Form 8-K Genesis Healthcare, Inc. For: Nov 03

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 3, 2016 

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

(610) 444-6350

(Registrant’s telephone number, including area code)

Not Applicable 

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Item 2.02Results of Operations and Financial Condition.  

On November 3, 2016, Genesis Healthcare, Inc. (“Genesis”) issued the press release furnished herewith as Exhibit 99.1 reporting its operating results for the quarter ended September 30, 2016 (the “Earnings Release”).

Certain information contained in the Earnings Release refers to non-GAAP financial measures and other definitions specific to Genesis’ businesses.  For an explanation of the adjustments and a description of Genesis’ uses of, and the limitations associated with, non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDAR, EBITDA and EBITDAR (each as defined below), see “Reasons for Non-GAAP Financial Disclosure” in the Earnings Release.

Definitions of key performance indicators and non-GAAP measures used in the Earnings Release:

The following is a glossary of terms for some key performance indicators and non-GAAP measures used in reference to Genesis:

“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 certain excluded items to provide supplemental information regarding our operating performance.

“Adjusted EBITDAR” is defined as EBITDAR adjusted for certain excluded items to provide supplemental information regarding our operating performance.

“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.

“EBITDAR” is defined as net income or loss attributed 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.

“EBITDA” is defined as EBITDAR less lease expense.

“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.

This information and the information contained in the press release shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in this Current Report on Form 8-K is not incorporated by reference into any filings of the Company made under the Securities Act of 1933, as amended, whether made before or after the date of this

Current Report on Form 8-K, regardless of any general incorporation language in the filing, unless specifically stated so therein.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

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 hereunto duly authorized.

EXHIBIT INDEX

Exhibit 99.1

FOR IMMEDIATE RELEASE 

Genesis HealthCare Contact:

Investor Relations

610-925-2000

GENESIS HEALTHCARE

REPORTS THIRD QUARTER 2016 RESULTS

Announces Planned Divestiture of Facilities in Eight States to Focus on Core Markets

Recently Announced New Leases Reduce Prior Lease Obligation by $440 Million through January 2032

Third Quarter EBITDA Meets First Call Consensus Estimate

KENNETT SQUARE, PA – (November 3, 2016) – Genesis HealthCare (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, 2016. 

Third Quarter 2016 Results 

“We delivered another solid quarter despite near-term headwinds and continued to position Genesis for success,” said George V. Hager, Jr., Chief Executive Officer. “The planned and completed divestiture of geographically non-strategic facilities and the recently announced new leases build on the actions we have taken to improve our asset quality, capital structure and performance. Over the past year, we have integrated acquisitions, brought down our cost base, paid down debt and divested non-strategic assets, creating a strong foundation for profitable growth in 2017 and beyond."

“Strategically, we are positioning Genesis to thrive in the emerging world of value-based purchasing,” Hager continued. “The deterioration in skilled census patterns is moderating quarter-on-quarter and our unique value-based initiatives are continuing to demonstrate promising results that we expect will make meaningful contributions to the bottom line next year. We believe we are establishing a ‘best-in-class’ track record with hospitals and payers by getting ahead of the curve on improving outcomes and lowering costs, and I am excited about our opportunities for gaining market share and generating financial upside for our shareholders as our strategy yields positive results.”

Portfolio Management and Financing Activities

Portfolio Management Activities 

The Company continually evaluates the performance of its operating units with an emphasis on divesting underperforming assets or assets in non-strategic markets.  For 2016 year to date, Genesis has completed or announced

divestitures of approximately 100 non-strategic or underperforming skilled nursing and assisted/senior living assets, as well as its hospice and home care businesses.  These actions are expected to increase management’s focus and resources on markets where the Company has geographic density, strong hospital partnerships and the greatest growth potential.   

Consistent with its strategy to divest assets in non-strategic markets, Genesis announced today its intention to exit inpatient operations in eight Midwestern states. The divestiture will occur in two phases:

As of October 2016, Genesis completed the previously announced divesture of 9 underperforming leased assisted living facilities in the states of Pennsylvania, Delaware and West Virginia.  The nine facilities had annual revenue of $22.5 million, $5.0 million in lease expense, no Adjusted EBITDA and $2.8 million of pre-tax net loss.

“We are constantly reviewing our portfolio to determine areas of strength and weakness,” noted Hager.  “The assets located in the eight Midwestern states account for 9% of inpatient revenues but have been a disproportionate drag on our earnings performance.  We expect our actions to exit non-strategic markets will allow for a renewed focus on our core markets and will strengthen the overall enterprise,” noted Hager.

Financing Activities

For 2016 year to date, Genesis has announced new and amended loan agreements, HUD refinancing and restructuring of master leases with long-term capital partners to strengthen the Company’s capital structure.

New Master Leases

Genesis recently announced it entered into a lease with a new landlord for 64 skilled nursing facilities previously leased from Welltower Inc. (Welltower).  On November 1, 2016, Welltower sold the real estate of the 64 facilities to Second Spring Healthcare Investments (Second Spring), a joint venture formed by affiliates of Lindsay Goldberg LLC, a private investment firm, and affiliates of Omega Healthcare Investors, Inc., a real estate investment trust (REIT).  Genesis will continue to operate the facilities pursuant to its new lease with affiliates of Second Spring effective November 1, 2016 and there will be no change in the operations of these facilities. 

The 64 facilities had been included in the Company’s master lease with Welltower and were historically subject to 3.4% annual escalators, which were scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease with Second Spring, initial annual rent for the 64 properties is reduced approximately 5% to $103.9 million and annual escalators will decrease to 1.0% after year 1, 1.5% after year 2, and 2.0% thereafter.  The more favorable lease terms are expected to reduce Genesis’ cumulative rent obligations through January 2032 by $297 million.  As part of the transaction, Genesis issued a note totaling $51.2 million to Welltower, maturing in October 2020. 

On November 2, 2016, in a separate transaction, Welltower announced that it had entered into an agreement to sell the real estate of 28 additional facilities to a joint venture among Welltower, Cindat Capital Management Ltd., and Union Life Insurance Co., Ltd. Similar to the new lease with Second Spring, as part of the Welltower sale, Genesis expects to enter into a lease at closing of the sale, which is expected in the fourth quarter of 2016.  Genesis will continue to operate the facilities pursuant to its new lease and there will be no change in the operations of these facilities. 

The 28 facilities are currently included in the Company’s master lease with Welltower and have been subject to 3.4% annual escalators, which are scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease, the 28 properties’ initial annual rent is expected to be reduced by approximately 5% to $54.5 million and the annual escalators are expected to decrease to 2.0%. The more favorable lease terms are expected to reduce Genesis’ cumulative rent obligations by $143 million through January 2032.  As part of the transaction, Genesis expects to issue a five-year note totaling $23.7 million to Welltower, a portion of which is expected to be convertible to common stock at approximately $4 per share.  Upon completion of this transaction, Welltower would still lease to Genesis 114 skilled nursing and assisted/senior living facilities.

Refinancing Activities

On July 29, 2016, as previously announced, Genesis entered into a new $120 million four-year term loan agreement and paid off the prior term loan that would have matured in December 2017.  Interest on the new term loan is equal to a base rate (subject to a floor of 1.00%) plus 13%, of which 2% may be paid-in-kind.  The new term loan does not contain any pre-payment penalty provision.  Genesis used the net proceeds of the new term loan, along with available cash, to repay in full the remaining $156.5 million obligation under the prior term loan agreement, including a 2% prepayment penalty.  The prior term loan and all related guarantees and liens were terminated upon such payments.

Also, on July 29, 2016, as previously announced, Genesis entered into an amendment to its revolving credit facilities.  The amendment provides the Company with additional flexibility through the modification of the financial covenants and increases the interest rate margin applicable to the three credit facility tranches by 0.25% to 1.00%.

Year-to-date, Genesis has closed on 21 HUD guaranteed mortgages totaling $143.2 million that, together with $54.2 million of asset sale proceeds, were used to pay down partially nearly $200 million of the Company’s real estate bridge loans with Welltower.  Genesis expects to continue to refinance the real estate bridge loans with lower cost and longer maturity HUD guaranteed mortgages or other permanent financing through the end of 2016 and into 2017.

Bundled Payment Update

Genesis’ Model 3 Bundled Payment Care Initiative program continues to perform to expectations generating positive results.  In mid-October, Genesis received the reconciliation for the first quarter of 2016 which resulted in a $1.8 million positive settlement, as well as an additional $0.3 million positive settlement for prior quarters. 

“We believe our program, now fully active in 32 of our facilities, is sufficiently gaining traction from both a financial and operational perspective,” noted Hager.  “Based on this experience, we remain enthusiastic about our ability to generate savings in the Medicare Shared Savings Program that our Genesis Physician Services subsidiary entered into effective January 1, 2016. Currently, Genesis is the only post-acute care provider authorized to participate in the program."

2016 Guidance

The Company reaffirms its previously announced guidance ranges for fiscal year 2016.

Conference Call

Genesis HealthCare will hold a conference call at 8:30 a.m. Eastern Time on Friday, November 4, 2016 to discuss financial results for the third quarter of 2016.  Investors can access the conference call live by calling (855) 849-2198 or through 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

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 approximately 500 skilled nursing centers and assisted/senior living communities in 34 states nationwide. Genesis subsidiaries also supply rehabilitation and respiratory therapy to more than

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.

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 and anticipated financing activities. 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 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;

• 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. Moreover, payment annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may negatively affect our results of operations;

• 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 Medicare 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, and contracts. These investigations and audits could result in adverse findings that may negatively affect our business, including our results of operations, liquidity and financial condition;

• 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 and financial condition;

• 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;

• our potential issuance of debt securities that are convertible into our common stock could result in dilution of your percentage ownership of our company, if such debt securities are converted to common stock;

• we are subject to numerous covenants and requirements under our various credit and leasing agreements and a breach of any such covenants or requirements could, unless timely and effectively remediated, lead to default and potential cross default under such agreements;

• the holders of a majority of the voting power of Genesis’ common stock have entered into an extended voting agreement, and the voting group’s interests may conflict with the interests of other holders;

• 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; and

• we are a “controlled company” within the meaning of NYSE rules and, as a result, qualify for and rely on exemptions from certain corporate governance requirements.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2015, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, including the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 when it is filed, 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.

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GENESIS HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

GENESIS HEALTHCARE, INC.

SELECTED BALANCE SHEET DATA

(UNAUDITED)

(IN THOUSANDS)

GENESIS HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

(1) - Net cash provided by (used in) operating activities in the nine months ended September 30, 2016 and 2015 includes approximately $10 million and $67 million, respectively, of cash payments for transaction-related costs.

GENESIS HEALTHCARE, INC.

KEY FINANCIAL PERFORMANCE INDICATORS

(UNAUDITED)

*Inpatient Segment Key Financial Performance Indicators for the nine months ended September 30, 2015 include Skilled Healthcare beginning February 1, 2015.

** In 2015 and 2016, includes 20 facilities located in Texas for which the real estate is owned by Genesis.

Reasons for Non-GAAP Financial Disclosure

The following discussion includes references to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). For purposes of SEC Regulation G, 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. Pursuant to the requirements of Regulation G, 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 relationship each reporting period between our cash basis lease expense and the level of operating earnings available to fund lease expense; 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 Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss) attributed to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the relative 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 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 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.  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) attributed to Genesis Healthcare, Inc. as an important measure of its 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 measures of our operating performance:

EBITDAR and EBITDA

“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.  We believe EBITDAR 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 and lease expense) and our asset base (depreciation and amortization expense) from our operating results.  We also use EBITDAR as one measure in determining the value of prospective acquisitions or divestitures.  EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry. In addition, covenants in our lease agreements use EBITDAR as a measure of financial compliance.

“EBITDA” is defined as EBITDAR less lease expense.   We believe EBITDA is useful to an investor in evaluating our operating performance for the same reasons identified with respect to EBITDAR.  EBITDA is a commonly used measure to estimate the enterprise value of businesses in the healthcare industry.  In addition, covenants in our debt agreements use EBITDA as a measure of financial compliance.

Adjustments to EBITDAR and EBITDA

We adjust EBITDAR and 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 and that the presentation of Adjusted EBITDAR and Adjusted EBITDA, when combined with GAAP net income (loss) attributable to Genesis Healthcare, Inc., EBITDAR 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 EBITDAR and EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

We adjust EBITDAR and EBITDA for the following items:

Adjustments to EBITDA

GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET LOSS ATTRIBUTABLE TO GENESIS HEALTHCARE, INC. TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS)