Market Overview

Genesis HealthCare Reports Solid First Quarter 2019 Results

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KENNETT SQUARE, Pa., May 09, 2019 (GLOBE NEWSWIRE) -- Genesis Healthcare, Inc. (Genesis, or the Company) (NYSE:GEN), one of the largest post-acute care providers in the United States, today announced operating results for the first quarter ended March 31, 2019. 

First Quarter 2019 Results

  • US GAAP revenue in the first quarter of 2019 was $1.16 billion compared to $1.30 billion in the first quarter of 2018; 
     
  • US GAAP net loss attributable to Genesis Healthcare, Inc. in the first quarter of 2019 was $15.3 million compared to $68.5 million in the first quarter of 2018; 
     
  • Adjusted EBITDAR in the first quarter of 2019 was $148.5 million compared to $150.6 million in the first quarter of 2018; and
     
  • Adjusted EBITDA in the first quarter of 2019, which was reduced by an increase in US GAAP basis lease expense of $64.4 million pursuant to the newly adopted lease accounting standard, was $54.4 million compared to $117.5 million in the first quarter of 2018. 

"We continued to deliver solid operating results this quarter, exceeding consensus estimates and building on the positive momentum created last year," noted George V. Hager, Jr., Chief Executive Officer of Genesis.  "This quarter experienced a continuation of favorable operating trends, including "same store" occupancy growth of 50 basis points, therapist efficiency reaching an all-time high and effective expense management and leveraging of our cost structure.  These trends served to fuel "same store" Adjusted EBITDAR growth of 6.5% and Adjusted EBITDAR margin expansion of 120 basis points."

"Organizationally we remain squarely focused on providing quality care and service to our patients, preparing for the October 1, 2019 implementation of the Medicare Patient Driven Payment Model, as well as executing on our portfolio optimization strategy," continued Hager.

Portfolio Optimization
Genesis continues to exit underperforming facilities and certain low density markets in order to focus on investment and growth in core, strategic markets. During the first quarter of 2019, Genesis divested or closed the operations of 10 facilities with approximate annual net revenue of $98 million, Adjusted EBITDA of $(0.7) million and a pre-tax net loss of $6.8 million. These transactions resulted in the reduction of approximately $3.6 million of annual cash lease payments.
             
As announced earlier, on January 31, 2019, Genesis also entered into a new real estate partnership (Partnership) with Next Healthcare Capital (Next) involving 15 skilled nursing facilities previously leased from Welltower Inc. (Welltower).  Welltower sold the real estate of the 15 facilities to the new Partnership, of which Genesis acquired a 46% ownership interest.  Genesis also acquired a fixed price purchase option to acquire the real estate which Genesis can exercise in 2026 at a 10% premium above the original acquisition cost. Genesis will continue to operate these facilities pursuant to a new lease with the Partnership.  The remaining interest is held by Next, a privately owned healthcare real estate investment firm. The 15 facilities had been included in the Company's master lease with Welltower and were subject to 2.0% annual rent escalators. Under the new lease, there are no rent escalators for the first five years and there is a 2.0% annual rent escalator thereafter.

Subsequent to March 31, 2019, Genesis sold five owned facilities located in California and expects to close on the sale of three additional California owned facilities in the coming months.  The sale of all eight facilities, is expected to generate sale proceeds of approximately $89 million, which will be used to repay approximately $80 million of indebtedness.  In addition, Genesis divested two underperforming leased facilities, resulting in a reduction of $0.6 million of annual cash lease payments.  In aggregate, these 10 facilities generate approximate annual net revenue of $96.7 million, Adjusted EBITDA of $9.9 million and a pre-tax net income of $4.2 million.

Adoption of New Lease Accounting Standard
On January 1, 2019, Genesis adopted FASB Accounting Standards Codification Topic 842, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet.  Genesis 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.  Therefore, comparative information for periods prior to January 1, 2019 has not been adjusted.

Topic 842 had a material effect on Genesis's consolidated financial statements.  The most significant effects of adoption relate to (1) the recognition of new right-of-use (ROU) assets and lease liabilities on its consolidated balance sheet for real estate operating leases; (2) the derecognition of existing assets and liabilities for sale-leaseback transactions that previously did not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities.

Upon adoption, Genesis:

  • Recognized additional operating lease liabilities of $0.6 billion and corresponding ROU assets of $0.5 billion, with a resulting net impact of $0.1 billion recognized as an increase to opening accumulated deficit at January 1, 2019.
  • Derecognized existing financing obligations of $2.7 billion and existing property and equipment of $1.7 billion.  For these contracts, Genesis recognized new operating lease liabilities and corresponding ROU assets on its consolidated balance sheet of $1.9 billion.  The resulting net impact of approximately $1.0 billion was recognized as a decrease to opening accumulated deficit at January 1, 2019.

For the quarter ended March 31, 2019, adoption of Topic 842 had the effect of decreasing pretax loss on the consolidated statement of operations by approximately $17.7 million, resulting from an increase in lease expense of $64.4 million, a decrease in interest expense of $65.4 million and a decrease in depreciation expense of $16.7 million.

Adoption of Topic 842 had no impact on Genesis's cash flow or financial covenants.

Conference Call
Genesis Healthcare, Inc. will hold a conference call at 8:30 a.m. Eastern Time on Friday, May 10, 2019.  Investors can access the conference call by calling (855) 849-2198 or live via a listen-only webcast through the Genesis website at http://www.genesishcc.com/investor-relations/, where a replay of the call will also be posted for one year. 

About Genesis Healthcare, Inc.
Genesis Healthcare, Inc. (NYSE:GEN) is a holding company with subsidiaries that, on a combined basis, comprise one of the nation's largest post-acute care providers with more than 400 skilled nursing facilities and assisted/senior living communities in 29 states nationwide. Genesis subsidiaries also supply rehabilitation therapy to approximately 1,200 healthcare providers in 46 states, the District of Columbia and China.  References made in this release to "Genesis," "the Company," "we," "us" and "our" refer to Genesis Healthcare, Inc. and each of its wholly-owned companies. Visit our website at www.genesishcc.com.

Forward-Looking Statements
This release includes "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 Genesis' expectations and beliefs regarding its future financial performance, anticipated cost management, anticipated business development, anticipated financing activities and anticipated demographic and supply-demand trends facing the industry. These forward-looking statements are based on current expectations and projections about future events, including the assumptions stated in this release, 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 Genesis may differ materially from that expressed or implied by such forward-looking statements.

These risks and uncertainties include, but are not limited to, the following:
• reductions and/or delays in Medicare or Medicaid reimbursement rates, or changes in the rules governing the Medicare or Medicaid programs could have a material adverse effect on our revenues, financial condition and results of operations;
• reforms to the U.S. healthcare system that have imposed new requirements on us and uncertainties regarding potential material changes to such reforms;
• revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
• our success being dependent upon retaining key executives and personnel;
• it can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees;
• recently enacted changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical professionals;
• we are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance;
• our physician services operations are subject to corporate practice of medicine laws and regulations. Our failure to comply with these laws and regulations could have a material adverse effect on our business and operations;
• we face inspections, reviews, audits and investigations under federal and state government programs, such as the Department of Justice. These investigations and audits could result in adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition, and reputation;
• significant legal actions, which are commonplace in our industry, could subject us to increased operating costs, which could materially and adversely affect our results of operations, liquidity, financial condition, and reputation;
• insurance coverages, including professional liability coverage, may become increasingly expensive and difficult to obtain for health care companies, and our self-insurance may expose us to significant losses;
• failure to maintain effective internal control over financial reporting could have an adverse effect on our ability to report on our financial results on a timely and accurate basis;
• we may be unable to reduce costs to offset decreases in our patient census levels or other expenses timely and completely;
• completed and future acquisitions may consume significant resources, may be unsuccessful and could expose us to unforeseen liabilities and integration risks;
• we lease a significant number of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions, special charges and leases that are not economically efficient in the current business environment;
• our substantial indebtedness, scheduled maturities and disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock;
• exposure to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses; and
• some of our directors are significant stockholders or representatives of significant stockholders, which may present issues regarding diversion of corporate opportunities and other potential conflicts.

The Company's Annual Report on Form 10-K for the year ended December 31, 2018, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, discuss the foregoing risks as well as other important risks and uncertainties of which investors should be aware. Any forward-looking statements contained herein are made only as of the date of this release. Genesis disclaims any obligation to update its forward-looking statements or any of the information contained in this release. Investors are cautioned not to place undue reliance on these forward-looking statements.


           
GENESIS HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

  Three months ended March 31, 
  2019     2018  
Net revenues $  1,161,640     $  1,301,072  
Salaries, wages and benefits    642,410        735,770  
Other operating expenses    342,538        384,160  
General and administrative costs    35,532        39,875  
Lease expense    94,061        33,071  
Depreciation and amortization expense    38,195        51,503  
Interest expense    51,516        115,037  
Loss on early extinguishment of debt    —        10,286  
Investment income    (1,864 )      (1,047 )
Other (income) loss    (16,917 )      68  
Transaction costs    1,261        12,095  
Long-lived asset impairments    —        28,360  
Equity in net (income) loss of unconsolidated affiliates    (61 )      220  
Loss before income tax expense    (25,031 )      (108,326 )
Income tax expense    51        347  
Net loss    (25,082 )      (108,673 )
Less net loss attributable to noncontrolling interests    9,819        40,135  
Net loss attributable to Genesis Healthcare, Inc. $  (15,263 )   $  (68,538 )
Loss per common share:          
Basic and diluted:          
Weighted-average shares outstanding for loss from continuing operations per share    103,715        98,252  
Net loss attributable to Genesis Healthcare, Inc. $  (0.15 )   $  (0.70 )
           


GENESIS HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)

  March 31,    December 31, 
  2019     2018  
Assets:          
Current assets:        
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