Market Overview

Genesis HealthCare Reports Third Quarter 2019 Results

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KENNETT SQUARE, Pa., Nov. 07, 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 third quarter ended September 30, 2019. 

Third Quarter 2019 Results

  • US GAAP revenue in the third quarter of 2019 was $1.12 billion; 
     
  • US GAAP net income attributable to Genesis Healthcare, Inc. in the third quarter of 2019 was $46.1 million;
     
  • Adjusted EBITDA in the third quarter of 2019 was $34.7 million; and
     
  • Adjusted EBITDAR in the third quarter of 2019 was $134.7 million.

"We had a very successful quarter as we generated same store occupancy growth for the fourth consecutive quarter, made final preparations for the transition to the PDPM and continued to execute on our portfolio optimization strategy," noted George V. Hager, Jr., Chief Executive Officer of Genesis.  "In addition, I am pleased to report that we received a positive reconciliation and settlement under the MSSP for the 2018 performance year and as a result, we reported income from our Genesis Healthcare ACO for the first time ever."

"The positive results this quarter reflect the successful execution of our strategic long-term investments in the areas of portfolio optimization and "value-based" programming," continued Hager.  "We are making significant progress in returning Genesis to its historic operating model based on local market density, strong hospital and payor relationships and consistent clinical outcomes and results. Currently, 76% of our facilities are located in Genesis' historical eastern markets."

Medicare Shared Savings Program (MSSP)
As the industry continues to migrate from fee-for-service to pay-for-value, Genesis' unique capabilities in the area of physician services has given it a competitive advantage in advancing participation in value-based programs.  

In 2016, Genesis Healthcare ACO, LLC began participating in the MSSP through the Company's 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 in the United States.

2018 Performance Year

During 2018, the Company managed approximately 6,400 Medicare fee-for-service beneficiaries under the MSSP with annualized Medicare spend of more than $155 million.  In 2018, the MSSP required Genesis to save at least 3.2% of the total Medicare spend under management to share in up to 50% of the savings with Centers for Medicare and Medicaid Services (CMS), while assuming no downside risk.  In August 2019, Genesis was informed by CMS that it reached the minimum savings rate set by CMS required for gain share.  As a result, in the third quarter of 2019, Genesis recognized MSSP income of approximately $1.7 million, net of expenses and provider distributions.

2019 Performance Year

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

With nearly four years of participation under the MSSP, the Company has 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 the Company during the quarter ended September 30, 2019, the Company 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.  The Company will continue to closely monitor and evaluate its estimated performance under the 2019 performance year and will adjust its estimated MSSP income.

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 third quarter of 2019, Genesis divested, exited or closed the operations of 22 facilities.  In 2019, through October 1, 2019, Genesis exited a total of 43 facilities with approximate annual net revenue of $366.3 million, a pre-tax net loss of $10.3 million and Adjusted EBITDA of $11.5 million. These transactions resulted in the reduction of approximately $6.9 million of annual cash lease payments and the repayment of $154 million of indebtedness.

Divestitures in excess of acquisitions reduced Adjusted EBITDAR by $10.5 million in the third quarter of 2019 as compared to the prior year quarter.
             
Genesis recently announced that it has made another investment with a private investor involving 18 skilled nursing facilities historically leased by Genesis from Second Spring Healthcare Investments and Welltower Inc. Genesis will continue to operate the 18 facilities pursuant to a new lease with the new owner, reducing annual rent escalators from 2.0% to zero until year five. Through its investment, Genesis holds approximately a 30% interest in the entity that owns the real estate of the 18 facilities.  Genesis also acquired a fixed price purchase option to acquire the real estate in 2024 at a 10% premium above the original acquisition cost.

"In addition to divestitures, we are prioritizing transactions like this unique investment that will lessen the burden of lease escalators, allow us to participate in future real estate appreciation, reduce our overall cost of capital and set the stage for greater facility ownership in the future," commented Hager.  "We were tracking so well toward our goal to own or obtain fixed price purchase options on at least 30% of our portfolio by the end of 2020 that we are now raising our goal to 35%. Additionally, we are currently pursing creative joint venture structures designed to take advantage of strong local operating resources in a number of our western markets."

Patient Driven Payment Model (PDPM)
Genesis continues to work through the transition to PDPM effective October 1, 2019.  As previously announced, the Company expects its average Medicare rate per patient day in its inpatient segment, to remain relatively flat under PDPM as compared to the average Medicare rate under the previous RUGs payment system. In addition, the Company estimates that operating expenses in its captive skilled nursing facilities will decline approximately $30 million annually as a result of using more cost effective modalities in the delivery of therapy services.  Separately, as a result of PDPM related contract pricing modifications, the Company's third party rehabilitation therapy services revenue is expected to decline approximately $30 million annually.  This revenue reduction is expected to be offset completely by cost reductions that have been implemented. Thus, Genesis continues to see PDPM as both positive for patients and accretive to the Company.

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.  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) significant new disclosures about leasing activities.  In addition, for the three and nine months ended September 30, 2019, adoption of Topic 842 is the primary driver of the increase to lease expense and the decrease to interest expense, when compared to the same periods in the prior year, since the prior year has not been adjusted. 

Conference Call
Genesis Healthcare, Inc. will hold a conference call at 8:30 a.m. Eastern Time on Thursday, November 7, 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. 

Credit Suisse 28th Annual Healthcare Conference
George V. Hager, Jr., Chief Executive Officer, and Tom DiVittorio, Chief Financial Officer, are scheduled to conduct a "fireside chat" at the Credit Suisse 28th Annual Healthcare Conference on Wednesday, November 13, 2019 at 9:10 a.m. Mountain Time at The Phoenician in Scottsdale, Arizona.  A live webcast and replay will also be available on the Company's website at www.genesishcc.com/investor-relations.

Stifel 2019 Healthcare Conference
George V. Hager, Jr., Chief Executive Officer, and Tom DiVittorio, Chief Financial Officer, are also scheduled to conduct a "fireside chat" at the Stifel 2019 Healthcare Conference on Wednesday, November 20, 2019 at 11:30 a.m. Eastern Time at the Lotte New York Palace Hotel, New York, New York.  A live webcast and replay will also be available on the Company's website at www.genesishcc.com/investor-relations.

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 nearly 400 skilled nursing facilities and assisted/senior living communities in 26 states nationwide. Genesis subsidiaries also supply rehabilitation therapy to approximately 1,200 healthcare providers in 44 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 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      
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