Skilled Healthcare Group Reports Third Quarter 2009 Earnings from Continuing Operations Per Diluted Share of $0.25

November 3, 2009 3:01 AM EST

FOOTHILL RANCH, Calif.--(BUSINESS WIRE)-- Skilled Healthcare Group, Inc. (NYSE: SKH) today announced its unaudited consolidated financial operating results for the three- and nine-month periods ended September 30, 2009.

Third Quarter 2009 Consolidated Results

    --  Total consolidated revenue for the quarter ended September 30, 2009 was
        $188.4 million, an increase of 3.2 percent, compared to total
        consolidated revenue of $182.5 million in the third quarter of 2008.
    --  Adjusted EBITDA1 was $25.9 million for the quarter ended September 30,
        2009, an increase of 3.7 percent, compared to $24.9 million during the
        same period in 20082.
    --  Adjusted EBITDAR3 was $30.4 million for the quarter ended September 30,
        2009, up 2.3 percent compared to $29.7 million for the same period in
        2008.
    --  Net income for the quarter ended September 30, 2009 totaled $9.1
        million, up 5.6 percent, compared to $8.6 million for the third quarter
        of 2008.
    --  Diluted earnings per common share from continuing operations for the
        quarter ended September 30, 2009 were $0.25, up 8.7 percent, compared to
        $0.23 for the same period in 2008. Including the loss per common share
        from discontinued operations for the quarter ended September 30, 2009,
        diluted earnings per common share were $0.24. During the third quarter,
        the Company closed its unprofitable hospice business in Ventura,
        California, which represented less than five percent of total hospice
        revenues in the nine-month period ended September 30, 2009.

Long-Term Care Services - Third Quarter 2009 Segment Results

    --  Total revenue for the long-term care services segment, which represented
        over 88 percent of consolidated revenues, was $166.2 million for the
        quarter ended September 30, 2009, an increase of $6.6 million, or 4.1
        percent, compared to the same period a year ago.
    --  Skilled mix4 was 22.4 percent in the third quarter of 2009, compared to
        23.0 percent during the same period in 2008.
    --  Occupancy rates5 were 83.2 percent during the third quarter of 2009,
        compared to 84.1 percent in the third quarter of 2008.
    --  The percentage of Medicare days in the upper nine RUG categories6 was
        41.2 percent in the third quarter of 2009, an increase of 110 basis
        points, compared to 40.1 percent during the third quarter of 2008.

Ancillary Services - Third Quarter 2009 Segment Results

    --  The Company's third-party rehabilitation therapy services' segment
        revenue was $19.1 million for the quarter ended September 30, 2009, an
        increase of 9.8 percent, compared to the same period a year ago.

    --  Third-party rehabilitation therapy accounted for over 10 percent of
        total consolidated revenues in the third quarter of 2009, compared to
        9.5 percent in the third quarter of 2008.
    --  The Company's hospice business, which represented 1.6 percent of total
        consolidated revenues, reported total revenue of $3.0 million for the
        quarter ended September 30, 2009, compared to $5.4 million in the third
        quarter of 2008. Hospice revenues were reduced by a $2.1 million reserve
        in the third quarter of 2009 due primarily to the statutory Medicare
        patient reimbursement limitation, or cap, overage which is calculated
        annually (see Management Discussion below for more detail).

First Nine Months of 2009 Consolidated Results

    --  Total consolidated revenue for the nine months ended September 30, 2009
        was $570.8 million, an increase of 5.0 percent, compared to total
        revenue of $543.5 million in the first nine months of 2008.
    --  Adjusted EBITDA was $83.8 million for the nine-month period ended
        September 30, 2009, an increase of 4.3 percent, compared to $80.4
        million during the same period in 2008.
    --  Adjusted EBITDAR was $97.4 million for the nine months ended September
        30, 2009, up 3.5 percent compared to $94.1 million for the same period
        in 2008.
    --  Net income for the first nine months ended September 30, 2009 totaled
        $28.1 million, up 13.6 percent, compared to $24.8 million for the first
        nine months of 2008.
    --  Diluted earnings per common share from continuing operations for the
        nine-month period ended September 30, 2009 were $0.77, up 14.9 percent
        from the same period in 2008. Including the loss per common share from
        discontinued operations for the nine months ended September 30, 2009,
        diluted earnings per common share were $0.76.

Long-Term Care Services - First Nine Months of 2009 Segment Results

    --  Total revenue for the long-term care services segment was $499.4 million
        for the nine months ended September 30, 2009, an increase of $21.9
        million, or 4.6 percent, compared to the same period a year ago.
    --  Skilled mix was 23.5 percent in the first nine months of 2009, compared
        to 24.4 percent during the same period in 2008.
    --  Occupancy rates were 84.0 percent during the first nine months of 2009,
        compared to 84.6 percent in the same period in 2008.
    --  The percentage of Medicare days in the upper nine RUG categories was
        41.4 percent in the first nine months of 2009, an increase of 130 basis
        points, compared to 40.1 percent in the first nine months of 2008.

Ancillary Services - First Nine Months of 2009 Segment Results

    --  The Company's third-party rehabilitation therapy services' segment
        revenue was $57.2 million for the nine-month period ended September 30,
        2009, an increase of 10.6 percent, compared to the same period a year
        ago.
    --  Third-party rehabilitation therapy accounted for 10.0 percent of total
        consolidated revenues in the first nine months of 2009, an increase from
        9.5 percent in the first nine months of 2008.
    --  The Company's hospice business, which represented 2.5 percent of total
        consolidated revenues in the first nine months of 2009, reported total
        revenue of $14.2 million for the nine-month period ended September 30,
        2009, compared to $14.4 million in the first nine months of 2008. As
        previously mentioned, hospice revenues in the third quarter of 2009 were
        reduced by a $2.1 million reserve due to a Medicare patient
        reimbursement limitation, or cap, overage.

Management Discussion - Third Quarter and Year-to-Date 2009 Results

Long-term care services revenue for the three- and nine-month periods ended September 30, 2009 increased 4.1 percent and 4.6 percent, respectively, compared to the same periods in 2008 due primarily to an increase in rates which were offset slightly by lower occupancy levels.

Boyd Hendrickson, Chairman and Chief Executive Officer of Skilled Healthcare Group, Inc. commented on the long-term care services results stating, "Long-term care services daily census for high-acuity patients was primarily impacted by slightly lower hospital admissions and decreased average length of stay which we expect is substantially attributable to current economic challenges. In addition, our long-term care services business is continuing to experience an increase in new competition primarily in its Texas markets. However, occupancy declines were more than offset by rate increases during that period, which allowed us to increase revenue on an annual basis. In addition, the Dallas Center of Rehabilitation, our newest skilled nursing facility which opened in April this year, has steadily increased its census and we believe is on track to break-even at the end of this year as expected. The Rehabilitation Center of Des Moines, a turnaround facility which we acquired in April this year has also improved revenue and margins upon acquisition. Furthermore, we are encouraged by steady incoming volumes and daily census trends in October as compared to the third quarter."

Mr. Hendrickson continued, "Going forward, we expect to implement additional cost controls as well as cost reductions to further streamline our operations given proposed Medicare rate cuts and possibly flat Medicaid rates, on average, in the 2010 Medicare and Medicaid fiscal year. The selection of expense controls were specifically chosen to avoid impact to our patient quality of care that we take very seriously."

Further commenting on the importance of patient care, Mr. Hendrickson remarked, "Our continued focus on patient care was further evidenced during the third quarter as 37 facilities operated by subsidiaries of Skilled Healthcare Group were awarded the prestigious 2009 Step 1 National Quality Award from the American Health Care Association and the National Center For Assisted Living (AHCA/NCAL) in recognition of a strong commitment to continuous quality improvement. This is one of the highest honors a skilled nursing facility can receive and a significant accomplishment especially during their first year of application. I once again want to congratulate the facilities and staff at those locations."

With respect to the Company's third-party rehabilitation services, increased revenues in both the three- and nine-month periods ended September 30, 2009 were primarily due to higher rates, increased census and improved Medicare Part A RUG distribution.

For the first nine months in 2009, the Company's hospice business was impacted by marketing challenges, an increase in average lengths of stay, service improvement initiatives at the California location and an intermediate self-imposed admissions hold pending the initial implementation of those initiatives. This resulted in a $2.1 million reserve for a Medicare cap overage for the hospice business in the third quarter of 2009.

Commenting on the hospice challenges, Mr. Hendrickson noted, "Earlier this year, as we reassessed our hospice business, we made some management changes after determining that modifications were necessary to better align that business with our future goals. Recently, we have completed a successful validation of our service and quality enhancement initiatives and are implementing new practices going forward that we expect will improve hospice admissions and prevent future Medicare cap issues. I am confident in the hospice leadership today to make these necessary changes and to improve operations."

For the three- and nine-month periods ended September 30, 2009, consolidated net income was positively impacted primarily by an increase in Adjusted EBITDA as well as lower interest expenses and a benefit to the provision for income taxes compared to the same periods in 2008. For the quarter ended September 30, 2009, the provision for income taxes was reduced by $1.9 million due to the expiration of a statute of limitations, compared to the same period in 2008 which included a positive impact of $1.4 million due to the expiration of a statute of limitations. Provision for income taxes for the quarter ended September 30, 2009 was $2.4 million, compared to $1.9 million for the third quarter of 2008. The effective tax rate for the quarter ended September 30, 2009 was 20.7 percent, compared to an effective tax rate of 18.2 percent for the quarter ended September 30, 2008. Additionally, interest expense during the three- and nine-month periods ended September 30, 2009 was $8.4 million and $24.7 million, respectively, down 8.6 percent and 11.7 percent, respectively, compared to the three- and nine-month periods ended September 30, 2008. Lower interest expense was due primarily to lower weighted-average interest rates.

Outlook

Skilled Healthcare Group is updating its 2009 full year guidance due to the effect of the hospice Medicare cap overage reserve, as previously mentioned, and expects revenue to be between $763 million and $767 million. EBITDAR is expected to be in the range of $131 million to $134 million and EBITDA is expected to be in the range of $112 million to $115 million. Diluted net income per common share is expected to be between $0.98 and $1.01. This guidance assumes:

    --  A 1.0% decrease in Medicare payment rates in the fourth quarter of 2009;
    --  No increase in Medicaid payment rates for the 2009/2010 fiscal year;
    --  Development capital expenditures of approximately $22 million for new
        facilities and Express Recovery(TM) Units;
    --  Preservation capital expenditures of approximately $16 million or $1,550
        per bed;
    --  Start-up losses of approximately $1.3 million on our newly completed
        developments;
    --  Current debt structure and existing interest rates in 2009;
    --  Cost control program to improve efficiencies; and
    --  An effective tax rate of approximately 39.5 percent prior to adjustments
        for the $1.9 million tax benefit due to the expiration of a statute of
        limitations.

Conference Call

A conference call and webcast will be held today, Tuesday, November 3, 2009, at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time) to discuss Skilled Healthcare's consolidated financial results for the third quarter of 2009 and its outlook for the future.

To participate in the call, interested parties may dial (866) 804-6925 within the U.S. and (857) 350-1671 internationally and reference passcode 84092345. Alternatively, interested parties may access the call in listen-only mode via Skilled Healthcare Group's Web site - www.skilledhealthcaregroup.com. A replay of the conference call will be available after 11:00 a.m. Pacific Time on November 3, 2009 via Skilled Healthcare Group's Web site or by dialing (888) 286-8010 within the U.S. and (617) 801-6888 internationally and referencing passcode 25594047. The replay will be available until November 10, 2009.

About Skilled Healthcare Group

Skilled Healthcare Group, Inc. ("Skilled Healthcare"), based in Foothill Ranch, California, is a holding company with subsidiary healthcare services companies, which in the aggregate have consolidated annual revenues of over $700 million and 14,000 employees. Skilled Healthcare and its wholly-owned companies, collectively referred to as the "Company", operate long-term care facilities and provide a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. As of September 30, 2009, the Company currently operates facilities in California, Iowa, Kansas, Missouri, Nevada, New Mexico and Texas, including 77 skilled nursing facilities which offer sub-acute care and rehabilitative and specialty medical skilled nursing care, and 22 assisted living facilities which provide room and board and social services. In addition, the Company provides physical, occupational and speech therapy in Company-operated facilities and unaffiliated facilities. Furthermore, the Company provides hospice care in the California and New Mexico markets. References made in this release to Skilled Healthcare, "the Company", "we", "us" and "our" refer to Skilled Healthcare Group, Inc. and each of its wholly-owned companies. More information about Skilled Healthcare is available at its Web site -- www.skilledhealthcaregroup.com.

Footnotes

     Adjusted earnings before interest, taxes, depreciation and amortization, or
(1)  Adjusted EBITDA, reflects the non-GAAP adjustments to net income from
     continuing operations that are reflected in the reconciliation tables of
     this press release.

     On June 29, 2009, we restated our financial statements for the annual
     periods in fiscal years 2006 through 2008 and the quarterly periods in
     fiscal years 2007 and 2008 in our amended Annual Report on Form 10-K/A for
     the year ended December 31, 2008 and for the first quarter of 2009 in our
     amended Quarterly Report on Form 10-Q/A for the quarter ended March 31,
(2)  2009. Throughout this press release, all referenced amounts for prior
     periods and prior period comparisons reflect the affected balances and
     amounts on a restated basis. Please refer to our amended Annual Report on
     Form 10-K/A for the year ended December 31, 2008 and our amended Quarterly
     Report on Form 10-Q/A for the quarter ended March 31, 2009 for more
     information regarding the restatement.

(3)  Adjusted EBITDAR is Adjusted EBITDA excluding facility rent expense.

     Skilled mix is defined as the number of Medicare and non-Medicaid managed
(4)  care patient days at the Company's skilled nursing facilities divided by
     the total number of patient days at the Company's skilled nursing
     facilities for any given period.

     Occupancy rates are based on actual patient days divided by available
(5)  patient days in any given period in reference to our skilled nursing
     facilities.

     The Medicare Resource Utilization Group, or RUG, category measures the
(6)  percentage of Medicare days that were generated by patients for whom
     reimbursement falls under one of the top nine highest reimbursement RUG
     categories.

Forward-Looking Statements

This release includes "forward-looking statements". 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" or "pursue," or the negative or other variations thereof or comparable terminology. In particular, they include the statements made by Mr. Hendrickson regarding the financial performance of The Dallas Center of Rehabilitation, the Company's cost controls, future operation of its hospice business, as well as the outlook for Skilled Healthcare's full year 2009 revenue, net income per diluted share, EBITDA and EBITDAR. These forward-looking statements are based on current expectations and projections about future events, including the assumptions stated in this release.

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 Skilled Healthcare may differ materially from that expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, the factors described in Skilled Healthcare's amended Annual Report on Form 10-K/A for the year ended December 31, 2008 filed with the Securities and Exchange Commission (including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein), our amended Quarterly Report on Form 10-Q/A for the period ending March 31, 2009 and in our subsequent reports on Form 10-Q and Form 8-K.

Any forward-looking statements are made only as of the date of this release. Skilled Healthcare disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

Skilled Healthcare Group, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

                    Three Months Ended              Nine Months Ended

                    September 30,                   September 30,

                      2009           2008             2009           2008

                                   (As Restated)                   (As Restated)

Revenue             $ 188,365      $ 182,474        $ 570,755      $ 543,549

Expenses:

Cost of services
(exclusive of
rent cost of
revenue and           152,457        147,404          456,275        433,746
depreciation and
amortization
shown below)

Rent cost of          4,509          4,771            13,568         13,714
revenue

General and           6,343          5,992            19,406         17,771
administrative

Depreciation and      6,014          5,301            17,358         15,534
amortization

                      169,323        163,468          506,607        480,765

Other income
(expenses):

Interest expense      (8,417  )      (9,207  )        (24,748 )      (28,022 )

Interest income       285            169              896            506

Other income          59             (110    )        (1      )      199
(expense)

Equity in
earnings of joint     746            624              2,230          1,733
venture

Total other           (7,327  )      (8,524  )        (21,623 )      (25,584 )
expenses, net

Income from
continuing
operations before     11,715         10,482           42,525         37,200
provision for
income taxes.

Provision for         2,420          1,909            14,000         12,439
income taxes

Income from
continuing            9,295          8,573            28,525         24,761
operations

Loss from
discontinued          (243    )      -                (390    )      -
operations, net
of tax

Net income          $ 9,052        $ 8,573          $ 28,135       $ 24,761

Earnings per
share, basic:

Earnings per
common share from   $ 0.25         $ 0.23           $ 0.77         $ 0.68
continuing
operations

Loss per common
share from            (0.01   )      -                (0.01   )      -
discontinued
operations

Earnings per        $ 0.24         $ 0.23           $ 0.76         $ 0.68
share

Earnings per
share, diluted:

Earnings per
common share from   $ 0.25         $ 0.23           $ 0.77         $ 0.67
continuing
operations

Loss per common
share from            (0.01   )      -                (0.01   )      -
discontinued
operations

Earnings per        $ 0.24         $ 0.23           $ 0.76         $ 0.67
share

Weighted-average
common shares         36,927         36,578           36,904         36,562
outstanding,
basic

Weighted-average
common shares         36,950         36,909           36,943         36,888
outstanding,
diluted

Skilled Healthcare Group, Inc.

Condensed Consolidated Balance Sheet and Cash Flow Data

(In thousands)

(Unaudited)

                                                  September 30,   December 31,
                                                  2009            2008

                                                                  (As restated)

Balance Sheet Data:

ASSETS

Cash and cash equivalents                         $ 3,235         $ 2,047

Other current assets                                137,866         139,366

Property and equipment, net                         362,910         346,466

Other assets                                        526,775         518,701

Total assets                                      $ 1,030,786     $ 1,006,580

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities less current portion of       $ 76,440        $ 86,303
long-term debt and capital leases

Current portion of long-term debt and capital       9,995           7,812
leases

Other long-term liabilities                         46,325          45,439

Long-term debt and capital leases, less current     462,518         462,449
portion

Stockholders' equity                                435,508         404,577

Total liabilities and stockholders' equity        $ 1,030,786     $ 1,006,580

                                                  Nine Months Ended

                                                  September 30,

                                                    2009            2008

Cash Flow Data:

Net cash provided by operating activities         $ 45,407        $ 46,592

Net cash used in investing activities               (30,832   )     (57,565   )

Net cash (used in) provided by financing            (13,777   )     10,288
activities

Cash flows from discontinued operations             390             -

Net increase (decrease) in cash and equivalents     1,188           (685      )

Cash and equivalents at beginning of period         2,047           5,012

Cash and equivalents at end of period             $ 3,235         $ 4,327

Skilled Healthcare Group, Inc.

Consolidated Key Performance Indicators

(Unaudited)

The following table summarizes our key performance indicators, along with other
statistics, for each of the dates or periods indicated:

                      Three Months Ended           Nine Months Ended

                      September 30,                September 30,

                        2009          2008           2009            2008

Occupancy
statistics
(skilled nursing

facilities):

Available beds in
service at end of       9,094         9,042          9,094           9,042
period.

Available patient       839,244       833,812        2,478,427       2,476,453
days

Actual patient          698,489       700,849        2,080,944       2,093,953
days

Occupancy               83.2    %     84.1    %      84.0      %     84.6      %
percentage

Skilled mix             22.4    %     23.0    %      23.5      %     24.4      %

Percentage of
Medicare days in
the

upper nine RUG          41.2    %     40.1    %      41.4      %     40.1      %
categories (1)

Average daily           7,592         7,618          7,623           7,642
number of patients

EBITDA (2) (in        $ 25,861      $ 24,821       $ 83,735        $ 80,250
thousands)

Adjusted EBITDA       $ 25,862      $ 24,931       $ 83,796        $ 80,360
(2) (in thousands)

Adjusted EBITDA         13.7    %     13.7    %      14.7      %     14.8      %
margin (2)

Adjusted EBITDAR      $ 30,371      $ 29,702       $ 97,364        $ 94,074
(2) (in thousands)

Adjusted EBITDAR        16.1    %     16.3    %      17.1      %     17.3      %
margin (2)

Revenue per
patient day
(skilled nursing
facilities prior
to intercompany
eliminations)

LTC only Medicare     $ 504         $ 478          $ 500           $ 470
(Part A)

Medicare blended        564           533            558             518
rate (Part A & B)

Managed care            372           357            369             358

Medicaid                147           140            145             137

Private and other       159           154            161             156

Weighted-average      $ 230         $ 222          $ 232           $ 222
for all

Revenue from
(total company):

Medicare                34.0    %     35.9    %      35.3      %     36.8      %

Managed care,
private pay, and        33.0          32.0           33.0            32.1
other

Quality mix             67.0          67.9           68.3            68.9

Medicaid                33.0          32.1           31.7            31.1

Total                   100.0   %     100.0   %      100.0     %     100.0     %

                                                 As of September 30,

                                                 2009      2008

Facilities:

Skilled nursing facilities (at end of period):

Owned                                             53        51

Leased                                            24        24

Total skilled nursing facilities                  77        75

Total licensed beds                               9,586     9,335

Assisted living facilities (at end of period):

Owned                                             20        19

Leased                                            2         2

Total assisted living facilities                  22        21

Total licensed units                              1,244     1,251

Total facilities (at end of period)               99        96

Percentage owned facilities (at end of period)    73.7  %   72.9  %

     As of January 1, 2006, the Medicare resource utilization group, or RUG,
(1)  categories were expanded from 44 to 53. This measures the percentage of our
     Medicare days that were generated by patients for whom we are reimbursed
     under one of the nine highest paying RUG categories.

     EBITDA, Adjusted EBITDA and Adjusted EBITDAR are supplemental measures of
     our performance that are not required by, or presented in accordance with,
     GAAP. We define EBITDA as income from continuing operations before
     depreciation, amortization and interest expense (net of interest income)
     and the provision for (benefit from) income taxes. Adjusted EBITDA excludes
(2)  certain special charges that are included in EBITDA such as the loss on
     disposal of asset. We define EBITDAR as income from continuing operations
     before depreciation, amortization and interest expense (net of interest
     income), the provision for income taxes and rent cost of revenue. Adjusted
     EBITDAR is defined as Adjusted EBITDA excluding rent cost of revenue.
     EBITDA, Adjusted EBITDA and Adjusted EBITDAR along with the Adjusted EBITDA
     and Adjusted EBITDAR margins have been updated as restated in 2008.

Skilled Healthcare Group, Inc.

Reconciliation of Income from Continuing Operations to EBITDA, Adjusted EBITDA
and Adjusted EBITDAR

(In thousands, unaudited)

                             Three Months Ended         Nine Months Ended

                             September 30,              September 30,

                               2009       2008            2009       2008

                                        (As Restated)              (As Restated)

Income from continuing       $ 9,295    $ 8,573         $ 28,525   $ 24,761
operations

Interest expense, net of       8,132      9,038           23,852     27,516
interest income

Provision for income taxes     2,420      1,909           14,000     12,439

Depreciation and               6,014      5,301           17,358     15,534
amortization expense

EBITDA                         25,861     24,821          83,735     80,250

Loss on disposal of asset      1          110             61         110

Adjusted EBITDA                25,862     24,931          83,796     80,360

Rent cost of revenue           4,509      4,771           13,568     13,714

Adjusted EBITDAR             $ 30,371   $ 29,702        $ 97,364   $ 94,074

We believe that the presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR provide useful information to investors regarding our operational performance because they enhance an investor's overall understanding of the financial performance and prospects for the future of our core business activities. Specifically, we believe that a report of EBITDA, Adjusted EBITDA and Adjusted EBITDAR provide consistency in our financial reporting and provides a basis for the comparison of results of core business operations between our current, past and future periods. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are primary indicators management uses for planning and forecasting in future periods, including trending and analyzing the core operating performance of our business from period-to-period without the effect of U.S. generally accepted accounting principles, or GAAP, expenses, revenues and gains (losses) that are unrelated to the day-to-day performance of our business. We also use EBITDA, Adjusted EBITDA and Adjusted EBITDAR to benchmark the performance of our business against expected results, to analyze year-over-year trends, as described below, and to compare our operating performance to that of our competitors.

Management uses EBITDA, Adjusted EBITDA and Adjusted EBITDAR to assess the performance of our core business operations, to prepare operating budgets and to measure our performance against those budgets on an administrative services segment and a facility by facility level. We typically use Adjusted EBITDA and Adjusted EBITDAR for these purposes, on a consolidated basis (because the adjustments to EBITDA are not generally allocable to any individual business unit), and we typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing and assisted living facility, as well as to assess the performance of our reporting segments: long term care services, which includes the operation of our skilled nursing and assisted living operating companies; and ancillary services, which includes our rehabilitation therapy and hospice operating companies. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are useful in this regard because they do not include such costs as interest expense, income taxes, depreciation and amortization expense, rent cost of revenue and special charges, which may vary from business unit to business unit and period to period depending upon various factors, including the method used to finance the business, the amount of debt that we have determined to incur, whether a facility is owned or leased, the date of acquisition of a facility or business, the original purchase price of a facility or business unit or the tax law of the state in which a business unit operates. These types of charges are dependent on factors unrelated to the underlying business unit performance. As a result, we believe that the use of EBITDA and Adjusted EBITDA provide a meaningful and consistent comparison of our underlying businesses between periods by eliminating certain items required by GAAP which have little or no significance in the day-to-day operations. Additionally, because Adjusted EBITDAR excludes rent cost of revenue, it is useful in comparing leased facilities to owned facilities.

We also make capital allocations to each of our companies based on expected EBITDA returns and establish compensation programs and bonuses for the facility level employees that are based in part upon the achievement of pre-established EBITDA and Adjusted EBITDA targets.

Skilled Healthcare Group, Inc.

Reconciliation of Forecasted Net Income to Forecasted EBITDA and Forecasted
EBITDAR

Year Ending December 31, 2009

(in millions)

Reconciliation of Forecasted Net Income to Forecasted EBITDA
and Forecasted EBITDAR:

                                                                Outlook

                                                                Low      High

GAAP net income guidance                                        $ 36     $ 38

Interest expense, net of interest income and other                32       33

Provision for income taxes                                        20       20

Depreciation and amortization expense                             24       24

EBITDA guidance                                                   112      115

Rent cost of revenue                                              19       19

EBITDAR guidance                                                $ 131    $ 134

    Source: Skilled Healthcare Group, Inc.

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