Genesis Healthcare 10Q 2020 Q3 Quarterly report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020.

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-33459

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-3934755
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

101 East State Street
Kennett Square, Pennsylvania		19348
(Address of principal executive offices)		(Zip Code)

(610) 444-6350

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	GEN	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated Filer ☒	Emerging growth company ☐

Non-accelerated filer ☐	Smaller reporting company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 6, 2020, was:

Class A common stock, $0.001 par value – 110,642,614 shares

Class B common stock, $0.001 par value – 744,396 shares

Class C common stock, $0.001 par value – 55,409,742 shares

Table of Contents

Genesis Healthcare, Inc.

Form 10-Q

Index

		Page Number
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets — September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations — Three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Comprehensive (Loss) Income — Three and nine months ended September 30, 2020 and 2019	5
	Consolidated Statements of Stockholders’ Deficit — Three and nine months ended September 30, 2020 and 2019	6
	Consolidated Statements of Cash Flows — Nine months ended September 30, 2020 and 2019	8
	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75

Item 4.	Controls and Procedures	75

Part II.	Other Information

Item 1.	Legal Proceedings	76

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 3.	Defaults Upon Senior Securities	76

Item 4.	Mine Safety Disclosures	76

Item 5.	Other Information	76

Item 6.	Exhibits	77

Signatures		78

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	September 30, 2020		December 31, 2019
Assets:
Current assets:
Cash and cash equivalents	$	200,995	$	12,097
Restricted cash and equivalents		45,437		63,101
Restricted investments in marketable securities		39,682		31,855
Accounts receivable		456,023		567,636
Prepaid expenses		118,051		108,908
Other current assets		37,225		44,079
Assets held for sale		—		1,171
Total current assets		897,413		828,847
Property and equipment, net of accumulated depreciation of $422,824 and $431,361 at September 30, 2020 and December 31, 2019, respectively		1,018,939		962,105
Finance lease right-of-use assets, net of accumulated amortization of $15,578 and $23,401 at September 30, 2020 and December 31, 2019, respectively		28,635		37,097
Operating lease right-of-use assets		1,817,603		2,399,505
Restricted cash and equivalents		51,106		50,608
Restricted investments in marketable securities		98,159		105,087
Other long-term assets		120,098		85,725
Deferred income taxes		1,946		3,772
Identifiable intangible assets, net of accumulated amortization of $80,126 and $76,243 at September 30, 2020 and December 31, 2019, respectively		83,530		87,446
Goodwill		85,642		85,642
Assets held for sale		11,554		16,306
Total assets	$	4,214,625	$	4,662,140
Liabilities and Stockholders' Deficit:
Current liabilities:
Current portion of long-term debt	$	10,693	$	162,426
Current portion of finance lease obligations		2,958		2,839
Current portion of operating lease obligations		126,974		140,887
Accounts payable		190,264		238,384
Accrued expenses		324,354		226,092
Accrued compensation		145,439		153,698
Self-insurance reserves		149,793		146,476
Current portion of liabilities held for sale		400		368
Total current liabilities		950,875		1,071,170
Long-term debt		1,543,698		1,450,994
Finance lease obligations		35,577		39,335
Operating lease obligations		2,199,826		2,681,403
Deferred income taxes		5,071		5,245
Self-insurance reserves		405,955		406,864
Liabilities held for sale		18,373		19,789
Other long-term liabilities		200,165		69,905
Commitments and contingencies
Stockholders’ deficit:
Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 110,642,614 and 107,888,854 at September 30, 2020 and December 31, 2019, respectively)		111		108
Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at September 30, 2020 and December 31, 2019, respectively)		1		1
Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 55,409,742 and 56,172,193 at September 30, 2020 and December 31, 2019, respectively)		55		56
Additional paid-in-capital		243,697		248,594
Accumulated deficit		(1,061,586)		(1,010,296)
Accumulated other comprehensive income		1,503		602
Total stockholders’ deficit before noncontrolling interests		(816,219)		(760,935)
Noncontrolling interests		(328,696)		(321,630)
Total stockholders' deficit		(1,144,915)		(1,082,565)
Total liabilities and stockholders’ deficit	$	4,214,625	$	4,662,140

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net revenues	$	938,653	$	1,123,705	$	2,987,162	$	3,430,397
Salaries, wages and benefits		535,009		620,493		1,732,486		1,889,062
Other operating expenses		309,664		339,441		967,419		1,014,507
General and administrative costs		45,172		35,930		124,558		107,024
Lease expense		86,247		100,018		280,662		288,665
Depreciation and amortization expense		24,373		34,932		84,177		101,395
Interest expense		33,918		37,099		102,065		141,590
Loss on early extinguishment of debt		1,101		2,460		6,561		2,436
Investment income		(957)		(2,071)		(3,074)		(6,078)
Other income		(53,507)		(131,811)		(182,439)		(172,141)
Transaction costs		15,561		12,941		26,696		23,025
Long-lived asset impairments		72,400		16,037		159,200		16,937
Federal stimulus - COVID-19 other income		(31,212)		—		(216,713)		—
Equity in net income of unconsolidated affiliates		(3,362)		(93)		(6,811)		(178)
(Loss) income before income tax expense (benefit)		(95,754)		58,329		(87,625)		24,153
Income tax expense (benefit)		176		(569)		(1,060)		(680)
Net (loss) income		(95,930)		58,898		(86,565)		24,833
Less net loss (income) attributable to noncontrolling interests		33,137		(12,801)		35,275		1,182
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(62,793)	$	46,097	$	(51,290)	$	26,015
(Loss) earnings per common share:
Basic:
Weighted-average shares outstanding for basic net (loss) income per share		113,145		109,123		111,372		106,581
Basic net (loss) income per common share attributable to Genesis Healthcare, Inc.	$	(0.55)	$	0.42	$	(0.46)	$	0.24

Diluted:
Weighted-average shares outstanding for diluted net (loss) income per share		113,145		166,002		111,372		164,583
Diluted net (loss) income per common share attributable to Genesis Healthcare, Inc.	$	(0.55)	$	0.40	$	(0.46)	$	0.21

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(IN THOUSANDS)

(UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net (loss) income	$	(95,930)	$	58,898	$	(86,565)	$	24,833
Net unrealized (loss) gain on marketable securities, net of tax		(149)		98		1,331		1,216
Comprehensive (loss) income		(96,079)		58,996		(85,234)		26,049
Less: comprehensive loss (income) attributable to noncontrolling interests		33,198		(12,830)		34,845		838
Comprehensive (loss) income attributable to Genesis Healthcare, Inc.	$	(62,881)	$	46,166	$	(50,389)	$	26,887

See accompanying notes to unaudited consolidated financial statements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(IN THOUSANDS)

(UNAUDITED)


														Accumulated
														other						Total
	Class A Common Stock			Class B Common Stock			Class C Common Stock			Additional		Accumulated		comprehensive		Stockholders'		Noncontrolling		stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		paid-in capital		deficit		income		deficit		interests		deficit
Balance at December 31, 2019	107,889	$	108	744	$	1	56,172	$	56	$	248,594	$	(1,010,296)	$	602	$	(760,935)	$	(321,630)	$	(1,082,565)
Net income	—		—	—		—	—		—		—		33,508		—		33,508		5,173		38,681
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		641		641		337		978
Share based compensation	—		—	—		—	—		—		1,894		—		—		1,894		—		1,894
Issuance of common stock	5		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	270		—	—		—	(270)		—		(2,612)		—		—		(2,612)		2,612		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(1,123)		(1,123)
Balance at March 31, 2020	108,164	$	108	744	$	1	55,902	$	56	$	247,876	$	(976,788)	$	1,243	$	(727,504)	$	(314,631)	$	(1,042,135)
Net loss	—		—	—		—	—		—		—		(22,005)		—		(22,005)		(7,311)		(29,316)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		348		348		154		502
Share based compensation	—		—	—		—	—		—		1,831		—		—		1,831		—		1,831
Issuance of common stock	1,928		2	—		—	—		—		(2)		—		—		—		—		—
Conversion of common stock among classes	492		1	—		—	(492)		(1)		(7,597)		—		—		(7,597)		7,597		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(1,163)		(1,163)
Balance at June 30, 2020	110,584	$	111	744	$	1	55,410	$	55	$	242,108	$	(998,793)	$	1,591	$	(754,927)	$	(315,354)	$	(1,070,281)
Net loss	—		—	—		—	—		—		—		(62,793)		—		(62,793)		(33,137)		(95,930)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		(88)		(88)		(61)		(149)
Share based compensation	—		—	—		—	—		—		1,600		—		—		1,600		—		1,600
Issuance of common stock	59		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	—		—	—		—	—		—		(11)		—		—		(11)		11		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(1,335)		(1,335)
Contributions from noncontrolling interests	—		—	—		—	—		—		—		—		—		—		21,180		21,180
Balance at September 30, 2020	110,643	$	111	744	$	1	55,410	$	55	$	243,697	$	(1,061,586)	$	1,503	$	(816,219)	$	(328,696)	$	(1,144,915)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(IN THOUSANDS)

(UNAUDITED)


														Accumulated
														other						Total
	Class A Common Stock			Class B Common Stock			Class C Common Stock			Additional		Accumulated		comprehensive		Stockholders'		Noncontrolling		stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		paid-in capital		deficit		(loss) income		deficit		interests		deficit
Balance at December 31, 2018	101,236	$	101	744	$	1	59,701	$	60	$	270,408	$	(1,609,828)	$	(262)	$	(1,339,520)	$	(705,346)	$	(2,044,866)
Net loss	—		—	—		—	—		—		—		(15,263)		—		(15,263)		(9,819)		(25,082)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		397		397		99		496
Share based compensation	—		—	—		—	—		—		2,087		—		—		2,087		—		2,087
Issuance of common stock	100		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	3,081		3	—		—	(3,081)		(3)		(18,175)		—		—		(18,175)		18,175		—
Distributions to noncontrolling interests	—		—	—		—	—		—		64		—		—		64		(1,202)		(1,138)
Contributions from noncontrolling interests	—		—	—		—	—		—		—		—		—		—		18,500		18,500
Cumulative effect of accounting change	—		—	—		—	—		—		—		584,913		—		584,913		340,129		925,042
Balance at March 31, 2019	104,417	$	104	744	$	1	56,620	$	57	$	254,384	$	(1,040,178)	$	135	$	(785,497)	$	(339,464)	$	(1,124,961)
Net loss	—		—	—		—	—		—		—		(4,819)		—		(4,819)		(4,164)		(8,983)
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		406		406		216		622
Share based compensation	—		—	—		—	—		—		1,748		—		—		1,748		—		1,748
Issuance of common stock	2,996		3	—		—	—		—		(3)		—		—		—		—		—
Conversion of common stock among classes	—		—	—		—	—		—		(7,842)		—		—		(7,842)		7,842		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(1,405)		(1,405)
Balance at June 30, 2019	107,413	$	107	744	$	1	56,620	$	57	$	248,287	$	(1,044,997)	$	541	$	(796,004)	$	(336,975)	$	(1,132,979)
Net income	—		—	—		—	—		—		—		46,097		—		46,097		12,801		58,898
Net unrealized gain on marketable securities, net of tax	—		—	—		—	—		—		—		—		69		69		29		98
Share based compensation	—		—	—		—	—		—		1,878		—		—		1,878		—		1,878
Issuance of common stock	28		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	93		1	—		—	(93)		(1)		(1,081)		—		—		(1,081)		1,081		—
Distributions to noncontrolling interests	—		—	—		—	—		—		(21)		—		—		(21)		(1,628)		(1,649)
Contributions from noncontrolling interests	—		—	—		—	—		—		—		—		—		—		8,531		8,531
Balance at September 30, 2019	107,534	$	108	744	$	1	56,527	$	56	$	249,063	$	(998,900)	$	610	$	(749,062)	$	(316,161)	$	(1,065,223)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Nine months ended September 30,
	2020		2019
Cash flows from operating activities
Net (loss) income	$	(86,565)	$	24,833
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Non-cash interest and leasing arrangements, net		18,348		21,194
Other non-cash gain, net		(182,439)		(172,141)
Share based compensation		5,325		5,713
Depreciation and amortization expense		84,177		101,395
Reduction in the carrying amount of operating lease right-of-use assets		88,219		86,250
Recovery for losses on accounts receivable		(81)		(1,005)
Equity in net income of unconsolidated affiliates		(6,811)		(178)
Benefit for deferred taxes		1,298		(1,774)
Loss (income) on early extinguishment of debt		1,942		(263)
Long-lived asset impairments		159,200		16,937
Changes in assets and liabilities:
Accounts receivable		112,164		64,614
Accounts payable and other accrued expenses and other		11,845		(63,186)
Medicare advance payments		155,824		—
Operating lease obligations		(81,288)		(66,631)
Net cash provided by operating activities		281,158		15,758
Cash flows from investing activities:
Capital expenditures		(42,040)		(47,046)
Purchases of marketable securities		(54,490)		(47,896)
Proceeds on maturity or sale of marketable securities		55,276		56,725
Purchases of assets		(207,313)		(591,660)
Sales of assets		218,636		237,632
Restricted deposits		12,910		(1,224)
Investments in joint venture		(16,936)		—
Loan provided to joint venture		(9,000)		—
Other, net		(2,617)		435
Net cash used in investing activities		(45,574)		(393,034)
Cash flows from financing activities:
Borrowings under revolving credit facilities		3,531,261		3,522,000
Repayments under revolving credit facilities		(3,667,222)		(3,518,465)
Proceeds from issuance of long-term debt		227,860		480,906
Repayment of long-term debt		(167,489)		(133,913)
Repayment of finance lease obligations		(2,177)		(1,973)
Debt issuance costs		(3,644)		(8,325)
Contributions from noncontrolling interests		21,180		27,031
Distributions to noncontrolling interests and stockholders		(3,621)		(4,192)
Net cash (used in) provided by financing activities		(63,852)		363,069
Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents		171,732		(14,207)
Cash, cash equivalents and restricted cash and equivalents:
Beginning of period		125,806		142,276
End of period	$	297,538	$	128,069
Supplemental cash flow information:
Interest paid	$	80,352	$	118,757
Net taxes paid		2,469		2,672
Federal stimulus - COVID-19 other income		216,713		—
Non-cash investing and financing activities:
Finance lease obligations, net write-down due to lease activity	$	(1,462)	$	(930,582)
Assets subject to finance lease obligations, net write-down due to lease activity		(492)		(1,131,352)
Operating lease obligations, net (write-down) gross-up due to lease activity		(414,201)		2,901,799
Assets subject to operating leases, net write-down (gross-up) due to lease activity		346,964		(2,514,414)
Financing obligations, net write-down due to lease activity		—		(2,734,940)
Assets subject to financing obligations, net write-down due to lease activity		—		1,718,507

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1)

General Information

Description of Business

Genesis Healthcare, Inc. is a healthcare services holding company that, through its subsidiaries (collectively, the Company or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At September 30, 2020, the Company provided inpatient services through 360 skilled nursing, assisted/senior living and behavioral health centers located in 25 states. Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of its revenues.

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. The Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% of the Company’s revenues.

The Company provides an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of the Company’s revenues.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net (loss) income attributable to Genesis Healthcare, Inc. and net (loss) income attributable to noncontrolling interests in its consolidated statements of operations.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of control and economics that considers whether the Company has the power to direct the activities that most significantly impact the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to the VIE.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the disclosures normally required by U.S. GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (SEC) on Form 10-K on March 16, 2020.

Going Concern Considerations

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions.

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The Company’s primary focus as the effects of COVID-19 began to impact the United States was the health and safety of its patients, residents, employees and their respective families. The Company implemented various measures to provide the safest possible environment within its sites of service during this pandemic and will continue to do so.

The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the healthcare industry and the Company’s businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system across the United States. A significant number of the Company’s facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 is having and will likely continue to have a material and adverse effect on the Company’s operations and supply chains, resulting in a reduction in its operating occupancy and related revenues, and an increase in its expenditures.

The Company performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In completing its going concern assessment, the Company considered the uncertainties around the impact of COVID-19 on its future results of operations as well as its current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s indebtedness and other conditional and unconditional obligations due within 12 months following the date its financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about the Company’s ability to continue as a going concern, the Company has taken the following measures:

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The Company applied for and received government-sponsored financial relief related to the pandemic;

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The Company is utilizing the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;

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While it vigorously advocates, for itself and the skilled nursing industry, regarding the need for additional government-sponsored funding, the Company continues to explore and to take advantage of existing government-sponsored funding programs implemented to support businesses impacted by COVID-19;

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The Company continues to seek and implement measures to adapt its operational model to function for the long-term in a COVID-19 environment;

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The Company has pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity; and

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The Company is exploring and evaluating a number of strategic and other alternatives to manage and to improve its liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.

These measures and other plans and initiatives are needed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond the Company’s control or may not be available on terms acceptable to the

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Company, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if the Company receives additional funding support from government sources and/or is able to execute successfully all of these plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events or circumstances could force the Company to seek reorganization under the U.S. Bankruptcy Code.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the FASB) issued Accounting Standard Update (ASU) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements. The Company adopted the new standard on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Further, the FASB issued ASU 2019-04 and ASU 2019-05 to provide additional guidance on the credit losses standard. The standard is effective for fiscal years beginning after December 15, 2022, for smaller reporting companies, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which serves to remove or amend certain requirements associated with the accounting for income taxes. The standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the effect, if any, that the standard will have on its consolidated financial statements and related disclosures.

(2) Certain Significant Risks and Uncertainties

COVID-19

The COVID-19 pandemic has materially and adversely affected, and will continue materially and adversely to affect, the Company’s patients, staff and operations, which in turn has materially and adversely affected its revenues and expenses. The Company began to experience the negative impact of the COVID-19 pandemic beginning in late February 2020. For a more detailed discussion of the impact of COVID-19 on the Company’s operations, net revenues, operating expenses and liquidity, see Note 3 – “Significant Transactions and Events – COVID-19.”

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Revenue Sources

The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services segment derives approximately 81% of its revenue from Medicare and various state Medicaid programs. The following table depicts the Company’s inpatient services segment revenue by source for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Medicare	20	%	19	%	20	%	20	%
Medicaid	61	%	59	%	61	%	58	%
Insurance	10	%	12	%	10	%	12	%
Private	7	%	8	%	7	%	8	%
Other	2	%	2	%	2	%	2	%
Total	100	%	100	%	100	%	100	%

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

It is difficult to quantify fully the effect of legislative changes, public and private subsidy and grant programs related to COVID-19, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business. The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have an adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations are and will continue to be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Laws and regulations governing the Medicare and Medicaid programs, and the Company’s businesses generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations. However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from participation in the Medicare and/or Medicaid programs.

Concentration of Credit Risk

The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk. These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions.

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Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in the Company’s rehabilitation therapy services business where it has over 150 distinct customers, many being chain operators with more than one location. One of the Company’s customers, a related party, comprises $31.0 million, or approximately 42%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2020. See Note 11 – “Related Party Transactions.” A future adverse event impacting this customer or other large customers, resulting in their insolvency or other economic distress, would have a material impact on the Company.

The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Part II. Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 16, 2020, and in the Company’s Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.

Covenant Compliance

Should the Company fail to comply with its debt and lease covenants at a future measurement date, it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have a significant adverse impact on the Company’s financial position.

Although the Company is in compliance with the covenants required by its material debt and material lease agreements at September 30, 2020, the ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on the Company’s ability to remain in compliance with its financial covenants through November 9, 2021. Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to timely meet its required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

The Company’s ability to maintain compliance with financial covenants required by its debt and lease agreements depends in part on management’s ability to increase revenues and control costs and receive adequate government-sponsored financial support in response to the COVID-19 pandemic as well as possible waivers, deferrals and/or adjustments of debt and lease terms. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt and lease covenant requirements.

There can be no assurance that the confluence of these and other factors will not impede the Company’s ability to meet covenants required by its debt and lease agreements in the future.

(3) Significant Transactions and Events

COVID-19

As discussed in Note 1 – “General Information – Going Concern Considerations,” the Company’s operations and supply chains have been materially and adversely affected by the COVID-19 pandemic, resulting in a reduction in its operating occupancy and related revenues, and an increase in its expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures serve to outline the estimated impact of COVID-19 on its business through September 30, 2020, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19.

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Operations

The Company’s first report of a positive case of COVID-19 in one of its facilities occurred on March 16, 2020. Since that time, 266 of the Company’s 360 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 70% of the patient and resident positive COVID-19 cases in its facilities have occurred in the states of New Jersey, Connecticut, Massachusetts, Pennsylvania and Maryland, which correspond to many of the largest community outbreak areas across the country. The Company’s facilities in these five states represent 45% of its total operating beds.

The Company’s occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.

Net Revenues

The Company’s net revenues for the three and nine months ended September 30, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. The Company’s skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 75.4% for the three months ended September 30, 2020. The revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as discussed below. See Regulatory and Reimbursement Relief. After considering a commensurate reduction in related and direct operating expenses, the Company estimates lost revenue caused by COVID-19 reduced earnings by approximately $71.0 million and $145.0 million for the three and nine months ended September 30, 2020, respectively.

Operating Expenses

The Company’s operating expenses for the three and nine months ended September 30, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the three months and nine months ended September 30, 2020, the Company estimates it incurred approximately $52.0 million and $205.0 million, respectively, of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs and the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate.

The Company is not reasonably able to predict the total amount of costs it will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.

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Liquidity

The Company has taken, and will continue to take, actions to enhance and to preserve its liquidity in response to the pandemic. During the three and nine months ended September 30, 2020, the Company’s usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, in the second quarter of 2020, the Company applied for and received $156.8 million of advanced Medicare payments and from April through September 2020, received approximately $254.0 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, the Company has elected to implement the CARES Act payroll tax deferral program, which is expected to preserve on an interest free basis approximately $90.0 million of cash representing the employer portion of payroll taxes estimated to be incurred between March 27, 2020 and December 31, 2020, of which approximately $65.0 million has been realized through September 30, 2020. The advance Medicare payments of $156.8 million, which are also interest free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding has been committed by a number of states in which the Company operates, currently estimated at $85.0 million, of which approximately $76.0 million has been recognized in net revenue through September 30, 2020.

The Company continues to seek opportunities to enhance and to preserve its liquidity, including through reducing expenses, continuing to evaluate its capital structure and seeking further government-sponsored financial relief related to the pandemic. The Company cannot provide assurance that such efforts will be successful, timely or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic. See Note 1 – “General Information – Going Concern Considerations.”

Regulatory and Reimbursement Relief

On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provided a temporary 6.2% increase to each qualifying state’s Medicaid Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (HHS), including any extensions or termination, which currently expires January 20, 2021. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporarily increased FMAP is claimed. Further, a number of additional states in which the Company operates have implemented incremental FMAP related reimbursement provisions and other forms of support to assist providers. For the three and nine months ended September 30, 2020, the Company recognized as net revenues in the consolidated statements of operations approximately $30.0 million and $76.0 million, respectively, of additional FMAP reimbursement relief. The Company cannot predict the extent to which further FMAP funding programs will be implemented in the states in which it operates.

In further response to the pandemic, on March 27, 2020, the President signed into law the bipartisan CARES Act, which authorized the cash distribution of relief funds to reimburse healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus. Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. The secretary of HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.

The Company was impacted by certain provisions of the CARES Act, as summarized below.

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Temporary suspension of certain patient coverage criteria and documentation and care requirements. The CARES Act and a series of temporary waivers and guidance issued by the Centers for Medicare and Medicaid Services (CMS) suspend various Medicare patient coverage criteria as well as certain documentation and care requirements. These accommodations are intended to ensure patients have access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

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Relief Funds. The CARES Act authorized HHS to distribute relief fund grants to healthcare providers to support healthcare-related expenses or lost revenue attributable to COVID-19. HHS has made several rounds of distributions to providers based upon a variety of factors and providers have been able to apply for additional funding. To retain the funds, providers must submit an attestation accepting certain terms and conditions. During April 2020, the Company first began receiving relief grants from CARES Act funds administered by HHS. Through September 30, 2020, the Company has received $190.9 million in these initial relief grants, the majority of which are related to skilled nursing care provided through the Company’s Inpatient Services segment.

On July 22, 2020, President Trump announced an additional $5 billion relief fund to be used to protect residents of long term care facilities and nursing homes from the impact of COVID-19. The $5 billion relief fund included:

Approximately $2.5 billion in payments to be used primarily to support increased testing and meet staffing and personal protective equipment needs. During the third quarter of 2020, the Company received $57.9 million of relief grants under the program.

Five subsequent distributions as part of the Quality Incentive Payments Program (QIP). In order to qualify for payments under QIP, a facility must have an active state certification as a nursing home or skilled nursing facility and receive reimbursement from CMS. HHS will administer quality checks on nursing home certification status to identify and remove facilities that have a terminated, expired, or revoked certification or enrollment. Facilities must also report to at least one of three data sources that will be used to establish eligibility and collect necessary provider data to inform payment.

The QIP Program is scheduled to be divided into five performance periods (September, October, November, December 2020 and the last period will be for the combined four months of September 2020 – December 2020). Currently, it is anticipated that the payment amounts designated for each of these five periods may vary, however the total payments are expected to equal $2 billion. All nursing homes or skilled nursing facilities meeting the previously noted qualifications will be eligible for each of the performance periods.

$250 million of the funds is to be allocated for distribution to “COVID only” facilities.

$250 million of the funds will be part of a program for providers that participate in approved training programs to better enable nursing home employees to administer COVID-19-related safety practices.

The Company recognizes relief funds as income once there is reasonable assurance that the applicable terms and conditions required to retain the funds have been met. During the three and nine months ended September 30, 2020, the Company recognized $31.2 million and $216.7 million, respectively, of aggregate relief funds within the “Federal stimulus – COVID-19 other income” caption in the consolidated statements of operations. The Company has recorded $32.1 million of relief funds within Accrued Expenses in the consolidated balance sheet as of September 30, 2020.

On June 9, 2020 as part of its ongoing efforts to provide financial relief to healthcare providers impacted by COVID-19, HHS announced the Phase 2 general distribution to Medicaid, Medicaid managed care, Children's Health Insurance Program (CHIP) and dental providers. HHS anticipates distributing approximately $15 billion to eligible providers that participate in state Medicaid and CHIP programs that did not receive a payment from the Provider Relief Fund General Allocation (Phase 1). Eligible applicants will receive 2% of Gross Revenues from Patient Care for calendar years 2017, 2018 or 2019 as selected by applicant. The Company has submitted applications for its assisted living facilities that meet the eligibility criteria.

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Medicare Accelerated and Advanced Payment Program. During the second quarter of 2020, the Company applied for and received $156.8 million of interest free advanced Medicare payments. These payments will be subsequently recouped over time as revenue is recognized for claims submitted for services provided to Medicare patients. In October 2020, CMS extended the recoupment period to begin one year from the date the advanced payments were issued. The Company’s recoupment period for the advanced payments is expected to be from April 2021 to February 2022. The Company has reported advanced payments of $82.4 million and $73.4 million within accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet as of September 30, 2020.

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Payroll Tax Deferral. Under the CARES Act, the Company has elected to defer payment, on an interest free basis, of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. The Company has presented the balance of deferred payroll taxes, $64.7 million, within other long-term liabilities in the consolidated balance sheet as of September 30, 2020.

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Temporary Suspension of Medicare Sequestration. The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee for service claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to remain in place through at least 2023, unless Congress takes further action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020. During the three and nine months ended September 30, 2020, the suspension of sequestration resulted in net revenues of approximately $3.1 million and $5.2 million, respectively.

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Employee Retention Tax Credit. The employer payroll tax credit provisions of the CARES Act grant eligible companies a credit against applicable payroll taxes for each calendar quarter in an amount equal to 50% of qualified wages with a maximum credit of $5,000 per employee. The refundable tax credit is available to employers that fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. Qualified employees are those who are not providing services as a result of such orders of a government authority. The impact of the employee retention tax credit program was not material for the three and nine months ended September 30, 2020.

Strategic Partnerships

Vantage Point Partnership

On January 10, 2020, Welltower, Inc. (Welltower) sold the real estate of 1 skilled nursing facility located in Massachusetts to the Vantage Point Partnership. The sale represents the final component of a transaction that occurred on September 12, 2019, whereby the Company acquired an approximately 30% membership interest in the partnership, which acquired the real estate of 18 facilities previously leased from Welltower and Second Spring Healthcare Investments (Second Spring). As a result of the January 10, 2020 transaction, the Company will receive an annual rent credit of $0.7 million from Welltower and recorded a gain of $0.2 million as a result of the lease termination. The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million. The consolidation of this additional skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing. The Company operates all 19 facilities owned by the Vantage Point Partnership.

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NewGen Partnership

On February 1, 2020, the Company transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to a partnership with New Generation Health, LLC (the NewGen Partnership). The Company sold the real estate and operations of 6 skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for $78.7 million. Net transaction proceeds were used by the Company to repay indebtedness, including prepayment penalties, of $33.7 million, fund its initial 50% equity contribution and working capital requirement of $14.9 million, and provide financing to the partnership of $9.0 million. The Company recorded a gain on sale of assets and transition of leased facilities of $58.8 million and loss on early extinguishment of debt of $1.0 million. Further, on May 15, 2020, the Company transitioned operational responsibility for 4 additional leased facilities in the state of California to the NewGen Partnership. The 4 facilities generated annual revenues of $55.0 million and pre-tax loss of $0.5 million. Concurrent with these transactions, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. The Company will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. The Company does not hold a controlling financial interest in the NewGen Partnership. As such, the Company has applied the equity method of accounting for its 50% interest in the NewGen Partnership. The Company’s investment in the NewGen Partnership, $23.9 million, is included within other long-term assets in the consolidated balance sheet as of September 30, 2020.

Cascade Partnership

On July 2, 2020, the Company sold 1 facility to an affiliate of Cascade Capital Group, LLC (Cascade) for $26.1 million, using proceeds from the sale to retire U.S. Department of Housing and Urban Development (HUD) financed debt of $10.5 million, pay aggregate prepayment penalties and other closing costs of $1.0 million, and partially fund its investment in a partnership with Cascade (the Cascade Partnership). Cascade also acquired 8 facilities that were operated by the Company under a master lease agreement with Second Spring. The Company continues to operate all 9 of these facilities subject to a new master lease agreement with affiliates of Cascade. The master lease agreement contains an initial term of 10 years with 1 five-year renewal option and base rent of $20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. The Company also obtained a fixed price option to purchase the 9 facilities for $251.6 million that is exercisable from July 2023 through June 2025. The Company executed a promissory note with Cascade for $20.3 million, which was subsequently converted into a 49% membership interest in the Cascade Partnership. The Company also holds a subordinated equity interest in the Cascade Partnership of $10.0 million.

The Cascade Partnership is a VIE of which the Company is the primary beneficiary. Consequently, the Company has consolidated all of the accounts of the Cascade Partnership in the accompanying financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Cascade Partnership acquired all 9 skilled nursing facilities for an aggregate purchase price of $223.6 million. The initial consolidation primarily resulted in property and equipment of $208.6 million, non-recourse debt of $190.3 million, net of debt issuance costs, and noncontrolling interests of $21.2 million. The Company has not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period. The net impact of consolidating the Cascade Partnership was not material to the accompanying consolidated statement of operations for the three and nine months ended September 30, 2020.

Divestiture of Non-Strategic Facilities

On January 31, 2020, Omega Healthcare Investors, Inc. (Omega) sold the real estate of 1 skilled nursing facility located in Massachusetts. The Company leased the facility under a master lease agreement but closed the facility on July 1, 2019. The sale resulted in a gain on the lease termination of $0.2 million and an annual rent credit of $0.4 million.

On February 1, 2020, the Company sold 2 owned skilled nursing facilities in North Carolina and 1 owned skilled nursing facility in Maryland for $61.8 million. Proceeds were used to retire $29.1 million of HUD financed debt. The three facilities generated revenues of $38.7 million and pre-tax income of $0.5 million. The transactions resulted in a gain on sale of $24.5 million and loss on early extinguishment of debt of $2.6 million.

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On February 26, 2020, the Company completed the sale of 1 owned HUD-insured skilled nursing facility in California for $20.8 million. The facility had been classified as an asset held for sale as of December 31, 2019. Proceeds were used to retire $20.5 million of HUD financed debt. The facility generated revenues of $14.0 million and pre-tax loss of $0.1 million. See Note 14 – “Assets Held for Sale.” The transactions resulted in a gain on sale of $3.0 million and loss on early extinguishment of debt of $0.4 million.

On March 4, 2020, the Company divested the operations of 1 leased assisted/senior living facility in Montana. The lease termination resulted in an annual rent credit of $0.7 million. The facility generated revenues of $2.5 million and pre-tax income of $0.1 million.

On April 1, 2020, the Company sold 2 owned skilled nursing facilities in New Jersey and 1 owned skilled nursing facility in Maryland for $45.8 million. Proceeds were used to retire $15.2 million of HUD financed debt and $7.5 million of MidCap Real Estate Loans. The 3 facilities generated annual revenues of $35.8 million and pre-tax income was de minimis. The transactions resulted in a gain on sale of $21.8 million and loss on early extinguishment of debt of $1.4 million.

On April 1, 2020, the Company divested the operations and terminated the lease of 2 skilled nursing facilities in Montana. The 2 facilities generated annual revenues of $18.8 million and pre-tax income of $0.4 million. The lease termination resulted in an annual rent credit of $1.1 million.

On April 20, 2020, the Company divested the operations of 4 skilled nursing facilities in Florida and 2 skilled nursing facilities in Maryland that were subject to a master lease with Second Spring. The 6 facilities generated annual revenues of $62.0 million and pre-tax loss of $2.3 million. The lease termination resulted in a net annual rent credit of $8.5 million.

On June 1, 2020, the Company divested the operations of 4 leased skilled nursing facilities in Idaho that were subject to a master lease with Omega. The 4 facilities generated annual revenues of $19.5 million and pre-tax income of $0.1 million. The lease termination resulted in an annual rent credit of $1.4 million.

On July 6, 2020, the Company sold a skilled nursing facility in Rhode Island for $10.5 million, resulting in a gain on sale of $6.1 million. Proceeds were used to retire $5.5 million of MidCap Real Estate Loans. The facility generated annual revenues of $9.9 million and pre-tax income of $0.2 million.

Gains and losses associated with transactions and divestitures are included in other income on the consolidated statements of operations. See Note 12 – “Other Income.”

(4) Net Revenues and Accounts Receivable

Revenue Streams

Inpatient Services

The Company generates revenues primarily by providing services to patients within its facilities. The Company uses interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care. Many of the Company’s facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management, as well as standard services, such as room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. The Company assesses collectibility on all accounts prior to providing services.

Rehabilitation Therapy Services

The Company generates revenues by providing rehabilitation therapy services, including speech-language pathology, physical therapy, occupational therapy and respiratory therapy at its skilled nursing facilities and assisted/senior living facilities, as well as

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(UNAUDITED)

facilities of third-party skilled nursing operators and other outpatient settings. The majority of revenues generated by rehabilitation therapy services rendered are billed to contracted third party providers.

Other Services

The Company generates revenues by providing an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

COVID-19

The Company’s net revenues for the three and nine months ended September 30, 2020 were materially impacted by COVID-19. For discussion of the impact, see Note 3 – “Significant Transactions and Events – COVID-19.”

Disaggregation of Revenues

The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source. Payments are generally received within 30 to 60 days after billing. See Note 6 – “Segment Information.”

The composition of net revenues by payor type and operating segment for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):


	Three months ended September 30, 2020
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	155,374		$	23,168		$	—		$	178,542
Medicaid		477,295			473			—			477,768
Insurance		80,242			5,852			—			86,094
Private		57,788	(1)		2			—			57,790
Third party providers		—			63,954			20,702			84,656
Other		16,374	(2)		8,068	(2)		29,361	(3)		53,803
Total net revenues	$	787,073		$	101,517		$	50,063		$	938,653


	Three months ended September 30, 2019
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	187,493		$	22,643		$	—		$	210,136
Medicaid		572,100			560			—			572,660
Insurance		111,529			5,453			—			116,982
Private		77,440	(1)		66			—			77,506
Third party providers		—			85,051			17,285			102,336
Other		17,449	(2)		2,527	(2)		24,109	(3)		44,085
Total net revenues	$	966,011		$	116,300		$	41,394		$	1,123,705

(1)

Includes Assisted/Senior living revenue of $19.1 million and $23.1 million for the three months ended September 30, 2020 and 2019, respectively. Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.

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	Nine months ended September 30, 2020
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	518,892		$	64,579		$	—		$	583,471
Medicaid		1,536,155			1,417			—			1,537,572
Insurance		259,237			16,130			—			275,367
Private		193,982	(1)		149			—			194,131
Third party providers		—			203,616			64,855			268,471
Other		50,085	(2)		17,619	(2)		60,446	(3)		128,150
Total net revenues	$	2,558,351		$	303,510		$	125,301		$	2,987,162


	Nine months ended September 30, 2019
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	596,468		$	68,387		$	—		$	664,855
Medicaid		1,730,147			1,688			—			1,731,835
Insurance		351,228			16,603			—			367,831
Private		233,499	(1)		270			—			233,769
Third party providers		—			262,689			58,379			321,068
Other		51,659	(2)		8,438	(2)		50,942	(3)		111,039
Total net revenues	$	2,963,001		$	358,075		$	109,321		$	3,430,397

(1)

Includes Assisted/Senior living revenue of $61.0 million and $70.4 million for the nine months ended September 30, 2020 and 2019, respectively. Such amounts do not represent contracts with customers under ASC 606.

(2)

Primarily consists of revenue from Veteran Affairs and administration of third party facilities.

(3)

Includes net revenues from all payors generated by the other services, excluding third party providers.

(5) Earnings (Loss) Per Share

The Company has 3 classes of common stock. Classes A and B are identical in economic and voting interests. Class C has a 1:1 voting ratio with each of the other two classes, representing the voting interests of the legacy FC-GEN Operations Investment, LLC (FC-GEN) owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.

The noncontrolling owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option. There were exchanges of 0.8 million FC-GEN units and Class C shares in the nine months ended September 30, 2020 equating to 0.8 million Class A shares. There were exchanges of 3.2 million FC-GEN units and Class C shares in the nine months ended September 30, 2019 equating to 3.2 million Class A shares.

Basic EPS was computed by dividing net (loss) income attributable to Genesis Healthcare, Inc. by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net (loss) income attributable to Genesis Healthcare, Inc. plus the effect of any assumed conversions of noncontrolling interests by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common stock.

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A reconciliation of the numerator and denominator used in the calculation of basic net (loss) income per common share follows (in thousands, except per share data):


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Numerator:
Net (loss) income	$	(95,930)	$	58,898	$	(86,565)	$	24,833
Less: Net loss (income) attributable to noncontrolling interests		33,137		(12,801)		35,275		1,182
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(62,793)	$	46,097	$	(51,290)	$	26,015
Denominator:
Weighted-average shares outstanding for basic net (loss) income per share		113,145		109,123		111,372		106,581

Basic net (loss) income per common share attributable to Genesis Healthcare, Inc.	$	(0.55)	$	0.42	$	(0.46)	$	0.24

A reconciliation of the numerator and denominator used in the calculation of diluted net (loss) income per common share follows (in thousands, except per share data):


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Numerator:
Net (loss) income	$	(95,930)	$	58,898	$	(86,565)	$	24,833
Less: Net loss (income) attributable to noncontrolling interests		33,137		(12,801)		35,275		1,182
Net (loss) income attributable to Genesis Healthcare, Inc.	$	(62,793)	$	46,097	$	(51,290)	$	26,015
Plus: Assumed conversion of noncontrolling interests		—		20,179		—		8,060
Net (loss) income available to common stockholders after assumed conversions	$	(62,793)	$	66,276	$	(51,290)	$	34,075
Denominator:
Weighted-average common shares outstanding		113,145		109,123		111,372		106,581
Plus: Assumed conversion of noncontrolling interests		—		56,605		—		57,313
Plus: Unvested restricted stock units and stock warrants		—		274		—		689
Adjusted weighted-average common shares outstanding, diluted		113,145		166,002		111,372		164,583

Diluted net (loss) income per common share attributable to Genesis Healthcare, Inc.	$	(0.55)	$	0.40	$	(0.46)	$	0.21

The computation of diluted net (loss) income per common share attributable to Genesis Healthcare, Inc. excludes the effects of anti-dilutive shares attributable to the assumed conversion of noncontrolling interests, unvested restricted stock units, and stock warrants, which were 55.4 million and 56.0 million for the three and nine months ended September 30, 2020, respectively. There were 55.4 million and 56.5 million units attributable to the noncontrolling interests outstanding as of September 30, 2020 and 2019, respectively.

Omnibus Equity Incentive Plans

During the second quarter of 2020, the Company’s shareholders approved the 2020 Omnibus Equity Incentive Plan (the 2020 Plan). As of the effective date of the 2020 Plan, no further grants may be made under the Genesis Healthcare, Inc. Amended and Restated 2015 Omnibus Equity Incentive Plan (the “Prior Plan”). Any shares that were available for issuance under the Prior Plan and that were not subject to outstanding awards under the Prior Plan became available for issuance (in addition to the newly authorized shares) under the 2020 Plan. Accordingly, upon stockholder approval of the 2020 Plan at the Annual Meeting of Stockholders on June 3, 2020, a total of 6,462,605 shares became available for delivery under the 2020 Plan, including (i) 3,500,000 newly authorized shares and (ii) 2,962,605 shares previously registered on Forms S-8 filed with the SEC that were available for issuance under the Prior Plan.

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(6) Segment Information

The Company has 3 reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments, see Note 1 – “General Information – Description of Business.”

A summary of the Company’s segmented revenues follows (in thousands, except percentages):


	Three months ended September 30,
	2020				2019				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	766,782	81.8	%	$	941,722	83.8	%	$	(174,940)	(18.6)	%
Assisted/Senior living facilities		19,128	2.0	%		23,057	2.1	%		(3,929)	(17.0)	%
Administration of third party facilities		1,835	0.2	%		1,980	0.2	%		(145)	(7.3)	%
Elimination of administrative services		(672)	(0.1)	%		(748)	(0)	%		76	10.2	%
Inpatient services, net		787,073	83.9	%		966,011	86.0	%		(178,938)	(18.5)	%

Rehabilitation therapy services:
Total therapy services		156,706	16.7	%		183,898	16.4	%		(27,192)	(14.8)	%
Elimination of intersegment rehabilitation therapy services		(55,189)	(5.9)	%		(67,598)	(6.0)	%		12,409	18.4	%
Third party rehabilitation therapy services, net		101,517	10.8	%		116,300	10.4	%		(14,783)	(12.7)	%

Other services:
Total other services		73,276	7.8	%		55,532	4.9	%		17,744	32.0	%
Elimination of intersegment other services		(23,213)	(2.5)	%		(14,138)	(1.3)	%		(9,075)	(64.2)	%
Third party other services, net		50,063	5.3	%		41,394	3.6	%		8,669	20.9	%

Net revenues	$	938,653	100.0	%	$	1,123,705	100.0	%	$	(185,052)	(16.5)	%


	Nine months ended September 30,
	2020				2019				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	2,493,616	83.5	%	$	2,888,659	84.1	%	$	(395,043)	(13.7)	%
Assisted/Senior living facilities		60,991	2.0	%		70,408	2.1	%		(9,417)	(13.4)	%
Administration of third party facilities		5,986	0.2	%		6,281	0.2	%		(295)	(4.7)	%
Elimination of administrative services		(2,242)	(0.1)	%		(2,347)	(0.1)	%		105	4.5	%
Inpatient services, net		2,558,351	85.6	%		2,963,001	86.3	%		(404,650)	(13.7)	%

Rehabilitation therapy services:
Total therapy services		475,127	15.9	%		571,875	16.7	%		(96,748)	(16.9)	%
Elimination of intersegment rehabilitation therapy services		(171,617)	(5.7)	%		(213,800)	(6.2)	%		42,183	19.7	%
Third party rehabilitation therapy services, net		303,510	10.2	%		358,075	10.5	%		(54,565)	(15.2)	%

Other services:
Total other services		199,058	6.7	%		143,139	4.2	%		55,919	39.1	%
Elimination of intersegment other services		(73,757)	(2.5)	%		(33,818)	(1.0)	%		(39,939)	(118.1)	%
Third party other services, net		125,301	4.2	%		109,321	3.2	%		15,980	14.6	%

Net revenues	$	2,987,162	100.0	%	$	3,430,397	100.0	%	$	(443,235)	(12.9)	%

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(UNAUDITED)

A summary of the Company’s unaudited condensed consolidated statement of operations follows (in thousands):



	Three months ended September 30, 2020
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	787,745	$	156,706	$	73,276	$	—	$	(79,074)	$	938,653
Salaries, wages and benefits		375,352		122,134		37,523		—		—		535,009
Other operating expenses		362,212		7,178		19,447		—		(79,173)		309,664
General and administrative costs		—		—		—		45,172		—		45,172
Lease expense		85,245		253		450		299		—		86,247
Depreciation and amortization expense		20,301		1,736		206		2,245		(115)		24,373
Interest expense		15,674		—		10		19,414		(1,180)		33,918
Loss on early extinguishment of debt		—		—		—		1,101		—		1,101
Investment income		—		—		—		(2,137)		1,180		(957)
Other (income) loss		(54,052)		620		(75)		—		—		(53,507)
Transaction costs		—		—		—		15,561		—		15,561
Long-lived asset impairments		72,400		—		—		—		—		72,400
Federal stimulus - COVID-19 other income		(27,002)		(4,210)		—		—		—		(31,212)
Equity in net income of unconsolidated affiliates		—		—		—		(2,310)		(1,052)		(3,362)
(Loss) income before income tax benefit		(62,385)		28,995		15,715		(79,345)		1,266		(95,754)
Income tax expense		—		—		—		176		—		176
Net (loss) income	$	(62,385)	$	28,995	$	15,715	$	(79,521)	$	1,266	$	(95,930)


	Three months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	966,759	$	183,898	$	55,515	$	17	$	(82,484)	$	1,123,705
Salaries, wages and benefits		437,508		152,793		30,192		—		—		620,493
Other operating expenses		394,115		11,779		16,421		—		(82,874)		339,441
General and administrative costs		—		—		—		35,930		—		35,930
Lease expense		98,987		320		384		327		—		100,018
Depreciation and amortization expense		29,263		2,934		176		2,559		—		34,932
Interest expense		12,363		14		9		24,713		—		37,099
Loss on early extinguishment of debt		—		—		—		2,460		—		2,460
Investment income		—		—		—		(2,071)		—		(2,071)
Other income		(131,811)		—		—		—		—		(131,811)
Transaction costs		—		—		—		12,941		—		12,941
Long-lived asset impairments		16,037		—		—		—		—		16,037
Equity in net loss (income) of unconsolidated affiliates		—		—		—		2,932		(3,025)		(93)
Income (loss) before income tax benefit		110,297		16,058		8,333		(79,774)		3,415		58,329
Income tax benefit		—		—		—		(569)		—		(569)
Net income (loss)	$	110,297	$	16,058	$	8,333	$	(79,205)	$	3,415	$	58,898

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(UNAUDITED)


	Nine months ended September 30, 2020
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,560,593	$	475,127	$	199,058	$	—	$	(247,616)	$	2,987,162
Salaries, wages and benefits		1,237,570		378,687		116,229		—		—		1,732,486
Other operating expenses		1,132,321		24,440		58,623		—		(247,965)		967,419
General and administrative costs		—		—		—		124,558		—		124,558
Lease expense		277,506		878		1,380		898		—		280,662
Depreciation and amortization expense		71,479		5,099		612		7,140		(153)		84,177
Interest expense		42,069		27		29		63,480		(3,540)		102,065
Loss on early extinguishment of debt		—		—		—		6,561		—		6,561
Investment income		—		—		—		(6,614)		3,540		(3,074)
Other (income) loss		(183,265)		621		205		—		—		(182,439)
Transaction costs		—		—		—		26,696		—		26,696
Long-lived asset impairments		159,200		—		—		—		—		159,200
Federal stimulus - COVID-19 other income		(204,977)		(9,359)		(2,377)		—		—		(216,713)
Equity in net income of unconsolidated affiliates		—		—		—		(6,419)		(392)		(6,811)
Income (loss) before income tax benefit		28,690		74,734		24,357		(216,300)		894		(87,625)
Income tax benefit		—		—		—		(1,060)		—		(1,060)
Net income (loss)	$	28,690	$	74,734	$	24,357	$	(215,240)	$	894	$	(86,565)


	Nine months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,965,348	$	571,875	$	142,905	$	234	$	(249,965)	$	3,430,397
Salaries, wages and benefits		1,336,298		464,740		88,024		—		—		1,889,062
Other operating expenses		1,185,684		34,866		44,312		—		(250,355)		1,014,507
General and administrative costs		—		—		—		107,024		—		107,024
Lease expense		285,510		985		1,064		1,106		—		288,665
Depreciation and amortization expense		83,463		9,210		524		8,198		—		101,395
Interest expense		68,454		41		26		73,069		—		141,590
Loss on early extinguishment of debt		—		—		—		2,436		—		2,436
Investment income		—		—		—		(6,078)		—		(6,078)
Other (income) loss		(172,126)		(76)		61		—		—		(172,141)
Transaction costs		—		—		—		23,025		—		23,025
Long-lived asset impairments		16,937		—		—		—		—		16,937
Equity in net loss (income) of unconsolidated affiliates		—		—		—		4,318		(4,496)		(178)
Income (loss) before income tax benefit		161,128		62,109		8,894		(212,864)		4,886		24,153
Income tax benefit		—		—		—		(680)		—		(680)
Net income (loss)	$	161,128	$	62,109	$	8,894	$	(212,184)	$	4,886	$	24,833

The following table presents the segment assets as of September 30, 2020 compared to December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Inpatient services	$	3,670,154	$	4,221,579
Rehabilitation therapy services		257,641		281,978
Other services		63,822		49,877
Corporate and eliminations		223,008		108,706
Total assets	$	4,214,625	$	4,662,140

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The following table presents segment goodwill as of September 30, 2020 compared to December 31, 2019 (in thousands):


	Rehabilitation Therapy Services		Other Services		Consolidated
Balance at December 31, 2019
Goodwill	$	73,814	$	11,828	$	85,642
Accumulated impairment losses		—		—		—
	$	73,814	$	11,828	$	85,642
Balance at September 30, 2020
Goodwill		73,814		11,828		85,642
Accumulated impairment losses		—		—		—
	$	73,814	$	11,828	$	85,642

(7) Property and Equipment

Property and equipment consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Land, buildings and improvements	$	1,081,930	$	1,004,447
Equipment, furniture and fixtures		357,032		386,248
Construction in progress		2,801		2,771
Gross property and equipment		1,441,763		1,393,466
Less: accumulated depreciation		(422,824)		(431,361)
Net property and equipment	$	1,018,939	$	962,105

Net property and equipment included $741.7 million and $535.9 million at September 30, 2020 and December 31, 2019, respectively, associated with the Company's consolidated VIEs.

During the nine months ended September 30, 2020, the Company purchased 9 skilled nursing facility and sold 14 skilled nursing facilities resulting in a net increase in net property and equipment of $104.6 million.

During the nine months ended September 30, 2020, the Company recorded long-lived asset impairment charges to its property and equipment of $7.1 million.

(8) Leases

The Company leases the majority of the skilled nursing facilities and assisted/senior living facilities used in its operations, most of which are subject to triple-net leases, meaning that in addition to rent, the Company is responsible for paying property taxes, insurance, and maintenance and repair costs. As of September 30, 2020, the Company leased approximately 72% of its centers; 39% were leased pursuant to master lease agreements with 4 landlords. The Company also leases certain office space, land, and equipment.

The Company’s real estate leases generally have initial lease terms of 10 to 15 years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional five to ten years or more. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term. The Company assesses renewal options using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, the majority of its leases’ terms do not include renewal periods for accounting purposes. For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the right-of-use (ROU) asset and lease liability. The payment structure of the Company’s leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices. Leases with an initial term of 12 months or less are not recorded on the balance sheet; expense for these leases is recognized on a straight-line basis over the lease term as an other operating expense.

As of September 30, 2020, the Company held fixed-price options to purchase 66 facilities, 23 of which are subject to third-party leases and 43 of which are included within the Company’s consolidated VIEs. The Company assesses the likelihood of exercising the purchase option using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore,

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purchase options are generally assumed to be exercised when a compelling economic reason to exercise the option exists. Certain leases include options to terminate the lease, the terms and conditions of which vary by contract. Such options allow the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The Company’s lease agreements do not contain any material residual value guarantees. The Company leases certain facilities from affiliates of related parties. See Note 11 – “Related Party Transactions.”

The Company makes certain assumptions in determining the discount rate. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate for collateralized borrowings, based on the information available at commencement date, in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach was utilized to group assets based on similar lease terms in a manner whereby the Company reasonably expects that the application does not differ materially from application to individual leases.

Subsequent to lease commencement date, the Company reassesses lease classification when there is a contract modification that is not accounted for as a separate contract, a change in lease term, or a change in the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. This reassessment is made using current facts, circumstances and conditions. As a result of a lease’s modification, the remaining consideration in the contract is reallocated to lease and non-lease components, as applicable, and the lease liability is remeasured using the applicable discount rate at the effective date of the modification. The remeasurement of the lease liability will result in adjustment to the corresponding ROU asset, unless the lease is fully or partially terminated, in which case, a gain or loss will be recognized.

During the three and nine months ended September 30, 2020, the Company recorded long-lived asset impairment charges to its lease ROU assets of $72.4 million and $152.1 million, respectively.

The maturity of total operating and finance lease obligations at September 30, 2020 is as follows (in thousands):


Year ending December 31,	Operating Leases		Finance Leases ⁽¹⁾
2020 (excluding the nine months ended September 30, 2020)	$	84,386	$	1,735
2021		334,643		6,809
2022		334,691		6,603
2023		334,631		6,385
2024		340,676		6,149
Thereafter		2,671,792		34,861
Total lease payments		4,100,819		62,542
Less interest		(1,774,019)		(24,007)
Total lease obligations		2,326,800		38,535
Less current portion		(126,974)		(2,958)
Long-term lease obligations	$	2,199,826	$	35,577

(1)

Finance lease payments include $37.2 million related to options to renew lease terms that are reasonably certain of being exercised.

The following table provides lease costs and income by line item on the consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 (in thousands):


		Three months ended September 30,				Nine months ended September 30,
	Classification	2020		2019		2020		2019
Operating lease cost	Lease expense	$	86,247	$	100,018	$	280,662	$	288,665
Finance lease cost:
Amortization of finance lease ROU assets	Depreciation and amortization expense		968		1,734		2,950		15,222
Interest on finance lease obligations	Interest expense		1,341		4,299		3,392		48,931
Total finance lease expense			2,309		6,033		6,342		64,153
Variable lease cost	Other operating expenses		8,948		10,697		26,697		32,027
Short-term leases	Other operating expenses		4,447		5,980		14,121		18,596
Sublease income	Net revenues		(1,853)		-		(4,290)		-
Total		$	100,098	$	122,728	$	323,532	$	403,441

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(UNAUDITED)

The following table provides remaining lease term and discount rates by lease classification as of September 30, 2020 and December 31, 2019:


Lease Term and Discount Rate	September 30, 2020		December 31, 2019
Weighted-average remaining lease term (years)
Operating leases		12.0		12.6
Finance leases		9.7		10.2
Weighted-average discount rate
Operating leases		10.0%		9.6%
Finance leases		10.6%		12.2%

The following table includes supplemental lease information for the nine months ended September 30, 2020 and 2019 (in thousands):


	Nine months ended September 30,
Other information	2020		2019
Cash paid for amounts included in the measurement of lease obligations
Operating cash flows from operating leases	$	266,713	$	270,449
Operating cash flows from finance leases		5,570		45,286
Financing cash flows from finance leases		2,177		1,973
Right-of-use assets obtained in exchange for new lease obligations
Operating leases		16,270		82,471
Finance leases		727		688

Lease Covenants

The Company’s lease agreements generally contain covenant requirements that, among other things, and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries. These leases also require the Company to meet defined financial covenants, such as a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage. Certain of the Company’s leases include cross-default provisions with each other and certain material debt instruments. At September 30, 2020, the Company was in compliance with or received waivers with respect to the financial covenants contained in its leases containing cross-default provisions.

At September 30, 2020, the Company did not meet certain financial covenants contained in 2 leases related to 4 of its facilities. The Company is current in the timely payment of its obligations under such leases. These leases do not have cross-default provisions, nor do they trigger cross-default provisions in any of the Company’s other loan or lease agreements. The Company will continue to work with the related credit parties to amend such leases and the related financial covenants. The Company does not believe the breach of such financial covenants at September 30, 2020 will have a material adverse impact on its financial position. The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.

The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue, control costs and receive timely and adequate government-sponsored financial support in response to the COVID-19 pandemic. See Note 1 – “General Information – Going Concern Considerations” and Note 3 – “Significant Transactions and Events – COVID-19” for discussions that could impact future covenant compliance. Should the Company fail to comply with its lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing lease agreements. To the extent any cross-default provisions may apply, the default would have a significant adverse impact on the Company’s financial position.

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(9) Long-Term Debt

Long-term debt at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):



	September 30, 2020		December 31, 2019
Asset based lending facilities, net of debt issuance costs of $6,575 and $8,615 at September 30, 2020 and December 31, 2019, respectively	$	278,425	$	412,346
Term loan agreements, net of debt issuance costs of $660 and $1,084 and debt premium balance of $2,844 and $4,816 at September 30, 2020 and December 31, 2019, respectively		207,215		196,714
Real estate loans, net of debt issuance costs of $2,710 and $3,846 and debt premium balance of $12,080 and $19,328 at September 30, 2020 and December 31, 2019, respectively		228,713		265,700
HUD insured loans, net of debt issuance costs of $870 and $2,909 at September 30, 2020 and December 31, 2019, respectively		34,252		117,117
Notes payable		102,646		116,952
Mortgages and other secured debt (recourse)		6,142		6,369
Mortgages and other secured debt (non-recourse), net of debt issuance costs of $11,415 and $9,349 and debt premium balance of $1,348 and $1,422 at September 30, 2020 and December 31, 2019, respectively		696,998		498,222
		1,554,391		1,613,420
Less: Current portion of long-term debt		(10,693)		(162,426)
Long-term debt	$	1,543,698	$	1,450,994

Asset Based Lending Facilities

The Company maintains an asset based lending facility, as amended, that was previously comprised of (a) a $285.0 million first lien term loan facility, (b) a $240.0 million first lien revolving credit facility and (c) a $30.0 million delayed draw term loan facility (collectively, the ABL Credit Facilities) with affiliates of MidCap Financial Services, LLC (MidCap). The commitments under the delayed draw term loan facility were reduced to $22.5 million on September 30, 2020 and will be further reduced to $20.0 million on December 31, 2020.

The Company originally entered into the ABL Credit Facilities in March 2018. The ABL Credit Facilities have a stated maturity of March 6, 2023 and include a springing maturity clause that would accelerate the maturity date 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans (each defined below), in the event those agreements are not extended or refinanced. In the event that the springing maturity clause is triggered, the maturity date of the ABL Credit Facilities would be accelerated to October 3, 2021. The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed. Cash proceeds of $51.1 million received under the ABL Credit Facilities remain in a restricted account. This amount is pledged to cash collateralize letters of credit. The Company has classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents in the consolidated balance sheets at September 30, 2020 and December 31, 2019.

Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%. Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11.0%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.

In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate equals 0.5% per annum on the revolving credit facility and 2% on the delayed draw term loan facility.

The term loan facility and revolving credit facility include a termination fee equal to 1.5%. The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loan’s retirement or on the maturity date.

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The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings. Financial covenants include a minimum consolidated fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity.

Borrowings and interest rates under the ABL Credit Facilities were as follows at September 30, 2020 (dollars in thousands):


					Weighted
					Average
ABL Credit Facilities	Commitment		Borrowings		Interest
Term loan facility	$	285,000	$	285,000	6.50	%
Revolving credit facility (Non-HUD)		168,000		—	6.50	%
Revolving credit facility (HUD)		72,000		—	6.50	%
Delayed draw term loan facility		22,500		—	12.00	%
	$	547,500	$	285,000	6.50	%

As of September 30, 2020, the Company had a total borrowing base capacity of $332.4 million with outstanding borrowings under the ABL Credit Facilities of $285.0 million, leaving the Company with approximately $47.4 million of available borrowing capacity under the ABL Credit Facilities.

Term Loan Agreements

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a term loan agreement, as amended, (the Term Loan Agreement) with an affiliate of Welltower and an affiliate of Omega. The Term Loan Agreement originally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million and later expanded to $160.0 million. The Term Loan Agreement was set to mature on November 30, 2021, but the agreement was amended on November 8, 2020 extending the maturity date to January 1, 2022. The original Term Loan for $120.0 million bears interest at a rate equal to 14.0% per annum, with up to 9.0% per annum to be paid in kind. The additional Term Loan for $40.0 million bears interest at a rate equal to 10.0% per annum, with up to 5.0% per annum to be paid in kind. The Term Loans had an outstanding accreted principal balance of $205.0 million and $193.0 million at September 30, 2020 and December 31, 2019, respectively.

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions. The Term Loan Agreement is also secured by a junior lien on the assets that secure the ABL Credit Facilities on a first priority basis.

Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants.

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type. Financial covenants include a maximum leverage ratio, a minimum interest coverage ratio and a minimum fixed charge coverage ratio, the most restrictive of which is the minimum interest coverage ratio which requires the Company to maintain a coverage ratio, as defined therein, of no less than 1.7 to 1.0 through December 31, 2020, and increasing to 1.8 to 1.0 thereafter.

Real Estate Loans

MidCap Real Estate Loans

The Company originally entered into 2 real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million during March 2018. The MidCap Real Estate Loans are secured by 7 skilled nursing facilities and mature on March 30, 2023, subject to acceleration of the maturity date in the event the ABL Credit Facilities are repaid in full and terminated. The loans are subject to principal payments and bear an annual interest rate equal to 30-day LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%, with the balance due at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below). On November 8, 2018, 1 of the MidCap Real Estate Loans was amended with an additional borrowing of $10.0 million. The proceeds were used to retire a maturing mortgage loan on a

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(UNAUDITED)

corporate office building. The office building has been added as collateral and the loan maturity remains March 30, 2023. The $10.0 million additional loan is subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 2.0%) plus an applicable margin of 6.25% with principal amortizing immediately and the balance due at maturity. During 2019, the Company divested the real property and operations of 6 facilities that were subject to the MidCap Real Estate Loans, using the sale proceeds to repay $39.8 million on the loans. During the nine months ended September 30, 2020, the Company divested the real property and operations of 5 facilities that were subject to the MidCap Real Estate Loans, using the sale proceeds to repay $27.1 million on the loans. The MidCap Real Estate Loans had an outstanding principal balance of $14.3 million and $42.2 million at September 30, 2020 and December 31, 2019, respectively.

On October 30, 2020, the Company sold the real property and divested the operations of 3 facilities in Vermont that were subject to the MidCap Real Estate Loans, using the sale proceeds to retire the remaining outstanding principal balance of $14.3 million. See Note 17 – “Subsequent Events.”

Welltower Real Estate Loans

The Company is subject to 2 real estate loan agreements with Welltower (Welltower Real Estate Loans). The Welltower Real Estate Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Real Estate Loans. The Welltower Real Estate Loans have a maturity date of January 1, 2022 and an annual interest rate of 12.0%, of which 7.0% will be paid in cash and 5.0% will be paid in kind. The Company agreed to make commercially reasonable efforts to secure commitments to repay no less than $105.0 million of the Welltower Real Estate Loan obligations. As of September 30, 2020, the Company has not yet secured the total required repayments or commitments. As a result, the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest. At September 30, 2020, the Welltower Real Estate Loans are unsecured. The Welltower Real Estate Loans contain a conversion option, whereby up to $50.0 million of the balance can be converted into Class A common stock of the Company or a 10-year note bearing 2% paid in kind interest. The conversion option is available to the Company upon the satisfaction of certain conditions, the most significant include: the raise of new capital and application thereof to existing Welltower debt instruments, the repayment of $105.0 million to Welltower, as described above, the partial repayment of the Term Loans, and the partial repayment of the Welltower Real Estate Loans, such that the remaining outstanding principal balance does not exceed $50.0 million. During the first quarter of 2020, the Company divested the real property and operations of the remaining facility that was subject to the Welltower Real Estate Loans, using the sale proceeds to repay $9.0 million on the loans. The Welltower Real Estate Loans had an outstanding accreted principal balance of $205.0 million and $208.0 million at September 30, 2020 and December 31, 2019, respectively.

HUD Insured Loans

As of September 30, 2020, the Company had 7 owned skilled nursing facility loans insured by HUD. The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 28.2 years with fixed interest rates ranging from 3.0% to 3.5% and a weighted average interest rate of 3.3%. Prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required thereafter. Any further HUD insured loans will require additional HUD approval. All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of September 30, 2020, the balance of escrow reserve funds, $4.6 million, is included within prepaid expenses in the consolidated balance sheets.

During the nine months ended September 30, 2020, the Company sold the real property and operations of 9 skilled nursing facilities that were subject to HUD financing, 1 of which was classified as held for sale at December 31, 2019. The sale proceeds were used to retire HUD insured loans totaling $85.0 million. The HUD insured loans for owned facilities had an aggregate principal balance of $54.4 million and $140.6 million at September 30, 2020 and December 31, 2019, respectively. Additionally, the HUD insured loans of 2 facilities with an aggregate principal balance of $19.3 million were classified as held for sale at September 30, 2020.

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On October 30, 2020, the Company sold the real property and divested the operations of 2 facilities in Vermont that were subject to HUD insured loans, using the sale proceeds to retire loans of $8.1 million. See Note 17 – “Subsequent Events.”

Notes Payable

In November 2016, the Company issued a note totaling $51.2 million to Welltower, which accrues cash interest at 3.0% and paid-in-kind interest at 7.0%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1. During 2019, the maturity date of the note was extended to December 15, 2021. Upon the satisfaction of certain conditions, including the repayment of the Term Loans, repayment of the other note payable, noted below, to Welltower, and partial repayment of the Welltower Real Estate Loans, the outstanding note balance in excess of $6.0 million will be forgiven by Welltower. The note had an outstanding accreted principal balance of $66.5 million and $64.2 million at September 30, 2020 and December 31, 2019, respectively.

In December 2016, the Company issued a second note totaling $11.7 million to Welltower, which accrues cash interest at 3.0% and paid-in-kind interest at 7.0%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15. The note matures on December 15, 2021, and had an outstanding accreted principal balance of $15.1 million and $14.6 million at September 30, 2020 and December 31, 2019, respectively.

In October 2019, the Company converted $23.2 million of its trade payables into a note payable. The note requires monthly interest payments based on an annual interest rate of 3.5%. As of September 30, 2020, the outstanding principal balance of the note payable was $21.1 million. The balance of the note is due on September 30, 2022.

In November 2019, the Company issued a short-term note payable for $15.0 million. The balance of the note was repaid during the third quarter of 2020.

Other Debt

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets. The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest rate of 0.6% at September 30, 2020, and maturity dates ranging from 2020 to 2024.

Mortgages and other secured debt (non-recourse). The Company’s consolidated joint ventures and VIEs are subject to various loans, as set forth below. These loans are labeled “non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements.

Next Partnership Debt

The Company holds a 46% ownership interest in a partnership with Next Healthcare (Next), a related party (the Next Partnership). The Company has concluded the Next Partnership, which includes 15 facilities, qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Next Partnership in the accompanying consolidated financial statements.

The Next Partnership is subject to a term loan agreement with an original principal balance of $142.1 million and maturity date of January 31, 2022. The term loan bears interest at LIBOR plus 3.50% and is subject to interest-only payments through January 31, 2021. Beginning in April 2021, principal payments calculated based on a 25-year amortization schedule, after giving effect to any prior refinancings or other repayments of the term loan, will be applied to the remaining term loan balance. During the second quarter of 2020, the Next Partnership term loan was partially refinanced via 2 new HUD insured loans. Proceeds from the new HUD insured loans were principally used to pay down $24.6 million on the Next Partnership term loan. The term loan had an outstanding principal balance of $78.8 million and $103.4 million as of September 30, 2020 and December 31, 2019, respectively. The term loan was collateralized by 10 facilities as of September 30, 2020.

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(UNAUDITED)

The Next Partnership is subject to a mezzanine loan with an original principal balance of $27.0 million and maturity date of February 1, 2029. The mezzanine loan bears interest at 11.50% and is subject to interest-only payments through January 2022, with payments including a principal component thereafter. The mezzanine loan had an outstanding principal balance of $27.0 million as of both September 30, 2020 and December 31, 2019.

The Next Partnership includes 5 facilities that are subject to HUD-insured loans, 2 of which were entered into during the nine months ended September 30, 2020. The loans mature on dates ranging from January 1, 2055 through June 1, 2055. The loans bear interest at fixed rates ranging from 2.79% to 3.15% and had an aggregate outstanding principal balance of $67.3 million and $41.7 million at September 30, 2020 and December 31, 2019, respectively.

Vantage Point Partnership Debt

The Company holds an approximately 30% ownership interest in a partnership with Vantage Point Capital, LLC (the Vantage Point Partnership). The Company has concluded the Vantage Point Partnership, which includes 19 facilities, qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Vantage Point Partnership in the accompanying consolidated financial statements.

The Vantage Point Partnership is subject to a term loan agreement with an aggregate original principal balance of $240.9 million and maturity date of September 12, 2026. The term loan bears interest at LIBOR (subject to a floor of 1.75%) plus 3.75% and is subject to interest-only payments through October 1, 2021. The interest-only period can be extended through October 1, 2022 upon satisfaction of certain conditions, such as the achievement of a specified debt service coverage ratio and ratio of adjusted net operating income to the outstanding term loan balance. Following the interest-only period, principal payments calculated based on a 25-year amortization schedule, after giving effect to any prior refinancings or other repayments of the term loan, will be applied to the remaining term loan balance. The term loan had an outstanding principal balance of $240.9 million and $233.6 million at September 30, 2020 and December 31, 2019, respectively. The term loan was collateralized by 19 facilities as of September 30, 2020.

The Vantage Point Partnership is subject to a promissory note in the amount of $76.8 million, the entire balance of which was outstanding at September 30, 2020 and December 31, 2019. The promissory note bears interest at 14.0% and matures on September 12, 2028.

Cascade Partnership Debt

The Cascade Partnership is subject to a term loan agreement with an aggregate principal balance of $183.5 million and maturity date of July 2, 2023. The term loan bears interest at LIBOR (subject to a floor of 1.50%) plus 4.75% and is subject to interest-only payments through the maturity date. The term loan also has two one-year optional extension periods that become exercisable upon satisfaction of certain conditions, such as achieving a specified debt service coverage ratio. The debt service payments during the extension periods include a principal component that will be calculated based on the outstanding balance, an assumed interest rate of 6.0%, and a 25-year amortization schedule, with the balance due at maturity. The entire term loan balance was outstanding as of September 30, 2020. The term loan is collateralized by 9 facilities as of September 30, 2020.

The Cascade Partnership is subject to a note payable in the amount of $10.0 million, the entire balance of which was outstanding at September 30, 2020. The note matures on June 30, 2024 and bears interest at 10.0%, of which 5.0% will be paid in cash and 5.0% will be paid in kind. Paid in kind interest compounds annually beginning July 1, 2021. Subsequent to July 1, 2022, quarterly principal payments are required based on cash flows generated by the Cascade Partnership, with the remaining balance due at maturity.

Other Non-Recourse Debt

The Company has other non-recourse loans consisting principally of revenue bonds and secured bank loans with maturities ranging from 2023 through 2034. The loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest, with a weighted average interest rate of 4.2% at September 30, 2020. The loans had an

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(UNAUDITED)

aggregate outstanding principal balance of $22.8 million and $23.8 million at September 30, 2020 and December 31, 2019, respectively.

Debt Covenants

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and minimum liquidity. The Credit Facilities include cross-default provisions with each other and certain material lease agreements. At September 30, 2020, the Company was in compliance with or received waivers with respect to its financial covenants contained in the Credit Facilities.

The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue, control costs and receive timely and adequate government-sponsored financial support in response to the COVID-19 pandemic. See Note 1 – “General Information – Going Concern Considerations” and Note 3 – “COVID-19” for discussions that could impact future covenant compliance. Should the Company fail to comply with its debt covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing credit agreements. To the extent any cross-default provisions may apply, the default would have a significant adverse impact on the Company’s financial position.

The maturity of total debt of $1,560.3 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at September 30, 2020 is as follows (in thousands):


Twelve months ended September 30,
2021	$	10,691
2022		883,975
2023		213,090
2024		22,296
2025		10,085
Thereafter		420,212
Total debt maturity	$	1,560,349

(10)

Income Taxes

The Company effectively owns 67.1% of FC-GEN, which is an entity taxed as a partnership for U.S. income tax purposes and the Company’s only source of taxable income. FC-GEN is subject to income taxes in several U.S. state and local jurisdictions. The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 67.1% ownership of FC-GEN.

For the three months ended September 30, 2020, the Company recorded income tax expense of $0.2 million, representing an effective tax rate of (0.2)%, compared to income tax benefit of $0.6 million, representing an effective tax rate of (1.0%), for the same period in 2019.

For the nine months ended September 30, 2020, the Company recorded income tax benefit of $1.1 million, representing an effective tax rate of 1.3%, compared to income tax benefit of $0.7 million, representing an effective tax rate of (2.8%), for the same period in 2019.

The Company previously established a full valuation allowance against the majority of its net deferred tax assets based on its assessment that the Company will not realize such assets. The Company continues to assess the requirement for, and amount of, the valuation allowance for its deferred tax assets in accordance with the “more likely than not” standard. As of September 30, 2020, management determined that the current valuation allowance was still necessary and sufficient.

The Company’s Bermuda captive insurance company incurred year-to-date losses due to the impact of COVID-19. Under the CARES Act, any loss sustained during 2020 is permitted to be carried back for five years. For the nine months ended September 30, 2020, the Company recorded current income tax benefits of $2.9 million attributable to losses incurred during 2020.

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The Company expects that its 2020 tax year will likely be impacted by certain provisions contained in the CARES Act, such as increased limits on interest expense deductions, acceleration of refunds related to alternative minimum tax credits, payroll tax deferrals, and employee retention tax credits.

Exchange Rights and Tax Receivable Agreement

The noncontrolling owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option. As a result of such exchanges, the Company increases its holding interest in FC-GEN at the cost of the fair market value of the stock that was exchanged with the noncontrolling owners for their interest in FC-GEN. The cost of the exchanges to the Company in excess of the tax basis of the Company’s increased share of the assets of FC-GEN is adjusted to the tax basis of the Company’s increased share of the assets of FC-GEN, pursuant to internal revenue code (IRC) Section 743(b), because of FC-GEN’s IRC Section 754 election. The exchanges during the nine months ended September 30, 2020 and 2019 resulted in IRC Section 743(b) deductible goodwill of $6.6 million and $14.3 million, respectively.

The Company is party to a tax receivable agreement (TRA) with the noncontrolling owners of FC-GEN. The agreement provides for the payment by the Company to the noncontrolling owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA. Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the noncontrolling owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, such as the timing of exchanges, the price of shares of the Company’s Class A common stock at the time of the exchange, the amount and timing of the Company’s income, and future tax rates of jurisdictions in which the Company has tax liability.

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA. In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises. Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine. Although FC-GEN does not expect the IRS to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future payments. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.

The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.

In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.

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(11)

Related Party Transactions

The Company provides rehabilitation services to certain facilities owned and operated by 2 customers in which certain members of the Company’s board of directors, board observer, and shareholders with greater than 5% of the Company’s Class A common stock beneficially own an ownership interest. In the case of one significant customer, these services resulted in net revenues of $24.2 million and $75.5 million in the three and nine months ended September 30, 2020, respectively, as compared to net revenues of $29.1 million and $88.9 million in the three and nine months ended September 30, 2019, respectively. The customer’s total net accounts receivable balance was $31.0 million and $28.9 million at September 30, 2020 and December 31, 2019, respectively. Further, the Company holds a note receivable from this customer, which was derived from past due accounts receivable, in the amount of $56.3 million. The Company has reserved $55.0 million on the note receivable balance. The reserve represents the judgment of management and does not indicate a forgiveness of any amount owed by this related party customer. The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available. In the case of the other customer, the Company recorded net revenues of $1.4 million and $4.0 million in the three and nine months ended September 30, 2020, respectively, compared to net revenues of $1.7 million and $5.2 million in the three and nine months ended September 30, 2019, respectively. The customer’s total net accounts receivable balance was $1.4 million and $1.4 million at September 30, 2020 and December 31, 2019, respectively.

Certain subsidiaries of the Company are subject to a lease of 12 centers in New Hampshire and Florida from 12 separate limited liability companies affiliated with Next (the Next Landlord Entities). The lease was effective June 1, 2018 and the initial annualized rent to be paid was $13.0 million. The lease includes a purchase option that is exercisable in 2022. Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling approximately 4% in the aggregate. These members have earned acquisition fees and may earn asset management fees and other fees paid from the Next Landlord Entities.

As of September 30, 2020, Welltower held greater than 5% of the Company’s Class A common stock. The Company is party to a master lease with an affiliate of Welltower. The initial term of the master lease expires on January 31, 2037 and the Company has one eleven-year renewal option. Annual rent escalators under the master lease are 2.0%. During the three and nine months ended September 30, 2020, the Company paid rent of approximately $17.6 million and $53.0 million, respectively, to Welltower, as compared to $17.9 million and $56.0 million during the three and nine months ended September 30, 2019, respectively. The Company holds options to purchase certain facilities subject to the master lease. At September 30, 2020, the Company leased 42 facilities from Welltower. The Company and certain of its affiliates are also party to certain debt instruments with Welltower. During the three and nine months ended September 30, 2020, the Company paid interest to Welltower of $5.6 million and $16.7 million, respectively, as compared to $5.5 million and $16.2 million during the three and nine months ended September 30, 2019, respectively.

The Company transitioned operational responsibility for 23 facilities in the states of California, Washington and Nevada to the NewGen Partnership. The Company does not hold a controlling financial interest in the NewGen Partnership. As such, the Company has applied the equity method of accounting for its 50% interest in the NewGen Partnership. The Company provided $9.0 million in financing to the NewGen Partnership. Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. The Company provides administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. The Company also subleases 6 facilities to the NewGen Partnership. Total revenues recorded for these services in the three and nine months ended September 30, 2020 were $7.3 million and $17.5 million, respectively.

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(12)

Other Income

In the three and nine months ended September 30, 2020 and 2019, the Company completed multiple transactions, including the divestiture of numerous skilled nursing facilities and the termination or modification of certain lease agreements. See Note 3 – “Significant Transactions and Events.” These transactions resulted in a net (gain) loss recorded as other income in the consolidated statements of operations. The following table summarizes those net (gains) losses (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Gain on sale of owned assets (1)	$	(6,242)	$	(63,645)	$	(104,037)	$	(90,992)
Loss recognized for exit costs associated with divestiture of operations (2)		652		6,725		10,961		14,647
Gain on lease termination or modification (3)		(37,917)		(74,891)		(79,363)		(95,796)
Gain on landlord consideration credit (4)		(10,000)		—		(10,000)		—
Total other income	$	(53,507)	$	(131,811)	$	(182,439)	$	(172,141)

(1)

The Company sold 1 and 14 owned skilled nursing facilities during the three and nine months ended September 30, 2020, respectively. The Company sold 10 and 15 owned skilled nursing facilities during the three and nine months ended September 30, 2019, respectively. The gain represents sale proceeds in excess of the carrying value of the assets sold.

(2)

The Company divested operations of 1 and 44 facilities, including the sold facilities noted above, in the three and nine months ended September 30, 2020, respectively. The Company divested operations of 22 and 41 facilities, including the sold facilities noted above, in the three and nine months ended September 30, 2019, respectively. Upon divestiture, the Company recognizes exit costs for uncollectible accounts receivable resulting from a sale, the write-off of inventory balances assumed by the new operator, and other costs associated with the transition of operations.

(3)

The Company amended numerous lease agreements in the three and nine months ended September 30, 2020 and 2019. These transactions resulted in a combination of base rent reductions, annual escalator reductions, lease term extensions or reductions and facility terminations. Each lease amendment triggers a lease reassessment of the respective ROU asset and lease liability with an offsetting adjustment recorded to the consolidated statements of operations as other income or loss. In the three months ended September 30, 2020, the Company recognized a gain on the lease termination of 12 facilities totaling $18.2 million and a gain associated with lease modifications of $19.7 million. In the nine months ended September 30, 2020, the Company sold the leasehold rights of 13 facilities resulting in a gain of $10.7 million, terminated 24 divested facilities from various lease agreements resulting in a gain of $30.7 million, recognized a gain on the lease termination of 12 facilities totaling $18.2 million and a gain associated with lease modifications of $19.7 million. In the three and nine months ended September 30, 2019, the Company amended its master leases with Welltower, Omega, Second Spring, and certain other landlords to reflect the lease termination of 27 and 53 facilities, respectively. In conjunction with certain of these amendments, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. During the three and nine months ended September 30, 2019, these lease terminations and remeasurements resulted in a net gain of $74.9 million and $95.8 million, respectively.

(4)

The Company recorded a gain of $10.0 million in its consolidation accounting of the Cascade Partnership. The gain is associated with subordinated equity of the Cascade Partnership to be paid to the Company upon liquidation of the partnership.

(13)

Asset Impairment Charges

Long-Lived Assets with a Definite Useful Life

In each quarter, the Company’s long-lived assets with a definite useful life are tested for impairment at the lowest levels for which there are identifiable cash flows. The primary asset in each long-lived asset group is principally a building or ROU asset in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets. The cash flow period was based on the remaining useful lives of each long-lived asset group. The Company recognized asset impairment charges in the inpatient segment of $72.4 million and $159.2 million during the three and nine months ended September 30, 2020, respectively, as compared to $16.0 million and $16.9 million during the three and nine months ended September 30, 2019, respectively.

(14)

Assets Held for Sale

In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets. These assets are evaluated to determine whether they qualify as assets held for sale or discontinued operations. The assets and liabilities of a disposal group classified as held for sale shall be presented separately in the asset and liability sections, respectively, of the statement of financial position in the period in which they are identified only. Assets held for sale that qualify as discontinued operations are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the consolidated statements of operations.

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At September 30, 2020, the Company classified 2 skilled nursing facilities operated by the Company in the states of California and Nevada as held for sale. The facilities did not meet the criteria as discontinued operations. The Company is party to purchase and sale agreements, as amended, to sell the facilities for an aggregate $20.9 million.

At December 31, 2019, the Company classified 1 skilled nursing facility operated by the Company in California as held for sale. The facility did not meet the criteria as a discontinued operation. The sale of the facility, which was subject to a HUD insured loan, was completed on February 26, 2020. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities.”

The following table sets forth the major classes of assets and liabilities included as part of the disposal groups as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Current assets:
Prepaid expenses	$	—	$	1,171
Long-term assets:
Property and equipment, net of accumulated depreciation of $3,015 and $2,201 at September 30, 2020 and December 31, 2019, respectively		11,554		16,306
Total assets	$	11,554	$	17,477
Current liabilities:
Current portion of long-term debt	$	400	$	368
Long-term liabilities:
Long-term debt		18,373		19,789
Total liabilities	$	18,773	$	20,157

(15)

Commitments and Contingencies

Loss Reserves For Certain Self-Insured Programs

General and Professional Liability and Workers’ Compensation

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. General and professional liability policies are typically written for a duration of 12 months or less and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. Excess insurance policies are typically written for a duration of 12 months or less and are measured on an “occurrence” basis. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

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The Company utilizes a combination of third-party administrators (TPAs), in-house adjusters, and legal counsel, along with systems designed to maintain and process claims to provide it with the data utilized in its assessments of reserve adequacy. Where TPAs are utilized, they operate under the oversight of the Company’s in-house risk management and legal functions. These functions and systems ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

The provision for general and professional liability risks totaled $21.3 million and $56.4 million for the three and nine months ended September 30, 2020, respectively, as compared to $16.1 million and $42.9 million for the three and nine months ended September 30, 2019, respectively. The reserves for general and professional liability, which are recorded on an undiscounted basis, were $382.3 million and $392.8 million as of September 30, 2020 and December 31, 2019, respectively.

The provision for workers’ compensation risks totaled $17.2 million and $54.8 million for the three and nine months ended September 30, 2020, respectively, as compared to $14.0 million and $42.7 million for the three and nine months ended September 30, 2019, respectively. The reserves for loss for workers’ compensation risks were $173.4 million and $160.5 million as of September 30, 2020 and December 31, 2019, respectively. These reserves are discounted based on actuarial estimates of claim payment patterns using a discount rate for the current policy year of 1.6%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $9.3 million and $12.0 million as of September 30, 2020 and December 31, 2019, respectively.

Health Insurance

The Company offers employees an option to participate in self-insured health plans. Health insurance claims are paid as they are submitted to the plans’ administrators. The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid. This accrual for incurred but not yet reported claims was $13.1 million and $15.1 million as of September 30, 2020 and December 31, 2019, respectively. The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets. Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

Select Subcommittee on the Coronavirus Crisis

A U.S. House of Representatives subcommittee, the Select Subcommittee on the Coronavirus Crisis (the Committee), announced an investigation into the ongoing COVID-19 crisis in nursing homes, demanding information from both the federal government and five large operators, including the Company. The Company has provided all requested information. On October 30, 2020, the Committee issued an “Interim Staff Report.”

Legal Proceedings

The Company and certain of its subsidiaries are involved in or have received notice of various investigations, litigation and potential claims related to the COVID-19 pandemic, including inquiries from state and federal agencies; professional liability claims; and employment-related lawsuits and claims. Such claims may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation. The applicability of such protection has not yet been adjudicated in any pending claim against the Company.

While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigation and investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment of materiality may evolve based upon further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available,

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management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment of materiality may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

Lease Guarantees

The Company is subject to lease guaranty agreements on 6 of the facilities leased by the NewGen Partnership, under which it guarantees all payments and performance obligations of the tenants. As of September 30, 2020, the 6 leases have undiscounted cash rent obligations remaining of $86.3 million.

(16)

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and equivalents, restricted investments in marketable securities, accounts receivable, accounts payable and current and long-term debt.

The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance.

Recurring Fair Value Measures

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


	Level 1 —		Quoted prices (unadjusted) in active markets for identical assets or liabilities.
	Level 2 —		Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
	Level 3 —		Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

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(UNAUDITED)

The tables below present the Company’s assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	September 30,		Identical Assets		Observable Inputs		Inputs
Assets:	2020		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	200,995	$	200,995	$	—	$	—
Restricted cash and equivalents		96,543		96,543		—		—
Restricted investments in marketable securities		137,841		43,648		94,193		—
Total	$	435,379	$	341,186	$	94,193	$	—


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
Assets:	2019		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	12,097	$	12,097	$	—	$	—
Restricted cash and equivalents		113,709		113,709		—		—
Restricted investments in marketable securities		136,942		45,903		91,039		—
Total	$	262,748	$	171,709	$	91,039	$	—

The Company places its cash and cash equivalents, restricted cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument. The Company has not experienced any significant losses on such investments. Certain of the Company’s financial instruments have quoted prices but are traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fairly valued using other financial instruments, the parameters of which can be directly observed. These financial instruments have been reported as Level 2 measurements.

Debt Instruments

The table below shows the carrying amounts and estimated fair values, net of debt issuance costs and other non-cash debt discounts and premiums, of the Company’s primary long-term debt instruments (in thousands):


	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Asset based lending facilities	$	278,425	$	278,425	$	412,346	$	412,346
Term loan agreements		207,215		207,215		196,714		196,714
Real estate loans		228,713		228,713		265,700		265,700
HUD insured loans		34,252		34,252		117,117		117,117
Notes payable		102,646		102,646		116,952		116,952
Mortgages and other secured debt (recourse)		6,142		6,142		6,369		6,369
Mortgages and other secured debt (non-recourse)		696,998		696,998		498,222		498,222
	$	1,554,391	$	1,554,391	$	1,613,420	$	1,613,420

The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented. The majority of the Company’s debt instruments contain variable rates that are based upon current market prices, or have been refinanced within the recent past. Consequently, management believes the carrying value of these debt instruments approximates fair value. The Company believes this approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Non-Recurring Fair Value Measures

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test.

The following tables present the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):


			Impairment Charges -
	Carrying Value		Nine months ended
	September 30, 2020		September 30, 2020
Assets:
Property and equipment, net	$	1,018,939	$	7,100
Finance lease right-of-use assets, net		28,635		6,000
Operating lease right-of-use assets		1,817,603		146,100
Intangible assets, net		83,530		—
Goodwill		85,642		—

			Impairment Charges -
	Carrying Value		Nine months ended
	December 31, 2019		September 30, 2019
Assets:
Property and equipment, net	$	962,105	$	10,696
Finance lease right-of-use assets, net		37,097		—
Operating lease right-of-use assets		2,399,505		6,241
Intangible assets, net		87,446		—
Goodwill		85,642		—

The fair value allocation related to the Company’s acquisitions and the fair value of tangible and intangible assets related to the Company’s impairment analysis are determined using a discounted cash flow approach, which is a significant unobservable input (Level 3). The Company estimates the fair value using the income approach (which is a discounted cash flow technique). These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates. The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows.

The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows. The Company believes the estimates and assumptions used in the valuation methods are reasonable.

(17) Subsequent Events

NewGen Partnership

On October 1, 2020, the Company transitioned operational responsibility for 1 additional leased facility in the state of Washington to the NewGen Partnership. The facility generated annual revenues of $12.3 million and pre-tax income of $0.2 million. Subsequent to October 1, 2020, the Company has applied the equity method of accounting for its 50% interest in this operation.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Divestiture of Non-Strategic Facilities

On October 15, 2020, the Company divested the operations of 2 leased skilled nursing facilities in Connecticut that were subject to a master lease. The 2 facilities generated annual revenues of $18.9 million and pre-tax income of $0.1 million. The lease termination resulted in 0 annual rent credit.

On October 30, 2020, the Company sold the real property and divested the operations of 5 owned facilities in Vermont for $46.6 million. Proceeds were used to retire $8.1 million of HUD insured loans and $14.3 million of MidCap Real Estate Loans. The 5 facilities generated annual revenues of $47.4 million and pre-tax loss of $2.7 million.

On November 1, 2020, the Company divested the operations and terminated the lease of 1 skilled nursing facility in Rhode Island. The facility generated annual revenues of $12.3 million and pre-tax income of $0.1 million. The lease termination resulted in an annual rent credit of $0.3 million.

The Company is currently assessing the full impact these divestitures and lease amendments will have on its consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented and should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q. As used in this MD&A, the words “we,” “our,” “us” and the “Company,” and similar terms, refer collectively to Genesis Healthcare, Inc. and its subsidiaries, unless the context requires otherwise. This MD&A should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in our Annual Report (defined below).

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are 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 the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, 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 the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 16, 2020 (the Annual Report), and those discussed in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, particularly in Item 1A, “Risk Factors,” which were filed with the SEC on May 27, 2020 and August 10, 2020, respectively, as well as others that are discussed in this Quarterly Report on Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

Business Overview

Genesis is a healthcare services holding company that, through its subsidiaries, owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business. We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. At September 30, 2020, we provided inpatient services through 360 skilled nursing, senior/assisted living and behavioral health centers located in 25 states. Revenues of our owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of our revenues.

We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% of our revenues.

We provide an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of our revenues.

Going Concern Considerations

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Our primary focus as the effects of COVID-19 began to impact the United States was the health and safety of our patients, residents, employees and their respective families. We implemented various measures to provide the safest possible environment within our sites of service during this pandemic and will continue to do so.

The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the healthcare industry and our businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system across the United States. A significant number of our facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 is having and will likely continue to have a material and adverse effect on our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures.

We performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of our plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:

●

We applied for and received government-sponsored financial relief related to the pandemic;

●

We are utilizing the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;

●

While we vigorously advocate, for ourself and the skilled nursing industry, regarding the need for additional government-sponsored funding, we continue to explore and to take advantage of existing government-sponsored funding programs implemented to support businesses impacted by COVID-19;

●

We continue to seek and implement measures to adapt our operational model to function for the long-term in a COVID-19 environment;

●

We have pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity; and

●

We are exploring and evaluating a number of strategic and other alternatives to manage and to improve our liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.

These measures and other plans and initiatives of ours are designed to provide us with adequate liquidity to meet our obligations for at least the twelve-month period following the date our financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond our control or may not be available on terms acceptable to us, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if we receive additional funding support from government sources and/or are able to execute successfully all of our plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, our operating plans and resulting cash flows together with our cash and cash equivalents and

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other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events and circumstances could force us to seek reorganization under the U.S. Bankruptcy Code.

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.

Significant Transactions and Events

COVID-19

The Centers for Disease Control and Prevention (CDC) has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19. In addition, our employees are at higher risk of contracting or spreading the disease due to the nature of the work environment when caring for patients. In an effort to prevent the introduction of COVID-19 into our facilities, and to help control further exposure to infections within communities, we have implemented policies restricting visitors at all of our facilities except for essential healthcare personnel and certain end-of-life situations. We also implemented policies for screening employees and anyone permitted to enter the building, implemented in-room only dining, activities programming and therapy. Upon confirmation of a positive COVID-19 exposure at a facility, our policy is to follow government guidance to minimize further exposure, including implementing personal protection protocols, restricting new admissions, and isolating patients. Due to the vulnerable nature of our patients, we expect many of these restrictions will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed. Notwithstanding these restrictions and our other response efforts, the virus has had, and likely will continue to have, introduction to, and transmission within, certain facilities due to the easily transmissible nature of COVID-19.

COVID-19 has materially and adversely affected our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures serve to outline the estimated impact of COVID-19 on our business through September 30, 2020, as well as further developments through the filing date of this Quarterly Report on Form 10-Q, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19.

Operations

Our first report of a positive case of COVID-19 in one of our facilities occurred on March 16, 2020. Since that time, 266 of our 360 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 70% of the patient and resident positive COVID-19 cases in our facilities have occurred in the states of New Jersey, Connecticut, Massachusetts, Pennsylvania and Maryland, which correspond to many of the largest community outbreak areas across the country. Our facilities in these five states represent 45% of our total operating beds.

Our occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.

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Net Revenues

Our net revenues for the three and nine months ended September 30, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. Our skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 75.4% for the three months ended September 30, 2020. However, the revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as discussed below. See “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue - COVID-19 Regulatory and Reimbursement Relief.”

After considering a commensurate reduction in related and direct operating expenses, we estimate lost revenue caused by COVID-19 reduced earnings by approximately $71.0 million and $145.0 million for the three and nine months ended September 30, 2020, respectively. The impact of COVID-19 on our occupancy and net revenues for the remainder of 2020 will depend on future developments, which are highly uncertain and cannot be predicted, including the pace of recovery in occupancy, the future scope and severity of COVID-19 and the actions taken by public and private entities in response to the pandemic.

Operating Expenses

Our operating expenses for the three and nine months ended September 30, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the three months and nine months ended September 30, 2020, we estimate we incurred approximately $52.0 million and $205.0 million, respectively, of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs, the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate.

We are not reasonably able to predict the total amount of costs we will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.

Strategic Partnerships

Vantage Point Partnership

On January 10, 2020, Welltower, Inc. (Welltower) sold the real estate of one skilled nursing facility located in Massachusetts to the Vantage Point Partnership. The sale represents the final component of a transaction that occurred on September 12, 2019, whereby we acquired an approximately 30% membership interest in the partnership, which acquired the real estate of 18 facilities previously leased from Welltower and Second Spring Healthcare Investments (Second Spring). As a result of the January 10, 2020 transaction, we will receive an annual rent credit of $0.7 million from Welltower and recorded a gain of $0.2 million as a result of the lease termination. The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million. The consolidation of this additional skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing. We operate all 19 facilities owned by the Vantage Point Partnership.

NewGen Partnership

On February 1, 2020, we transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to a partnership with New Generation Health, LLC (the NewGen Partnership). We sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for $78.7 million. Net transaction proceeds were used by us to repay indebtedness, including prepayment penalties, of $33.7 million, fund our initial 50% equity contribution and working capital requirement of $14.9 million, and provide financing to the partnership of $9.0 million. We recorded a gain on sale of assets and transition of leased facilities of $58.8 million and loss on early extinguishment of

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debt of $1.0 million. Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. We do not hold a controlling financial interest in the NewGen Partnership. As such, we have applied the equity method of accounting for our 50% interest in the NewGen Partnership. Our investment in the NewGen Partnership, $23.9 million, is included within other long-term assets in the consolidated balance sheet as of September 30, 2020.

On May 15, 2020, we transitioned operational responsibility for four additional leased facilities in California to the NewGen Partnership. The four facilities generated annual revenues of $55.0 million and pre-tax loss of $0.5 million.

On October 1, 2020, we transitioned operational responsibility for one additional leased facility in the state of Washington to the NewGen Partnership. The facility generated annual revenues of $12.3 million and pre-tax income of $0.2 million.

Subsequent to the transition of these five facilities, we have applied the equity method of accounting for our 50% interest in these operations.

Cascade Partnership

On July 2, 2020, we sold one facility to an affiliate of Cascade Capital Group, LLC (Cascade) for $26.1 million, using proceeds from the sale to retire U.S. Department of Housing and Urban Development (HUD) financed debt of $10.5 million, pay aggregate prepayment penalties and other closing costs of $1.0 million, and partially fund our investment in a partnership with Cascade (the Cascade Partnership). Cascade also acquired eight facilities that we operated under a master lease agreement with Second Spring. We continue to operate all nine of these facilities subject to a new master lease agreement with affiliates of Cascade. The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of $20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. We also obtained a fixed price option to purchase the nine facilities for $251.6 million that is exercisable from July 2023 through June 2025. We executed a promissory note with Cascade for $20.3 million, which was subsequently converted into a 49% membership interest in the Cascade Partnership. We also hold a subordinated equity interest in the Cascade Partnership of $10.0 million.

The Cascade Partnership is a VIE of which we are the primary beneficiary. Consequently, we have consolidated all of the accounts of the Cascade Partnership in the accompanying financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Cascade Partnership acquired all nine skilled nursing facilities for an aggregate purchase price of $223.6 million. The initial consolidation primarily resulted in property and equipment of $208.6 million, non-recourse debt of $190.3 million, net of debt issuance costs, and noncontrolling interests of $21.2 million. We have not finalized the analysis of the consideration and purchase price allocation and will continue to review this during the measurement period. The net impact of consolidating the Cascade Partnership was not material to the accompanying consolidated statement of operations for the three and nine months ended September 30, 2020.

Divestiture of Non-Strategic Facilities

On January 31, 2020, Omega Healthcare Investors, Inc. (Omega) sold the real estate of one skilled nursing facility located in Massachusetts. We leased the facility under a master lease agreement but closed the facility on July 1, 2019. The sale resulted in a gain on the lease termination of $0.2 million and an annual rent credit of $0.4 million.

On February 1, 2020, we sold two owned skilled nursing facilities in North Carolina and one owned skilled nursing facility in Maryland for $61.8 million. Proceeds were used to retire $29.1 million of U.S. Department of Housing and Urban Development (HUD) financed debt. The three facilities generated revenues of $38.7 million and pre-tax income of $0.5 million. The transactions resulted in a gain on sale of $24.5 million and loss on early extinguishment of debt of $2.6 million.

On February 26, 2020, we completed the sale of one owned HUD-insured skilled nursing facility in California for $20.8 million. The facility had been classified as an asset held for sale as of December 31, 2019. Proceeds were used to retire $20.5 million of HUD financed debt. The facility generated revenues of $14.0 million and pre-tax loss of $0.1 million. See Note 14 – “Assets Held for Sale.” The transactions resulted in a gain on sale of $3.0 million and loss on early extinguishment of debt of $0.4 million.

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On March 4, 2020, we divested the operations of one leased assisted/senior living facility in Montana. The lease termination resulted in an annual rent credit of $0.7 million. The facility generated revenues of $2.5 million and pre-tax income of $0.1 million.

On April 1, 2020, we sold two owned skilled nursing facilities in New Jersey and one owned skilled nursing facility in Maryland for $45.8 million. Proceeds were used to retire $15.2 million of HUD financed debt and $7.5 million of MidCap Real Estate Loans. The three facilities generated annual revenues of $35.8 million and pre-tax income was de minimis. The transactions resulted in a gain on sale of $21.8 million and loss on early extinguishment of debt of $1.4 million.

On April 1, 2020, we divested the operations and terminated the lease of two skilled nursing facilities in Montana. The two facilities generated annual revenues of $18.8 million and pre-tax income of $0.4 million. The lease termination resulted in an annual rent credit of $1.1 million.

On April 20, 2020, we divested the operations of four skilled nursing facilities in Florida and two skilled nursing facilities in Maryland that were subject to a master lease with Second Spring. The six facilities generated annual revenues of $62.0 million and pre-tax loss of $2.3 million. The lease termination resulted in a net annual rent credit of $8.5 million.

On June 1, 2020, we divested the operations of four leased skilled nursing facilities in Idaho that were subject to a master lease with Omega. The four facilities generated annual revenues of $19.5 million and pre-tax income of $0.1 million. The lease termination resulted in an annual rent credit of $1.4 million.

On July 6, 2020, we sold a skilled nursing facility in Rhode Island for $10.5 million, resulting in a gain on sale of $6.1 million. Proceeds were used to retire $5.5 million of MidCap Real Estate Loans. The facility generated annual revenues of $9.9 million and pre-tax income of $0.2 million.

On October 15, 2020, we divested the operations of two leased skilled nursing facilities in Connecticut that were subject to a master lease. The two facilities generated annual revenues of $18.9 million and pre-tax income of $0.1 million. The lease termination resulted no annual rent credit.

On October 30, 2020, we sold the real property and divested the operations of five owned facilities in Vermont for $46.6 million. Proceeds were used to retire $8.1 million of HUD insured loans and $14.3 million of MidCap Real Estate Loans. The five facilities generated annual revenues of $47.4 million and pre-tax loss of $2.7 million.

On November 1, 2020, we divested the operations and terminated the lease of one skilled nursing facility in Rhode Island. The facility generated annual revenues of $12.3 million and pre-tax income of $0.1 million. The lease termination resulted in an annual rent credit of $0.3 million.

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

COVID-19 Regulatory and Reimbursement Relief

On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provided a temporary 6.2% increase to each qualifying state’s Medicaid Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter of the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (HHS), including any extensions or termination, which currently expires January 20, 2021. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporarily increased FMAP is claimed. Further, a number of additional states in which we operate have implemented incremental FMAP related reimbursement provisions and other forms of support to assist providers. For the three and nine months ended September 30, 2020, we recognized as net revenues in the consolidated statements of operations, of approximately $30.0 million and $76.0 million, respectively, of additional FMAP reimbursement relief. We cannot predict the extent to which further FMAP funding programs will be implemented in the states in which we operate.

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compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. The secretary of HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.

Further, the Paycheck Protection Program and Health Care Enhancement Act was signed into law on April 24, 2020. Congress appropriated $75.0 billion for healthcare providers through the Paycheck Protection Program and Health Care Enhancement Act. HHS is distributing this money through the Provider Relief Fund, and these payments do not need to be repaid. While we believe that the relief funds received by us to date under the CARES Act have primarily benefited Medicare providers as opposed to Medicaid providers and have provided limited support to our rehabilitation therapy services segment, we cannot predict the extent to which any of our businesses will receive any such additional funds, and to what extent the financial impact of receiving such funds would effectively offset any shortfall in funds received to date as compared to the escalation in our costs and lost revenue as a result of the broad implications of the pandemic.

We were impacted by certain provisions of the CARES Act, as summarized below.

●

Relief Funds. The CARES Act authorized HHS to distribute relief fund grants to healthcare providers to support healthcare-related expenses or lost revenue attributable to COVID-19. HHS has made several rounds of distributions to providers based upon a variety of factors and providers have been able to apply for additional funding. To retain the funds, providers must submit an attestation accepting certain terms and conditions. During April 2020, we first began receiving relief grants from CARES Act funds administered by HHS. Through September 30, 2020, we have received $190.9 million in these initial relief grants, the majority of which are related to skilled nursing care provided through our Inpatient Services segment.

Approximately $2.5 billion in payments to be used primarily to support increased testing and meet staffing and personal protective equipment needs. During the third quarter of 2020, we received $57.9 million of relief grants under the program.

$250 million of the funds is to be allocated for distribution to “COVID only” facilities.

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Program (CHIP) and dental providers. HHS anticipates distributing approximately $15.0 billion to eligible providers that participate in state Medicaid and CHIP programs that did not receive a payment from the Provider Relief Fund General Allocation (Phase 1). Eligible applicants will receive 2% of Gross Revenues from Patient Care for calendar years 2017, 2018 or 2019 as selected by applicant. We have submitted applications for our assisted living facilities that meet the eligibility criteria.

●

Medicare Accelerated and Advanced Payment Program. During the second quarter of 2020, we applied for and received $156.8 million of interest free advanced Medicare payments. These payments will be subsequently recouped over time as revenue is recognized for claims submitted for services provided to Medicare patients. In October 2020, CMS extended the recoupment period to begin one year from the date the advanced payments were issued. Our recoupment period for the advanced payments is expected to be from April 2021 to February 2022. We have reported advanced payments of $82.4 million and $73.4 million within accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet as of September 30, 2020.

●

Payroll Tax Deferral. Under the CARES Act, we have elected to defer payment, on an interest free basis, of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. We have presented the balance of deferred payroll taxes, $64.7 million, within other long term liabilities in the consolidated balance sheet as of September 30, 2020. We estimate the total payroll tax deferral through December 31, 2020 to approximate $90.0 million.

●

COVID-19 Testing Requirements

Beginning in April 2020, authorities in several states in which we operate began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities. This came after the CDC stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes. On July 22, 2020, CMS announced that nursing homes in states with a 5% or greater positivity rate for COVID-19 will be required to test all nursing home staff each week. On August 26, 2020, CMS issued new parameters for testing, requiring routine monthly testing of all facility staff if the facility’s county positivity rate is less than 5%; weekly testing if the county positivity rate is between 5-10%; and twice weekly testing if the county positivity rate exceeds 10%. These testing requirements are in addition to obligations to screen staff each shift, residents daily, and all persons entering the facility for signs and symptoms of COVID-19. Facilities must test any staff or resident who has signs or symptoms of COVID-19. In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period. In addition to CMS's testing mandates, some states have imposed their own testing requirements for residents and staff. Non-compliance with state or federal mandates may result in imposition of fines or other administrative action, including license revocation.

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COVID-19 Reporting Requirements

On April 19, 2020, CMS announced new regulatory requirements that will require skilled nursing homes to report cases of COVID-19 directly to the CDC. This information must be reported in accordance with existing privacy regulations and statues. In addition, skilled nursing homes are required to inform residents, their families and representatives of COVID-19 cases in their facilities; this notification is required to take place by 5 PM the next calendar day following the occurrence of a single confirmed infection of COVID-19, or of three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another. Further, the CDC provided a reporting tool to skilled nursing homes that will support Federal efforts to collect nationwide data to assist in COVID-19 surveillance and response. There could be civil monetary penalties for not meeting these reporting requirements.

Survey Activity and Enforcement

On March 20, 2020, CMS announced the initiation of focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic. CMS prioritized infection control surveys over annual recertification and complaint surveys at the non-immediate jeopardy level, confirming its commitment to infection prevention and control in the skilled nursing industry. Effective August 17, 2020, CMS provided guidance authorizing resumption of traditional survey activity.

On June 1, 2020, CMS introduced an enhanced enforcement program with respect to infection control deficiencies. The program contemplates more significant remedies against facilities with a prior history of infection control deficiencies, and imposes more stringent penalties with deficiencies identified at a higher scope and severity. The spectrum of remedies available to CMS for imposition on skilled nursing facilities in connection with this enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative penalties.

Independent Commission on Safety and Quality in Nursing Homes

On April 30, 2020, CMS announced that it would be convening an independent commission to conduct comprehensive assessments of nursing home responses to the COVID-19 pandemic. This Commission on Safety and Quality in Nursing Homes (Commission) was intended to identify opportunities for improvement to inform immediate and future actions. On September 16, 2020, the Commission issued its final report and recommendations to CMS. Based upon these recommendations, CMS may implement additional measures to combat COVID-19 in nursing facilities.

Provider Relief Fund Reporting Requirement

On July 20, 2020, HHS informed Provider Relief Fund (PRF) of future reporting requirements. The Secretary of HHS provided directions on reporting obligations in program instructions directed to all recipients. The reporting system became available to recipients for reporting on October 1, 2020. All recipients must report within 45 days of the end of calendar year 2020 on their expenditures through the period ending December 31, 2020. Recipients who have expended funds in full prior to December 31, 2020 must submit a single final report between October 1, 2020 and February 15, 2021. Recipients with funds unexpended after December 31, 2020, must submit a second and final report no later than July 31, 2021.

Provider Relief Fund Single Audit Requirement

HHS indicates that PRF payments will be subject to the Office of Management and Budget Single Audit process, which requires an organization-wide audit of an entity that expends $750,000 or more of federal assistance. The objective of the Single Audit is to provide assurance that federal funds are used appropriately.

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Final Rule - Medicare Annual Market Basket for Fiscal Year 2021

On July 31, 2020, CMS issued a final rule providing a net market basket increase for skilled nursing facilities of 2.2 percent beginning October 1, 2020. This market basket update reflects a full market basket increase of 2.2 percentage points, no forecast error correction and no multifactor productivity adjustment. CMS estimates that the net market basket update would increase Medicare skilled nursing facility payments by approximately $750 million in fiscal year 2021.

Proposed Rule – Physician Fee Schedule

On August 3, 2020, CMS issued a proposed rule to revise payment policies under the Medicare physician fee schedule and makes other policy changes related to Medicare Part B payment on or after January 1, 2021. The revised payment policies, as proposed, would reduce our reimbursement rate for Medicare Part B therapy services and physician services revenues by an estimated $30 million to $40 million on an annualized basis. We are evaluating options to mitigate the impact of the rate reductions should the rule be finalized as proposed.

Medicaid Fiscal Accountability Regulation (MFAR)

In November 2019, CMS issued a proposed rule, the Medicaid Fiscal Accountability Regulation (MFAR), regarding the use of Medicaid supplemental payment programs and financing arrangements. In September 2020, CMS announced that it was withdrawing MFAR from its regulatory agenda.

Key Performance and Valuation Measures

In order to assess our financial performance between periods, we evaluate certain key performance and valuation measures for each of our operating segments separately for the periods presented. Results and statistics may not be comparable period-over-period due to the impact of acquisitions and dispositions, or the impact of new and lost therapy contracts.

The following is a glossary of terms for some of our key performance and valuation measures and Non-GAAP measures:

“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 newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental performance measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, Non-GAAP measures.

“Adjusted EBITDAR” is defined as EBITDAR adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental valuation measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, Non-GAAP measures.

“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.

“EBITDA” is defined as EBITDAR less lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with Non-GAAP measures.

“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. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with Non-GAAP measures.

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“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 and customer value added services by total labor minutes for the period.

Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Financial Results (in thousands)
Financial Performance Measures:
Net revenues (GAAP)	$	938,653	$	1,123,705	$	2,987,162	$	3,430,397
Net (loss) income attributable to Genesis Healthcare, Inc. (GAAP)		(62,793)		46,097		(51,290)		26,015
EBITDA (Non-GAAP)		(37,463)		130,360		98,617		267,138
Adjusted EBITDA (Non-GAAP)		62,178		34,683		164,420		150,552
Valuation Measure:
Adjusted EBITDAR (Non-GAAP)	$	148,425			$	445,082

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INPATIENT SEGMENT:


	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Occupancy Statistics - Inpatient
Available licensed beds in service at end of period		38,073			43,769			38,073			43,769
Available operating beds in service at end of period		36,616			41,912			36,616			41,912
Available patient days based on licensed beds		3,502,716			4,026,748			10,432,861			11,939,391
Available patient days based on operating beds		3,369,354			3,856,927			10,018,532			11,437,918
Actual patient days		2,540,395			3,367,241			8,050,490			10,011,691
Occupancy percentage - licensed beds		72.5	%		83.6	%		77.2	%		83.9	%
Occupancy percentage - operating beds		75.4	%		87.3	%		80.4	%		87.5	%
Skilled mix		16.9	%		17.6	%		17.1	%		18.4	%
Average daily census		27,613			36,600			29,381			36,673
Revenue per patient day (skilled nursing facilities)
Medicare Part A	$	573		$	523		$	571		$	525
Insurance		495			465			493			460
Private and other		365			368			368			367
Medicaid		261			233			258			232
Medicaid (net of provider taxes)		237			213			235			213
Weighted average (net of provider taxes)	$	303		$	277		$	301		$	279
Patient days by payor (skilled nursing facilities)
Medicare		240,485			319,656			781,252			999,535
Insurance		162,034			239,060			506,186			735,736
Total skilled mix days		402,519			558,716			1,287,438			1,735,271
Private and other		140,445			188,157			462,503			545,584
Medicaid		1,835,846			2,425,249			5,793,991			7,150,761
Total Days		2,378,810			3,172,122			7,543,932			9,431,616
Patient days as a percentage of total patient days (skilled nursing facilities)
Medicare		10.1	%		10.1	%		10.4	%		10.6	%
Insurance		6.8	%		7.5	%		6.7	%		7.8	%
Skilled mix		16.9	%		17.6	%		17.1	%		18.4	%
Private and other		5.9	%		5.9	%		6.1	%		5.8	%
Medicaid		77.2	%		76.5	%		76.8	%		75.8	%
Total		100.0	%		100.0	%		100.0	%		100.0	%
Facilities at end of period
Skilled nursing facilities
Leased		241			280			241			280
Owned		14			30			14			30
Joint Venture		70			38			70			38
Managed		12			12			12			12
Total skilled nursing facilities		337			360			337			360
Total licensed beds		40,535			43,712			40,535			43,712
Assisted/Senior living facilities:
Leased		19			21			19			21
Owned		1			1			1			1
Joint Venture		2			1			2			1
Managed		1			1			1			1
Total assisted/senior living facilities		23			24			23			24
Total licensed beds		1,829			1,941			1,829			1,941
Total facilities		360			384			360			384

Total Jointly Owned and Managed— (Unconsolidated)		36			13			36			13

REHABILITATION THERAPY SEGMENT*:


	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Revenue mix %:
Company-operated		33.1	%		35.3	%		33.9	%		35.9	%
Non-affiliated and affiliated third party		66.9	%		64.7	%		66.1	%		64.1	%
Sites of service (at end of period)		1,064			1,185			1,064			1,185
Revenue per site	$	145,360		$	149,357		$	440,170		$	459,411
Therapist efficiency %		65.8	%		67.8	%		67.3	%		68.7	%

* Excludes respiratory therapy services.

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Reasons for Non-GAAP Financial Disclosure

The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). 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. 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 measures used by management and others who follow our industry to estimate the value of our company; 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 two Non-GAAP Financial Measures primarily (EBITDA and Adjusted EBITDA) as performance measures and believe that the GAAP financial measure most directly comparable to these two Non-GAAP Financial Measures is net income (loss) attributable to Genesis Healthcare, Inc. We use one Non-GAAP Financial Measure (Adjusted EBITDAR) as a valuation measure and believe that the GAAP financial measure most directly comparable to this Non-GAAP Financial Measures is net income (loss) attributable to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the value of our business and the 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 value and 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 value and 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. These costs include our lease expense (only in the case of Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses on early extinguishment of debt, transaction costs, long-lived asset

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impairment charges, federal and state income tax expenses, the operating results of our divested businesses and the income or loss attributable to noncontrolling interests. 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) attributable to Genesis Healthcare, Inc. as an important measure of our 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 valuation and operating performance measures:

EBITDA

We believe EBITDA 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 expense) and our asset base (depreciation and amortization expense) from our operating results. In addition, financial covenants in our debt agreements use EBITDA as a measure of compliance.

Adjustments to EBITDA

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

We adjust EBITDA for the following items:

●

Loss (gain) on early extinguishment of debt. We recognize gains or losses on the early extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees. We exclude the effect of gains or losses recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.

●

Other income. We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets. We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.

●

Transaction costs. In connection with our restructuring, acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs. We exclude restructuring, acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses.

●

Long-lived asset impairments. We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing performance of our operating businesses. Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is also excluded from EBITDA.

●

Severance and restructuring. We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment. We believe these costs do not reflect the underlying performance of our operating businesses. We do not exclude severance costs that are not associated with such restructuring activities.

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●

(Income) loss of newly acquired, constructed or divested businesses. Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition. Newly constructed or developed businesses also generate losses while in their start-up phase. We view these losses as both temporary and an expected component of our long-term investment in the new venture. We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business. The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA. The divestiture of underperforming or non-strategic facilities is also an element of our business strategy. We eliminate the results of divested facilities beginning in the quarter in which they become divested. We view the income or losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating business.

●

Stock-based compensation. We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying performance of our operating businesses.

●

Estimated impact of COVID-19. We excluded the net impact of the COVID-19 pandemic on our revenues and expenses for the three and nine months ended September 30, 2020 due to the extraordinary nature of the virus and its impact across the globe. We view the incremental expenses, lost revenue and government relief grants as not indicative of the underlying potential long-term performance of our operating businesses. Our estimate of the pandemic’s impact on earnings for the three and nine months ended September 30, 2020 includes the following components: (1) incremental funding received to address escalating expenses and lost revenue; (2) incremental expenses incurred as a result of the pandemic; and (3) the net impact of lost revenue, after considering a resulting reduction in operating expenses. For the three and nine months ended September 30, 2020, we excluded funding recognized under the CARES Act and additional funding provided by certain states totaling approximately $64.0 million and $298.0 million, respectively. For the three and nine months ended September 30, 2020, we excluded incremental expenses incurred in connection with the COVID-19 pandemic of approximately $52 million and $205 million, respectively. For the three and nine months ended September 30, 2020 we excluded the estimated net impact of lost revenue offset by any resulting reduction in operating expenses, of approximately $71.0 million and $145.0 million, respectively.

●

Other non-recurring income. In the three and nine months ended September 30, 2019, we excluded an insurance recovery and costs related to the hurricane events of fiscal year 2017. We do not believe the excluded costs reflect the performance of our ongoing operating business.

Adjusted EBITDAR

We use Adjusted EBITDAR as one measure in determining the value of our business and the value of prospective acquisitions or divestitures. Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare and other industries. In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of compliance. The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

Supplemental Information

We provide supplemental information about certain capital costs we believe are beneficial to an investor’s understanding of our capital structure and cash flows. This supplemental information includes (1) cash interest payments on our recourse and HUD guaranteed indebtedness (2) cash rent payments made to partially owned real estate joint ventures that is eliminated in consolidation, net of any distributions returned to us, and (3) total cash lease payments made pursuant to operating leases and finance leases.

This supplemental information is used by us to evaluate our leverage, fixed charge coverage and cash flow. This supplemental information is consistent with information used by our major creditors in evaluating compliance with financial covenants contained in our material lease and loan agreements.

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See the reconciliation of net (loss) income attributable to Genesis Healthcare, Inc. to Non-GAAP financial information included herein (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Net (loss) income attributable to Genesis Healthcare, Inc.	$	(62,793)	$	46,097	$	(51,290)	$	26,015
Adjustments to compute EBITDA:
Net (loss) income attributable to noncontrolling interests		(33,137)		12,801		(35,275)		(1,182)
Depreciation and amortization expense		24,373		34,932		84,177		101,395
Interest expense		33,918		37,099		102,065		141,590
Income tax expense (benefit)		176		(569)		(1,060)		(680)
EBITDA	$	(37,463)	$	130,360		98,617		267,138
Adjustments to compute Adjusted EBITDA:
Loss on early extinguishment of debt		1,101		2,460		6,561		2,436
Other income		(53,507)		(131,811)		(182,439)		(172,141)
Transaction costs		15,561		12,941		26,696		23,025
Long-lived asset impairments		72,400		16,037		159,200		16,937
Severance and restructuring		354		2,751		1,055		4,870
Loss (income) of newly acquired, constructed, or divested businesses		2,769		67		(2,481)		2,811
Stock-based compensation		1,599		1,878		5,324		5,713
Estimated impact of COVID-19		59,364		—		51,887		—
Other non-recurring income		—		—		—		(237)
Adjusted EBITDA	$	62,178	$	34,683	$	164,420	$	150,552
Lease expense		86,247		100,018		280,662		288,665
Adjusted EBITDAR	$	148,425			$	445,082
Supplemental information:
Cash interest payments on recourse and HUD debt	$	14,257	$	20,550	$	48,917	$	63,490
Cash payments made to partially owned real estate joint ventures, net of distributions received		14,186		5,610		39,565		9,810
Total cash lease payments made pursuant to operating leases and finance leases	$	85,575	$	100,500	$	269,357	$	314,516

Results of Operations

Same-store Presentation

We define our same-store inpatient operations as those skilled nursing and assisted/senior living centers which have been operated by us, in a steady-state, for each comparable period in this Results of Operations discussion. We exclude from that definition those skilled nursing and assisted/senior living facilities recently acquired that were not operated by us for the entire period, as well as those that were divested prior to or during the most recent period presented. In cases where we are developing new skilled nursing or assisted/senior living centers, those operations are excluded from our “same-store” inpatient operations until the revenue driven by operating patient census is stable in the comparable periods.

Since the nature of our rehabilitation therapy services operations experiences high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of that business, a same-store presentation based solely on the contract or gym count does not provide an accurate depiction of the business. Accordingly, we do not reference same-store figures in this MD&A with regard to that business.

The volume of services delivered in our other services businesses can also be affected by strategic transactional activity. To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion.

Impact of COVID-19 on Results of Operations

The COVID-19 pandemic will impact the comparability of our 2020 financial results with those of other periods. That reduced comparability will be highlighted in the discussion of our results of operations, separate from our same-store presentation. For more information about the COVID-19 pandemic and its impact on our results of operations and financial position, see “COVID-19” described more fully in this MD&A.

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Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

A summary of our unaudited results of operations for the three months ended September 30, 2020 as compared with the same period in 2019 follows (in thousands, except percentages):


	Three months ended September 30,
	2020				2019				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	766,782	81.8	%	$	941,722	83.8	%	$	(174,940)	(18.6)	%
Assisted/Senior living facilities		19,128	2.0	%		23,057	2.1	%		(3,929)	(17.0)	%
Administration of third party facilities		1,835	0.2	%		1,980	0.2	%		(145)	(7.3)	%
Elimination of administrative services		(672)	(0.1)	%		(748)	(0)	%		76	10.2	%
Inpatient services, net		787,073	83.9	%		966,011	86.0	%		(178,938)	(18.5)	%

Rehabilitation therapy services:
Total therapy services		156,706	16.7	%		183,898	16.4	%		(27,192)	(14.8)	%
Elimination of intersegment rehabilitation therapy services		(55,189)	(5.9)	%		(67,598)	(6.0)	%		12,409	18.4	%
Third party rehabilitation therapy services, net		101,517	10.8	%		116,300	10.4	%		(14,783)	(12.7)	%

Other services:
Total other services		73,276	7.8	%		55,532	4.9	%		17,744	32.0	%
Elimination of intersegment other services		(23,213)	(2.5)	%		(14,138)	(1.3)	%		(9,075)	(64.2)	%
Third party other services, net		50,063	5.3	%		41,394	3.6	%		8,669	20.9	%

Net revenues	$	938,653	100.0	%	$	1,123,705	100.0	%	$	(185,052)	(16.5)	%


	Three months ended September 30,
	2020				2019				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	(26,410)	(3.4)	%	$	151,923	15.7	%	$	(178,333)	(117.4)	%
Rehabilitation therapy services		30,731	19.6	%		19,006	10.3	%		11,725	61.7	%
Other services		15,931	21.7	%		8,518	15.3	%		7,413	87.0	%
Corporate and eliminations		(57,715)	—	%		(49,087)	—	%		(8,628)	(17.6)	%
EBITDA	$	(37,463)	(4.0)	%	$	130,360	11.6	%	$	(167,823)	(128.7)	%

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A summary of our unaudited condensed consolidating statement of operations follows (in thousands):



	Three months ended September 30, 2020
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	787,745	$	156,706	$	73,276	$	—	$	(79,074)	$	938,653
Salaries, wages and benefits		375,352		122,134		37,523		—		—		535,009
Other operating expenses		362,212		7,178		19,447		—		(79,173)		309,664
General and administrative costs		—		—		—		45,172		—		45,172
Lease expense		85,245		253		450		299		—		86,247
Depreciation and amortization expense		20,301		1,736		206		2,245		(115)		24,373
Interest expense		15,674		—		10		19,414		(1,180)		33,918
Loss on early extinguishment of debt		—		—		—		1,101		—		1,101
Investment income		—		—		—		(2,137)		1,180		(957)
Other (income) loss		(54,052)		620		(75)		—		—		(53,507)
Transaction costs		—		—		—		15,561		—		15,561
Long-lived asset impairments		72,400		—		—		—		—		72,400
Federal stimulus - COVID-19 other income		(27,002)		(4,210)		—		—		—		(31,212)
Equity in net income of unconsolidated affiliates		—		—		—		(2,310)		(1,052)		(3,362)
(Loss) income before income tax benefit		(62,385)		28,995		15,715		(79,345)		1,266		(95,754)
Income tax expense		—		—		—		176		—		176
Net (loss) income	$	(62,385)	$	28,995	$	15,715	$	(79,521)	$	1,266	$	(95,930)


	Three months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	966,759	$	183,898	$	55,515	$	17	$	(82,484)	$	1,123,705
Salaries, wages and benefits		437,508		152,793		30,192		—		—		620,493
Other operating expenses		394,115		11,779		16,421		—		(82,874)		339,441
General and administrative costs		—		—		—		35,930		—		35,930
Lease expense		98,987		320		384		327		—		100,018
Depreciation and amortization expense		29,263		2,934		176		2,559		—		34,932
Interest expense		12,363		14		9		24,713		—		37,099
Loss on early extinguishment of debt		—		—		—		2,460		—		2,460
Investment income		—		—		—		(2,071)		—		(2,071)
Other income		(131,811)		—		—		—		—		(131,811)
Transaction costs		—		—		—		12,941		—		12,941
Long-lived asset impairments		16,037		—		—		—		—		16,037
Equity in net loss (income) of unconsolidated affiliates		—		—		—		2,932		(3,025)		(93)
Income (loss) before income tax benefit		110,297		16,058		8,333		(79,774)		3,415		58,329
Income tax benefit		—		—		—		(569)		—		(569)
Net income (loss)	$	110,297	$	16,058	$	8,333	$	(79,205)	$	3,415	$	58,898

Net Revenues

Net revenues for the three months ended September 30, 2020 decreased by $185.1 million, or 16.5%, as compared with the three months ended September 30, 2019.

Inpatient Services – Revenue decreased $178.9 million, or 18.5%, in the three months ended September 30, 2020 as compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, inpatient services revenue decreased $42.3 million, or 5.1%, excluding 65 divested underperforming facilities and the acquisition or development of one additional facilities. The same-store revenue decrease is net of $16.8 million related to a new provider tax program in the state of New Mexico, which was not in place for the corresponding period in 2019 and an additional increase of $10.7 million in the three months ended September 30, 2020 is attributed to the transition from the resource utilization group based reimbursement to the Patient-Driven Payment Model (PDPM) reimbursement methodology in the fourth quarter of fiscal 2019. Giving effect to these factors, we estimate the remaining same-store inpatient revenue decrease of $69.8 million in the three months ended September 30, 2020 compared with the same period in 2019 is due to the impact of COVID-19, partially offset by increasing payor rates, primarily in our Medicaid population, reflecting a trend that was observed before COVID-19 impacted our operations. While census was adversely impacted by admission holds and declining in-house census as the pandemic progressed, average payor rates increased as acuity of the in-house census increased with treatment of the population testing positive for the virus. COVID-19,

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has, and will likely continue to disrupt this favorable overall census trend and may have an unpredictable impact on the skilled mix of our inpatient facilities as a result of the temporary change to patient coverage criteria.

For an expanded discussion regarding the factors influencing our operating census and challenges to our ability to grow inpatient service revenues, see Item 1, “Business – Industry Trends” in our Annual Report on Form 10-K filed with the SEC, “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day as well as “COVID-19” in this MD&A.

Rehabilitation Therapy Services – Revenue decreased $14.8 million, or 12.7% comparing the three months ended September 30, 2020 with the same period in 2019. Of that decrease, $14.9 million is due to lost contract business, offset by $7.3 million attributed to new contracts. COVID-19 began to impact the skilled nursing customers of our rehabilitation services at an accelerating rate by March 2020 and continuing through September 30, 2020, resulting in a decrease of revenue of $2.2 million in the three months ended September 30, 2020 as compared with the same period in 2019. The remaining decrease of $5.0 million is principally due to reduced volume of services provided to existing customers and amended customer pricing terms in connection with the implementation of PDPM.

Other Services – Revenue increased $8.7 million, or 20.9% in the three months ended September 30, 2020 as compared with the same period in 2019. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our Accountable Care Organization (ACO). In the three months ended September 30, 2020 and 2019, the ACO recognized $13.5 million and $8.7 million, respectively under the Medicare Shared Savings Program (MSSP). The MSSP recognition in the three months ended September 30, 2020 included $10.3 million related to the 2019 MSSP program and an estimated 2020 program achievement to date of $3.2 million. Revenue in our physician services business decreased $2.3 million in the three months ended September 30, 2020 as compared with the same period in 2019, all of which is attributed to reduced census volumes from the impact of COVID-19 on the inpatient business. Revenue in our staffing services business increased $3.1 million in the three months ended September 30, 2020 as compared with the same period in 2019. The staffing services business has shifted its focus to developing its services to our affiliated nursing facilities and therapy gyms. While the staffing business gross revenue has increased over 44% in the three months ended September 30, 2020 as compared with the same period in 2019, its revenue from external customers has only increased 12.5% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business and will enable our organization to meet the evolving demands of post-acute care in light of the COVID-19 impact on our various lines of business. The remaining increase in revenue of $3.1 million pertains to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental revenue in three months ended September 30, 2019.

EBITDA

EBITDA for the three months ended September 30, 2020 decreased by $167.8 million, or 128.7%, as compared with the three months ended September 30, 2019. Excluding the impact of loss on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments and Federal Stimulus – COVID-19 other income, EBITDA decreased $63.1 million, or 210.4% when compared with the same period in 2019. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased by $178.3 million, or 117.4% for the three months ended September 30, 2020 as compared with the same period in 2019. Excluding the impact of other (income) loss, long-lived asset impairments and Federal Stimulus – COVID-19 other income, EBITDA as adjusted decreased $71.2 million when compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, the inpatient EBITDA as adjusted decreased $64.1 million. Same-store staffing costs, net of nursing agency and other purchased services and adjusted for the impact of COVID-19, increased $11.9 million. Wages and purchased services include supplemental premium pay rates and bonuses to insure we could attract adequate staff to address our clinical needs during the pandemic. Nursing wage inflation increased 11.0% while non-nursing wage inflation increased 6.8% in the three months ended September 30, 2020 as compared with the same period in 2019. Same-store lease expense decreased $10.7 million, primarily due to lease amendments in 2019 resulting in certain financing leases being reclassified as operating leases. Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in a decrease of $17.2 million EBITDA as adjusted in the three months ended September 30, 2020 as compared with the same period in 2019. The provision for workers compensation specific to COVID-19 exposure risk accounts for most of this self-insurance decrease to EBITDA, with an incremental $12.4 million expensed

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in the 2020 period. Prior to the COVID-19 pandemic our self-insurance programs were performing as anticipated and within normal claims reporting patterns of our same-store operations recently. The provisions for general and professional liability recorded in both the three months ended September 30, 2020 and the comparable period in 2019 reflect continued favorable claims development and accelerated claims settlement initiated in 2018. We have not changed our reserving methodology or assumptions for any COVID-19 specific professional liability exposures. Our self-insured health benefit plans have seen reduced expenses principally due to other medical care settings limiting non-emergency services during the COVID-19 pandemic, however, we anticipate those deferred procedures will impact expense over the remainder of fiscal year 2020. The introduction of the new provider tax program in New Mexico resulted in an increase of EBITDA of $12.5 million compared to the same period in 2019 before the program was enacted. The remaining $58.2 million decrease in EBITDA, as adjusted, of the segment is principally due to the negative affects COVID-19 has had on our business, partially offset with reduced therapy services cost due to the implementation of PDPM. See “Significant Transactions and Events – COVID-19.”

Rehabilitation Therapy Services – EBITDA increased by $11.7 million, or 61.7%, for the three months ended September 30, 2020 as compared with the same period in 2019. Excluding the impact of Federal Stimulus – COVID-19 other income, EBITDA as adjusted increased $8.1 million when compared with the same period in 2019. Lost therapy contracts exceeded new contracts by $1.9 million in the three months ended September 30, 2020 as compared with the same period in 2019. COVID-19 resulted in a decrease of EBITDA of $0.2 million in the three months ended September 30, 2020. The remaining increase of $9.8 million is principally attributed to overhead cost reductions and improved accounts receivable collections in the period. Therapist efficiency was negatively impacted by the impact of COVID-19, decreasing to 65.8% in the three months ended September 30, 2020 compared with 67.8% in the comparable period in the prior year. This decline in therapist efficiency is expected to be temporary as we have adjusted staffing and service models to address the clinical needs of our skilled nursing customers impacted by COVID-19.

Other Services — EBITDA increased $7.4 million, or 87.0%, for the three months ended September 30, 2020 as compared with the same period in 2019. The EBITDA of our ACO increased $6.5 million in the three months ended September 30, 2020 as compared with the same period in 2019. In the 2020 period, we recognized $10.3 million for the 2019 program performance based on actual results achieved and an estimated $3.2 million for the 2020 program. The EBITDA of our staffing services business decreased $0.7 million in the three months ended September 30, 2020 as compared with the same period in 2019, principally due to reduced pricing in its services with affiliated customers, partially offset with increased volumes with those affiliated customers. The EBITDA of our physician services business decreased $1.6 million. The physician services business has been negatively impacted by COVID-19 reducing patient encounters due to reduced skilled nursing census across the industry and increased costs to support practitioners. The remaining increase in EBITDA of $3.2 million principally relates to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental income in three months ended September 30, 2019.

Corporate and Eliminations — EBITDA decreased $8.6 million, or 17.6%, for the three months ended September 30, 2020 as compared with the same period in 2019. EBITDA of our corporate function includes loss on early extinguishment of debt and losses associated with transactions that are outside of the scope of our reportable segments. These and other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $1.3 million of the net decrease in EBITDA. Corporate overhead costs increased $9.2 million, or 25.7%, in the three months ended September 30, 2020 as compared with the same period in 2019. This increase is principally due to investments in information technology and related upgrades and incremental performance based incentive compensation.

Other (income) loss — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other (income) loss for the three months ended September 30, 2020 principally represents gains on sales of real estate and leasehold rights in the period. See also Note 12 – “Other Income.”

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the three months ended September 30, 2020 and 2019 were $15.6 million and $12.9 million, respectively.

Long-lived asset impairments — In the three months ended September 30, 2020 and 2019, we recognized impairments of property and equipment and right-of-use (ROU) assets of $72.4 million and $16.0 million, respectively. For more information about

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the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 13 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

Federal stimulus – COVID 19 – other income – During the three months ended September 30, 2020, we recognized $31.2 million of relief grants from CARES Act funds administered by the HHS. The grants are primarily related to the skilled nursing care provided through our Inpatient Services segment. Grants received are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for health care related expenses, including cost of infection control, or lost revenues that are attributable to COVID-19. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act.

Other Expense

The following discussion applies to the consolidated expense categories between EBITDA and net (loss) income of all reportable segments, corporate and eliminations in our consolidating statement of operations for the three months ended September 30, 2020 as compared with the same period in 2019.

Depreciation and amortization — Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance lease ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $10.6 million in the three months ended September 30, 2020 as compared with the same period in 2019. On a same-store basis, depreciation and amortization decreased $11.3 million in the three months ended September 30, 2020 as compared with the same period in 2019. This decrease is principally due to acceleration of depreciation of assets sold into real estate joint ventures in the prior year quarter and reductions in the amortization of the right to use assets of our remaining leases in our inpatient services segment.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases. Interest expense decreased $3.2 million in the three months ended September 30, 2020 as compared with the same period 2019. On a same-store basis, interest expense is down $0.7 million in the three months ended September 30, 2020 as compared with the same period in 2019. An increase of $4.7 million of interest expense is attributed to consolidating debt and the associated interest expense of two real-estate partnerships in 2019, which were determined to be variable interest entities (VIEs) of which we are the primary beneficiary. See Note 1 – “General Information – Basis of Presentation” and Note 9 – “Long-Term Debt.” Cash interest decreased $4.6 million in the three months ended September 30, 2020 as compared with the same period in 2019 as a result of a reduction in outstanding borrowings under our revolving credit facility, primarily due to the timing of the Medicare Advance payments received and other phases of the CARES Act relief funding. Borrowing levels are expected to increase over the period the Medicare Advance is expected to be recouped from April 2021 through February 2022. The remaining decrease in same-store interest expense of $0.8 million is principally due to lease amendments entered in 2019 and early 2020 that resulted in modifications to the accounting for certain leases, converting them from financing leases with interest expense to operating leases presented as lease expense.

Income tax expense (benefit) — For the three months ended September 30, 2020, we recorded income tax expense of $0.2 million from continuing operations representing an effective tax rate of (0.2)% compared to an income tax benefit of $0.6 million from continuing operations, representing an effective tax rate of (1.0)% for the same period in 2019. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of September 30, 2020, we have determined that the valuation allowance is still necessary.

Net (Loss) Income Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between net (loss) income and net (loss) income attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the three months ended September 30, 2020 as compared with the same period in 2019.

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Net (loss) income attributable to noncontrolling interests — On February 2, 2015, FC-GEN Operations Investment, LLC (FC-GEN) combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 9.0 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 32.9%. For the three months ended September 30, 2020 and 2019, (loss) income of $(31.5) million and $19.9 million, respectively, has been attributed to the Class C common stock.

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the three months ended September 30, 2020 and 2019, loss of $(1.6) million and $(7.1) million, respectively, has been attributed to these unaffiliated third parties.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

A summary of our unaudited results of operations for the nine months ended September 30, 2020 as compared with the same period in 2019 follows (in thousands, except percentages):


	Nine months ended September 30,
	2020				2019				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	2,493,616	83.5	%	$	2,888,659	84.1	%	$	(395,043)	(13.7)	%
Assisted/Senior living facilities		60,991	2.0	%		70,408	2.1	%		(9,417)	(13.4)	%
Administration of third party facilities		5,986	0.2	%		6,281	0.2	%		(295)	(4.7)	%
Elimination of administrative services		(2,242)	(0.1)	%		(2,347)	(0.1)	%		105	4.5	%
Inpatient services, net		2,558,351	85.6	%		2,963,001	86.3	%		(404,650)	(13.7)	%

Rehabilitation therapy services:
Total therapy services		475,127	15.9	%		571,875	16.7	%		(96,748)	(16.9)	%
Elimination of intersegment rehabilitation therapy services		(171,617)	(5.7)	%		(213,800)	(6.2)	%		42,183	19.7	%
Third party rehabilitation therapy services, net		303,510	10.2	%		358,075	10.5	%		(54,565)	(15.2)	%

Other services:
Total other services		199,058	6.7	%		143,139	4.2	%		55,919	39.1	%
Elimination of intersegment other services		(73,757)	(2.5)	%		(33,818)	(1.0)	%		(39,939)	(118.1)	%
Third party other services, net		125,301	4.2	%		109,321	3.2	%		15,980	14.6	%

Net revenues	$	2,987,162	100.0	%	$	3,430,397	100.0	%	$	(443,235)	(12.9)	%


	Nine months ended September 30,
	2020				2019				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	142,238	5.6	%	$	313,045	10.6	%	$	(170,807)	(54.6)	%
Rehabilitation therapy services		79,860	16.8	%		71,360	12.5	%		8,500	11.9	%
Other services		24,998	12.6	%		9,444	6.6	%		15,554	164.7	%
Corporate and eliminations		(148,479)	—	%		(126,711)	—	%		(21,768)	(17.2)	%
EBITDA	$	98,617	3.3	%	$	267,138	7.8	%	$	(168,521)	(63.1)	%

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A summary of our unaudited condensed consolidating statement of operations follows (in thousands):


	Nine months ended September 30, 2020
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,560,593	$	475,127	$	199,058	$	—	$	(247,616)	$	2,987,162
Salaries, wages and benefits		1,237,570		378,687		116,229		—		—		1,732,486
Other operating expenses		1,132,321		24,440		58,623		—		(247,965)		967,419
General and administrative costs		—		—		—		124,558		—		124,558
Lease expense		277,506		878		1,380		898		—		280,662
Depreciation and amortization expense		71,479		5,099		612		7,140		(153)		84,177
Interest expense		42,069		27		29		63,480		(3,540)		102,065
Loss on early extinguishment of debt		—		—		—		6,561		—		6,561
Investment income		—		—		—		(6,614)		3,540		(3,074)
Other (income) loss		(183,265)		621		205		—		—		(182,439)
Transaction costs		—		—		—		26,696		—		26,696
Long-lived asset impairments		159,200		—		—		—		—		159,200
Federal stimulus - COVID-19 other income		(204,977)		(9,359)		(2,377)		—		—		(216,713)
Equity in net income of unconsolidated affiliates		—		—		—		(6,419)		(392)		(6,811)
Income (loss) before income tax benefit		28,690		74,734		24,357		(216,300)		894		(87,625)
Income tax benefit		—		—		—		(1,060)		—		(1,060)
Net income (loss)	$	28,690	$	74,734	$	24,357	$	(215,240)	$	894	$	(86,565)


	Nine months ended September 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,965,348	$	571,875	$	142,905	$	234	$	(249,965)	$	3,430,397
Salaries, wages and benefits		1,336,298		464,740		88,024		—		—		1,889,062
Other operating expenses		1,185,684		34,866		44,312		—		(250,355)		1,014,507
General and administrative costs		—		—		—		107,024		—		107,024
Lease expense		285,510		985		1,064		1,106		—		288,665
Depreciation and amortization expense		83,463		9,210		524		8,198		—		101,395
Interest expense		68,454		41		26		73,069		—		141,590
Loss on early extinguishment of debt		—		—		—		2,436		—		2,436
Investment income		—		—		—		(6,078)		—		(6,078)
Other (income) loss		(172,126)		(76)		61		—		—		(172,141)
Transaction costs		—		—		—		23,025		—		23,025
Long-lived asset impairments		16,937		—		—		—		—		16,937
Equity in net loss (income) of unconsolidated affiliates		—		—		—		4,318		(4,496)		(178)
Income (loss) before income tax benefit		161,128		62,109		8,894		(212,864)		4,886		24,153
Income tax benefit		—		—		—		(680)		—		(680)
Net income (loss)	$	161,128	$	62,109	$	8,894	$	(212,184)	$	4,886	$	24,833

Net Revenues

Net revenues for the nine months ended September 30, 2020 decreased by $443.2 million, or 12.9%, as compared with the nine months ended September 30, 2019.

Inpatient Services – Revenue decreased $404.7 million, or 13.7%, in the nine months ended September 30, 2020 as compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, inpatient services revenue decreased $29.0 million, or 1.1%, excluding 88 divested underperforming facilities and the acquisition or development of two additional facilities. The same-store revenue increase is net of $35.6 million related to a new provider tax program in the state of New Mexico, which was not in place for the corresponding period in 2019 and an additional $30.6 million of the increase in the nine months ended September 30, 2020 is attributed to the transition from the resource utilization group based reimbursement to the Patient-Driven Payment Model (PDPM) reimbursement methodology in the fourth quarter of fiscal 2019. Giving effect to these factors, we estimate the remaining same-store inpatient revenue decrease of $95.2 million in the nine months ended September 30, 2020 compared with the same period in 2019 is due to the impact of COVID-19, partially offset by increasing payor rates, primarily in our Medicaid population, reflecting a trend that was observed before COVID-19 impacted our operations. While census was adversely impacted by admission holds and declining in-house census as the pandemic progressed, average payor rates increased as acuity of the in-house census increased with treatment of the population testing positive for the virus. COVID-19,

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Rehabilitation Therapy Services – Revenue decreased $54.6 million, or 15.2% comparing the nine months ended September 30, 2020 with the same period in 2019. Of that decrease, $32.6 million is due to lost contract business, offset by $14.0 million attributed to new contracts. COVID-19 began to impact the skilled nursing customers of our rehabilitation services at an accelerating rate by March 2020 and continued through September 30, 2020, resulting in a decrease of revenue of $14.1 million in the nine months ended September 30, 2020 as compared with the same period in 2019. The remaining decrease of $21.9 million is principally due to reduced volume of services provided to existing customers and amended customer pricing terms in connection with the implementation of PDPM.

Other Services – Revenue increased $16.0 million, or 14.6% in the nine months ended September 30, 2020 as compared with the same period in 2019. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO. In the nine months ended September 30, 2020 and 2019, the ACO recognized $13.5 million and $8.7 million, respectively under the Medicare Shared Savings Program (MSSP). The MSSP recognition in the nine months ended September 30, 2020 included $10.3 million related to the 2019 MSSP program and an estimated 2020 program achievement to date of $3.2 million. Revenue in our physician services business decreased $1.2 million in the nine months ended September 30, 2020 as compared with the same period in 2019, all of which is attributed to reduced census volumes from the impact of COVID-19 on the inpatient business. Revenue of our staffing services business increased $5.7 million in the nine months ended September 30, 2020 as compared with the same period in 2019. The staffing services business has shifted its focus to developing its services to our affiliated nursing facilities and therapy gyms. While the staffing business gross revenue has increased over 58% in the nine months ended September 30, 2020 as compared with the same period in 2019, its revenue from external customers has only increased 12.5% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and will enable our organization to meet the evolving demands of post-acute care in light of the COVID-19 impact on our various lines of business. The remaining increase in revenue of $6.7 million principally pertains to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental revenue in nine months ended September 30, 2019.

EBITDA

EBITDA for the nine months ended September 30, 2020 decreased by $168.5 million, or 63.1%, as compared with the nine months ended September 30, 2019. Excluding the impact of loss on early extinguishment of debt, other (income) loss, transaction costs and long-lived asset impairments, EBITDA decreased $245.5 million, or 178.7% when compared with the same period in 2019. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased by $170.8 million, or 54.6% for the nine months ended September 30, 2020 as compared with the same period in 2019. Excluding the impact of other (income) loss, long-lived asset impairments and Federal Stimulus – COVID-19 other income, EBITDA as adjusted decreased $244.7 million, or 155.0% when compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, the inpatient EBITDA as adjusted decreased $217.0 million. Same-store staffing costs, net of nursing agency and other purchased services and adjusted for the impact of COVID-19, increased $141.3 million. Wages and purchased services include supplemental premium pay rates and bonuses to insure we could attract adequate staff to address our clinical needs during the pandemic. Nursing wage inflation increased 14.6% while non-nursing wage inflation increased 7.7% in the nine months ended September 30, 2020 as compared with the same period in 2019. Same-store lease expense decreased $4.5 million, primarily due to lease amendments in 2019 resulting in certain financing leases being reclassified as operating leases. Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in a decrease of $37.6 million EBITDA as adjusted in the nine months ended September 30, 2020 as compared with the same period in 2019. The provision for workers compensation specific to COVID-19 exposure risk accounts for most of this self-insurance decrease to EBITDA, with an incremental $37.4 million expensed in the 2020 period. Prior to the COVID-19 pandemic our self-insurance programs were performing as anticipated and

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within normal claims reporting patterns of our same-store operations recently. The provisions for general and professional liability recorded in both the nine months ended September 30, 2020 and the comparable period in 2019 reflect continued favorable claims development and accelerated claims settlement initiated in 2018. We have not changed our reserving methodology or assumptions for any COVID-19 specific professional liability exposures. Our self-insured health benefit plans have seen reduced expenses principally due to other medical care settings limiting non-emergency services during the COVID-19 pandemic, however, we anticipate those deferred procedures will impact expense over the remainder of fiscal year 2020. The introduction of the new provider tax program in New Mexico resulted in an increase of EBITDA of $22.9 million compared to the same period in 2019 before the program was enacted. The remaining $65.5 million decrease in EBITDA, as adjusted, of the segment is principally due to the negative affects COVID-19 has had on our business, partially offset with reduced therapy services cost due to the implementation of PDPM. See “Significant Transactions and Events – COVID-19.”

Rehabilitation Therapy Services – EBITDA increased by $8.5 million, or 11.9%, for the nine months ended September 30, 2020 as compared with the same period in 2019. Excluding the impact of Federal Stimulus – COVID-19 other income, EBITDA as adjusted decreased $0.2 million when compared with the same period in 2019. Lost therapy contracts exceeded new contracts by $5.5 million in the nine months ended September 30, 2020 as compared with the same period in 2019. COVID-19 resulted in a decrease of EBITDA of $4.3 million in the nine months ended September 30, 2020. The remaining increase of $9.6 million is principally attributed to reduced overhead costs. Therapist efficiency declined to 67.3% in the nine months ended September 30, 2020 compared with 68.7% in the comparable period in the prior year. This decline in therapist efficiency is expected to be temporary as we have adjusted staffing and service models to address the clinical needs of our skilled nursing customers impacted by COVID-19.

Other Services — EBITDA increased $15.6 million, or 164.7%, for the nine months ended September 30, 2020 as compared with the same period in 2019. Excluding the impact of Federal Stimulus – COVID-19 other income, EBITDA as adjusted increased $13.3 million when compared with the same period in 2019. The EBITDA of our ACO increased $5.9 million in the three months ended September 30, 2020 as compared with the same period in 2019. In the 2020 period, we recognized $10.3 million for the 2019 program performance based on actual results achieved and an estimated $3.2 million for the 2020 program. The EBITDA of our staffing services business increased $2.4 million in the nine months ended September 30, 2020 as compared with the same period in 2019, principally due to growth in its services with affiliated customers, partially offset with pricing reductions to those affiliated customers. The EBITDA of our physician services business decreased $1.9 million. The physician services business has been negatively impacted by COVID-19 reducing patient encounters due to reduced skilled nursing census across the industry and increased costs to support practitioners. The remaining increase in EBITDA of $6.9 million principally relates to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental income in three months ended September 30, 2019.

Corporate and Eliminations — EBITDA decreased $21.8 million, or 17.2%, for the nine months ended September 30, 2020 as compared with the same period in 2019. EBITDA of our corporate function includes loss on early extinguishment of debt and losses associated with transactions that are outside of the scope of our reportable segments. These and other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $7.8 million of the net decrease in EBITDA. Corporate overhead costs, net of fee income, increased $17.5 million, or 16.4%, in the three months ended September 30, 2020 as compared with the same period in 2019. This increase is principally due to investments in information technology and related upgrades. The remaining increase in EBITDA of $3.5 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

Other (income) loss — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other (income) loss for the nine months ended September 30, 2020 principally represents gains on sales of real estate and leasehold rights in the period. See also Note 12 – “Other Income.”

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the nine months ended September 30, 2020 and 2019 were $26.7 million and $23.0 million, respectively.

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Long-lived asset impairments — In the nine months ended September 30, 2020, we recognized impairments of property and equipment and right-of-use (ROU) assets of $159.2 million. For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 13 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

Federal stimulus – COVID 19 – other income – During the nine months ended September 30, 2020 we recognized $216.7 million of relief grants from CARES Act funds administered by HHS. The grants are primarily related to the skilled nursing care provided through our Inpatient Services segment. Grants received are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for health care related expenses, including costs of infection control, or lost revenues that are attributable to COVID-19. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act.

Other Expense

The following discussion applies to the consolidated expense categories between EBITDA and net income (loss) of all reportable segments, corporate and eliminations in our consolidating statement of operations for the nine months ended September 30, 2020 as compared with the same period in 2019.

Depreciation and amortization — Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance lease ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $17.2 million in the nine months ended September 30, 2020 as compared with the same period in 2019. On a same-store basis, depreciation and amortization decreased $21.8 million in the nine months ended September 30, 2020 as compared with the same period in 2019. In the inpatient services segment, $9.9 million of the decrease is principally due reduction in the amortization of right to use assets in our continuing lease portfolio, with the remaining $11.9 million reduction principally due to prior year acceleration related to multiple lease transactions.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases. Interest expense decreased $39.5 million in the nine months ended September 30, 2020 as compared with the same period 2019. On a same-store basis, interest expense is down $27.4 million in the nine months ended September 30, 2020 as compared with the same period in 2019. An increase of $16.8 million of interest expense is attributed to consolidating debt and the associated interest expense of two real-estate partnerships in 2019, which were determined to be variable interest entities (VIEs) of which we are the primary beneficiary. See Note 1 – “General Information – Basis of Presentation” and Note 9 – “Long-Term Debt.” Cash interest decreased $9.5 million in the nine months ended September 30, 2020 as compared with the same period in 2019 as a result of a reduction in outstanding borrowings under our revolving credit facility, primarily due to the timing of the Medicare Advance payments received in addition to other phases of CARES Act relief funding. Borrowing levels are expected to increase over the period the Medicare Advance is required to be recouped in 2021. The remaining decrease in interest expense of $34.7 million is principally due to lease amendments entered in 2019 and early 2020 that resulted in modifications to the accounting for certain leases, converting them from financing leases with interest expense to operating leases presented as lease expense.

Income tax benefit — For the nine months ended September 30, 2020, we recorded income tax benefit of $1.1 million from continuing operations representing an effective tax rate of 1.2% compared to an income tax benefit of $0.7 million from continuing operations, representing an effective tax rate of (2.8)% for the same period in 2019. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of September 30, 2020, we have determined that the valuation allowance is still necessary.

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Net (Loss) Income Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between net income (loss) and net income (loss) attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the nine months ended September 30, 2020 as compared with the same period in 2019.

Net (loss) income attributable to noncontrolling interests — On February 2, 2015, FC-GEN Operations Investment, LLC (FC-GEN) combined with Skilled Healthcare Group, Inc. and the combined results were consolidated with approximately 42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 9.0 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 32.9%. For the nine months ended September 30, 2020 and 2019, (loss) income of $(32.1) million and $7.7 million, respectively, has been attributed to the Class C common stock.

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the nine months ended September 30, 2020 and 2019, loss of $(3.1) million and ($8.9) million, respectively, has been attributed to these unaffiliated third parties.

Liquidity and Capital Resources

Cash Flow and Liquidity

The following table presents selected data from our consolidated statements of cash flows (in thousands):


	Nine months ended September 30,
	2020		2019
Net cash provided by operating activities	$	281,158	$	15,758
Net cash used in investing activities		(45,574)		(393,034)
Net cash (used in) provided by financing activities		(63,852)		363,069
Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents		171,732		(14,207)
Beginning of period		125,806		142,276
End of period	$	297,538	$	128,069

Net cash provided by operating activities in the nine months ended September 30, 2020 increased $265.4 million compared with the same period in 2019. The nine months ended September 30, 2020 include receipt of Medicare advances of $155.8 million and $64.7 million from the deferral of payroll taxes under the CARES Act. The remaining increase in cash provided by operating activities is attributed to a combination of state and federal COVID-19 grants, offset by the cost and lost revenue caused by COVID-19 and the timing of payments.

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Net cash used in investing activities in the nine months ended September 30, 2020 was $45.6 million compared to net cash used in investing activities of $393.0 million in the nine months ended September 30, 2019. Routine capital expenditures for the nine months ended September 30, 2020 decreased by $5.0 million as compared with the same period in the prior year. Net sales and maturities of marketable securities of $0.8 million in 2020 was less than net sales of marketable securities of $8.8 million in 2019, resulting in a net reduction in cash provided of $8.0 million. In the nine months ended September 30, 2020, there were asset purchases of $207.3 million primarily as a result of the acquisition of eight skilled nursing facilities by the consolidated Cascade Partnership and one skilled nursing facility by the consolidated Vantage Point Partnership as described in “Significant Transaction and Events” compared to asset sales of $218.6 million comprised primarily of the real property of 14 owned facilities and leasehold rights of 13 leased facilities described in “Significant Transaction and Events”. In the nine months ended September 30, 2019, there were asset purchases of $252.5 million by the consolidated Next Partnership and its acquisition of 22 skilled nursing facilities and asset sale proceeds of $79.0 million resulting from the simultaneous sale of seven skilled nursing facilities. Also in the nine months ended September 30, 2019, there were asset purchases of $339.2 million as a result of the consolidation of the Vantage Point Partnership and its acquisition of 18 skilled nursing facilities. The nine months ended September 30, 2019 also included $66.9 million in proceeds from the sale of seven facilities in California as well as $91.7 million in proceeds from the sale of eight facilities in Georgia, New Jersey, Virginia and Maryland. The nine months ended September 30, 2020 provided cash of $12.9 million on the receipt of restricted deposits compared to payments of restricted deposits of $1.2 million in the same period in the prior year. The nine months ended September 30, 2020 included cash used of $16.9 million for an investment in a new joint venture and cash used of $9.0 million extending the new joint venture a loan as described in “Significant Transaction and Events.” The remaining incremental use of cash in the nine months ended September 30, 2020 as compared to the same period in the prior year of $3.1 million was due primarily to notes receivable activity.

Net cash used in financing activities in the nine months ended September 30, 2020 was $63.9 million compared to net cash provided by financing activities of $363.1 million in the September 30, 2019. The net increase in cash used in financing activities of $426.9 million is principally attributed to debt repayments exceeding new borrowings in the nine months ended September 30, 2020 as compared to the same period in 2019. In the nine months ended September 30, 2020, we had proceeds from the issuance of debt of $227.9 million, consisting primarily of $193.5 million by the consolidated Cascade Partnership, $7.3 million by the consolidated Vantage Point Partnership and $26.1 million in HUD refinancings by our consolidated Next Partnership. In the nine months ended September 30, 2019, we had proceeds from the issuance of debt of $480.9 million primarily resulting from the consolidation of the Next Partnership and Vantage Point Partnership. Repayment of long-term debt in the nine months ended September 30, 2020 was $167.5 million compared to $133.9 million in the same period of the prior year. In the nine months ended September 30, 2020, we repaid $85.0 million in HUD-insured loans, $27.0 million in MidCap Real Estate Loans, $9.1 million in Welltower Real Estate Loans, $15.0 million in a short-term note payable and $24.5 million in term loan paydowns associated with the consolidated Next Partnership. In the nine months ended September 30, 2019, we repaid $39.8 million in MidCap Real Estate Loans and $42.2 million in HUD-insured loans using proceeds from the sale of 12 facilities and reduced the term loan facility of the ABL Credit Facilities by $40.0 million while increasing the revolving credit facilities by the same amount. The remaining decrease in cash used to repay long-term debt of $5.2 million relates to a decrease in routine debt payments. In the nine months ended September 30, 2020, we had net repayments under the revolving credit facilities of $136.0 million as compared with $3.5 million of net borrowings under the revolving credit facilities in the same period in 2019. In the nine months ended September 30, 2020, we paid debt issuance costs of $3.6 million associated with loans incurred by our consolidated partnerships. In the nine months ended September 30, 2019, we paid debt issuance costs of $8.3 million resulting from the consolidation of the Next Partnership and the Vantage Point Partnership. In the nine months ended September 30, 2020, we received contributions from a noncontrolling interest for $21.2 million resulting from the consolidation of the Cascade Partnership. In the nine months ended September 30, 2019, we received contributions from a noncontrolling interest for $18.5 million and $8.5 million resulting from the consolidation of the aforementioned Next Partnership and Vantage Point Partnership, respectively. The remaining net increase in cash provided by financing activities of $0.4 million in the nine months ended September 30, 2020 compared to the same period in 2019 is due to a decrease in distributions to noncontrolling interests partially offset by an increase in repayments of finance lease obligations.

Our primary sources of liquidity are cash on hand, cash flows from operations, borrowings under our asset based lending facilities (ABL Credit Facilities) and the receipt of government-sponsored financial support in response to the COVID-19 pandemic.

At September 30, 2020, we had total liquidity of $280.7 million consisting of cash on hand of $233.3 million and available borrowings under our ABL Credit Facilities of $47.4 million. During the nine months ended September 30, 2020, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.

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COVID-19 Impact on Liquidity

We have taken, and will continue to take, actions to enhance and preserve our liquidity in response to the pandemic. During the three and nine months ended September 30, 2020, our usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the CARES Act. Specifically, in the second quarter of 2020, we applied for and received $156.8 million of advanced Medicare payments and from April through September 2020 received approximately $254.0 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, we have elected to implement the CARES Act payroll tax deferral program, which is expected to preserve on an interest free basis approximately $90.0 million of cash representing the employer portion of payroll taxes estimated to be incurred between March 27, 2020 and December 31, 2020, of which approximately $65.0 million was realized through September 30, 2020. The advance Medicare payments of $156.8 million, which are also interest free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding has been committed by a number of states in which we operate, currently estimated at $85.0 million, of which approximately $76.0 million has been recognized in net revenue through September 30, 2020.

We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses, continuing to evaluate our capital structure, pursuing strategic liquidity enhancing transactions and seeking further government-sponsored financial relief related to the pandemic. We cannot provide assurance that such efforts will be successful or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic.

Liquidity and Going Concern Considerations

In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:

●

We applied for and received government-sponsored financial relief related to the pandemic;

●

We are utilizing the CARES Act payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;

●

We continue to seek and implement measures to adapt our operational model to function for the long-term in a COVID-19 environment;

●

We have pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity; and

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Risk and Uncertainties

Although we are in compliance with the covenants required by our material debt and material lease agreements at September 30, 2020, the ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on our ability to remain in compliance with our financial covenants through November 9, 2021. Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

There can be no assurance that the confluence of these and other factors will not impede our ability to meet our debt and lease covenants in the future.

Financing Activities

Divestiture of Non-Strategic Facilities

Consistent with our strategy to divest assets in non-strategic markets, we have exited 53 inpatient operations, including 46 skilled nursing facilities, two assisted/senior living facilities and five behavioral health centers in 12 states beginning January 1, 2020 through November 1, 2020, including:

●

The sale of three owned skilled nursing facilities located in North Carolina and Maryland on February 1, 2020. A gain was recognized totaling $24.9 million.

●

The transition of operational responsibility for 19 facilities in the states of California, Washington and Nevada to NewGen on February 1, 2020. The transaction included the sale of the real estate and operations of six skilled nursing facilities and transfer of the leasehold rights to seven skilled nursing, five behavioral health centers and one assisted living facility. A gain was recognized totaling $58.8 million.

●

The sale of one owned skilled nursing facility located in California on February 26, 2020. A gain was recognized totaling $3.0 million.

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The lease termination of one assisted/senior living facility located in Montana on March 4, 2020. A de minimis loss was recognized.

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The sale of three owned skilled nursing facilities located in New Jersey and Maryland on April 1, 2020. A gain was recognized totaling $21.7 million.

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The lease termination of two skilled nursing facilities located in Montana on April 1, 2020. A loss was recognized totaling $0.8 million.

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The lease termination of six skilled nursing facilities located in Florida and Maryland on April 20, 2020. A gain was recognized totaling $11.2 million.

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The transition of operational responsibility for four additional leased facilities in California to NewGen on May 15, 2020. A gain was recognized totaling $5.1 million.

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The lease termination of six skilled nursing facilities located in Idaho on June 1, 2020. A gain was recognized totaling $5.3 million.

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The sale of one owned skilled nursing facility located in Rhode Island on July 6, 2020. A gain was recognized totaling $5.7 million.

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The transition of operational responsibility for one additional leased facility in Washington to NewGen on October 1, 2020.

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The lease termination of two skilled nursing facilities located in Connecticut on October 15, 2020.

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The sale of the real property and divestiture of the operations of five skilled nursing facilities in Vermont on October 30, 2020.

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The lease termination of one skilled nursing facility located in Rhode Island on November 1, 2020.

Term Loan Agreement Amendment

Our term loan agreement (Term Loan Agreement) with an affiliate of Welltower and an affiliate of Omega was set to mature on November 30, 2021. The Term Loan Agreement was amended on November 8, 2020 extending the maturity date to January 1, 2022.

Financial Covenants

The ABL Credit Facilities, the Term Loan Agreement and the Welltower Real Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and minimum liquidity. At September 30, 2020, we were in compliance with all of the financial covenants contained in the Credit Facilities.

We have master lease agreements with Welltower, Omega and Second Spring (collectively, the Master Lease Agreements). Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity. At September 30, 2020, we were in compliance with the covenants contained in the Master Lease Agreements.

We have two master lease agreements with Cindat Best Years Welltower JV LLC involving 28 of our facilities. We did not meet certain financial covenants contained in one of the master lease agreements involving two of our facilities at September 30, 2020. In November 2020, we received a waiver for these covenant breaches through January 1, 2022. At September 30, 2020, we are in compliance with the financial covenants contained in the other master lease agreement.

At September 30, 2020, we did not meet certain financial covenants contained in two leases related to four of our facilities. We are current in the timely payment of our obligations under such leases. These leases do not have cross-default provisions, nor do they trigger cross-default provisions in any of our other loan or lease agreements. We will continue to work with the related credit parties to amend such leases and the related financial covenants. We do not believe the breach of such financial covenants has a material adverse impact on us at September 30, 2020.

Our ability to maintain compliance with our covenants depends in part on management’s ability to increase revenue and control costs, and the extent to which our efforts and the impact of government-sponsored financial relief related to the COVID-19 pandemic adequately and timely offset lost revenue and higher costs caused by the pandemic. Should we fail to comply with our covenants at a future measurement date, we would, absent necessary and timely waivers and/or amendments, be in default under certain of our existing credit agreements. To the extent any cross-default provisions may apply, the default would have a significant adverse impact on our financial position. See Liquidity and Going Concern Considerations.

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Concentration of Credit Risk

We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations as we are, resulting in a concentration of risk. These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engage in similar business activities or have economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions.

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in our rehabilitation therapy services business where we have over 150 distinct customers, many being chain operators with more than one location. One customer, which is a related party of ours, comprises $31.0 million, or approximately 42%, of the gross outstanding contract receivables in the rehabilitation services business at September 30, 2020. See Note 11 – “Related Party Transactions.” A future adverse event impacting this customer or several other large customers resulting in their insolvency or other economic distress would have a material impact on us.

Off-Balance Sheet Arrangements

As of September 30, 2020, we were subject to six lease guarantees whereby we guarantee all payments and performance obligations of six facilities leased by the NewGen Partnership. As of September 30, 2020, the six leases have undiscounted cash rent obligations remaining of $86.3 million. As of December 31, 2019, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were effective at that reasonable assurance level.

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Changes in Internal Control Over Financial Reporting

Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 15 — “Commitments and Contingencies – Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes or additions to the risk factors previously in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 16, 2020 or in Part II. Item 1A, “Risk Factors,” of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020, which were filed with the SEC on May 27, 2020 and August 10, 2020, respectively.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

On November 5, 2020, upon the approval of the Board of Directors, the Company entered into a letter agreement with Mr. Hager under which Mr. Hager received a retention payment of $5,194,297 (CEO Retention Payment).

If Mr. Hager resigns other than for “Good Reason” or if his employment is terminated for “Cause” (each as defined in the letter agreement) prior to December 31, 2021, Mr. Hager will repay to the Company an amount equal to the portion of the CEO Retention Payment actually received (i.e., the net amount of the amount after reduction by all amounts withheld for taxes therefrom) prorated as follows:


Date of Termination or Resignation	Proration
10/1/21 - 12/30/21	retain 75%, repay 25%
7/1/21 - 9/30/21	retain 50%, repay 50%
4/1/21 - 6/30/21	retain 25%, repay 75%
through 3/31/21	retain 0%, repay 100%

As a condition of receiving the CEO Retention Payment, Mr. Hager has agreed that any cash severance or termination pay otherwise payable in the event of termination or resignation prior to December 31, 2022 for Mr. Hager under any other agreement between him and the Company will be reduced on a dollar-for-dollar basis by the amount of any retained CEO Retention Payment, but not to an amount less than zero.

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On September 23, 2020, the Board of Directors approved a cash incentive to be paid to certain key employees (including each of the Company’s named executive officers) upon achievement of a $125.4 million EBITDAR performance metric for the six-month period of July 1, 2020 through December 31, 2020 (such incentive program, the ICP). The ICP was adopted under the Company’s 2020 Omnibus Incentive Compensation Plan, which was approved by the Company’s shareholders at this year’s annual meeting. The full year’s bonus opportunity under the ICP will be available if the EBITDAR metric is completely satisfied. Given the challenging operating environment, reduced awards will be available if 80% or more of the EBITDAR metric is met.

On November 5, 2020, the Board of Directors approved the funding of an irrevocable “secular” trust up to $2.1 million, representing the maximum amount of cash incentive that may be paid out under the ICP to seven of the Company’s officers. The aforementioned trust funds shall not be subject to the claims of the Company’s creditors in the event of the Company’s insolvency and shall first become payable after the close of the books at the end of 2020, subject to the completion of the audit process and upon approval by the Compensation Committee.

Item 6. Exhibits

(a)

Exhibits.


Number		Description



31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

________________


*	Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended

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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 thereunto duly authorized.


		GENESIS HEALTHCARE, INC.

Date:	November 9, 2020	By	/S/ GEORGE V. HAGER, JR.
			George V. Hager, Jr.
			Chief Executive Officer

Date:	November 9, 2020	By	/S/ THOMAS DIVITTORIO
			Thomas DiVittorio
			Chief Financial Officer
			(Principal Financial Officer and Authorized Signatory)

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Genesis Healthcare (GENN) 10-Q2020 Q3 Quarterly report

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