KENNETT SQUARE, PA — Genesis Healthcare, Inc. (NYSE: GEN), one of the largest post-acute care providers in the United States, announced operating results for the first quarter ended March 31, 2019.
First Quarter 2019 Results
- US GAAP revenue in the first quarter of 2019 was $1.16 billion compared to $1.30 billion in the first quarter of 2018;
- US GAAP net loss attributable to Genesis Healthcare, Inc. in the first quarter of 2019 was $15.3 million compared to $68.5 million in the first quarter of 2018;
- Adjusted EBITDAR in the first quarter of 2019 was $148.5 million compared to $150.6 million in the first quarter of 2018; and
- Adjusted EBITDA in the first quarter of 2019, which was reduced by an increase in US GAAP basis lease expense of $64.4 million pursuant to the newly adopted lease accounting standard, was $54.4 million compared to $117.5 million in the first quarter of 2018.
“We continued to deliver solid operating results this quarter, exceeding consensus estimates and building on the positive momentum created last year,” noted George V. Hager, Jr., Chief Executive Officer of Genesis. “This quarter experienced a continuation of favorable operating trends, including “same store” occupancy growth of 50 basis points, therapist efficiency reaching an all-time high and effective expense management and leveraging of our cost structure. These trends served to fuel “same store” Adjusted EBITDAR growth of 6.5% and Adjusted EBITDAR margin expansion of 120 basis points.”
“Organizationally we remain squarely focused on providing quality care and service to our patients, preparing for the October 1, 2019 implementation of the Medicare Patient Driven Payment Model, as well as executing on our portfolio optimization strategy,” continued Hager.
Genesis continues to exit underperforming facilities and certain low-density markets in order to focus on investment and growth in core, strategic markets. During the first quarter of 2019, Genesis divested or closed the operations of 10 facilities with approximate annual net revenue of $98 million, Adjusted EBITDA of $(0.7) million and a pre-tax net loss of $6.8 million. These transactions resulted in a reduction of approximately $3.6 million of annual cash lease payments.
As announced earlier, on January 31, 2019, Genesis also entered into a new real estate partnership (Partnership) with Next Healthcare Capital (Next) involving 15 skilled nursing facilities previously leased from Welltower Inc. (Welltower). Welltower sold the real estate of the 15 facilities to the new Partnership, of which Genesis acquired a 46% ownership interest. Genesis also acquired a fixed price purchase option to acquire the real estate which Genesis can exercise in 2026 at a 10% premium above the original acquisition cost. Genesis will continue to operate these facilities pursuant to a new lease with the Partnership. The remaining interest is held by Next, a privately owned healthcare real estate investment firm. The 15 facilities had been included in the Company’s master lease with Welltower and were subject to 2.0% annual rent escalators. Under the new lease, there are no rent escalators for the first five years and there is a 2.0% annual rent escalator thereafter.
Subsequent to March 31, 2019, Genesis sold five owned facilities located in California and expects to close on the sale of three additional California owned facilities in the coming months. The sale of all eight facilities, is expected to generate sale proceeds of approximately $89 million, which will be used to repay approximately $80 million of indebtedness. In addition, Genesis divested two underperforming leased facilities, resulting in a reduction of $0.6 million of annual cash lease payments. In aggregate, these 10 facilities generate approximate annual net revenue of $96.7 million, Adjusted EBITDA of $9.9 million and a pre-tax net income of $4.2 million.
Adoption of New Lease Accounting Standard
On January 1, 2019, Genesis adopted FASB Accounting Standards Codification Topic 842, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet. Genesis elected the option to apply the transition requirements in Topic 842 at the effective date of January 1, 2019 with the effects of initially applying Topic 842 recognized as a cumulative-effect adjustment to accumulated deficit in the period of adoption. Therefore, comparative information for periods prior to January 1, 2019 has not been adjusted.
Topic 842 had a material effect on Genesis’s consolidated financial statements. The most significant effects of adoption relate to (1) the recognition of new right-of-use (ROU) assets and lease liabilities on its consolidated balance sheet for real estate operating leases; (2) the derecognition of existing assets and liabilities for sale-leaseback transactions that previously did not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities.
Upon adoption, Genesis:
- Recognized additional operating lease liabilities of $0.6 billion and corresponding ROU assets of $0.5 billion, with a resulting net impact of $0.1 billion recognized as an increase to opening accumulated deficit at January 1, 2019.
- Derecognized existing financing obligations of $2.7 billion and existing property and equipment of $1.7 billion. For these contracts, Genesis recognized new operating lease liabilities and corresponding ROU assets on its consolidated balance sheet of $1.9 billion. The resulting net impact of approximately $1.0 billion was recognized as a decrease to opening accumulated deficit at January 1, 2019.
For the quarter ended March 31, 2019, adoption of Topic 842 had the effect of decreasing pretax loss on the consolidated statement of operations by approximately $17.7 million, resulting from an increase in lease expense of $64.4 million, a decrease in interest expense of $65.4 million and a decrease in depreciation expense of $16.7 million.
Adoption of Topic 842 had no impact on Genesis’s cash flow or financial covenants.
Source: Genesis Administrative Services LLC, 101 East State Street, Kennett Square PA 19348