBITDAR

We use Adjusted EBITDAR as one measure in determining the value of our business and the value of prospective acquisitions or divestitures. Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare and other industries. In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of compliance. The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

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See the reconciliation of net income (loss) attributable to Genesis Healthcare, Inc. to Non-GAAP financial information included herein (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018

Net income (loss) attributable to Genesis Healthcare, Inc.	$	46,097	$	(58,128)	$	26,015	$	(166,278)
Adjustments to compute EBITDA:
Net income (loss) attributable to noncontrolling interests		12,801		(33,773)		(1,182)		(97,153)
Depreciation and amortization expense		34,932		53,038		101,395		168,036
Interest expense		37,099		115,695		141,590		348,687
Income tax expense (benefit)		(569)		(1,220)		(680)		(1,759)
EBITDA	$	130,360	$	75,612		267,138		251,533
Adjustments to compute Adjusted EBITDA:
Loss on early extinguishment of debt		2,460		—		2,436		9,785
Other income		(131,811)		(20,207)		(172,141)		(42,360)
Transaction costs		12,941		11,361		23,025		26,567
Long-lived asset impairments		16,037		32,390		16,937		88,008
Goodwill and identifiable intangible asset impairments		—		929		—		2,061
Severance and restructuring		2,751		1,023		4,870		7,357
Loss of newly acquired, constructed, or divested businesses		67		1,385		2,811		3,560
Stock-based compensation		1,878		2,176		5,713		6,732
Regulatory defense and related costs		—		463		—		603
Other non-recurring costs		—		8,388		(237)		8,435
Adjusted EBITDA	$	34,683	$	113,520	$	150,552	$	362,281
Lease Expense		100,018		32,366		288,665		97,548
Adjusted EBITDAR	$	134,701			$	439,217

Total cash lease payments made pursuant to operating leases, finance leases and financing obligations	$	100,500	$	105,980	$	314,516	$	323,658

Results of Operations

Same-store Presentation

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

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

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

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

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

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


	Three months ended September 30,
	2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	941,722	83.8	%	$	1,029,453	84.6	%	$	(87,731)	(8.5)	%
Assisted/Senior living facilities		23,057	2.1	%		23,974	2.0	%		(917)	(3.8)	%
Administration of third party facilities		1,980	0.2	%		2,025	0.2	%		(45)	(2.2)	%
Elimination of administrative services		(748)	(0.1)	%		(784)	(0.1)	%		36	(4.6)	%
Inpatient services, net		966,011	86.0	%		1,054,668	86.7	%		(88,657)	(8.4)	%

Rehabilitation therapy services:
Total therapy services		183,898	16.4	%		214,421	17.6	%		(30,523)	(14.2)	%
Elimination of intersegment rehabilitation therapy services		(67,598)	(6.0)	%		(82,257)	(6.8)	%		14,659	(17.8)	%
Third party rehabilitation therapy services, net		116,300	10.4	%		132,164	10.8	%		(15,864)	(12.0)	%

Other services:
Total other services		55,532	4.9	%		38,526	3.2	%		17,006	44.1	%
Elimination of intersegment other services		(14,138)	(1.3)	%		(8,087)	(0.7)	%		(6,051)	74.8	%
Third party other services, net		41,394	3.6	%		30,439	2.5	%		10,955	36.0	%

Net revenues	$	1,123,705	100.0	%	$	1,217,271	100.0	%	$	(93,566)	(7.7)	%


	Three months ended September 30,
	2019				2018				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	151,923	15.7	%	$	101,865	9.7	%	$	50,058	49.1	%
Rehabilitation therapy services		19,006	10.3	%		26,432	12.3	%		(7,426)	(28.1)	%
Other services		8,518	15.3	%		(7,916)	(20.5)	%		16,434	(207.6)	%
Corporate and eliminations		(49,087)	—	%		(44,769)	—	%		(4,318)	9.6	%
EBITDA	$	130,360	11.6	%	$	75,612	6.2	%	$	54,748	72.4	%

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



	Three months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	966,759	$	183,898	$	55,515	$	17	$	(82,484)	$	1,123,705
Salaries, wages and benefits		437,508		152,793		30,192		—		—		620,493
Other operating expenses		394,115		11,779		16,421		—		(82,874)		339,441
General and administrative costs		—		—		—		35,930		—		35,930
Lease expense		98,987		320		384		327		—		100,018
Depreciation and amortization expense		29,263		2,934		176		2,559		—		34,932
Interest expense		12,363		14		9		24,713		—		37,099
Loss on early extinguishment of debt		—		—		—		2,460		—		2,460
Investment income		—		—		—		(2,071)		—		(2,071)
Other income		(131,811)		—		—		—		—		(131,811)
Transaction costs		—		—		—		12,941		—		12,941
Long-lived asset impairments		16,037		—		—		—		—		16,037
Equity in net loss (income) of unconsolidated affiliates		—		—		—		2,932		(3,025)		(93)
Income (loss) before income tax benefit		110,297		16,058		8,333		(79,774)		3,415		58,329
Income tax benefit		—		—		—		(569)		—		(569)
Income (loss) from continuing operations	$	110,297	$	16,058	$	8,333	$	(79,205)	$	3,415	$	58,898


	Three months ended September 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,055,452	$	214,421	$	38,463	$	63	$	(91,128)	$	1,217,271
Salaries, wages and benefits		480,345		175,098		25,161		—		—		680,604
Other operating expenses		428,398		12,891		20,902		—		(91,127)		371,064
General and administrative costs		—		—		—		35,482		—		35,482
Lease expense		31,732		—		316		318		—		32,366
Depreciation and amortization expense		46,472		3,147		172		3,247		—		53,038
Interest expense		91,106		14		9		24,566		—		115,695
Investment income		—		—		—		(2,178)		—		(2,178)
Other income		(20,207)		—		—		—		—		(20,207)
Transaction costs		—		—		—		11,361		—		11,361
Long-lived asset impairments		32,390		—		—		—		—		32,390
Goodwill and identifiable intangible asset impairments		929		—		—		—		—		929
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(523)		371		(152)
(Loss) income before income tax benefit		(35,713)		23,271		(8,097)		(72,210)		(372)		(93,121)
Income tax benefit		—		—		—		(1,220)		—		(1,220)
(Loss) income from continuing operations	$	(35,713)	$	23,271	$	(8,097)	$	(70,990)	$	(372)	$	(91,901)

Net Revenues

Net revenues for the three months ended September 30, 2019 decreased by $93.6 million, or 7.7%, as compared with the three months ended September 30, 2018.

Inpatient Services – Revenue decreased $88.7 million, or 8.4%, in the three months ended September 30, 2019 as compared with the same period in 2018. On a same-store basis, inpatient services revenue increased $12.6 million, or 1.4%, excluding 77 divested underperforming facilities and the acquisition or development of 12 additional facilities. This same-store increase is due to increasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the skilled mix of our inpatient facilities. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings. While overall census is recovering as compared with the preceding year, the skilled mix continued to deteriorate. We believe population demographics will present opportunities in the near future to recapture census, and to some extent skilled mix, where it was lost through reform measures. As recently as the fourth fiscal quarter of 2018, we saw the decline of overall occupancy rates moderate and approximate those of the comparable period in 2017, and in the three months ended September 30, 2019, we saw overall same-store occupancy rates exceed that of the same period in 2018 by 90 basis points. However, at the same time, same-store skilled mix in the three months ended September 30, 2019 lagged the same period in 2018 by 80 basis points.

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

Rehabilitation Therapy Services – Revenue decreased $15.9 million, or 12.0% comparing the three months ended September 30, 2019 with the same period in 2018. Of that decrease, $16.1 million is due to lost contract business, offset by $4.9 million attributed to new contracts. The remaining decrease of $4.7 million is principally due to reduced volume of services provided and lower rates to existing customers. PDPM has not yet had an impact on rehabilitation therapy revenues, but beginning October 1, 2019, the pricing in our contracts with customers of our rehabilitation services will reflect the change in payment model. Additionally, as a result of the decline in therapist treatment hours, utilizing more group and concurrent therapy sessions, we anticipate that rehabilitation therapy revenue will decline by 6.5% as compared with periods prior to the implementation of PDPM.

Other Services – Revenue increased $11.0 million, or 36.0% in the three months ended September 30, 2019 as compared with the same period in 2018. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO. In the three months ended September 30, 2019, the ACO recognized revenue under the MSSP, with $2.3 million achievement pertaining to the 2018 service savings, $4.2 million estimated achievement for the first half of 2019 and $2.1 million estimated achievement for savings earned during the three months ended September 30, 2019. There was no MSSP revenue recognized in the comparable three month period in 2018. Revenue in our physician services business increased $2.7 million in the three months ended September 30, 2019 as compared with the same period in 2018. The remaining decrease of revenue of $0.3 million is in our staffing services business, which has shifted its recent focus to developing its services to our affiliated nursing facilities and therapy gyms, with its external revenue flat period over period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and provides a benefit to our inpatient and rehabilitation therapy segments as record low unemployment nationally makes recruiting difficult.

EBITDA

EBITDA for the three months ended September 30, 2019 increased by $54.7 million, or 72.4%, as compared with the three months ended September 30, 2018. Excluding the impact of loss on early extinguishment of debt, other income, transaction costs, long-lived asset impairments, and goodwill and identifiable intangible asset impairments, EBITDA decreased $70.1 million, or 70.0% when compared with the same period in 2018. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA increased by $50.1 million, or 49.1% for the three months ended September 30, 2019 as compared with the same period in 2018. Excluding the impact of other income, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $78.8 million, or 68.6% when compared with the same period in 2018. On a same-store basis, the inpatient EBITDA as adjusted decreased $68.4 million. Of that same-store decline, lease expense increased $61.5 million, principally resulting from the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases (Topic 842) effective January 1, 2019. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements.” See also Note 8 – “Leases.” Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in an increase of $3.4 million EBITDA as adjusted in the three months ended September 30, 2019 as compared with the same period in 2018. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies, we are also seeing reduced pressures particularly in our general and professional liability claims experience. The reduction in the provision for general and professional liability for the three months ended September 30, 2019 as compared with the same period in 2018 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives. Offsetting some of the positive trends in professional liability experience, self-insured health benefits on the same-store population saw an increase over the prior year quarter due to some singularly large claims that presented early in 2019. Same-store staffing costs, net of nursing agency and other purchased services, increased $15.8 million. Nursing wage inflation increased 5.9%, while non-nursing wage inflation increased 1.1% in the three months ended September 30, 2019 as compared with the same period in 2018, respectively. The remaining $5.5 million increase in same-store EBITDA, as adjusted, of the segment is attributed to ongoing expense management and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix of our inpatient facilities described above under “Net Revenues.”

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Rehabilitation Therapy Services – EBITDA decreased by $7.4 million, or 28.1%, for the three months ended September 30, 2019 as compared with the same period in 2018. Of this decrease, $4.4 million is principally attributed to reduced revenue volume and pricing from existing customers, and partially offset with overhead cost reductions and reductions of start-up losses in our operations in China. Higher costs of labor was largely offset with therapist efficiency which improved to 70.5% in the three months ended September 30, 2019 compared with 67.5% in the comparable period in the prior year. In addition, EBITDA decreased by $3.0 million due to lost therapy contracts exceeding new contracts in the three months ended September 30, 2019 as compared with the same period in 2018. PDPM has not yet had a direct impact on the EBITDA of our rehabilitation therapy service business. Once it is implemented on October 1, 2019, and our service delivery model is completely transitioned, we anticipate the impact will be relatively neutral to our operating results with reduced labor costs offsetting the lost revenue previously described.

Other Services – EBITDA increased $16.4 million, or 207.6%, for the three months ended September 30, 2019 as compared with the same period in 2018. Of this amount, the ACO contributed $6.0 million, most of which was due to the low cost structure and no MSSP revenue recognition in that business in the comparable 2018 period. The EBITDA of our staffing services business increased $0.6 million in the three months ended September 30, 2019 as compared with the same period in 2018, principally due to growth in its services with affiliated customers. The remaining increase of $9.8 million pertains to our physician services business. The three months ended September 30, 2018 included charges of $8.5 million to write down accounts receivable to its realizable fair value. Those charges did not recur in 2019, and in fact collections under a new third party contractor are continuing to trend favorably. The remaining increase in our physician services business was principally driven by increased physician and nurse practitioner encounters, coupled with improved reimbursement rates, partially offset by increased administrative costs of practice management.

Corporate and Eliminations – EBITDA decreased $4.3 million, or 9.6%, for the three months ended September 30, 2019 as compared with the same period in 2018. EBITDA of our corporate function includes gain on early extinguishment of debt and losses associated with transactions that, in our chief operating decision maker’s view, are outside of the scope of our reportable segments. These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $4.1 million of the net decrease in EBITDA. Corporate overhead costs increased $0.4 million, or 1.3%, in the three months ended September 30, 2019 as compared with the same period in 2018. The remaining increase in EBITDA of $0.2 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

Other income — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other income for the three month periods ended September 30, 2019 and 2018 principally represents non-cash gains on leases exited or modified and gains on the sale of owned assets in the period. See also Note 12 – “Other Income.”

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the three months ended September 30, 2019 and 2018 were $12.9 million and $11.4 million, respectively.

Long-lived asset impairments — In the three months ended September 30, 2019 and 2018, we recognized impairments of property and equipment, and ROU assets of $16.0 million and $32.4 million, respectively. For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 13 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

Other Expense

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

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identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $18.1 million in the three months ended September 30, 2019 as compared with the same period in 2018. On a same-store basis, depreciation and amortization decreased $8.7 million in the three months ended September 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $4.8 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” In the inpatient services segment, $3.6 million of the decrease is principally due to prior year acceleration related to multiple lease transactions. The remaining $0.3 million of decrease is principally due to asset impairments and assets reaching the end of their depreciable term.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations. Interest expense decreased $78.6 million in the three and nine months ended September 30, 2019 as compared with the same period 2018. On a same-store basis, interest expense is down $74.0 million in the three months ended September 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $78.3 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” The remaining increase of $4.3 million is principally the result of consolidating debt and associated interest expense of a real-estate partnership in the first quarter of 2019, which was determined to be a VIE. See Note 1 – “General Information – Basis of Presentation.”

Income tax benefit — For three months ended September 30, 2019, we recorded income tax benefit of $0.6 million from continuing operations representing an effective tax rate of (1.0)% compared to an income tax benefit of $1.2 million from continuing operations, representing an effective tax rate of 1.3% for the same period in 2018. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of September 30, 2019, we have determined that the valuation allowance is still necessary.

Net Income (Loss) Attributable to Genesis Healthcare, Inc.

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

Net income (loss) attributable to noncontrolling interests — On February 2, 2015, FC-GEN Operations Investment, LLC (FC-GEN) combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 7.9 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 34.1%. For the three months ended September 30, 2019 and 2018, income (loss) of $19.9 million and $(34.3) million, respectively, has been attributed to the Class C common stock.

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the three months ended September 30, 2019 and 2018, (loss) income of $(7.1) million and $0.5 million, respectively, has been attributed to these unaffiliated third parties.

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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

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


	Nine months ended September 30,
	2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	2,888,659	84.1	%	$	3,190,065	84.2	%	$	(301,406)	(9.4)	%
Assisted/Senior living facilities		70,408	2.1	%		71,220	1.9	%		(812)	(1.1)	%
Administration of third party facilities		6,281	0.2	%		6,577	0.2	%		(296)	(4.5)	%
Elimination of administrative services		(2,347)	(0.1)	%		(2,254)	(0.1)	%		(93)	4.1	%
Inpatient services, net		2,963,001	86.3	%		3,265,608	86.2	%		(302,607)	(9.3)	%

Rehabilitation therapy services:
Total therapy services		571,875	16.7	%		685,672	18.1	%		(113,797)	(16.6)	%
Elimination of intersegment rehabilitation therapy services		(213,800)	(6.2)	%		(263,890)	(7.0)	%		50,090	(19.0)	%
Third party rehabilitation therapy services, net		358,075	10.5	%		421,782	11.1	%		(63,707)	(15.1)	%

Other services:
Total other services		143,139	4.2	%		124,300	3.3	%		18,839	15.2	%
Elimination of intersegment other services		(33,818)	(1.0)	%		(20,987)	(0.6)	%		(12,831)	61.1	%
Third party other services, net		109,321	3.2	%		103,313	2.7	%		6,008	5.8	%

Net revenues	$	3,430,397	100.0	%	$	3,790,703	100.0	%	$	(360,306)	(9.5)	%


	Nine months ended September 30,
	2019				2018				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	313,045	10.6	%	$	323,995	9.9	%	$	(10,950)	(3.4)	%
Rehabilitation therapy services		71,360	12.5	%		81,090	11.8	%		(9,730)	(12.0)	%
Other services		9,444	6.6	%		(6,733)	(5.4)	%		16,177	(240.3)	%
Corporate and eliminations		(126,711)	—	%		(146,819)	—	%		20,108	(13.7)	%
EBITDA	$	267,138	7.8	%	$	251,533	6.6	%	$	15,605	6.2	%

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


	Nine months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,965,348	$	571,875	$	142,905	$	234	$	(249,965)	$	3,430,397
Salaries, wages and benefits		1,336,298		464,740		88,024		—		—		1,889,062
Other operating expenses		1,185,684		34,866		44,312		—		(250,355)		1,014,507
General and administrative costs		—		—		—		107,024		—		107,024
Lease expense		285,510		985		1,064		1,106		—		288,665
Depreciation and amortization expense		83,463		9,210		524		8,198		—		101,395
Interest expense		68,454		41		26		73,069		—		141,590
Loss on early extinguishment of debt		—		—		—		2,436		—		2,436
Investment income		—		—		—		(6,078)		—		(6,078)
Other (income) loss		(172,126)		(76)		61		—		—		(172,141)
Transaction costs		—		—		—		23,025		—		23,025
Long-lived asset impairments		16,937		—		—		—		—		16,937
Equity in net loss (income) of unconsolidated affiliates		—		—		—		4,318		(4,496)		(178)
Income (loss) before income tax benefit		161,128		62,109		8,894		(212,864)		4,886		24,153
Income tax benefit		—		—		—		(680)		—		(680)
Income (loss) from continuing operations	$	161,128	$	62,109	$	8,894	$	(212,184)	$	4,886	$	24,833

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	Nine months ended September 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	3,267,862	$	685,672	$	124,184	$	116	$	(287,131)	$	3,790,703
Salaries, wages and benefits		1,477,153		562,875		82,100		—		—		2,122,128
Other operating expenses		1,323,423		41,707		47,780		—		(287,131)		1,125,779
General and administrative costs		—		—		—		114,404		—		114,404
Lease expense		95,660		—		959		929		—		97,548
Depreciation and amortization expense		147,552		9,479		509		10,496		—		168,036
Interest expense		277,753		41		27		70,866		—		348,687
Loss on early extinguishment of debt		—		—		—		9,785		—		9,785
Investment income		—		—		—		(4,856)		—		(4,856)
Other (income) loss		(42,438)		—		78		—		—		(42,360)
Transaction costs		—		—		—		26,567		—		26,567
Long-lived asset impairments		88,008		—		—		—		—		88,008
Goodwill and identifiable intangible asset impairments		2,061		—		—		—		—		2,061
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(1,029)		1,135		106
(Loss) income before income tax benefit		(101,310)		71,570		(7,269)		(227,046)		(1,135)		(265,190)
Income tax benefit		—		—		—		(1,759)		—		(1,759)
(Loss) income from continuing operations	$	(101,310)	$	71,570	$	(7,269)	$	(225,287)	$	(1,135)	$	(263,431)

Net Revenues

Net revenues for the nine months ended September 30, 2019 decreased by $360.3 million, or 9.5%, as compared with the nine months ended September 30, 2018.

Inpatient Services – Revenue decreased $302.6 million, or 9.3%, in the nine months ended September 30, 2019 as compared with the same period in 2018. On a same-store basis, inpatient services revenue increased $26.1 million, or 1.0%, excluding 97 divested underperforming facilities and the acquisition or development of 12 additional facilities. This same-store increase is due to increasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the skilled mix of our inpatient facilities. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings. While overall census is recovering as compared with the preceding year, the skilled mix continued to deteriorate. We believe population demographics will present opportunities in the near future to recapture census where it was lost through reform measures. As recently as the fourth fiscal quarter of 2018, we saw the decline of overall occupancy rates moderate and approximate those of the comparable period in 2017, and in the nine months ended September 30, 2019, we saw overall same-store occupancy rates exceed that of the same period in 2018 by 100 basis points. However, at the same time, same-store skilled mix in the nine months ended September 30, 2019 lagged the same period in 2018 by 100 basis points.

Rehabilitation Therapy Services – Revenue decreased $63.7 million, or 15.1% comparing the nine months ended September 30, 2019 with the same period in 2018. Of that decrease, $61.7 million is due to lost contract business, offset by $16.4 million attributed to new contracts. The remaining decrease of $18.4 million is principally due to reduced volume of services provided and lower rates to existing customers. PDPM has not yet had an impact on rehabilitation therapy revenues, but beginning October 1, 2019, the pricing in our contracts with customers of our rehabilitation services will reflect the change in payment model. Additionally, as a result of the decline in therapist treatment hours, utilizing more group and concurrent therapy sessions, we anticipate that rehabilitation therapy revenue will decline by 6.5% as compared with periods prior to the implementation of PDPM.

Other Services – Revenue increased $6.0 million, or 5.8% in the nine months ended September 30, 2019 as compared with the same period in 2018. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO. In the nine months ended September 30, 2019, the ACO recognized revenue under the MSSP, with $2.3 million achievement pertaining to the 2018 service savings, $6.3 million estimated achievement for savings earned during the nine months ended September 30, 2019. There was no MSSP revenue recognized in the comparable three month period in 2018. Revenue in our physician services business increased $1.7 million in the nine months ended September 30, 2019 as compared with

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the same period in 2018. The remaining decrease of revenue of $4.3 million is in our staffing services business, which has shifted its focus to developing its services to our affiliated nursing facilities and therapy gyms. While the staffing business gross revenue has increased 11.7% in the nine months ended September 30, 2019 as compared with the same period in 2018, its revenue from external customers has decreased 6.2% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and provides a benefit to our inpatient and rehabilitation therapy segments as record low unemployment nationally makes recruiting difficult.

EBITDA

EBITDA for the nine months ended September 30, 2019 increased by $15.6 million, or 6.2%, as compared with the nine months ended September 30, 2018. Excluding the impact of loss on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and goodwill and identifiable intangible asset impairments, EBITDA decreased $198.2 million, or 59.1% when compared with the same period in 2018. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased by $11.0 million, or 3.4% for the nine months ended September 30, 2019 as compared with the same period in 2018. Excluding the impact of other (income) loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $213.8 million, or 57.5% when compared with the same period in 2018. On a same-store basis, the inpatient EBITDA as adjusted decreased $180.2 million. Of that same-store decline, lease expense increased $189.6 million, principally resulting from the adoption of Topic 842, which became effective on January 1, 2019. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements.” See also Note 8 – “Leases.” Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in an increase of $9.2 million EBITDA as adjusted in the nine months ended September 30, 2019 as compared with the same period in 2018. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures particularly in our general and professional liability claims experience. The reduction in the provision for general and professional liability for the nine months ended September 30, 2019 as compared with the same period in 2018 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives. Offsetting some of the positive trends in professional liability experience, self-insured health benefits on the same-store population saw an increase over the prior year quarter due to some singularly large claims that presented early in 2019. Same-store staffing costs, net of nursing agency and other purchased services, increased $21.6 million. Nursing wage inflation increased 4.6% while non-nursing wage inflation increased 0.2% in the nine months ended September 30, 2019 as compared with the same period in 2018, respectively. The remaining $21.8 million increase in EBITDA, as adjusted, of the segment is attributed to ongoing expense management and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix of our inpatient facilities described above under “Net Revenues.”

Rehabilitation Therapy Services – EBITDA decreased by $9.7 million, or 12.0%, for the nine months ended September 30, 2019 as compared with the same period in 2018. Lost therapy contracts exceeded new contracts by $9.1 million in the nine months ended September 30, 2019 as compared with the same period in 2018. The remaining decrease of $0.6 million is principally attributed to reduced service volume and pricing to existing customers and increased labor costs, partially offset by overhead cost reductions and reductions of start-up losses in our operations in China. Higher costs of labor was largely offset with therapist efficiency which improved to 71.6% in the nine months ended September 30, 2019 compared with 67.8% in the comparable period in the prior year. PDPM has not yet had a direct impact on the EBITDA of our rehabilitation therapy service business. Once it is implemented on October 1, 2019, and our service delivery model is completely transitioned, we anticipate the impact will be relatively neutral to our operating results with reduced labor costs offsetting the lost revenue previously described.

Other Services — EBITDA increased $16.2 million, or 240.3%, for the nine months ended September 30, 2019 as compared with the same period in 2018. Of this amount, the ACO contributed $5.2 million, most of which was due to the low cost structure and no MSSP revenue recognition in that business in the comparable 2018 period. The EBITDA of our staffing services business increased $0.8 million in the nine months ended September 30, 2019 as compared with the same period in 2018, principally due to growth in its services with affiliated customers. The remaining increase of $10.2 million pertains to our physician services business. The nine months ended September 30, 2018 included charges of $8.5 million to write down accounts receivable to its realizable fair value. Those charges did not recur in 2019, and in fact collections under a new third party contractor are continuing to trend

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favorably. The remaining increase in our physician services business was principally driven by increased physician and nurse practitioner encounters, coupled with improved reimbursement rates, partially offset by increased administrative costs of practice management.

Corporate and Eliminations — EBITDA increased $20.1 million, or 13.7%, for the nine months ended September 30, 2019 as compared with the same period in 2018. EBITDA of our corporate function includes loss on early extinguishment of debt and losses associated with transactions that, in our chief operating decision maker’s view, are outside of the scope of our reportable segments. These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $10.7 million of the net increase in EBITDA. Corporate overhead costs decreased $7.4 million, or 6.5%, in the nine months ended September 30, 2019 as compared with the same period in 2018. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $2.0 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

Other income — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other income for the nine months ended September 30, 2019 principally represents non-cash gain on leases exited or modified and gains on the sale of owned assets in the period. See also Note 12 – “Other Income.”

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the nine months ended September 30, 2019 and 2018 were $23.0 million and $26.6 million, respectively.

Long-lived asset impairments — In the nine months ended September 30, 2019 and 2018, we recognized impairments of property and equipment, and ROU assets of $16.9 million and $88.0 million, respectively. For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 13 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

Other Expense

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

Depreciation and amortization — Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance lease ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $66.6 million in the nine months ended September 30, 2019 as compared with the same period in 2018. On a same-store basis, depreciation and amortization decreased $44.8 million in the nine months ended September 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $37.7 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” In the inpatient services segment, $3.3 million of the decrease is principally due to prior year acceleration offset by current year acceleration related to multiple lease transactions. The remaining $3.8 million of decrease is principally due to asset impairments and assets reaching the end of their depreciable term.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations. Interest expense decreased $207.1 million in the nine months ended September 30, 2019 as compared with the same period 2018. On a same-store basis, interest expense is down $187.8 million in the nine months ended September 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $200.5 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” The

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remaining increase of $12.7 million is principally the result of higher rates of interest incurred in the nine months ended September 30, 2019 on the debt instruments impacted by the financial restructuring, which was not fully realized in the prior year period, in addition to consolidating debt and the associated interest expense of a real-estate partnership in the first quarter of 2019, which was determined to be a VIE. See Note 1 – “General Information – Basis of Presentation” and Note 9 – “Long-Term Debt.”

Income tax benefit — For the nine months ended September 30, 2019, we recorded income tax benefit of $0.6 million from continuing operations representing an effective tax rate of (2.8)% compared to an income tax benefit of $1.8 million from continuing operations, representing an effective tax rate of 0.7% for the same period in 2018. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of September 30, 2019, we have determined that the valuation allowance is still necessary.

Net Income (Loss) Attributable to Genesis Healthcare, Inc.

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

Net income (loss) attributable to noncontrolling interests — On February 2, 2015, FC-GEN combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 7.9 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 34.1%. For the nine months ended September 30, 2019 and 2018, a loss of $7.7 million and $98.7 million, respectively, has been attributed to the Class C common stock.

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the nine months ended September 30, 2019 and 2018, (loss) income of $(8.9) million and $1.5 million, respectively, has been attributed to these unaffiliated third parties.

Liquidity and Capital Resources

Cash Flow and Liquidity

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


	Nine months ended September 30,
	2019		2018
Net cash provided by operating activities	$	15,758	$	14,066
Net cash used in investing activities		(393,034)		(54,877)
Net cash provided by financing activities		363,069		110,273
Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents		(14,207)		69,462
Beginning of period		142,276		58,638
End of period	$	128,069	$	128,100

Net cash provided by operating activities in the nine months ended September 30, 2019 increased $1.7 million compared with the same period in 2018. The nine months ended September 30, 2019 are highlighted by an increase in cash provided of $15.9 million for the collection of outstanding accounts receivable partially offset by an increase in cash used of $1.1 million for payments on accounts payable and other accrued expenses and other.

Net cash used in investing activities in the nine months ended September 30, 2019 was $393.0 million compared to net cash used in investing activities of $54.9 million in the nine months ended September 30, 2018. Routine capital expenditures for the nine

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months ended September 30, 2019 increased by $5.7 million as compared with the same period in the prior year. Net sales and maturities of marketable securities of $8.8 million in 2019 exceeded net purchases of marketable securities of $12.6 million in 2018, resulting in a net change in cash provided of $21.4 million. In the nine months ended September 30, 2019, there were asset purchases of $252.5 million as a result of the consolidation of the Next Partnership and its acquisition of 22 skilled nursing facilities and asset sale proceeds of $79.0 million resulting from the simultaneous sale of seven skilled nursing facilities as described in “Significant Transaction and Events – Strategic Partnerships – Next Partnership.” In the nine months ended September 30, 2019, there were asset purchases of $339.2 million as a result of the consolidation of the Vantage Point Partnership and its acquisition of 18 skilled nursing facilities as described in “Significant Transaction and Events – Strategic Partnerships – Vantage Point Partnership.” The nine months ended September 30, 2019 also included $66.9 million in proceeds from the sale of seven facilities in California as well as $91.7 million in proceeds from the sale of eight facilities in Georgia, New Jersey, Virginia and Maryland. In comparison, the nine months ended September 30, 2018 had no asset purchases or sales. The remaining incremental source of cash in the nine months ended September 30, 2019 as compared to the same period in the prior year of $0.1 million was due primarily to net joint venture investment and restricted deposit activity.

Net cash provided by financing activities in the nine months ended September 30, 2019 was $363.1 million compared to net cash provided by financing activities of $110.3 million in the nine months ended September 30, 2018. The net increase in cash provided by financing activities of $252.8 million is principally attributed to debt borrowings exceeding debt repayments in the nine months ended September 30, 2019 as compared to the same period in 2018. In the nine months ended September 30, 2019, we had proceeds from the issuance of debt of $480.9 million primarily resulting from the consolidation of the Next Partnership and Vantage Point Partnership. In the nine months ended September 30, 2018, we had proceeds from the issuance of debt of $563.7 million, which includes $438.0 million from the ABL Credit Facilities, $73.0 million from the MidCap Real Estate Loans, $40.0 million from the expanded Term Loan Agreement and $10.9 million from the refinancing of a bridge loan with a HUD insured loan. Repayment of long-term debt in the nine months ended September 30, 2019 was $133.9 million compared to $462.1 million in the same period of the prior year. In the nine months ended September 30, 2019, we repaid $39.8 million in MidCap Real Estate Loans and $42.2 million in HUD-insured loans using proceeds from the sale of 12 facilities and reduced the term loan facility of the ABL Credit Facilities by $40.0 million while increasing the revolving credit facilities by the same amount. In the nine months ended September 30, 2018, we paid $363.2 million in the retirement of our terminated revolving credit facilities, $69.8 million in the paydown of Welltower Real Estate Loans and $9.9 million in the payoff of a bridge loan with the proceeds from a HUD-insured refinancing. The remaining decrease in cash used to repay long-term debt of $7.3 million relates to a decrease in routine debt payments. In the nine months ended September 30, 2019, we had net borrowings under the revolving credit facilities of $3.5 million as compared with $27.1 million of net borrowings under the revolving credit facilities in the same period in 2018. In the nine months ended September 30, 2019, we paid debt issuance costs of $8.3 million resulting from the consolidation of the Next Partnership and the Vantage Point Partnership. In the nine months ended September 30, 2018, we paid debt issuance costs of $16.7 million, which includes $13.6 million in fees for the ABL Credit Facilities and $2.9 million in fees for the MidCap Real Estate Loans. In the nine months ended September 30, 2019, we received contributions from a noncontrolling interest for $18.5 million and $8.5 million resulting from the consolidation of the aforementioned Next Partnership and Vantage Point Partnership, respectively. The remaining net increase in cash used in financing activities of $4.4 million in the nine months ended September 30, 2019 compared to the same period in 2018 is primarily due to an increase in distributions to noncontrolling interests and repayments of finance lease obligations offset by a reduction in debt settlement costs.

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

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

At September 30, 2019, we had total liquidity of $80.6 million consisting of cash on hand of $68.3 million and available borrowings under our ABL Credit Facilities of $12.3 million. During the nine months ended September 30, 2019, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.

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Financing Activities

Welltower Loan Extensions

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

ABL Credit Facilities Amendment

Divestiture of Non-Strategic Facilities

Consistent with our strategy to divest assets in non-strategic markets, we have exited 43 inpatient operations, including 40 skilled nursing facilities, two assisted/senior living facility and one behavioral health center in 10 states beginning January 1, 2019 through November 1, 2019, including:

The sale and lease termination of nine skilled nursing facilities located in New Jersey and Ohio between January 31, 2019 and February 7, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $3.3 million.

The closure of one skilled nursing facility located in Ohio on February 26, 2019. The facility remains subject to a master lease agreement. A loss was recognized totaling $0.2 million.

The lease expiration of one behavioral health center located in California on April 1, 2019. A loss was recognized totaling $0.1 million.

The sale and lease termination of two skilled nursing facilities located in Connecticut on May 1, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $0.8 million.

The sale of five owned skilled nursing facilities located in California on May 1, 2019. A gain was recognized totaling $25.0 million.

The sale and lease termination of one skilled nursing facility located in Ohio on June 30, 2019. A loss was recognized totaling $0.3 million.

The closure of one skilled nursing facility located in Massachusetts on July 1, 2019. The facility remains subject to a master lease agreement with Omega. A loss was recognized totaling $0.2 million.

The sale and lease termination of three skilled nursing facilities located in Ohio on July 1, 2019 that were subject to a master lease with Omega. A loss was recognized totaling $0.8 million.

The sale and lease termination of six skilled nursing facilities located in Ohio on August 1, 2019, marking an exit from the inpatient business in this state. A loss was recognized totaling $1.5 million.

The sale of one owned assisted/senior living facility located in California on August 1, 2019. A gain was recognized totaling $0.1 million.

The sale and lease termination of one skilled nursing facility located in Utah on August 1, 2019. A loss was recognized totaling $0.2 million.

The sale of one owned skilled nursing facility located in Virginia on August 15, 2019. A gain was recognized totaling $16.5 million.

The sale of one owned skilled nursing facility located in Maryland on August 15, 2019 and transfer of operations on September 1, 2019. A gain was recognized totaling $3.9 million.

The sale of two owned skilled nursing facilities, one assisted/senior living facility and the lease termination of one skilled nursing facility located in Georgia on August 19, 2019. A gain was recognized totaling $7.6 million.

The sale and lease termination of one skilled nursing facility located in Idaho on September 1, 2019. A loss was recognized totaling $0.2 million.

The sale of one owned skilled nursing facility located in New Jersey on September 1, 2019. A gain was recognized totaling $11.1 million.

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The sale of one owned skilled nursing facility located in California on September 17, 2019. A gain was recognized totaling $1.0 million.

The sale of one owned skilled nursing facility located in New Jersey on September 27, 2019. A gain was recognized totaling $11.2 million.

The sale of one owned skilled nursing facility located in New Jersey on August 27, 2019 and transfer of operations on October 1, 2019. A gain was recognized totaling $7.8 million.

The sale and lease termination of one skilled nursing facility located in California on October 1, 2019. A loss was recognized totaling $0.4 million.

Financial Covenants

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures. At September 30, 2019, we were in compliance with all of the financial covenants contained in the Credit Facilities.

We have master lease agreements with Welltower, Sabra Health Care REIT, Inc., Omega and Second Spring Healthcare Investments (collectively, the Master Lease Agreements). Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity. At September 30, 2019, we were in compliance with the covenants contained in the Master Lease Agreements.

We have two master lease agreements with Cindat Best Years Welltower JV LLC involving 28 of our facilities. We did not meet certain financial covenants contained in one of the master lease agreements involving five of our facilities at September 30, 2019. On November 4, 2019, we received a waiver for these covenant breaches through January 1, 2021. At September 30, 2019, we are in compliance with the financial covenants contained in the other master lease agreement.

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

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

Concentration of Credit Risk

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

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in our rehabilitation therapy services business where it has over 160 distinct customers, many being chain operators with more than one location. One customer, which is a related party of ours, comprises $32.5 million, approximately 35%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2019. See Note 11 – “Related Party Transactions.” One former customer comprises $8.0 million, approximately 9%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2019. An adverse event impacting the solvency of these large customers resulting in their insolvency or other economic distress would have a material impact on us.

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Financial Condition and Liquidity Considerations

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

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 8, 2019). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 8, 2020. Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about our ability to continue as a going concern for 12 months following the date of issuance of these financial statements (November 8, 2019).

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

During the nine months ended September 30, 2019, we amended, or obtained waivers related to, the financial covenants of all of our material debt and lease agreements to account for these ongoing changes in our capital structure and business conditions. Although we are and project to be in compliance with all of our material debt and lease covenants through November 8, 2020, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with the covenants. Should we fail to comply with our debt and lease covenants at a future measurement date we could, absent necessary and timely waivers and/or amendments, be in default under certain of our existing debt and lease agreements. To the extent any cross–default provisions apply, the default could have a more significant impact on our financial position.

Risk and Uncertainties

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

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable to smaller reporting companies.

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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 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon their evaluation, the 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 effective at that reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the nine months ended September 30, 2019, we implemented certain internal controls in conjunction with our adoption of the new leasing standard, Topic 842. There were no other 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 15 — “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 or additions to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on March 18, 2019.

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.

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Item 5. Other Information

None.

Item 6. Exhibits

(a)Exhibits.


Number		Description
10.1	Amendment No. 4, dated September 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent.
10.2	Amendment No. 7, dated as of September 12, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent.

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 8, 2019	By	/S/ GEORGE V. HAGER, JR.
			George V. Hager, Jr.
			Chief Executive Officer

Date:	November 8, 2019	By	/S/ THOMAS DIVITTORIO
			Thomas DiVittorio
			Chief Financial Officer
			(Principal Financial Officer and Authorized Signatory)