Genesis HealthCare Announces Plans to Strengthen Capital Structure and Reports Third Quarter 2017 Results

11/9/17

KENNETT SQUARE, Pa., Nov. 08, 2017 (GLOBE NEWSWIRE) -- Genesis HealthCare (NYSE:GEN), one of the largest post-acute care providers in the United States, today announced it has reached preliminary non-binding agreements with certain landlords and credit parties intended to reduce fixed charges and improve cash flow. Genesis also announced operating results for the third quarter ended September 30, 2017.

Capital Structure

Restructuring Plans

Genesis and its counterparties to the Welltower Master Lease, the Sabra Master Leases, the Welltower Bridge Loans, the Term Loans and certain other loans have entered into preliminary non-binding agreements concerning a proposed long-term restructuring of these master leases and loans (the Restructuring Plans) in an effort to strengthen significantly the capital structure of the Company.

These Restructuring Plans include the proposed sale by Sabra and Welltower of certain facilities currently leased to the Company, which the Company intends to re-lease from new third-party landlords at reduced rents. Genesis will also make commercially reasonable efforts to refinance or repay through asset sales, certain of its debt obligations with Welltower which, upon completion, is expected to result in a reduction in interest costs.

These Restructuring Plans, if and when fully consummated, are expected to reduce the Company’s current cash fixed charges between $80 million and $100 million annually. This level of reduction in fixed charges is subject to the successful sale of the Welltower and Sabra facilities to new landlords, the successful re-leasing of those facilities to Genesis at reduced rents, the successful refinancing and/or repayment of certain debt obligations and the receipt of additional concessions to be made by other credit parties. Genesis believes the transactions under the proposed restructuring could occur during the first half of 2018.

“We are very appreciative of the constructive and collaborative support of our key credit partners,” noted George V. Hager Jr., Chief Executive Officer of Genesis. “We look forward to executing on the Restructuring Plans, which upon completion, we believe will result in a significantly strengthened capital structure for the Company, providing adequate liquidity and free cash flow to allow continued investment in our people and our clinical programs.”

“We remain committed to providing outstanding care to our patients and the continued development of our value-based initiatives, which we believe are the keys to long-term shareholder value”.

Third Quarter 2017 Results

  • US GAAP revenue in the third quarter of 2017 was $1.32 billion compared to $1.42 billion in the prior year quarter;
  • US GAAP net loss attributable to Genesis HealthCare, Inc. in the third quarter of 2017 was $373.8 million compared to $20.5 million in the prior year quarter;
  • Adjusted EBITDAR in the third quarter of 2017 was $147.8 million compared to $172.1 million in the prior year quarter; and
  • Adjusted EBITDA in the third quarter of 2017 was $109.1 million compared to $136.6 million in the prior year quarter.

“The operating environment continues to be very challenging, with further declines this quarter in skilled patient admissions and higher levels of nursing wage inflation than in recent quarters,” noted Mr. Hager. “These factors served to further compress operating margins in the third quarter of 2017.”

“I would also like to mention that while Hurricanes Irma and Harvey had minimal financial impact on the quarter, hundreds of Genesis employees went above and beyond to ensure the safety and well-being of patients, residents, and fellow caregivers. Their generosity, compassion, and dedication was truly amazing and for that we say thank you.”

Business Development and Divestitures

Genesis continues to make progress with its strategy to exit challenging, low density markets and focus on investment and growth in core, strategic markets. Since the Company’s last earnings announcement, divestitures included:

  • One leased facility during the third quarter 2017, and two additional leased facilities divested in October 2017. The three facilities had annual net revenue of $21.2 million, Adjusted EBITDA of ($2.1) million and a pre-tax net loss of ($4.3) million.

Genesis expects to divest an additional 14 underperforming assets or assets in non-strategic markets through early 2018.

Balance Sheet and Cash Flows

Asset Impairment Charges
The Company’s inpatient segment has experienced a decline in financial performance as a result of the ongoing challenging operating environment. Based on the Company’s annual goodwill impairment testing, management determined that the carrying value of the inpatient segment goodwill was fully impaired, resulting in a non-cash impairment charge of $360.0 million for goodwill and identifiable intangible assets recorded in the three months ended September 30, 2017. In addition, the Company determined that the carrying value of property, plant and equipment associated with certain of its inpatient facilities exceeded their estimated fair value. In accordance with generally accepted accounting principles, the Company recorded a non-cash impairment charge of $163.4 million in the three months ended September 30, 2017 representing the difference between the estimated fair value and the carrying value of such property, plant and equipment.

Financing Activities Occurring During the Third Quarter
During the third quarter of 2017, Genesis closed on one HUD guaranteed mortgage totaling $6.4 million that was used partially to pay down the Company’s real estate loans with Welltower. Genesis expects to continue to refinance the real estate loans with lower cost and longer maturity HUD guaranteed mortgages or other permanent financing as conditions allow.

Value-Based Care Delivery

With more than two years’ experience in managing through the value-based care delivery shift, Genesis continues to learn from and strengthen its participation in value-based care delivery initiatives.

Bundled Payments
Genesis’ Model 3 Bundled Payment Care Initiative program continues to perform above expectations generating positive results. At the start of 2017, Genesis expected to recognize $8.0 million in favorable estimated settlements for the fiscal year ended 2017. As the Company continues to refine its participation under the Model 3 program, improve efficiencies and drive outcomes, the Company expects a full year 2017 run rate of $20.5 million in favorable estimated settlements.

Medicare Shared Savings Program (MSSP)
Effective January 1, 2016, Genesis HealthCare Accountable Care Organization (ACO) began participating in the MSSP through its Genesis Physician Services (GPS) division. During 2016, the Company managed approximately 14,000 Medicare fee for service beneficiaries with annualized Medicare spend of more than $784 million. During 2016, the MSSP required Genesis to save at least 2.7% of the total Medicare spend under management in order to share in up to 50% of the savings with the Centers for Medicare & Medicaid Services (CMS). At the beginning of September, Genesis was informed by CMS that it did not reach the minimum savings rate set by CMS required for gainsharing. As a result, Genesis will not receive a shared savings payout in 2017 for the 2016 performance year.

Genesis attributes the final reconciliation shortfall to unexpected changes in the national trend factor which served to increase the targeting savings hurdle.

“While disappointing, we know that gainsharing is uncommon for new MSSP participants,” noted Mr. Hager. “For 2015, CMS reported that only a quarter of first year participants received a savings payout and, including more mature ACOs, only a third of all MSSP ACOs received a shared savings payout. During 2017, we implemented a number of initiatives designed to improve performance, increase collaboration, drive healthcare efficiencies and improve select quality outcomes.”

Vitality to You
Genesis’ unique Vitality to You service offering that extends Genesis Rehabilitation Service’s therapy business into the community increased revenue for the quarter to $5.8 million, a 23% increase compared to the prior year quarter and to $16.8 million, a 35% increase for the nine months ended September 30, 2017, compared to the same period in the prior year.

About Genesis HealthCare

Genesis HealthCare (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 450 skilled nursing facilities and assisted/senior living communities in 30 states nationwide. Genesis subsidiaries also supply rehabilitation and respiratory therapy to approximately 1,700 healthcare providers in 45 states, the District of Columbia and China. References made in this release to "Genesis," "the Company," "we," "us" and "our" refer to Genesis HealthCare and each of its wholly-owned companies. Visit our website at www.genesishcc.com.

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