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 June 30, ~~2018.~~2019.

☐ 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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒	~~Accelerated filer ☒~~Emerging growth company ◻

Non-accelerated filer ☐		Smaller reporting company ☐
~~(do not check if smaller reporting company)~~	☒

~~Emerging growth 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 August 8, ~~2018,~~2019, was:

Class A common stock, $0.001 par value – ~~101,090,509~~107,413,398 shares

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

Class C common stock, $0.001 par value – 59~~,700,801~~56,620,453 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 — June 30, ~~2018~~2019 and December 31, ~~2017~~2018	3
	Consolidated Statements of Operations — Three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	4
	Consolidated Statements of Comprehensive Loss — Three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	5
	Consolidated Statements of Stockholders’ Deficit — Three and six months ended June 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows — Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	68
	Notes to Unaudited Consolidated Financial Statements	79

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3840

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6865

Item 4.	Controls and Procedures	6866

Part II.	Other Information

Item 1.	Legal Proceedings	6966

Item 1A.	Risk Factors	6966

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6966

Item 3.	Defaults Upon Senior Securities	6966

Item 4.	Mine Safety Disclosures	6966

Item 5.	Other Information	6967

Item 6.	Exhibits	7067

Signatures		7168

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)


	June 30,		December 31,
	2018		2017		June 30, 2019		December 31, 2018
Assets:
Current assets:
Cash and cash equivalents	$	78,932	$	54,525	$	11,857	$	20,865
Restricted cash and equivalents		6,949		4,113		32,600		73,762
Restricted investments in marketable securities		29,831		33,015		35,950		35,631
Accounts receivable, net of allowances for doubtful accounts of $313,357 at December 31, 2017		687,970		724,138
Accounts receivable						558,907		622,717
Prepaid expenses		65,368		74,368		67,038		82,747
Other current assets		50,239		49,748		33,702		36,528
Assets held for sale		9,278		—		6,574		3,375
Total current assets		928,567		939,907		746,628		875,625
Property and equipment, net of accumulated depreciation of $994,945 and $939,155 at June 30, 2018 and December 31, 2017, respectively		3,017,243		3,413,599
Property and equipment, net of accumulated depreciation of $438,610 and $976,802 at June 30, 2019 and December 31, 2018, respectively						673,911		2,887,554
Finance lease right-of-use assets, net of accumulated amortization of $65,889 at June 30, 2019						516,537		—
Operating lease right-of-use assets						2,200,252		—
Restricted cash and equivalents		57,191		—		52,334		47,649
Restricted investments in marketable securities		102,797		93,101		108,500		100,522
Other long-term assets		105,206		109,060		119,479		125,595
Deferred income taxes		5,032		3,580		5,482		5,867
Identifiable intangible assets, net of accumulated amortization of $94,369 and $88,336 at June 30, 2018 and December 31, 2017, respectively		131,091		142,976
Identifiable intangible assets, net of accumulated amortization of $70,992 and $99,160 at June 30, 2019 and December 31, 2018, respectively						92,397		119,082
Goodwill		85,642		85,642		85,642		85,642
Assets held for sale		112,048		—		41,418		16,087
Total assets	$	4,544,817	$	4,787,865	$	4,642,580	$	4,263,623
Liabilities and Stockholders' Deficit:
Current liabilities:
Current installments of long-term debt	$	107,338	$	26,962	$	108,639	$	122,531
Capital lease obligations		2,159		2,511
Financing obligations		1,983		1,878
Current installments of finance lease obligations						2,678		2,171
Current installments of operating lease obligations						110,156		—
Current installments of financing obligations						—		2,001
Accounts payable		251,644		285,637		230,474		234,786
Accrued expenses		201,790		233,856		218,105		227,813
Accrued compensation		156,773		167,368		155,639		172,726
Self-insurance reserves		180,459		180,982		137,111		149,545
Current portion of liabilities held for sale		2,110		—		1,257		639
Total current liabilities		904,256		899,194		964,059		912,212
Long-term debt		1,076,537		1,050,337		1,142,079		1,082,933
Capital lease obligations		996,059		1,025,355
Finance lease obligations						839,196		967,942
Operating lease obligations						2,250,790		—
Financing obligations		2,744,799		2,929,483		—		2,732,939
Deferred income taxes		7,708		7,584		5,999		6,281
Self-insurance reserves		442,781		436,560		435,920		453,993
Liabilities held for sale		118,929		—		55,038		25,942
Other long-term liabilities		101,494		119,484		82,478		126,247
Commitments and contingencies
Stockholders’ deficit:
Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 101,009,462 and 97,100,738 at June 30, 2018 and December 31, 2017, respectively)		101		97
Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at June 30, 2018 and December 31, 2017, respectively)		1		1
Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 59,700,801 and 61,561,393 at June 30, 2018 and December 31, 2017, respectively)		59		61
Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 107,413,398 and 101,235,935 at June 30, 2019 and December 31, 2018, respectively)						107		101
Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at June 30, 2019 and December 31, 2018, respectively)						1		1
Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 56,620,453 and 59,700,801 at June 30, 2019 and December 31, 2018, respectively)						57		60
Additional paid-in-capital		266,210		290,573		248,287		270,408
Accumulated deficit		(1,482,747)		(1,374,597)		(1,044,997)		(1,609,828)
Accumulated other comprehensive loss		(269)		(362)
Accumulated other comprehensive income (loss)						541		(262)
Total stockholders’ deficit before noncontrolling interests		(1,216,645)		(1,084,227)		(796,004)		(1,339,520)
Noncontrolling interests		(631,101)		(595,905)		(336,975)		(705,346)
Total stockholders' deficit		(1,847,746)		(1,680,132)		(1,132,979)		(2,044,866)
Total liabilities and stockholders’ deficit	$	4,544,817	$	4,787,865	$	4,642,580	$	4,263,623

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 June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Net revenues	$	1,272,360	$	1,341,276	$	2,573,432	$	2,730,408	$	1,145,052	$	1,272,360	$	2,306,692	$	2,573,432
Salaries, wages and benefits		705,754		739,402		1,441,524		1,563,896		626,159		705,754		1,268,569		1,441,524
Other operating expenses		370,555		396,316		754,715		762,137		332,528		370,555		675,066		754,715
General and administrative costs		39,046		41,151		78,921		86,237		35,562		39,046		71,094		78,921
Lease expense		32,111		38,234		65,182		74,334		94,586		32,111		188,647		65,182
Depreciation and amortization expense		63,495		60,227		114,998		124,596		28,268		63,495		66,463		114,998
Interest expense		117,955		124,288		232,992		249,042		52,975		117,955		104,491		232,992
(Gain) loss on early extinguishment of debt		(501)		2,301		9,785		2,301		(24)		(501)		(24)		9,785
Investment income		(1,631)		(1,392)		(2,678)		(2,501)		(2,143)		(1,631)		(4,007)		(2,678)
Other (income) loss		(22,220)		4,190		(22,152)		13,224
Other income										(23,413)		(22,220)		(40,330)		(22,152)
Transaction costs		3,112		3,781		15,207		6,806		8,823		3,112		10,084		15,207
Customer receivership and other related charges		—		35,566		—		35,566
Long-lived asset impairments		27,257		—		55,617		—		900		27,257		900		55,617
Goodwill and identifiable intangible asset impairments		1,132		—		1,132		—		—		1,132		—		1,132
Equity in net loss (income) of unconsolidated affiliates		38		(88)		258		(222)
Loss before income tax (benefit) expense		(63,743)		(102,700)		(172,069)		(185,008)
Income tax (benefit) expense		(886)		2,803		(539)		4,087
Loss from continuing operations		(62,857)		(105,503)		(171,530)		(189,095)
Loss from discontinued operations, net of taxes		—		(47)		—		(68)
Equity in net (income) loss of unconsolidated affiliates										(24)		38		(85)		258
Loss before income tax benefit										(9,145)		(63,743)		(34,176)		(172,069)
Income tax benefit										(162)		(886)		(111)		(539)
Net loss		(62,857)		(105,550)		(171,530)		(189,163)		(8,983)		(62,857)		(34,065)		(171,530)
Less net loss attributable to noncontrolling interests		23,245		40,394		63,380		73,246		4,164		23,245		13,983		63,380
Net loss attributable to Genesis Healthcare, Inc.	$	(39,612)	$	(65,156)	$	(108,150)	$	(115,917)	$	(4,819)	$	(39,612)	$	(20,082)	$	(108,150)
Loss per common share:
Basic and Diluted:
Basic and diluted:
Weighted-average shares outstanding for loss from continuing operations per share		100,596		93,273		99,430		92,581		106,846		100,596		105,289		99,430
Net loss per common share:
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(0.39)	$	(0.70)	$	(1.09)	$	(1.25)
Loss from discontinued operations, net of taxes		—		(0.00)		-		(0.00)
Net loss attributable to Genesis Healthcare, Inc.	$	(0.39)	$	(0.70)	$	(1.09)	$	(1.25)	$	(0.05)	$	(0.39)	$	(0.19)	$	(1.09)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Net loss	$	(62,857)	$	(105,550)	$	(171,530)	$	(189,163)	$	(8,983)	$	(62,857)	$	(34,065)	$	(171,530)
Net unrealized (loss) gain on marketable securities, net of tax		(273)		5		(611)		26
Net unrealized gain (loss) on marketable securities, net of tax										622		277		1,118		(61)
Comprehensive loss		(63,130)		(105,545)		(172,141)		(189,137)		(8,361)		(62,580)		(32,947)		(171,591)
Less: comprehensive loss attributable to noncontrolling interests		23,825		40,389		64,084		73,226		3,948		23,275		13,668		63,534
Comprehensive loss attributable to Genesis Healthcare, Inc.	$	(39,305)	$	(65,156)	$	(108,057)	$	(115,911)	$	(4,413)	$	(39,305)	$	(19,279)	$	(108,057)

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		income (loss)		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)

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		income (loss)		deficit		interests		deficit
Balance at December 31, 2017	97,101	$	97	744	$	1	61,561	$	61	$	290,573	$	(1,374,597)	$	(362)	$	(1,084,227)	$	(595,905)	$	(1,680,132)
Net loss	—		—	—		—	—		—		—		(68,538)		—		(68,538)		(40,135)		(108,673)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		(214)		(214)		(124)		(338)
Share based compensation	—		—	—		—	—		—		2,427		—		—		2,427		—		2,427
Issuance of common stock	40		—	—		—	—		—		—		—		—		—		—		—
Conversion of common stock among classes	830		1	—		—	(830)		(1)		(8,635)		—		—		(8,635)		8,635		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(14)		(14)
Balance at March 31, 2018	97,971	$	98	744	$	1	60,731	$	60	$	284,365	$	(1,443,135)	$	(576)	$	(1,159,187)	$	(627,543)	$	(1,786,730)
Net loss	—		—	—		—	—		—		—		(39,612)		—		(39,612)		(23,245)		(62,857)
Net unrealized loss on marketable securities, net of tax	—		—	—		—	—		—		—		—		307		307		(30)		277
Share based compensation	—		—	—		—	—		—		2,130		—		—		2,130		—		2,130
Issuance of common stock	2,008		2	—		—	—		—		(2)		—		—		—		—		—
Conversion of common stock among classes	1,030		1	—		—	(1,030)		(1)		(20,283)		—		—		(20,283)		20,283		—
Distributions to noncontrolling interests	—		—	—		—	—		—		—		—		—		—		(566)		(566)
Balance at June 30, 2018	101,009	$	101	744	$	1	59,701	$	59	$	266,210	$	(1,482,747)	$	(269)	$	(1,216,645)	$	(631,101)	$	(1,847,746)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Six months ended June 30,				Six months ended June 30,
	2018		2017		2019		2018
Cash flows from operating activities
Net loss	$	(171,530)	$	(189,163)	$	(34,065)	$	(171,530)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash interest and leasing arrangements, net		39,016		32,222		13,818		39,016
Other non-cash (gains) charges, net		(22,152)		13,224
Other non-cash gain, net						(40,330)		(22,152)
Share based compensation		4,557		4,767		3,835		4,557
Depreciation and amortization expense		114,998		124,596		66,463		114,998
(Recovery) provision for losses on accounts receivable		(1,613)		47,513
Equity in net loss (income) of unconsolidated affiliates		258		(222)
(Benefit) provision for deferred taxes		(943)		1,661
Customer receivership and other related charges		—		35,566
Operating lease right-of-use asset amortization						59,529		—
Provision for losses on accounts receivable						(746)		(1,613)
Equity in net (income) loss of unconsolidated affiliates						(85)		258
Benefit for deferred taxes						(1,114)		(943)
Long-lived asset impairments		55,617		—		900		55,617
Goodwill and identifiable intangible asset impairments		1,132		—		—		1,132
Loss on early extinguishment of debt		9,300		2,301
(Gain) loss on early extinguishment of debt						(630)		9,300
Changes in assets and liabilities:
Accounts receivable		22,986		(16,901)		61,415		22,986
Accounts payable and other accrued expenses and other		(40,157)		13,563		(50,864)		(40,157)
Operating lease obligations						(42,045)		—
Net cash provided by operating activities		11,469		69,127		36,081		11,469
Cash flows from investing activities:
Capital expenditures		(27,151)		(33,841)		(36,550)		(27,151)
Purchases of marketable securities		(40,043)		(16,848)		(27,269)		(40,043)
Proceeds on maturity or sale of marketable securities		33,085		15,212		20,517		33,085
Purchases of assets						(252,475)		—
Sales of assets		—		79,343		134,373		—
Restricted deposits						(1,224)		(873)
Other, net		(973)		(130)		420		(100)
Net cash (used in) provided by investing activities		(35,082)		43,736
Net cash used in investing activities						(162,208)		(35,082)
Cash flows from financing activities:
Borrowings under revolving credit facilities		1,747,284		351,000		2,372,000		1,747,284
Repayments under revolving credit facilities		(1,726,455)		(370,300)		(2,382,934)		(1,726,455)
Proceeds from issuance of long-term debt		562,386		17,480		170,565		562,386
Proceeds from tenant improvement draws under lease arrangements		—		6,083
Repayment of long-term debt		(457,424)		(99,399)		(89,966)		(457,424)
Repayment of finance lease obligations						(1,271)		—
Debt issuance costs		(16,678)		(2,667)		(3,708)		(16,678)
Debt settlement costs		(485)		—		—		(485)
Contributions from noncontrolling interests						18,500		—
Distributions to noncontrolling interests and stockholders		(581)		(458)		(2,544)		(581)
Net cash provided by (used in) financing activities		108,047		(98,261)
Net increase in cash, cash equivalents and restricted cash and equivalents		84,434		14,602
Net cash provided by financing activities						80,642		108,047
Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents						(45,485)		84,434
Cash, cash equivalents and restricted cash and equivalents:
Beginning of period		58,638		63,460		142,276		58,638
End of period	$	143,072	$	78,062	$	96,791	$	143,072
Supplemental cash flow information:
Interest paid	$	192,831	$	217,901	$	91,543	$	192,831
Net taxes paid (refunded)		4,104		(1,871)
Net taxes paid						1,610		4,104
Non-cash investing and financing activities:
Capital lease obligations and assets	$	(34,980)	$	(14,909)
Financing obligations		(125,783)		11,260
Financing obligation assets		113,254		—
Finance lease obligations, net write-down due to lease activity					$	(131,842)	$	(34,980)
Assets subject to finance lease obligations, net (gross-up) write-down due to lease activity						(530,025)		34,980
Operating lease obligations, net gross-up due to lease activity						2,408,557		—
Assets subject to operating leases, net (gross-up) due to lease activity						(2,264,702)		—
Financing obligations, net write-down due to lease activity						(2,734,940)		(125,783)
Assets subject to financing obligations, net write-down due to lease activity						1,718,507		113,254

See accompanying notes to unaudited consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)General Information

Description of Business

Genesis Healthcare, Inc. is a healthcare services 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 June 30, ~~2018,~~2019, the Company provides inpatient services through ~~451~~407 skilled nursing, assisted/senior living and behavioral health centers located in 3029 states. Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately ~~86%~~87% 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 11% 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 wholly-owned subsidiaries. All significant 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 attributable to Genesis Healthcare, Inc. and net loss 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 any 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 ~~power~~control and economics that considers which entity has the power to direct the activities that ~~“most~~"most significantly ~~impact”~~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. In the first quarter of 2019, the Company entered into a partnership that acquired the real property of 15 skilled nursing facilities that are leased to the Company. The ~~Company's composition of VIEs was not material at June 30, 2018.~~partnership qualifies as a consolidated VIE. See Note – 3 “Significant Transactions and Events – Next Partnership.”

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, ~~2017~~2018 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March ~~16, 2018.~~18, 2019.

Certain prior year disclosure amounts have been reclassified to conform to current period presentation. Restricted cash had previously been included in restricted cash and investments in marketable securities. As a result of recently adopted accounting pronouncements, discussed below, restricted cash will be presented separately on the Company’s consolidated balance sheets. The

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~~provision for losses on accounts receivable has been combined with other operating expenses and general and administrative costs, on the consolidated statement of operations. See Note 4 – “NetRevenues and Accounts Receivable.~~”

Financial Condition and Liquidity Considerations

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements were issued (August 9, ~~2018)~~2019). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before August 9, ~~2019.~~2020. Based upon such considerations, management determined that there are no known or knowable conditions or events that raise substantial doubt about the ~~Company is able~~Company’s ability to continue as a going concern for 12 months following the date of issuance of these financial statements (August 9, ~~2018)~~2019).

The Company’s results of operations ~~have been~~continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers. In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment. These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in 2017.

InThe Company expects to continue to pursue cost mitigation and other strategies in 2019 in response to ~~these issues,~~ the ~~Company entered into a number of agreements, amendments~~operating environment and ~~new financing facilities (the Restructuring Transactions) during~~liquidity requirements. During the six months ended June 30, ~~2018. See Note 3 – “Significant Transactions and Events – Restructuring Transactions~~.” In total, these agreements and amendments are estimated to reduce the Company’s annual cash fixed charges by approximately $62.0 million beginning January 1, 2018. The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility. In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement. Also in connection with the Restructuring Transactions,2019, the Company amended, or obtained waivers related to, the financial covenants inof all of its material ~~loan~~debt and lease agreements to account for these ongoing changes in its capital structure and business conditions. Although the Company is and projects to be in compliance with all ~~but two~~ of its material ~~master leases. Financial~~debt and lease covenants ~~beginning in 2018 were amended~~through August 9, 2020, the ongoing uncertainty related to ~~account for changes in~~the impact of healthcare reform initiatives may have an adverse impact on the Company’s ~~capital structure as~~ability to remain in compliance with the covenants. Should the Company fail to comply with its debt and lease covenants at a ~~result of the Restructuring Transactions~~future measurement date it could, absent necessary and ~~to account for the current business climate. The Company received~~timely waivers ~~from the counterparties to two~~and/or amendments, be in default under certain of its ~~material master leases, for which agreements to amend~~existing debt and lease agreements. To the extent any cross-default provisions apply, the default could have a more significant impact on the Company’s financial ~~covenants were not attained, with respect to compliance with financial covenants.~~ position.

Recently Adopted Accounting Pronouncements

In ~~May 2014,~~February 2016, the ~~FASB issued~~Financial Accounting Standards Board (FASB) established Accounting Standards Codification (ASC) Topic 842, Leases (Topic 842), by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. ~~2014-09,~~2018-01, ~~Revenue from Contracts~~Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with ~~Customers~~a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and ~~all related amendments (ASC 606), which serves to supersede most existing revenue~~classification of expense recognition ~~guidance, including guidance specific to~~in the ~~healthcare industry. ASC 606 provides a principles-based framework for recognizing revenue to depict the transfer~~statement of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. operations.

The Company adopted ~~ASC 606 effective~~the new standard on January 1, ~~2018 using~~2019. The Company elected the ~~modified retrospective~~option to apply the transition ~~method. There was no cumulative effect on~~requirements in Topic 842 at the ~~opening balance of accumulated deficit as a result of adopting the standard as~~effective date of January 1, ~~2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative~~2019 with the effects of initially applying Topic 842 recognized as a cumulative-effect adjustment to accumulated deficit in the period of adoption. Consequently, financial information has not been ~~restated~~updated and ~~continues to be reported~~the disclosures required under the ~~accounting standards~~new standard have not been provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in ~~effect for those periods. See Note 4 – “NetRevenues~~transition. The Company has elected the ‘package of practical expedients’, which permit it to not reassess its prior conclusions about lease identification, lease classification and ~~Accounts Receivable.~~”initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.

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~~In January 2016, the FASB issued ASU No. 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~ (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value; and requires separate presentation of financial assets and financial liabilities by measurement category. The Company adopted the new guidance effective January 1, 2018. The adoption of ~~ASU 2016-01 did not have~~the new standard had a material ~~impact~~effect on the Company’s ~~consolidated~~ financial ~~condition and results~~statements. The most significant effects relate to (1) the recognition of ~~operations.~~

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~ ~~(ASU 2016-15), which addresses how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The Company adopted the~~ new guidance effective January 1, 2018. Upon assessment of the cash flow issues subject to amendment, the adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated statements of cash flows.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows (230): Restricted Cash~~ (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new guidance effective January 1, 2018. To better accommodate the adoption of ASU 2016-18, the Company has elected to separately disclose restricted cash on its consolidated balance sheets for all periods presented. The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated statements of cash flows.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combination (805): Clarifying the Definition of a Business~~ (ASU 2017-01), which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the new guidance effective January 1, 2018. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial condition and results of operations.

~~Recently Issued Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize leaseROU assets and lease liabilities ~~which would generally result in lease expense being recognized~~ on ~~a straight-line basis over~~its balance sheet for real estate operating leases; (2) the ~~lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application~~derecognition of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective approach, which includes a number of optional practical expedients. The adoption of ASU 2016-02 is expected to have a material impact on the Company’s financial position as a result of the recognition of the right-of-useexisting assets and liabilities ~~associated with~~for sale-leaseback transactions (including those arising from build-to-suit lease arrangements for which construction is complete and the Company is leasing the constructed asset) that historically did not qualify for sale accounting; and (3) providing significant new disclosures about its leasing activities.

Upon adoption, the Company:

Recognized operating lease liabilities of $0.6 billion based on the present value of the remaining minimum rental payments as determined in accordance with Topic 842 for leases that had historically been accounted for as operating leases under the previous leasing standards. The Company recognized corresponding ROU assets of approximately $0.5 billion based on the operating lease liabilities, adjusted for existing straight-line lease liabilities, existing assets and liabilities related to favorable and unfavorable terms of operating leases previously recognized in respect of business combinations, and the impairment of the ROU assets. The resulting net impact of $0.1 billion associated with this change in accounting was recognized as an increase to opening accumulated deficit as of January 1, 2019.

Derecognized existing financing obligations of $2.7 billion and existing property and equipment of $1.7 billion. The Company recognized new operating lease liabilities and corresponding ROU assets of $1.9 billion on its balance sheet for the associated leases. The resulting net impact of $1.0 billion associated with this change in accounting was recognized as a reduction to opening accumulated deficit as of January 1, 2019.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases ~~as well as~~that qualify. This means, for those leases that qualify, the ~~impact~~Company does not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets and liabilities currently accounted for as financing obligations. The Company has established a cross-functional implementation team and is currently reviewing all lease agreements and service contracts which may contain an embedded lease. The Company has begun to design

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~~changes to existing processes~~ in ~~conjunction with its review of lease agreements. The Company will adopt the new lease standard effective January 1, 2019 and expects to elect certain available transitional practical expedients.~~transition. See Note 8 – “Leases.”

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act (Tax Reform Act) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. ~~ASU 2018-02 is effective for~~The Company adopted the ~~Company beginning~~new standard on January 1, 2019 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized.2019. The adoption of ASU 2018-02 ~~will~~did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In ~~March~~August 2018, the FASB issued ASU ~~2018-05, Amendments~~2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to ~~SEC Paragraphs Pursuant~~the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2019, 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to ~~SEC Staff Accounting Bulletin No. 118.~~improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. The ~~amendments in this update~~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 ~~when to record and disclose provisional amounts for certain income tax effects of~~ the ~~Tax Reform Act.~~credit losses standard. The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required disclosures that an entity must make with regard to the Tax Reform Act. This ASUstandard is effective ~~immediately as new information is available to adjust provisional amounts that were previously recorded.~~for fiscal years beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company ~~has adopted this~~is currently evaluating the effect that the standard aswill have on its consolidated financial statements and related disclosures.

Table of ~~January 1, 2018 and will continue to evaluate indicators that may give rise to a change in its tax provision as a result of the Tax Reform Act.~~Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Certain Significant Risks and Uncertainties

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 78% 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 six months ended June 30, ~~2018~~2019 and ~~2017.~~2018:


	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Medicare	22	%	23	%	22	%	23	%	20	%	22	%	20	%	22	%
Medicaid	57	%	55	%	56	%	55	%	58	%	57	%	58	%	56	%
Insurance	12	%	12	%	13	%	12	%	12	%	12	%	12	%	13	%
Private	8	%	9	%	8	%	9	%	8	%	8	%	7	%	8	%
Other	1	%	1	%	1	%	1	%	2	%	1	%	3	%	1	%
Total	100	%	100	%	100	%	100	%	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 not possible to quantify fully the effect of legislative changes, 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

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lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have ~~a continuing~~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 business 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,

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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.

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 ~~200~~160 distinct customers, many being chain operators with more than one location. ~~The four largest customers~~One customer, which is a related party of the ~~Company’s rehabilitation services business comprise $62.1~~Company, comprises $29.6 million, approximately ~~54%~~32%, of the ~~net~~gross outstanding contract receivables in the rehabilitation services business at June 30, ~~2018.~~ 2019. See Note 11 – “Related Party Transactions.” One former customer ~~which is a related party of the Company,~~ comprises ~~$36.5~~$9.1 million, approximately ~~32%~~10%, of the ~~net~~gross outstanding contract receivables in the rehabilitation services business at June 30, ~~2018. See Note 16 –~~ ~~“Related Party Transactions.”~~2019. An adverse event impacting the solvency ~~of several~~ of these 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, ~~2017,~~2018, which was filed with the SEC on March ~~16, 2018,~~18, 2019, 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 an even more significant impact on the Company’s financial position.

Although the Company is in compliance, and projects to beremain in compliance, with the covenants required by its material debt and lease ~~covenants,~~agreements, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with its financial covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010, ~~currently being considered in Congress,~~ among others.

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The Company’s ability to maintain compliance with financial covenants required by its debt and lease ~~covenants~~agreements depends in part on management’s ability to increase ~~revenue~~revenues and control costs. 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 ~~compliance~~ requirements. Should the Company fail to comply with its debt and 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 credit agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.

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 ~~covenants~~agreements in the future.

(3) Significant Transactions and Events

~~Restructuring Transactions~~

~~Overview~~

In the first quarter of 2018, the Company entered into a number of agreements, amendments and new financing facilities further described below in an effort to strengthen significantly its capital structure. In total, the Restructuring Transactions are estimated to reduce the Company’s annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility.Next Partnership

In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior Revolving Credit Facilities, expanding its term loan borrowings, amending its real estate loans withOn January 31, 2019, Welltower Inc. (Welltower) ~~while refinancing some of those loan amounts through new~~sold the real estate ~~loans. The new asset based lending facility agreement and~~of 15 facilities to a real estate ~~loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap)~~partnership (Next Partnership), ~~respectively. For further information on these debt refinancings, see~~of which the Company acquired a 46% membership interest for $16.0 million. The remaining interest is held by Next Healthcare (Next), a related party. See Note 811 – “~~Long-Term Debt~~Related Party Transactions.” ~~Also in connection~~The Company will continue to operate these facilities pursuant to a new master lease with the Restructuring Transactions, the Company amended the financial covenants in all of its material loan agreements and all but two of its material master leases. Financial covenants beginning in 2018 were amended to account for changes in the Company’s capital structure as a result of the Restructuring Transactions and to account for the current business climate.

~~Welltower Master Lease Amendment~~

~~On February 21, 2018, the Company entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment).~~Next Partnership. The Welltower Master Lease Amendment reduces the Company’s annual base rent payment by $35.0 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term of the master lease byis 15 years with two five-year renewal options available. The Company will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. The Company also obtained a fixed price purchase option to ~~January 31, 2037 and extends the renewal term~~acquire all of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35.0 million.

~~Omnibus Agreement~~

On February 21, 2018, the Company entered into an Omnibus Agreement with Welltower and Omega Healthcare Investors, Inc. (Omega), pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan agreement to, among other things, accommodate a refinancingreal property of the ~~Company’s existing asset based credit facility,~~facilities. The purchase option is exercisable between lease years five and seven, reducing in price each ~~case subject~~successive year down to ~~certain conditions, including~~a 10% premium over the ~~completion of a restructuring of certain of the Company’s other material debt and lease obligations.~~ original purchase price.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower will be written off and (b)In accordance with U.S. GAAP, the Company ~~may request conversion of not more than $50.0 million~~has concluded the Next Partnership qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the ~~outstanding balance~~accounts of the ~~Company’s Welltower Real Estate Loans into equity. If~~Next Partnership in the ~~proposed equity conversion would result~~accompanying financial statements. The Next Partnership acquired all 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million. The initial consolidation of the remaining 15 facilities resulted in ~~any adverse REIT qualification, status or compliance consequences~~property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million. The Company has not finalized the analysis of the consideration and purchase price allocation and will continue to ~~Welltower, then~~review this during the ~~debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term~~measurement period. The impact of ~~ten years commencing~~consolidation on the ~~date~~accompanying consolidated statement of operations was not material for the ~~applicable conditions precedent to the equity conversion have been satisfied. Moreover,~~six months ended June 30, 2019 apart from non-recurring transaction costs of $5.3 million.

Divestiture of Non-Strategic Facilities

Between January 31, 2019 and February 7, 2019, the Company ~~agreed to support Welltower~~divested nine facilities located in ~~connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating~~New Jersey and ~~entering into definitive new master lease agreements with third party buyers.~~

In connection with the Omnibus Agreement, the Company agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of the Company’s Class A Common Stock at an exercise price equal to $1.33 per share. Issuance of the warrant to Welltower isOhio that were subject to the ~~satisfaction~~master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenue of ~~certain conditions.~~$90.2 million and annual pre-tax net loss of $6.0 million. The ~~warrants may be exercised at any time during the period commencing six months from the date~~Company recognized a loss on exit reserves of ~~issuance and ending five years from the date of issuance.~~

~~Lease Transactions and Divestitures~~

~~Sabra Divestitures~~$3.3 million.

On April 1, ~~2018,~~2019, the Company divested ~~five skilled nursing facilities. All five~~the operations of ~~the skilled nursing facilities, three~~one behavioral health center located in ~~Massachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra).~~California upon the lease’s expiration. The ~~five skilled nursing facilities~~center generated annual revenues of ~~$28.5~~$3.1 million and pre-tax net loss of ~~$2.9~~$0.3 million. The divestiture resulted in a loss of $0.1 million.

On May ~~4, 2018, Sabra completed~~1, 2019, the Company divested the operations of two skilled nursing facilities located in Connecticut that were subject to the Welltower Master Lease. The facilities generated annual revenues of $18.0 million and pre-tax net loss of $1.6 million. The divestiture resulted in a loss of $0.8 million.

On May 1, 2019, the Company divested the real property and operations of five skilled nursing facilities in California for a sale price of $56.5 million. See Note 7 – “Property and ~~lease termination~~Equipment.” Loan repayments of $41.8 million were paid on the facilities at closing, as discussed in Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million.

On June 30, 2019, the Company divested the operations of one skilled nursing facility in ~~California that had been closed in 2017.~~Ohio. The ~~Company recognized a net gain on the write off of certain lease liabilities, offset by exit costs, of $0.7 million on the six skilled nursing facilities.~~

On June 1, 2018, Sabra completed the sale and lease termination of 12 skilled nursing facilities located in Florida and New Hampshire. As a result of the sale, the Company will receive an annual rent credit of $12.0 million for the remainder of the lease term. The Company continues to operate these facilities under a new lease with a new landlord, Next Healthcare. See Note 16 – “~~Related Party Transactions.~~” As a result of the sale, the Company recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $7.0 million.

~~On June 29, 2018, Sabra completed the sale and lease termination of eight skilled nursing facilities and one assisted/senior living~~ facility located in seven different states. As a result of the sale, the Company will receive an annual rent credit of $7.4 million for the remainder of the lease term. The Company continues to operate these facilities under a lease agreement with a new landlord. The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million As a result of the sale, the Company recognized accelerated depreciation expense of $3.6 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $2.9 million.

~~Second Spring Divestitures~~

Acquisitions

On June 1, 2019, the Company acquired the operations of one skilled nursing facility in New Mexico. The new facility has approximately 80 beds and generates approximate annual net revenue of $3.4 million. The facility is leased from Omega Healthcare Investors, Inc. (Omega) and is classified as an operating lease. The Company expects the facility’s 2019 pre-tax net income to be de minimis.

Lease Amendments

Between January 31, 2019 and February 7, 2019, the Company amended the Welltower Master Lease several times to reflect the lease termination of 24 facilities, including the 15 facilities sold and now leased from the Next Partnership. As a result of the ~~sale~~lease termination on the 24 facilities, the Company received annual rent credits of $23.4 million from Welltower. ROU assets and lease ~~termination,~~obligations of $221.3 million and $241.6 million, respectively, were written off resulting in a gain of $20.3 million.

On March 8, 2019, the Company ~~recognized~~amended a ~~capital~~master lease ~~net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million.~~agreement for 19 skilled nursing facilities. The ~~resulting gain of $21.2 million was offset~~amendment extended the lease term by ~~$6.3 million of exit costs. In~~five years through October 31, 2026, removed the ~~three months ended June 30, 2018, there was accelerated depreciation expense of $5.3 million on~~Company’s option to purchase certain facilities under the ~~property and equipment sold.~~

lease

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~Other Lease Amendments~~ and ~~Divestitures~~

~~For~~adjusted certain financial covenants. In conjunction with the ~~six months ended June 30, 2018, the Company divested or amended the lease agreements to six other skilled nursing facilities.~~amendment, one facility located in Ohio was closed. The ~~lease agreement to one behavioral outpatient clinic expired on June 30, 2018. As a result~~facility generated annual revenues of ~~these lease amendments~~$7.7 million and ~~divestitures, the Company recognized~~pre-tax net loss of $1.6 million. The divestiture resulted in a loss ~~for exit costs and the write off~~ of ~~certain lease assets of $3.3~~$0.2 million.

~~In total for the six months ended June 30, 2018,~~On May 1, 2019, the Company ~~recorded~~amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million. ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off resulting in a ~~net~~ gain onof $0.5 million.

Gains and losses associated with transactions, such as divestitures, acquisitions and lease ~~transactions and divestitures of $22.2 million which is~~amendments, are included in other ~~(income) loss on~~income in 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 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.

Revenue Recognition

The Company generates revenues, primarily by providing healthcare services to its customers. Revenues are recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration to which the Company expects to be entitled from patients, third-party ~~payers~~payors (including government programs and insurers) and others, in exchange for those goods and services.

Performance obligations are determined based on the nature of the services provided. The majority of the Company’s healthcare services represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance obligation satisfied over time as services are rendered. The Company also provides certain ancillary services which are not included in the bundle of services, and as such, are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known. Adjustments arising from a change in the transaction price were not significant for the three and six months ended June 30, 2019 and 2018.

The Company has elected a practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

~~Adoption of ASC 606~~

The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues. Prior to adoption of ASC 606, such amounts were classified as provision for losses on accounts receivable. For the three and six months ended June 30, 2018, the Company recorded approximately $22.0 million and $46.8 million, respectively, of implicit price concessions as a direct reduction of net revenues that would have been recorded as operating expenses prior to the adoption of ASC 606. The adoption of ASC 606 is not expected to have a material impact on net income on an ongoing basis. To the extent there are material subsequent events that affect the payor's ability to pay, such amounts are recorded within operating expenses.

At June 30, 2018, the remaining balance of allowance for doubtful accounts previously disclosed on the consolidated balance sheets relating to accounts receivable with December 31, 2017 and prior service dates is $277.4 million.

~~The Company has reclassified the provision for losses on accounts receivable of $24.0 million and $47.5~~ ~~million for the three and six months ended June 30, 2017, respectively, to other operating expenses in the consolidated statements of operations. These reclassifications had no effect on the reported results of operations.~~

~~Under ASC 606, the~~ Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

~~Under ASC 606, payments~~Payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. The Company had no material contract liabilities or activity as of and for the three and six months ended June 30, 2019 and 2018.

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 ~~billed.~~billing. See Note 6 – “Segment Information.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The composition of net revenues by payor type and operating segment for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 are as follows (in thousands):


	Three months ended June 30, 2018											Three months ended June 30, 2019
				Rehabilitation											Rehabilitation
	Inpatient			Therapy			Other					Inpatient			Therapy			Other
	Services			Services			Services			Total		Services			Services			Services			Total
Medicare	$	232,594		$	23,622		$	—		$	256,216	$	201,007		$	22,992		$	—		$	223,999
Medicaid		619,735			465			—			620,200		577,097			573			—			577,670
Insurance		132,824			6,095			—			138,919		114,619			5,916			—			120,535
Private		87,079	(1)		92			—			87,171		79,127	(1)		92			—			79,219
Third party providers		—			108,474			22,476			130,950		—			88,108			20,486			108,594
Other		18,377	(2)		7,039	(2)		13,488	(3)		38,904		17,648	(2)		3,254	(2)		14,133	(3)		35,035
Total net revenues	$	1,090,609		$	145,787		$	35,964		$	1,272,360	$	989,498		$	120,935		$	34,619		$	1,145,052


	Three months ended June 30, 2017 (4)											Three months ended June 30, 2018
				Rehabilitation											Rehabilitation
	Inpatient			Therapy			Other					Inpatient			Therapy			Other
	Services			Services			Services			Total		Services			Services			Services			Total
Medicare	$	260,295		$	22,091		$	—		$	282,386	$	232,594		$	23,622		$	—		$	256,216
Medicaid		628,065			9			—			628,074		619,735			465			—			620,200
Insurance		149,367			6,074			—			155,441		132,824			6,095			—			138,919
Private		97,272	(1)		168			—			97,440		87,079	(1)		92			—			87,171
Third party providers		—			115,919			23,915			139,834		—			108,474			22,476			130,950
Other		21,585	(2)		4,160	(2)		12,356	(3)		38,101		18,377	(2)		7,039	(2)		13,488	(3)		38,904
Total net revenues	$	1,156,584		$	148,421		$	36,271		$	1,341,276	$	1,090,609		$	145,787		$	35,964		$	1,272,360

(1)

Includes Assisted/Senior living revenue of $23.7 million and ~~$24.1~~$23.7 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, 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.

~~(4)~~

~~The Company adopted the new revenue standard using the modified retrospective transition method. As a result, the prior period amounts have not been adjusted.~~


	Six months ended June 30, 2019
				Rehabilitation
	Inpatient			Therapy			Other
	Services			Services			Services			Total
Medicare	$	408,975		$	45,744		$	—		$	454,719
Medicaid		1,158,045			1,128			—			1,159,173
Insurance		239,699			11,150			—			250,849
Private		156,060	(1)		204			—			156,264
Third party providers		—			177,637			41,094			218,731
Other		34,211	(2)		5,912	(2)		26,833	(3)		66,956
Total net revenues	$	1,996,990		$	241,775		$	67,927		$	2,306,692

Six months ended June 30, 2018

Rehabilitation

Inpatient

Therapy

Other

Services

Services

Services

Total

Medicare

$
483,819

$
46,105

$
—

$
529,924

Medicaid

1,241,168

1,040

—

1,242,208

Insurance

275,829

12,609

—

288,438

Private

173,740
(1)

251

—

173,991

Third party providers

—

219,164

45,506

264,670

Other

36,384
(2)

10,449
(2)

27,368
(3)

74,201

Total net revenues

$
2,210,940

$
289,618
.
$
72,874

$
2,573,432


	Six months ended June 30, 2017 (4)											Six months ended June 30, 2018
				Rehabilitation											Rehabilitation
	Inpatient			Therapy			Other					Inpatient			Therapy			Other
	Services			Services			Services			Total		Services			Services			Services			Total
Medicare	$	545,205		$	48,070		$	—		$	593,275	$	483,819		$	46,105		$	—		$	529,924
Medicaid		1,270,752			596			—			1,271,348		1,241,168			1,040			—			1,242,208
Insurance		299,263			12,326			—			311,589		275,829			12,609			—			288,438
Private		196,872	(1)		357			—			197,229		173,740	(1)		251			—			173,991
Third party providers		—			234,548			48,666			283,214		—			219,164			45,506			264,670
Other		40,418	(2)		8,211	(2)		25,124	(3)		73,753		36,384	(2)		10,449	(2)		27,368	(3)		74,201
Total net revenues	$	2,352,510		$	304,108		$	73,790		$	2,730,408	$	2,210,940		$	289,618		$	72,874		$	2,573,432

(1)

Includes Assisted/Senior living revenue of ~~$47.2~~$47.4 million and ~~$48.1~~$47.2 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, 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.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(3)

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

~~(4)~~

~~The Company adopted the new revenue standard using the modified retrospective transition method. As a result, the prior period amounts have not been adjusted.~~

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(5)Loss Per Share

The Company has three 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 noncontrolling interest 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.

Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net loss plus the effect of any assumed conversions ~~(if applicable)~~ by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common ~~shares.~~stock.

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


	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Numerator:
Loss from continuing operations	$	(62,857)	$	(105,503)	$	(171,530)	$	(189,095)	$	(8,983)	$	(62,857)	$	(34,065)	$	(171,530)
Less: Net loss attributable to noncontrolling interests		(23,245)		(40,394)		(63,380)		(73,246)		(4,164)		(23,245)		(13,983)		(63,380)
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(39,612)	$	(65,109)	$	(108,150)	$	(115,849)
Loss from discontinued operations, net of taxes		—		(47)		—		(68)
Net loss attributable to Genesis Healthcare, Inc.	$	(39,612)	$	(65,156)	$	(108,150)	$	(115,917)	$	(4,819)	$	(39,612)	$	(20,082)	$	(108,150)
Denominator:
Weighted-average shares outstanding for basic and diluted net loss per share		100,596		93,273		99,430		92,581		106,846		100,596		105,289		99,430
Basic and diluted net loss per common share:
Loss from continuing operations attributable to Genesis Healthcare, Inc.	$	(0.39)	$	(0.70)	$	(1.09)	$	(1.25)
Loss from discontinued operations, net of taxes		—		(0.00)		-		(0.00)
Net loss attributable to Genesis Healthcare, Inc.	$	(0.39)	$	(0.70)	$	(1.09)	$	(1.25)	$	(0.05)	$	(0.39)	$	(0.19)	$	(1.09)

The ~~following shares were excluded from the~~ computation of diluted net loss per common share inexcludes the effects of anti-dilutive shares attributable to the assumed conversion of noncontrolling interests, unvested restricted stock units under the 2015 Omnibus Equity Incentive Plan, and stock warrants, which were 57.5 million and 58.4 million for the three and six months ended June 30, 2019, respectively, and 61.7 million and 61.8 million for the three and six months ended June 30, 2018, ~~and 2017, as their inclusion would have been anti-dilutive (in thousands):~~

Three months ended June 30,

Six months ended June 30,


2018

2017

2018

2017
Exchange of noncontrolling interests

59,711

61,811


60,583


62,320
Employee and director unvested restricted stock units

964

1,129


630


1,541
Convertible note

—

3,000


—


3,000
Stock Warrants

1,500

—


1,288


—

The combined impact of the assumed conversion to common stock and related tax implications attributable to the noncontrolling interest, the grants under the 2015 Omnibus Equity Incentive Plan, and the stock warrants are anti-dilutive to EPS because the Company is in a net loss position for the three and six months ended June 30, 2018.respectively. As of June 30, ~~2018,~~2019, there were ~~59.7~~56.6 million units attributable to the noncontrolling interests outstanding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6)Segment Information

The Company has three 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 June 30,												Three months ended June 30,
	2018				2017				Increase / (Decrease)				2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue						Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	1,065,310	83.8	%	$	1,130,525	84.2	%	$	(65,215)	(5.8)	%	$	964,541	84.2	%	$	1,065,310	83.7	%	$	(100,769)	(9.5)	%
Assisted/Senior living facilities		23,742	1.9	%		24,125	1.8	%		(383)	(1.6)	%		23,702	2.1	%		23,742	1.9	%		(40)	(0.2)	%
Administration of third party facilities		2,300	0.2	%		2,319	0.2	%		(19)	(0.8)	%		2,054	0.2	%		2,300	0.2	%		(246)	(10.7)	%
Elimination of administrative services		(743)	(0.1)	%		(385)	—	%		(358)	93.0	%		(799)	(0)	%		(743)	(0.1)	%		(56)	7.5	%
Inpatient services, net		1,090,609	85.8	%		1,156,584	86.2	%		(65,975)	(5.7)	%		989,498	86.4	%		1,090,609	85.7	%		(101,111)	(9.3)	%

Rehabilitation therapy services:
Total therapy services		234,674	18.4	%		242,917	18.1	%		(8,243)	(3.4)	%		192,906	16.8	%		234,674	18.4	%		(41,768)	(17.8)	%
Elimination intersegment rehabilitation therapy services		(88,887)	(7.0)	%		(94,496)	(7.0)	%		5,609	(5.9)	%
Third party rehabilitation therapy services		145,787	11.4	%		148,421	11.1	%		(2,634)	(1.8)	%
Elimination of intersegment rehabilitation therapy services														(71,971)	(6.3)	%		(88,887)	(7.0)	%		16,916	(19.0)	%
Third party rehabilitation therapy services, net														120,935	10.5	%		145,787	11.4	%		(24,852)	(17.0)	%

Other services:
Total other services		51,345	4.0	%		44,221	3.3	%		7,124	16.1	%		45,489	4.0	%		42,946	3.4	%		2,543	5.9	%
Elimination intersegment other services		(15,381)	(1.2)	%		(7,950)	(0.6)	%		(7,431)	93.5	%
Third party other services		35,964	2.8	%		36,271	2.7	%		(307)	(0.8)	%
Elimination of intersegment other services														(10,870)	(0.9)	%		(6,982)	(0.5)	%		(3,888)	55.7	%
Third party other services, net														34,619	3.1	%		35,964	2.9	%		(1,345)	(3.7)	%

Net revenues	$	1,272,360	100.0	%	$	1,341,276	100.0	%	$	(68,916)	(5.1)	%	$	1,145,052	100.0	%	$	1,272,360	100.0	%	$	(127,308)	(10.0)	%


	Six months ended June 30,												Six months ended June 30,
	2018				2017				Increase / (Decrease)				2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue						Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	2,160,612	83.9	%	$	2,300,450	84.1	%	$	(139,838)	(6.1)	%	$	1,946,937	84.3	%	$	2,160,612	84.0	%	$	(213,675)	(9.9)	%
Assisted/Senior living facilities		47,246	1.8	%		48,077	1.8	%		(831)	(1.7)	%		47,351	2.1	%		47,246	1.8	%		105	0.2	%
Administration of third party facilities		4,552	0.2	%		4,752	0.2	%		(200)	(4.2)	%		4,301	0.2	%		4,552	0.2	%		(251)	(5.5)	%
Elimination of administrative services		(1,470)	—	%		(769)	—	%		(701)	91.2	%		(1,599)	—	%		(1,470)	—	%		(129)	8.8	%
Inpatient services, net		2,210,940	85.9	%		2,352,510	86.1	%		(141,570)	(6.0)	%		1,996,990	86.6	%		2,210,940	86.0	%		(213,950)	(9.7)	%

Rehabilitation therapy services:
Total therapy services		471,251	18.3	%		499,134	18.3	%		(27,883)	(5.6)	%		387,977	16.8	%		471,251	18.3	%		(83,274)	(17.7)	%
Elimination intersegment rehabilitation therapy services		(181,633)	(7.1)	%		(195,026)	(7.1)	%		13,393	(6.9)	%
Third party rehabilitation therapy services		289,618	11.2	%		304,108	11.2	%		(14,490)	(4.8)	%
Elimination of intersegment rehabilitation therapy services														(146,202)	(6.3)	%		(181,633)	(7.1)	%		35,431	(19.5)	%
Third party rehabilitation therapy services, net														241,775	10.5	%		289,618	11.2	%		(47,843)	(16.5)	%

Other services:
Total other services		99,853	3.9	%		90,267	3.3	%		9,586	10.6	%		87,607	3.8	%		85,774	3.3	%		1,833	2.1	%
Elimination intersegment other services		(26,979)	(1.0)	%		(16,477)	(0.6)	%		(10,502)	63.7	%
Third party other services		72,874	2.9	%		73,790	2.7	%		(916)	(1.2)	%
Elimination of intersegment other services														(19,680)	(0.9)	%		(12,900)	(0.5)	%		(6,780)	52.6	%
Third party other services, net														67,927	2.9	%		72,874	2.8	%		(4,947)	(6.8)	%

Net revenues	$	2,573,432	100.0	%	$	2,730,408	100.0	%	$	(156,976)	(5.7)	%	$	2,306,692	100.0	%	$	2,573,432	100.0	%	$	(266,740)	(10.4)	%

1819

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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



	Three months ended June 30, 2018												Three months ended June 30, 2019
			Rehabilitation												Rehabilitation
	Inpatient		Therapy		Other								Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated		Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,091,352	$	234,674	$	51,325	$	20	$	(105,011)	$	1,272,360	$	990,297	$	192,906	$	45,325	$	164	$	(83,640)	$	1,145,052
Salaries, wages and benefits		489,778		187,946		28,030		—		—		705,754		442,028		154,855		29,276		—		—		626,159
Other operating expenses		439,224		14,400		21,943		—		(105,012)		370,555		389,637		12,130		14,402		—		(83,641)		332,528
General and administrative costs		—		—		—		39,046		—		39,046		—		—		—		35,562		—		35,562
Lease expense		31,494		—		316		301		—		32,111		93,557		335		338		356		—		94,586
Depreciation and amortization expense		56,750		3,138		168		3,439		—		63,495		22,328		3,112		174		2,654		—		28,268
Interest expense		93,028		13		9		24,905		—		117,955		29,051		13		8		23,903		—		52,975
Gain on extinguishment of debt		—		—		—		(501)		—		(501)
Gain on early extinguishment of debt														—		—		—		(24)		—		(24)
Investment income		—		—		—		(1,631)		—		(1,631)		—		—		—		(2,143)		—		(2,143)
Other income		(22,220)		—		—		—		—		(22,220)
Other (income) loss														(23,474)		—		61		—		—		(23,413)
Transaction costs		—		—		—		3,112		—		3,112		—		—		—		8,823		—		8,823
Long-lived asset impairments		27,257		—		—		—		—		27,257		900		—		—		—		—		900
Goodwill and identifiable intangible asset impairments		1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(352)		390		38
(Loss) income before income tax benefit		(25,091)		29,177		859		(68,299)		(389)		(63,743)
Equity in net loss (income) of unconsolidated affiliates														—		—		—		1,910		(1,934)		(24)
Income (loss) before income tax benefit														36,270		22,461		1,066		(70,877)		1,935		(9,145)
Income tax benefit		—		—		—		(886)		—		(886)		—		—		—		(162)		—		(162)
(Loss) income from continuing operations	$	(25,091)	$	29,177	$	859	$	(67,413)	$	(389)	$	(62,857)
Income (loss) from continuing operations													$	36,270	$	22,461	$	1,066	$	(70,715)	$	1,935	$	(8,983)


	Three months ended June 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,091,352	$	234,674	$	42,926	$	20	$	(96,612)	$	1,272,360
Salaries, wages and benefits		489,778		187,946		28,030		—		—		705,754
Other operating expenses		439,224		14,400		13,544		—		(96,613)		370,555
General and administrative costs		—		—		—		39,046		—		39,046
Lease expense		31,494		—		316		301		—		32,111
Depreciation and amortization expense		56,750		3,138		168		3,439		—		63,495
Interest expense		93,028		13		9		24,905		—		117,955
Gain on early extinguishment of debt		—		—		—		(501)		—		(501)
Investment income		—		—		—		(1,631)		—		(1,631)
Other income		(22,220)		—		—		—		—		(22,220)
Transaction costs		—		—		—		3,112		—		3,112
Long-lived asset impairment charges		27,257		—		—		—		—		27,257
Goodwill and identifiable intangible asset impairments		1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(352)		390		38
(Loss) income before income tax benefit		(25,091)		29,177		859		(68,299)		(389)		(63,743)
Income tax benefit		—		—		—		(886)		—		(886)
(Loss) income from continuing operations	$	(25,091)	$	29,177	$	859	$	(67,413)	$	(389)	$	(62,857)

Three months ended June 30, 2017

Rehabilitation

Inpatient

Therapy

Other


Services

Services

Services

Corporate

Eliminations

Consolidated

Net revenues

$
1,156,969

$
242,917

$
44,144

$
77

$
(102,831)

$
1,341,276

Salaries, wages and benefits

508,509

201,944

28,949

—

—

739,402

Other operating expenses

462,158

22,308

14,681

—

(102,831)

396,316

General and administrative costs

—

—

—

41,151

—

41,151

Lease expense

37,449

7

300

478

—

38,234

Depreciation and amortization expense

51,837

3,866

172

4,352

—

60,227

Interest expense

103,325

14

10

20,939

—

124,288

Loss on extinguishment of debt

—

—

—

2,301

—

2,301

Investment income

—

—

—

(1,392)

—

(1,392)

Other loss

4,190

—

—

—

—

4,190

Transaction costs

—

—

—

3,781

—

3,781

Customer receivership and other related charges

—

35,566

—

—

—

35,566

Equity in net (income) loss of unconsolidated affiliates

—

—

—

(563)

475

(88)

(Loss) income before income tax expense

(10,499)

(20,788)

32

(70,970)

(475)

(102,700)

Income tax expense

—

—

—

2,803

—

2,803

(Loss) income from continuing operations

$
(10,499)

$
(20,788)

$
32

$
(73,773)

$
(475)

$
(105,503)

1920

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


	Six months ended June 30, 2018												Six months ended June 30, 2019
			Rehabilitation												Rehabilitation
	Inpatient		Therapy		Other								Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated		Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,212,410	$	471,251	$	99,800	$	53	$	(210,082)	$	2,573,432	$	1,998,589	$	387,977	$	87,390	$	217	$	(167,481)	$	2,306,692
Salaries, wages and benefits		996,808		387,777		56,939		—		—		1,441,524		898,790		311,947		57,832		—		—		1,268,569
Other operating expenses		895,025		28,816		40,957		—		(210,083)		754,715		791,569		23,087		27,891		—		(167,481)		675,066
General and administrative costs		—		—		—		78,921		—		78,921		—		—		—		71,094		—		71,094
Lease expense		63,928		—		643		611		—		65,182		186,523		665		680		779		—		188,647
Depreciation and amortization expense		101,080		6,332		337		7,249		—		114,998		54,200		6,276		348		5,639		—		66,463
Interest expense		186,647		27		18		46,300		—		232,992		56,091		27		17		48,356		—		104,491
Loss on early extinguishment of debt		—		—		—		9,785		—		9,785
Gain on early extinguishment of debt														—		—		—		(24)		—		(24)
Investment income		—		—		—		(2,678)		—		(2,678)		—		—		—		(4,007)		—		(4,007)
Other (income) loss		(22,230)		—		78		—		—		(22,152)		(40,315)		(76)		61		—		—		(40,330)
Transaction costs		—		—		—		15,207		—		15,207		—		—		—		10,084		—		10,084
Long-lived asset impairments		55,617		—		—		—		—		55,617		900		—		—		—		—		900
Goodwill and identifiable intangible asset impairments		1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(506)		764		258
(Loss) income before income tax benefit		(65,597)		48,299		828		(154,836)		(763)		(172,069)
Equity in net loss (income) of unconsolidated affiliates														—		—		—		1,386		(1,471)		(85)
Income (loss) before income tax benefit														50,831		46,051		561		(133,090)		1,471		(34,176)
Income tax benefit		—		—		—		(539)		—		(539)		—		—		—		(111)		—		(111)
(Loss) income from continuing operations	$	(65,597)	$	48,299	$	828	$	(154,297)	$	(763)	$	(171,530)
Income (loss) from continuing operations													$	50,831	$	46,051	$	561	$	(132,979)	$	1,471	$	(34,065)


	Six months ended June 30, 2017												Six months ended June 30, 2018
			Rehabilitation												Rehabilitation
	Inpatient		Therapy		Other								Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated		Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,353,279	$	499,134	$	89,940	$	327	$	(212,272)	$	2,730,408	$	2,212,410	$	471,251	$	85,721	$	53	$	(196,003)	$	2,573,432
Salaries, wages and benefits		1,089,932		414,696		59,268		—		—		1,563,896		996,808		387,777		56,939		—		—		1,441,524
Other operating expenses		901,002		43,645		29,762		—		(212,272)		762,137		895,025		28,816		26,878		—		(196,004)		754,715
General and administrative costs		—		—		—		86,237		—		86,237		—		—		—		78,921		—		78,921
Lease expense		72,766		14		595		959		—		74,334		63,928		—		643		611		—		65,182
Depreciation and amortization expense		107,817		7,613		339		8,827		—		124,596		101,080		6,332		337		7,249		—		114,998
Interest expense		206,642		28		19		42,353		—		249,042		186,647		27		18		46,300		—		232,992
Loss on early extinguishment of debt		—		—		—		2,301		—		2,301		—		—		—		9,785		—		9,785
Investment income		—		—		—		(2,501)		—		(2,501)		—		—		—		(2,678)		—		(2,678)
Other loss (income)		12,732		732		—		(240)		—		13,224
Other (income) loss														(22,230)		—		78		—		—		(22,152)
Transaction costs		—		—		—		6,806		—		6,806		—		—		—		15,207		—		15,207
Customer receivership and other related charges		—		35,566		—		—		—		35,566
Long-lived asset impairments														55,617		—		—		—		—		55,617
Goodwill and identifiable intangible asset impairments														1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(1,131)		909		(222)		—		—		—		(506)		764		258
Loss before income tax expense		(37,612)		(3,160)		(43)		(143,284)		(909)		(185,008)
Income tax expense		—		—		—		4,087		—		4,087
Loss from continuing operations	$	(37,612)	$	(3,160)	$	(43)	$	(147,371)	$	(909)	$	(189,095)
(Loss) income before income tax benefit														(65,597)		48,299		828		(154,836)		(763)		(172,069)
Income tax benefit														—		—		—		(539)		—		(539)
(Loss) income from continuing operations													$	(65,597)	$	48,299	$	828	$	(154,297)	$	(763)	$	(171,530)

2021

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the segment assets as of June 30, ~~2018~~2019 compared to December 31, ~~2017~~2018 (in thousands):


	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Inpatient services	$	3,992,053	$	4,303,370	$	4,192,932	$	3,735,778
Rehabilitation therapy services		352,490		351,711		304,758		329,687
Other services		54,438		50,127		36,984		36,240
Corporate and eliminations		145,836		82,657		107,906		161,918
Total assets	$	4,544,817	$	4,787,865	$	4,642,580	$	4,263,623

The following table presents segment goodwill as of June 30, ~~2018~~2019 compared to December 31, ~~2017~~2018 (in thousands):


	Inpatient		Rehabilitation Therapy Services		Other Services		Consolidated		Inpatient		Rehabilitation Therapy Services		Other Services		Consolidated
Balance at December 31, 2017
Balance at December 31, 2018
Goodwill		351,470		73,814		11,828		437,112		351,470		73,814		11,828		437,112
Accumulated impairment losses		(351,470)		—		—		(351,470)		(351,470)		—		—		(351,470)
	$	—	$	73,814	$	11,828	$	85,642	$	—	$	73,814	$	11,828	$	85,642
Balance at June 30, 2018
Balance at June 30, 2019
Goodwill		351,470		73,814		11,828		437,112		351,470		73,814		11,828		437,112
Accumulated impairment losses		(351,470)		—		—		(351,470)		(351,470)		—		—		(351,470)
	$	—	$	73,814	$	11,828	$	85,642	$	—	$	73,814	$	11,828	$	85,642

(7)Property and Equipment

Property and equipment consisted of the following as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Land, buildings and improvements	$	486,031	$	591,022	$	712,926	$	469,575
Capital lease land, buildings and improvements		720,465		752,657
Finance lease land, buildings and improvements						—		693,546
Financing obligation land, buildings and improvements		2,349,850		2,525,551		—		2,274,211
Equipment, furniture and fixtures		417,696		453,230		396,842		417,684
Construction in progress		38,146		30,294		2,753		9,340
Gross property and equipment		4,012,188		4,352,754		1,112,521		3,864,356
Less: accumulated depreciation		(994,945)		(939,155)		(438,610)		(976,802)
Net property and equipment	$	3,017,243	$	3,413,599	$	673,911	$	2,887,554

~~At June 30, 2018,~~On January 1, 2019, the Company derecognized net financing obligation land and buildings of $1.7 billion and reclassified net finance lease land and buildings of $0.6 billion to finance lease ROU assets within the consolidated balance sheets due to the adoption of Topic 842. See Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” Additionally, improvements of approximately $12.7 million and $73.6 million, which were historically associated with finance leases (referred to as “capital leases” prior to the adoption of Topic 842) and financing obligations, respectively, have been reclassified to “Land, buildings and improvements.”

During the first quarter of 2019, the Company consolidated the financial statements of the Next Partnership. See Note 3 – “Significant Transactions and Events – Next Partnership.” The consolidation resulted in an increase to “Land, buildings and improvements” of $173.5 million.

During the first quarter of 2019, the Company classified ~~the property and equipment of 23~~eight skilled nursing facilities ~~that qualified~~and one assisted/senior living facility in California as assets held for sale. ~~The~~See Note 14 – “Assets Held for Sale.” On May 1, 2019, the Company divested the real property and operations of five of these facilities, resulting in a total net reduction of property and equipment of ~~$112.0~~$27.9 million, which was primarily classified in the “Land, buildings and improvements” line item. See Note ~~15 – “Assets Held for Sale.”~~

~~In the six months ended June 30, 2018, the Company amended one of its master lease agreements resulting in a net capital lease asset write-down of $18.2 million. See Note~~ 3 – ““Significant Transactions and Events – ~~Welltower Master Lease Amendment.~~Divestiture of Non-Strategic Facilities.”

~~In the six months ended~~ At June 30, ~~2018,~~2019, the Company ~~divested 12 skilled nursing~~still classified the property and equipment of three California facilities ~~which were terminated~~as assets held for sale, with one facility having been removed from ~~their master lease~~the sale agreement, resulting in a total net ~~financing obligation asset write-down of $113.3 million and capital lease asset write-down of $16.8 million. See Note 3 – “Significant Transactions and Events – Second Spring Divestitures.”~~

~~In the six months ended June 30, 2018, the Company recognized impairment charges of $55.6 million on its property and equipment. See Note 14 –~~ ~~“Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”~~ ~~The impairments were recorded as a $48.6 million increase to accumulated depreciation and a write-off of land under “Financing obligation land, buildings and improvements” of $7.0 million.~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

reduction of property and equipment of $25.3 million, which was primarily classified in the “Land, buildings and improvements” line item.

(8) ~~Long-Term Debt~~Leases

~~Long-term debt at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):~~

June 30, 2018

December 31, 2017

Asset based lending facilities, net of debt issuance costs of $12,696 and $0 at June 30, 2018 and December 31, 2017, respectively

$
396,133

$
—

Revolving credit facilities, net of debt issuance costs of $0 and $10,109 at June 30, 2018 and December 31, 2017, respectively

—

303,091

Term loan agreements, net of debt issuance costs of $2,435 and $3,020 and debt premium balance of $12,124 and $0 at June 30, 2018 and December 31, 2017, respectively

180,739

120,706

Real estate loans, net of debt issuance costs of $5,740 and $3,486 and debt premium balance of $33,824 and $0 at June 30, 2018 and December 31, 2017, respectively

301,005

281,039

HUD insured loans, net of debt issuance costs of $5,313 and $5,590 and debt premium balance of $877 and $13,590 at June 30, 2018 and December 31, 2017, respectively

183,542

263,827

Notes payable

82,705

68,122

Mortgages and other secured debt (recourse)

12,573

12,536

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $203 and $99 and debt premium balance of $1,569 and $1,618 at June 30, 2018 and December 31, 2017, respectively

27,178

27,978

1,183,875

1,077,299

Less:  Current installments of long-term debt

(107,338)

(26,962)

Long-term debt

$
1,076,537

$
1,050,337

~~Asset Based Lending Facilities~~

On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities). The commitments under the delayed draw loan facility will be reduced to $20 million in the year 2020. Proceeds were used to replace and repay in full the Company’s existing $525 million Revolving Credit Facilities.

The ~~ABL Credit Facilities~~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 June 30, 2019, the Company leased approximately 78% of its centers; 49% were leased pursuant to master lease agreements with four landlords. The Company also leases certain office space, land, and equipment.

The Company’s real estate leases generally have ~~a five-year~~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 ~~set~~for an additional five to ~~mature on March 6, 2023. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior~~ten years or more. Exercise of the renewal options is generally subject to the ~~maturity~~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 ~~Term Loan Agreements, Welltower Real Estate Loans~~ROU asset and lease liability. The payment structure of the Company’s leases generally contain annual escalation clauses that are either fixed or ~~MidCap Real Estate Loans,~~variable in ~~the event those agreements~~nature, some of which are dependent upon published indices. Leases with an initial term of 12 months or less are not ~~extended or refinanced.~~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.

Certain leases include options for the Company to purchase the leased asset. For such leases, 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, purchase options are generally accounted for 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 ~~revolving credit facility includes~~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 ~~swinging lockbox arrangement~~portfolio approach was utilized to group assets based on similar lease terms in a manner whereby the Company ~~transfers all funds deposited within its designated lockboxes~~reasonably expects that the application does not differ materially from application to ~~MidCap on a daily basis and then draws from the revolving credit facility as needed. In accordance with U.S. GAAP,~~individual leases.

Subsequent to lease commencement date, the Company ~~has presented~~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 ~~entire revolving credit facility borrowings balance~~assessment of ~~$83.8 million~~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 ~~current installments~~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 ~~long-term debt at~~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.

Lease Transactions

During the six months ended June 30, ~~2018. Despite this classification,~~2019, the Company ~~expects that it will have the ability to borrow~~amended, extended and ~~repay on the revolving credit facility through its maturity on March 6, 2023.~~ partially terminated several material lease agreements resulting in ROU asset and liability adjustments.

~~$57.2 million~~The Welltower Master Lease was amended multiple times between January 31, 2019 and February 7, 2019 due to the divestiture and lease termination of the proceeds received under the ABL Credit Facilities remain in a restricted account. This amount is pledged to cash collateralize letters of credit previously issued under the Revolving Credit Facilities.24 skilled nursing facilities. The Company ~~has classified this deposit as restricted cash~~was granted an annual rent credit of $23.4 million. A lease modification analysis was performed and ~~equivalents on~~ the ~~consolidated balance sheets at June 30, 2018.~~

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%. 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~~remaining 49 facilities subject to the ~~lenders for any unutilized commitments. The commitment fee rate equals 0.5% per annum~~master lease were classified as operating leases.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Finance lease ROU assets and liabilities of $61.5 million and $130.2 million, respectively, were written off. On a net basis, operating lease ROU assets and liabilities of $159.8 million and $111.3 million, respectively, were written down and a gain on the ~~revolving credit facility~~partial lease termination was recorded for $20.3 million. See Note – 3 “Significant Transactions and ~~2% on the delayed draw term loan facility. The Company will be charged a letters~~Events – Next Partnership” and “Significant Transactions and Events – Divestiture of ~~credit fee equal to 6% on any undrawn letters of credit.~~Non-Strategic Facilities.” See Note 12 – “Other Income.”

The term loan facility and revolving credit facility include a termination fee equal to 2% if the loans are prepaid within the first year, 1% if the loans are prepaid after year one and before year two, and 0.5% thereafter. 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 loans retirement or on the maturity date.

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 June 30, 2018 (dollars in thousands):~~

Weighted

Average

ABL Credit Facilities

Commitment

Borrowings

Interest

Term loan facility

$
325,000

$
325,000

8.34
%
Revolving credit facility (Non-HUD)

155,000

54,816

8.34
%
Revolving credit facility (HUD)

45,000

29,013

8.34
%
Delayed draw facility

30,000

—

13.34
%

$
555,000

$
408,829

8.34
%

As of June 30, 2018, the Company had a total borrowing base capacity of $464.4 million with outstanding borrowings under the ABL Credit Facilities of $408.8 million, leaving the Company with approximately $55.6 million of available borrowing capacity under the ABL Credit Facilities.

~~Revolving Credit Facilities~~

Prior to March 6, 2018, the Company’s Revolving Credit Facilities, as amended, consisted of a senior secured, asset-based revolving credit facility of up to $525.0 million under two separate tranches: Tranche A-1 and HUD Tranche and were set to mature on February 2, 2020. Interest accrued at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin. The applicable margin was based on the level of commitments for both tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.00% to 3.50%; and (ii) for HUD Tranche ranges from 2.50% to 3.00%. The applicable margin was based on the level of commitments for both tranches, and in regards to base rate loans (i) for Tranche A-1 ranges from 2.00% to 2.50% and (ii) for HUD Tranche ranges from 2.00% to 2.50%.

~~Term Loan Agreements~~

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a four-year term loan agreement (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, with scheduled annual amortization of 2.5% of the initial principal balance in years one, two and three, and 5.0% in year four. On ~~March 6, 2018,~~January 31, 2019, the Company entered into a new master lease agreement with Next to lease 15 skilled nursing facilities for an ~~amendment~~initial term of 15 years plus two five-year renewal options. The Company has concluded it is the primary beneficiary of the Next Partnership and has consolidated the financial statements of the 15 real estate entities. As such, the ROU assets and liabilities related to this lease agreement have been fully eliminated in the ~~Term Loans (the Term Loan Amendment) pursuant to which~~Company’s consolidated financial statements. See Note – 3 “Significant Transactions and Events – Next Partnership.”

On March 8, 2019, the Company ~~borrowed an additional $40 million~~exercised a five-year renewal option on one master lease agreement with a third party landlord relating to 19 facilities extending the lease term through October 31, 2026. The renewal option period was not included in the initial operating lease ROU asset and liability as it was not determined to be ~~used for~~reasonably certain ~~debt repayment~~of exercising upon the Company’s transition to Topic 842 on January 1, 2019. The extension resulted in an operating lease ROU asset and ~~general corporate purposes (the 2018 Term Loan).~~ liability step-up of $77.2 million.

On May 1, 2019, the Company amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million. ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off resulting in a gain of $0.5 million.

The ~~Term Loan Agreement continues to have a~~ maturity ~~date~~ of ~~July 29, 2020. The 2018 Term Loan bears interest~~total operating and finance lease obligations at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind. The Term Loan Amendment also changes the interest rate applicable to the Term Loans to be equal to 14% per annum, with up to 9% per annum to be paid in kind. As of June 30, 2018, the Term Loans and 2018 Term Loan had an outstanding principal balance of $171.1 million. Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.2019 is as follows (in thousands):


Year ending December 31,	Operating Leases		Finance Leases (1)
2019 (excluding six months ended June 30, 2019)	$	169,795	$	38,549
2020		342,545		79,083
2021		345,496		80,509
2022		339,823		82,016
2023		337,495		83,568
Thereafter		3,047,236		2,944,589
Total lease payments		4,582,390		3,308,314
Less interest		(2,221,444)		(2,466,440)
Total lease obligations		2,360,946		841,874
Less current portion		(110,156)		(2,678)
Long-term lease obligations	$	2,250,790	$	839,196

(1)

Finance lease payments include $2.3 billion related to options to extend lease terms that are reasonably certain of being exercised.

The Company’s future minimum commitments under finance leases (formerly capital leases), financing obligations, and operating leases as of December 31, 2018 were as follows (in thousands):


Year ending December 31,	Finance Leases		Financing Obligations		Operating Leases
2019	$	88,793	$	237,335	$	110,755
2020		89,397		242,052		109,391
2021		91,292		245,311		106,031
2022		93,281		242,214		84,003
2023		95,376		247,852		76,701
Thereafter		3,325,042		6,661,624		373,753
Total future minimum lease payments		3,783,181		7,876,388	$	860,634
Less amount representing interest		(2,813,068)		(5,141,448)
Total lease obligation		970,113	$	2,734,940
Less current portion		(2,171)		(2,001)
Long-term obligation	$	967,942	$	2,732,939

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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.~~


		Three months ended		Six months ended
Lease Cost	Classification	June 30, 2019		June 30, 2019
Operating lease cost	Lease expense	$	94,586	$	188,647
Finance lease cost:
Amortization of finance lease right-of-use assets	Depreciation and amortization expense		6,630		13,488
Interest on finance lease obligations	Interest expense		21,840		44,632
Total finance lease expense			28,470		58,120
Variable lease cost	Other operating expenses		10,559		21,330
Short-term leases	Other operating expenses		6,439		12,615
Total lease cost		$	140,054	$	280,712

The ~~Term Loan Agreement contains financial, affirmative~~following table provides remaining lease term and negative covenants, and events of default that are customary for debt securities of this type. Financial covenants include four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures. The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined therein, of no more than 9.0 to 1.0 through December 31, 2018 and decreasingdiscount rates by ~~0.25 annually to 8.5 to 1.0 beginning in 2020.~~

The Term Loan Agreement includes a non-cash debt premium balance of $12.1 million at June 30, 2018. As the terms under the Term Loan Amendment were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Real Estate Loan Amendments and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018. Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Term Loan Amendment weighted interest rate of 13.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Term Loan Amendment. See Note 10 – “~~Financing Obligation~~.”

~~Real Estate Loans~~

~~On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn~~lease classification as of June 30, 2018. The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments commenced with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below). 2019:


Lease Term and Discount Rate	June 30, 2019
Weighted-average remaining lease term (years)
Operating leases		13.5
Finance leases		30.2
Weighted-average discount rate
Operating leases		11.0%
Finance leases		10.7%

The ~~Company is subject to multiple real estate loan agreements with Welltower (Welltower Real Estate Loans). The Welltower Real Estate Loans are subject to payments of interest only during~~following table includes supplemental lease information for 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. Each Welltower Real Estate Loan has a maturity date of January 1, 2022three and ~~had a 10.25% interest rate beginning January 1, 2018.~~

On February 21, 2018, the Company entered into amendments to the Welltower Real Estate Loans (the Real Estate Loan Amendments). The Real Estate Loan Amendments adjusted the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind. In connection with the Real Estate Loan Amendments, the Company agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105 million of the Welltower Real Estate Loan obligations. As of June 30, 2018, the Company secured repayments or commitments totaling approximately $82 million. As a result, the annual cash component of the interest payments will be increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest. At June 30, 2018, the Welltower Real Estate Loans are secured by a mortgage lien on the real property and a second lien on certain receivables of the operators of the 15 remaining facilities subject to

~~Table of Contents~~

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~the Welltower Real Estate Loans. In the~~ six months ended June 30, 2018, the Welltower Real Estate Loans were paid down $69.7 million using proceeds from the MidCap Real Estate Loans. The Welltower Real Estate Loans have an outstanding principal balance of $212.6 million at June 30, 2018.

The Welltower Real Estate Loans include a non-cash debt premium balance of $33.8 million at June 30, 2018. As the terms under the Real Estate Loan Amendments were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Term Loan Amendment and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018. Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Real Estate Loan Amendments weighted interest rate of 12.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Real Estate Loan Amendments. See Note 10 – “~~Financing Obligation~~.”

Thirteen skilled nursing facilities subject to the Welltower Real Estate Loans, balances included in the disclosures noted above, were reclassified as assets held for sale in the consolidated balance sheets at June 30, 2018. These 13 skilled nursing facilities had an aggregate principal balance of $109.3 million, of which $12.6 million will be retired using proceeds from the sale and are classified as held for sale. The sale is expected to be completed in the third or fourth quarter of 2018. See Note 15 – “~~Assets Held for Sale~~.”

On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million real estate loan (the Other Real Estate Loan). On February 22, 2018, the skilled nursing facility subject to the Other Real Estate Loan was refinanced through a loan insured through the U.S. Department of Housing and Urban Development (HUD). Some of the proceeds from the refinancing were used to payoff fully the Other Real Estate Loan.

~~HUD Insured Loans~~

As of June 30, 2018, the Company has 31 skilled nursing facility loans insured by HUD with a combined aggregate principal balance of $277.6 million, which includes a $13.4 million debt premium on 10 skilled nursing facility loans established in purchase accounting in 2015. In the six months ended June 30, 2018, one skilled nursing facility was financed with a HUD insured loan for $10.9 million using some of the proceeds to retire the Other Real Estate Loan.

The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 30 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.5%. Depending on the mortgage agreement, 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 June 30, 2018, the Company has total escrow reserve funds of $25.4 million with the loan servicer that are reported within prepaid expenses.

The HUD loans of nine skilled nursing facilities, balances included in the disclosures noted above, were reclassified as assets held for sale in the consolidated balance sheets at June 30, 2018. These nine skilled nursing facilities had an aggregate principal balance of $88.5 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $9.3 million. The nine skilled nursing facilities are expected to be sold in the third or fourth quarter of 2018. See Note 15 – “~~Assets Held for Sale~~.”

~~Table of Contents~~

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~Notes Payable~~

~~On January 17, 2018, the Company converted $19.6 million of its trade payables into a notes payable. The note, as amended, will be repaid in equal monthly installments through December~~ 2019 ~~at an annual interest rate of 5.75% and has an outstanding balance of $11.6 million at June 30, 2018.~~

In connection with Welltower’s sale of 28 skilled nursing facilities to Cindat Best Years Welltower JV LLC (CBYW) on December 23, 2016, the Company issued two notes totaling $23.7 million to Welltower. The first note has an initial principal balance of $11.7 million and accrues cash interest at 3% and paid-in-kind interest at 7%. 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. The note has an outstanding accreted principal balance of $13.2 million at June 30, 2018. The second note had an initial principal balance of $12.0 million and was converted into 3.0 million shares of common stock on November 13, 2017 and cancelled.

~~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 3.7% at June 30, 2018, with maturity dates ranging from 2018 to 2020.

~~Mortgages and other secured debt (non-recourse).~~ Loans are carried by certain of the Company’s consolidated joint ventures. The loans consist principally of revenue bonds and secured bank loans. 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 4.9% at June 30, 2018. Maturity dates range from 2023 to 2034. 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. The aggregate principal balance of these loans includes a $1.6 million debt premium on one debt instrument. The Company’s consolidated current installment of long-term debt decreased $10.9 million due to the reclassification of a non-recourse loan to long term upon the completion of a refinancing in March 2018.

~~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, minimum liquidity and maximum capital expenditures. At June 30, 2018, the Company was in compliance with 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 and control costs. 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 covenant compliance requirements. 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 an even more significant impact on the Company’s financial position.

~~Table of Contents~~

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~The maturity of total debt of $1,161.9 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at June 30, 2018 is as follows (in thousands):~~

Twelve months ended June 30,

2019

$
107,373
2020

11,019
2021

236,580
2022

219,897
2023

408,280
Thereafter

178,719
Total debt maturity

$
1,161,868

~~(9)Leases and Lease Commitments~~

~~The Company leases certain facilities under capital and operating leases. Future minimum payments for the next five years and thereafter under such leases at June 30, 2018 are as follows~~ (in thousands):

Twelve months ended June 30,

Capital Leases

Operating Leases
2019

$
91,414

$
121,271
2020

89,998

120,032
2021

91,913

119,863
2022

93,921

104,072
2023

95,988

87,304
Thereafter

3,400,760

400,888
Total future minimum lease payments

3,863,994

$
953,430
Less amount representing interest

(2,865,776)

Capital lease obligation

998,218

Less current portion

(2,159)

Long-term capital lease obligation

$
996,059


	Three months ended		Six months ended
Other information	June 30, 2019		June 30, 2019
Cash paid for amounts included in the measurement of lease obligations
Operating cash flows from operating leases	$	84,309	$	171,928
Operating cash flows from finance leases		19,008		40,451
Financing cash flows from finance leases		696		1,271
Right of use assets obtained in exchange for new lease obligations
Operating leases		-		77,166

~~Capital~~ Lease ~~Obligations~~Covenants

The capital lease obligations represent the present value of future minimum lease payments under such capital lease and cease to use arrangements and bear a weighted average imputed interest rate of 10.0% at June 30, 2018, and mature at dates ranging from 2026 to 2048.

~~Deferred Lease Balances~~

At June 30, 2018 and December 31, 2017, the Company had $28.2 million and $34.9 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $9.3 million and $15.5 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheets. Favorable and unfavorable lease assets and liabilities arise through the acquisition of operating leases in place that requires those contracts be recorded at their then fair value. The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets. A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with its cost above market rates. These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis. At June 30, 2018 and December 31, 2017, the Company had $22.2 million and $28.7 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheets.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~Lease Covenants~~

Certain lease agreements contain a number of restrictive covenants 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, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage. These leases include cross-default provisions with each other and certain material debt instruments.

The Company has master lease agreements with Welltower, Sabra Health Care REIT, Inc., Omega and ~~Omega~~Second Spring Healthcare Investments (Second Spring) (collectively, the Master Lease Agreements). The 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 June 30, ~~2018,~~2019, the Company is in compliance with the financial covenants contained in the Master Lease Agreements.

The Company has atwo master lease ~~agreement~~agreements with Second Spring involving 52 of its facilities. The Company did not meet a financial covenant contained in this master lease agreement at June 30, 2018. The Company received a waiver for this covenant breach.

~~The Company has a master lease agreement with CBYW~~Cindat Best Years Welltower JV LLC (CBYW) involving 28 of its facilities. The Company did not meet certain financial covenants contained in ~~this~~one of the master lease ~~agreement~~agreements involving nine of its facilities at June 30, ~~2018. The~~2019. On August 2, 2019, the Company received a waiver for these covenant ~~breaches.~~ breaches through October 1, 2020. At June 30, 2019, the Company is in compliance with the financial covenants contained in the other master lease agreement.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

At June 30, ~~2018,~~2019, the Company did not meet certain financial covenants contained in ~~seven~~three leases related to 45five of its facilities. The Company is and expects to continue to be 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 June 30, ~~2018~~2019 will have a material adverse impact on it. 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 and control costs. 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 lease covenant compliance requirements. 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 an even more significant impact on the Company’s financial position.

~~(10)Financing Obligation~~(9)Long-Term Debt

~~Financing obligations represent the present value of future minimum lease payments under such lease arrangements and bear a weighted average imputed interest rate of approximately 9.1%~~Long-term debt at June 30, 2019 and December 31, 2018 ~~and mature at dates ranging from 2021 to 2048.~~consisted of the following (in thousands):



	June 30, 2019		December 31, 2018
Asset based lending facilities, net of debt issuance costs of $9,975 and $11,335 at June 30, 2019 and December 31, 2018, respectively	$	369,715	$	419,289
Term loan agreements, net of debt issuance costs of $1,367 and $1,851 and debt premium balance of $6,130 and $8,446 at June 30, 2019 and December 31, 2018, respectively		190,126		184,652
Real estate loans, net of debt issuance costs of $4,603 and $5,360 and debt premium balance of $24,159 and $28,992 at June 30, 2019 and December 31, 2018, respectively		278,426		307,690
HUD insured loans, net of debt issuance costs of $4,620 and $5,247 and debt premium balance of $0 and $860 at June 30, 2019 and December 31, 2018, respectively		135,112		181,762
Notes payable		80,124		81,398
Mortgages and other secured debt (recourse)		5,647		4,190
Mortgages and other secured debt (non-recourse), net of debt issuance costs of $3,487 and $187 and debt premium balance of $1,471 and $1,520 at June 30, 2019 and December 31, 2018, respectively		191,568		26,483
		1,250,718		1,205,464
Less: Current installments of long-term debt		(108,639)		(122,531)
Long-term debt	$	1,142,079	$	1,082,933

Asset Based Lending Facilities

On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap). The ~~Welltower Master Lease Amendment includes~~agreement initially provided for a ~~non-cash financing obligation discount balance~~$555.0 million asset based lending facility comprised of ~~$49.4~~(a) a $325.0 million ~~at June 30, 2018. As~~first lien term loan facility, (b) a $200.0 million first lien revolving credit facility and (c) a $30.0 million delayed draw term loan facility (collectively, the ~~terms~~ABL Credit Facilities). The commitments under the ~~Welltower Master Lease Amendment were negotiated and executed at the same time as other Welltower amendments included~~delayed draw term loan facility will be reduced to $20.0 million in the ~~Restructuring Transactions (i.e.~~year 2020.

On June 5, 2019, the ABL Credit Facilities were amended to simultaneously increase the aggregate revolving credit facility commitment by $40.0 million and partially prepay the first lien term loan facility by $40.0 million. The resulting commitment levels of the revolving credit facility and first lien term loan facility were $240.0 million and $285.0 million, respectively.

The ABL Credit Facilities have a five-year term set to mature on March 6, 2023. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan ~~Amendment and~~Agreements, Welltower Real Estate ~~Loan Amendment)~~Loans or MidCap Real Estate Loans (each defined below), ~~U.S. GAAP requires~~in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements~~compared to the carrying value of the original obligations on March 6, 2018. Since the combined effective interest rate of~~transfers all ~~the Restructuring Transactions involving Welltower of approximately 7.5% is higher than the Welltower Master Lease Amendment weighted interest rate of~~ funds deposited within its

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed. In accordance with U.S. GAAP, the Company has presented the entire revolving credit facility borrowings balance of $94.7 million in current installments of long-term debt at June 30, 2019. Despite this classification, the Company expects that it will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023. Cash proceeds of $52.3 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 on the consolidated balance sheets at June 30, 2019 and December 31, 2018.

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.

Borrowings and interest rates under the ABL Credit Facilities were as follows at June 30, 2019 (dollars in thousands):


					Weighted
					Average
ABL Credit Facilities	Commitment		Borrowings		Interest
Term loan facility	$	285,000	$	285,000	8.32	%
Revolving credit facility (Non-HUD)		168,000		57,177	8.32	%
Revolving credit facility (HUD)		72,000		19,514	8.32	%
Delayed draw term loan facility		30,000		18,000	13.32	%
	$	555,000	$	379,691	8.56	%

As of June 30, 2019, the Company had a total borrowing base capacity of $411.3 million with outstanding borrowings under the ABL Credit Facilities of $379.7 million, leaving the Company with approximately $31.6 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 amended on May 9, 2019 to extend the maturity date from July 29, 2020 to November 30, 2021. The original Term Loan for $120.0 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 additional Term Loan for $40.0 million bears interest at a rate equal to 14.0% per annum, with up to 9.0% per annum to be paid in kind. As of June 30, 2019, the Term Loans had an outstanding principal balance of $185.4 million, including a net debt premium balance of $6.1 million.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~approximately 7.0%,~~

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company ~~recorded~~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 ~~financing obligation discount,~~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 four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures. The most restrictive financial covenant is the minimum interest coverage ratio which requires the Company to maintain a coverage ratio, as defined therein, of no less than 1.70 to 1.0 through December 31, 2020, and increasing to 1.80 to 1.0 thereafter.

Real Estate Loans

On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was ~~offset~~drawn as of June 30, 2019. The MidCap Real Estate Loans are secured by 15 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which were interest only in the first year, are subject to an annual interest rate equal to 30-day LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments commenced, with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below). On May 1, 2019, the Company divested the real property and operations of five skilled nursing facilities in California, three of which were subject to the MidCap Real Estate Loans. The Company used the sale proceeds to repay $27.7 million on the MidCap Real Estate Loans. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities.” The MidCap Real Estate Loans have an outstanding balance of $45.1 million at June 30, 2019.

On November 8, 2018, one 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 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. The loan has an outstanding balance of $9.9 million at June 30, 2019.

The Company is subject to multiple 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. Each Welltower Real Estate Loan has 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 June 30, 2019, 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 June 30, 2019, the Welltower Real Estate Loans are secured by a ~~corresponding~~mortgage lien on the real property and a second lien on certain receivables of the operators of the five remaining facilities subject to the Welltower Real Estate Loans. 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

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Loans, such that the remaining outstanding principal balance does not exceed $50.0 million. As of June 30, 2019, the Welltower Real Estate Loans have an outstanding principal balance of $203.9 million, including a debt premium balance of $24.2 million.

HUD Insured Loans

As of June 30, 2019, the Company has 23 skilled nursing facility loans insured by the U.S. Department of Housing and Urban Development (HUD) with a combined aggregate principal balance of $196.8 million, including a debt premium balance of $3.0 million.

The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 29 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.4%. Depending on the mortgage agreement, 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 June 30, 2019, the Company has total escrow reserve funds of $19.6 million with the loan servicer that are reported within prepaid expenses.

On May 1, 2019, the Company divested the real property and operations of five skilled nursing facilities in California, two of which were subject to HUD insured loans totaling $14.2 million. The Company used the sale proceeds to retire these loans. See Note 3 – “Significant Transactions and Events – Divestiture of Non-Strategic Facilities.”

At June 30, 2019, the HUD loans of six skilled nursing facilities were reclassified as assets held for sale in the consolidated balance sheets. These six skilled nursing facilities had an aggregate principal balance of $56.3 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $6.6 million. The sale of one of the facilities was completed on August 1, 2019 and the sales of the remaining five facilities are expected to be completed in 2019. See Note 14 – “Assets Held for Sale” and Note 17 – “Subsequent Events.”

Notes Payable

On January 17, 2018, the Company converted $19.6 million of its trade payables into a note payable. The note, as amended, will be repaid in equal monthly installments through December 2019 at an annual interest rate of 5.75% and has an outstanding balance of $4.0 million at June 30, 2019.

In connection with Welltower’s sale of 64 skilled nursing facilities to Second Spring on November 1, 2016, the Company issued a note totaling $51.2 million to Welltower. The note accrues cash interest at 3% and paid-in-kind interest at 7%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1. The note was amended on May 9, 2019 to extend the maturity date from October 30, 2020 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 has an outstanding accreted balance of $62.1 million at June 30, 2019.

In connection with Welltower’s sale of 28 skilled nursing facilities to CBYW on December 23, 2016, the Company issued a note totaling $11.7 million to Welltower. The note accrues cash interest at 3% and ~~Term Loan Amendment,~~paid-in-kind interest at 7%. Cash interest is paid and ~~will amortize over~~paid-in-kind interest accretes the ~~life~~principal amount semi-annually every June 15 and December 15. The note matures on December 15, 2021, and has an outstanding accreted principal balance of $14.1 million at June 30, 2019.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 ~~Welltower Master Lease Amendment. See Note 8 – “Long-Term Debt – Term Loan Agreements~~”underlying real property and “~~Long-Term Debt – Real Estate Loans~~.”have fixed or variable rates of interest with a weighted average interest rate of 1.6% at June 30, 2019, with maturity dates ranging from 2019 to 2020.

~~Future minimum payments for~~Mortgages and other secured debt (non-recourse). Loans are carried by certain of the ~~next five years~~Company’s consolidated joint ventures and ~~thereafter under leases classified as financing obligations~~VIEs. The loans consist principally of revenue bonds and secured bank loans. 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 5.1% at June 30, ~~2018~~2019. Maturity dates range from 2022 to 2034. 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. The aggregate principal balance of these loans includes a $1.5 million debt premium on one debt instrument. In the six months ended June 30, 2019, the Company consolidated the financial statements of the Next Partnership. See Note 3 – “Significant Transactions and Events – Next Partnership.” The Next Partnership’s debt consists of a three-year term loan in the amount of $142.1 million and a 10-year mezzanine loan in the amount of $27.0 million.

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, minimum liquidity and maximum capital expenditures. The Credit Facilities include cross-default provisions with each other and certain material lease agreements. At June 30, 2019, the Company was in compliance with its financial covenants contained in the Credit Facilities.

The maturity of total debt of $1,243.0 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at June 30, 2019 is as follows (in thousands):


Twelve months ended June 30,
2019	$	234,780
2020		239,316	$	108,688
2021		244,073		6,835
2022		242,594		614,065
2023		244,414		350,200
2024				9,015
Thereafter		6,726,252		154,207
Total future minimum lease payments		7,931,429
Less amount representing interest		(5,184,647)
Financing obligations	$	2,746,782
Less current portion		(1,983)
Long-term financing obligations	$	2,744,799
Total debt maturity			$	1,243,010

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~(11)~~(10)Income Taxes

The Company effectively owns ~~63.0%~~65.7% of FC-GEN, which is an entity taxed as a partnership for U.S. income tax ~~purposes. This is~~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 ~~63.0%~~65.7% ownership of FC-GEN.

For the three months ended June 30, ~~2018,~~2019, the Company recorded income tax benefit of $0.2 million from continuing operations, representing an effective tax rate of 1.8%, compared to income tax benefit of $0.9 million from continuing operations, representing an effective tax rate of 1.4%, ~~compared to~~for the same period in 2018.

For the six months ended June 30, 2019, the Company recorded income tax ~~expense~~benefit of ~~$2.8~~$0.1 million from continuing operations, representing an effective tax rate of ~~(2.7)%~~0.3%, ~~for the same period in 2017.~~

~~For the six months ended June 30, 2018, the Company recorded~~compared to income tax benefit of $0.5 million from continuing operations, representing an effective tax rate of 0.3%, ~~compared to income tax expense of $4.1 million from continuing operations, representing an effective tax rate of (2.2)%,~~ for the same period in ~~2017.~~

The change in the effective tax rate for the three and six months ended June 30, 2018, is attributable to a reduced projected change in the Company’s hanging credit deferred tax liability compared to the prior period that is the result of the goodwill impairment recorded against the inpatient services business in the third quarter of 2017.2018.

The Company continues to assess the requirement for, and amount of, a valuation allowance in accordance with the ~~more~~“more likely than ~~not~~not” standard. Management had previously determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets. As of June 30, ~~2018,~~2019, management has determined that the valuation allowance is still necessary.

The Company’s Bermuda captive insurance company is expected to produce a minimal U.S. federal taxable loss in ~~2018.~~2019. The captive is expected to generate positive pre-tax income in future periods to off-set its deferred tax assets. The ~~2018~~2019 U.S. federal taxable loss cannot be carried back but can be carried forward indefinitely.

The Company provides rehabilitation therapy services within the People’s Republic of China and Hong Kong. At June 30, ~~2018,~~2019, these business operations do not comprise a significant portion of the Company’s overall operating results. Management does not anticipate these operations will generate significant taxable income in the near term. The operations currently do not have a material effect on the Company’s effective tax rate.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) on December 23, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Tax Reform Act enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740. The Company's federal net operating losses that have been incurred prior to January 1, 2018, will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. For net operating losses created after December 31, 2017, the net operating losses will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. The Company has estimated the impact of the Tax Reform Act on state income taxes reflected in its income tax expense for the three and six months ended June 30, 2018. Reasonable estimates for the Company’s state and local provision were made based on the Company's analysis of tax reform. These provisional amounts may be adjusted in future periods during 2018 when additional information is obtained. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service (IRS) will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state and local income tax returns, state and local net operating losses and corresponding valuation allowances.

Exchange Rights and Tax Receivable Agreement

The 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’s membership interest in FC-GEN would increase and its purchase price would be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets. Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future. Any such increase would also ~~decrease~~result in a decreased gain (or ~~increase~~increased loss) on future dispositions of the affected assets. There were exchanges of 3,080,348 FC-GEN units and Class C shares in the six months ended June 30, 2019 equating to 3,080,883 Class A shares. The exchanges during the six months ended June 30, 2019 resulted in a $13.7 million internal revenue code (IRC) Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN. There were exchanges of 1,860,592 FC-GEN units and Class C shares in the six months ended June 30, 2018 equating to 1,860,912 Class A shares. The exchanges during the six months ended June 30, 2018 resulted in a $9.5 million internal revenue code (IRC) Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN. There were exchanges of 2,048,869 FC-GEN units and Class C shares during the six months ended June 30, 2017 equating to 2,049,222 Class A shares. The exchanges during the six months ended June 30, 2017 resulted in a $12.8 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.

The Company ~~has~~is party to a tax receivable agreement (TRA) with the owners of FC-GEN. The agreement provides for the payment by the Company to the 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 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.

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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, including:

the timing of ~~exchanges—~~exchanges – for instance, the increase in any tax deductions will vary depending on the fair value of the depreciable or amortizable assets of FC-GEN and its subsidiaries at the time of each exchange, which fair value may fluctuate over time;

the price of shares of Company Class A common stock at the time of the exchange—the increase in any tax deductions, and the tax basis increase in other assets of FC-GEN and its subsidiaries is directly proportional to the price of shares of Company Class A common stock at the time of the exchange;

the amount and timing of the Company’s ~~income—~~income – the Company is required to pay 90% of the deemed benefits as and when deemed realized. If FC-GEN does not have taxable income, the Company is generally not required (absent a

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change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit will have been actually realized. However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in payments under the TRA; 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.

(11)Related Party Transactions

The Company provides rehabilitation services to certain facilities owned and operated by a customer in which certain members of the Company’s board of directors and board observers beneficially own a majority ownership interest in the aggregate. These services resulted in net revenues of $29.9 million and $59.8 million in the three and six months ended June 30, 2019, respectively, as compared to net revenues of $32.8 million and $65.6 million in the three and six months ended June 30, 2018, respectively. The services resulted in net accounts receivable balances of $29.6 million and $32.3 million at June 30, 2019 and December 31, 2018, respectively. In addition, the Company has a note receivable for $56.2 million due from the related party customer. The Company has posted a $55.0 million reserve against the note receivable and deems this reserve prudent given the delays in collection on

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account of this related party customer. Further, the reserve represents the judgment of management, and does not indicate a forgiveness of any amount of the outstanding accounts receivable 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.

Certain members of the Company’s board of directors and board observers indirectly beneficially hold ownership interests in FC Compassus LLC (Compassus) totaling less than 10% in the aggregate. The Company is party to certain immaterial preferred provider and affiliation agreements with Compassus. Separately, the Company has a note receivable balance of $21.0 million from Compassus outstanding at June 30, 2019. The note, which is comprised of principal of $12.0 million and accrued interest, is associated with the Company’s sale of its hospice and home health operations to Compassus, which was completed during 2016.

Certain members of the Company’s board of directors and board observers indirectly beneficially hold ownership interests in Trident USA totaling less than 10% in the aggregate. The Company is party to mobile radiology and laboratory/diagnostic services agreements with Trident USA. Fees for these services were $1.2 million and $3.8 million in the three and six months ended June 30, 2019, respectively, compared to $3.4 million and $6.6 million in the three and six months ended June 30, 2018, respectively.

Certain subsidiaries of the Company are subject to a lease and a purchase option 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 is $13.0 million. The purchase option will become exercisable in the fifth lease year. In addition, certain subsidiaries of the Company are subject to a lease and a purchase option of 15 centers in Pennsylvania, New Jersey, Connecticut, Massachusetts and West Virginia from 15 separate limited liability companies affiliated with the Next Landlord Entities. The Company owns a 46% membership interest in the Next Partnership. The lease was effective February 1, 2019 and the initial annualized rent to be paid is $19.5 million. The purchase option is exercisable for a period of time in the fifth, sixth and seventh lease years. See Note 3 – “Significant Transactions and Events – Next Partnership.” 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 with respect to the Next Landlord Entities.

As of June 30, 2019, Welltower held approximately 8.9% of the shares of the Company’s Class A Common Stock, representing approximately 5.8% of the voting power of the Company’s voting securities. 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. Beginning January 1, 2019, annual rent escalators under the master lease were 2.0%. During the three and six months ended June 30, 2019, the Company paid rent of approximately $18.1 million and $38.2 million, respectively, to Welltower. The Company holds options to purchase certain facilities subject to the master lease. At June 30, 2019, the Company leased 47 facilities from Welltower. The Company and certain of its affiliates are also party to certain debt instruments with Welltower. See Note 9 – “Long-Term Debt – Term Loan Agreements,” “Long-Term Debt – Real Estate Loans,” and “Long-Term Debt – Notes Payable.”

In the third quarter of 2018, the Company began providing rehabilitation services to five health care centers operated by affiliates of NSPR Centers, LLC (NSpire). Certain members of the Company’s board of directors and board observers beneficially own in the aggregate a majority of the ownership interests in NSpire. The Company recorded net revenues of $1.8 million and $3.6 million, respectively, for services provided to NSpire in the three and six months ended June 30, 2019. The services resulted in net accounts receivable balances of $1.2 million and $1.1 million at June 30, 2019 and December 31, 2018, respectively.

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(12)Other Income

In the the three and six months ended June 30, 2019 and 2018, 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 June 30,				Six months ended June 30,
	2019		2018		2019		2018
Gain on sale of owned assets	$	(27,345)	$	—	$	(27,345)	$	—
Loss recognized for exit costs associated with divestiture of operations		4,578		7,368		7,921		9,074
Gain on partial master lease termination		(646)		—		(20,906)		—
Gain on lease terminations and amendments - unamortized straight-lining, favorable and unfavorable lease balances		—		(8,379)		—		(10,017)
Gain on lease terminations and amendments - unamortized financing lease and capital lease obligations		—		(21,209)		—		(21,209)
Total other income	$	(23,413)	$	(22,220)	$	(40,330)	$	(22,152)

(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 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 the primary asset in each long-lived asset group, principally a building in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. During the three and six months ended June 30, 2019, the Company recognized impairment charges in the inpatient segment of $0.9 million. During the three and six months ended June 30, 2018, the Company recognized impairment charges in the inpatient segment totaling $27.3 million and $55.6 million, 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.

In the year ended December 31, 2018, the Company identified a disposal group of seven skilled nursing facilities operated by the Company in the state of Texas that qualified as assets held for sale. The Company is party to a purchase and sale agreement, as amended, to sell the facilities for $20.1 million. Four of the facilities are subject to Welltower Real Estate Loans and three of the facilities are subject to HUD-insured loans. The disposal group does not meet the criteria as a discontinued operation. The sale of the real estate of the seven skilled nursing facilities is expected to close in 2019 and marks an exit from the inpatient business in Texas.

In the six months ended June 30, 2019, the Company identified a disposal group of eight skilled nursing facilities and one assisted/senior living facility operated by the Company in the state of California that qualified as assets held for sale. The Company is party to a purchase and sale agreement, as amended, to sell the facilities for $88.8 million. During the three months ended June 30, 2019, one of the nine facilities was removed from the purchase and sale agreement and is no longer classified as held for sale as of June 30, 2019. On May 1, 2019, five of the facilties were sold. See Note 3 – “Significant Transactions and Events – Divestiture of

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Non-Strategic Facilities.” The remaining three facilities are subject to HUD-insured loans. On August 1, 2019, the assisted/senior living facility was sold. See Note 17 – “Subsequent Events.” Closing on the remaining two facilities is subject to licensure and other regulatory approvals and is expected to occur in 2019. The disposal group does not meet the criteria as a discontinued operation. No gain or loss was recognized in the statements of operations for the disposal group.

In total, the Company has classified as assets held for sale in its consolidated balance sheets as of June 30, 2019 and December 31, 2018, the real property and other balances associated with 10 facilities and seven facilities, respectively.

The following table sets forth the major classes of assets and liabilities included as part of the disposal groups (in thousands):


	June 30, 2019		December 31, 2018
Current assets:
Prepaid expenses	$	6,574	$	3,375
Long-term assets:
Property and equipment, net of accumulated depreciation of $8,045 and $3,640 at June 30, 2019 and December 31, 2018, respectively		41,418		16,087
Total assets	$	47,992	$	19,462
Current liabilities:
Current installments of long-term debt	$	1,257	$	639
Long-term liabilities:
Long-term debt		55,038		25,942
Total liabilities	$	56,295	$	26,581

(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. Policies are typically written for a duration of 12 months 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. 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

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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.

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, ~~and~~ to provide it with the data utilized in its assessments of reserve adequacy. ~~The~~Where TPAs are utilized, they operate under the oversight of the Company’s in-house risk management and legal functions. These functions

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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 reserves for loss for workers’ compensation risks are discounted based on actuarial ~~estimates. The~~estimates of claim payment patterns using a discount rate for the current policy year ~~is 2.66%~~of 1.8%. 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 ~~$7.3~~$9.5 million and ~~$6.7~~$8.3 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

For the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the provision for general and professional liability risk totaled ~~$26.0~~$5.4 million and ~~$33.9 million,~~$26.0, respectively. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the provision for general and professional liability risk totaled $26.8 million and $54.2 million, respectively. The reduction in the provision for general and ~~$68.4 million, respectively.~~professional liability for the three and six months ended June 30, 2019 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives. The reserves for general and professional liability were ~~$450.9~~$402.2 million and ~~$442.9~~$435.3 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

For the three months ended, June 30, ~~2018~~2019, and ~~2017,~~2018, the provision for workers’ compensation risk totaled ~~$11.1~~$13.4 million and ~~$11.7~~$11.1 million, respectively. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the provision for workers’ compensation risk totaled ~~$26.4~~$28.6 million and ~~$28.9~~$26.4 million, respectively. The reserves for workers’ compensation risks were ~~$172.3~~$170.8 million and ~~$174.6~~$168.3 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 ~~$17.5~~$15.3 million and $16.6 million as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018, 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.

Legal Proceedings

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, ~~with the exception of the specific matters noted below,~~ 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

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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.

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~~(13)~~(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. The Company is not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

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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The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):


	Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant				Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable				Active Markets for		Significant Other		Unobservable
	June 30,		Identical Assets		Observable Inputs		Inputs		June 30,		Identical Assets		Observable Inputs		Inputs
Assets:	2018		(Level 1)		(Level 2)		(Level 3)		2019		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	78,932	$	78,932	$	—	$	—	$	11,857	$	11,857	$	—	$	—
Restricted cash and equivalents		64,140		64,140		—		—		84,934		84,934		—		—
Restricted investments in marketable securities		132,628		132,628		—		—		144,450		49,889		94,561		—
Total	$	275,700	$	275,700	$	—	$	—	$	241,241	$	146,680	$	94,561	$	—


	Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant				Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable				Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs		December 31,		Identical Assets		Observable Inputs		Inputs
Assets:	2017		(Level 1)		(Level 2)		(Level 3)		2018		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	54,525	$	54,525	$	—	$	—	$	20,865	$	20,865	$	—	$	—
Restricted cash and equivalents		4,113		4,113		—		—		121,411		121,411		—		—
Restricted investments in marketable securities		126,116		126,116		—		—		136,153		40,699		95,454		—
Total	$	184,754	$	184,754	$	—	$	—	$	278,429	$	182,975	$	95,454	$	—

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. Many 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.

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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):


	June 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Asset based lending facilitites	$	396,133	$	396,133	$	—	$	—
Revolving credit facilities		—		—		303,091		303,091
Asset based lending facilities									$	369,715	$	369,715	$	419,289	$	419,289
Term loan agreements		180,739		180,739		120,706		120,706		190,126		190,126		184,652		184,652
Real estate loans		301,005		301,005		281,039		281,039		278,426		278,426		307,690		307,690
HUD insured loans		183,542		182,717		263,827		250,768		135,112		135,112		181,762		180,950
Notes payable		82,705		82,705		68,122		68,122		80,124		80,124		81,398		81,398
Mortgages and other secured debt (recourse)		12,573		12,573		12,536		12,536		5,647		5,647		4,190		4,190
Mortgages and other secured debt (non-recourse)		27,178		27,178		27,978		27,978		191,568		191,568		26,483		26,483
	$	1,183,875	$	1,183,050	$	1,077,299	$	1,064,240	$	1,250,718	$	1,250,718	$	1,205,464	$	1,204,652

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.

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.

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


			Impairment Charges -				Impairment Charges -
	Carrying Value		Six months ended		Carrying Value		Six months ended
	June 30, 2018		June 30, 2018		June 30, 2019		June 30, 2019
Assets:
Property and equipment, net	$	3,017,243	$	55,617	$	673,911	$	900
Finance lease right-of-use assets, net						516,537		—
Operating lease right-of-use assets						2,200,252		—
Intangible assets, net						92,397		—
Goodwill		85,642		—		85,642		—
Intangible assets, net		131,091		1,132

			Impairment Charges -				Impairment Charges -
	Carrying Value		Six months ended		Carrying Value		Six months ended
	December 31, 2017		June 30, 2017		December 31, 2018		June 30, 2018
Assets:
Property and equipment, net	$	3,413,599	$	—	$	2,887,554	$	55,617
Intangible assets, net						119,082		1,132
Goodwill		85,642		—		85,642		—
Intangible assets, net		142,976		—

The fair value allocation related to the Company’s acquisitions and the fair value of tangible and intangible assets isrelated 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~~which is a discounted cash flow ~~technique).~~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.

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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 affect 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.

~~(14)Asset Impairment Charges~~(17)Subsequent Events

~~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 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 the primary asset in each long-lived asset group, principally a building in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. During the three months ended June 30, 2018 and 2017,On July 1, 2019, the Company ~~recognized impairment charges~~completed the closure of one skilled nursing facility in ~~the inpatient segment totaling $27.3~~Massachusetts that remains subject to a master lease with Omega. The facility generated annual revenues of $5.4 million and ~~$0.0~~pre-tax net loss of $1.7 million. The closure resulted in a loss on exit of $0.2 million ~~respectively. During~~recognized in the six months ended June 30, ~~2018 and 2017,~~2019.

On July 1, 2019, the Company divested the operations of three skilled nursing facilities located in Ohio that were subject to a master lease with Omega. The facilities generated annual revenues of $21.6 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.8 million recognized ~~impairment charges~~ in the ~~inpatient segment totaling $55.6 million and $0.0 million, respectively.~~

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~Identifiable Intangible Assets with a Definite Useful Life~~

~~Favorable Leases~~

Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement. Favorable lease contracts are amortized on a straight-line basis over the lease terms. These favorable lease contracts are measured for impairment using estimated future net undiscounted cash flows expected to be generated from the use of the leased assets compared to the carrying amount of the favorable lease. The cash flow period was based on the remaining useful lives of the asset, which for favorable lease assets is the lease term. ~~During the three and~~ six months ended June 30, ~~2018,~~2019. Upon divestiture, the Company ~~recognized impairment~~ ~~charges on its favorable lease intangible assets with a definite useful life~~received an annual rent credit of ~~$1.1~~$1.9 million. There was no impairment charges recognized in the three and six months ended June 30, 2017. This charge is presented in goodwill and identifiable intangible asset impairments on the consolidated statements of operations.

~~(15)Assets Held for Sale~~

~~In the normal course of business,~~On August 1, 2019, the Company ~~continually evaluates~~divested the ~~performance~~operations 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.

~~In the first quarter of 2018, the Company identified a disposal group of 23~~six leased skilled nursing facilities ~~operated by the Company~~located in ~~the state of Texas that qualified as assets held for sale. The Company entered into a purchase and sale agreement to sell the facilities for $120.0 million. The transaction will mark~~Ohio, marking an exit from the inpatient business in ~~Texas. Thirteen of the~~this state. The facilities are subject to Welltower Real Estate Loans, nine of the facilities are subject to HUD-insured loans and one facility is leased and accounted for as a financing obligation. Closing is subject to licensure and other regulatory approvals and expected to occur in the third quarter of 2018. The disposal group does not meet the criteria as a discontinued operation. A $7.5 million asset impairment charge was recognized in the three months ended June 30, 2018 in the statements of operations to reflect a decrease in the sale price of the disposal group. See Note 14 – “~~Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life~~.”

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~The following table sets forth the major classes of assets and liabilities included as part of the disposal group (in thousands):~~

June 30, 2018
Current assets:

Prepaid expenses

$
9,278
Long-term assets:

Property and equipment, net of accumulated depreciation of $27,885

112,048
Total assets

$
121,326
Current liabilities:

Current installments of long-term debt

$
2,110
Long-term liabilities:

Long-term debt

99,259
Financing obligations

19,670
Total liabilities

$
121,039

(~~16)Related Party Transactions~~

The Company provides rehabilitation services to certain facilities owned and operated by a customer in which certain members of the Company’s board of directors beneficially own an ownership interest. These services resulted in net revenue of $32.8 million and $65.6 million in the three and six months ended June 30, 2018, respectively, as compared to net revenue of $36.4 million and $74.0 million in the three and six months ended June 30, 2017, respectively. The services resulted in net accounts receivable balances of $36.5 million and $32.0 million at June 30, 2018 and December 31, 2017, respectively. These accounts receivable balances are net of a $55.0 million reserve recorded in 2017. The Company deemed this reserve prudent given the delays in collection on account of this related party customer. The reserve represents the judgment of management, and does not indicate a forgiveness of any amount of the outstanding accounts receivable 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.

Effective May 1, 2016, the Company completed the sale of its hospice and home health operations to FC Compassus LLC for $72.0 million in cash and a $12.0 million interest-bearing note. Certain members of the Company’s board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. The combined note and accrued interest balance of $17.2 million remains outstanding at June 30, 2018. On May 1, 2016, the Company entered into preferred provider and affiliation agreements with FC Compassus LLC. Fees for these services amounted to $3.4 million and $6.6 million in the three and six months ended June 30, 2018, respectively, compared to $3.0 million and $5.7 million in the three and six months ended June 30, 2017, respectively.

Certain subsidiaries of the Company have entered into a lease and a purchase option of twelve centers in New Hampshire and Florida from twelve separate limited liability companies affiliated with Next Healthcare (the Next Landlord Entities). The lease is effective June 1, 2018 and the annualized rent paid will initially be $13.0 million. The purchase option will become exercisable in the fifth lease year. Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling less than 2.5% in the aggregate. See Note 3 – “~~Significant Transactions and Events – Lease Transactions and Divestitures.~~”

~~(17)Subsequent Events~~

On August 1, 2018, the Company divested five skilled nursing facilities located in various states. All five of the skilled nursing facilities were terminated from their respective lease agreements. They generated annual revenues of ~~$64.7~~$39.2 million and pre-tax net loss of ~~$7.9~~$1.9 million.

On August 1, 2019, the Company divested the operations and sold the real property of one assisted/senior living facility located in California for a sale price of $4.7 million. The facility generated annual revenues of $2.7 million and pre-tax net loss of $0.2 million. The facility has been classified as an asset held for sale at June 30, 2019. See Note 14 – “Assets Held for Sale.”

On August 1, 2019, the Company divested the operations of one leased skilled nursing facility in Utah. The facility generated annual revenues of $4.7 million and pre-tax net loss of $0.6 million.

The Company is currently assessing the impact that the August 1, 2019 divestitures 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 wholly-owned 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 the 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, ~~2017,~~2018, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March ~~16, 2018~~18, 2019 (the Annual Report), as well as others that are discussed in this 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 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 June 30, ~~2018,~~2019, we provided inpatient services through ~~451~~407 skilled nursing, senior/assisted living and behavioral health centers located in 3029 states. Revenues of our owned, leased and otherwise consolidated ~~centers~~inpatient businesses constitute approximately ~~86%~~87% 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 11% 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.

Recent Transactions and Events

Next Partnership

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which we acquired a 46% membership interest for $16.0 million. The remaining interest is held by Next Healthcare (Next), a related party. See Note 11 – “Related Party Transactions.” We will continue to operate these facilities pursuant to a new master lease with the Next Partnership. The term of the master lease is 15 years with two five-year renewal options available. We

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~~Recent Transactions~~will pay annual rent of $19.5 million, with no rent escalators for the first five years and ~~Events~~an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.

~~Restructuring Transactions~~

~~Overview~~

~~During~~In accordance with U.S. generally accepted accounting principles (U.S. GAAP), we have concluded the Next Partnership qualifies as a variable interest entity (VIE) and that we are the primary beneficiary. As such, we have consolidated all of the accounts of the Next Partnership in the accompanying financial statements. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million. The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million. We have not finalized the analysis of the consideration and purchase price allocation and will continue to review during the measurement period. The impact of consolidation on the accompanying consolidated statement of operations was not material for the six months ended June 30, ~~2018, we entered into a number~~2019 apart from non-recurring transaction costs of agreements, amendments and new financing facilities further described below (the Restructuring Transactions) in an effort to strengthen significantly our capital structure. In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.$5.3 million.

In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement. Also in connection with the Restructuring Transactions, we amended the financial covenants in allDivestiture of our material loan agreements and all but two of our material master leases. Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate. We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants.

~~The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.~~

~~Asset Based Lending~~Non-Strategic Facilities

~~On March 6, 2018,~~Between January 31, 2019 and February 7, 2019, we entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facilitydivested nine facilities located in New Jersey and ~~(c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities).~~

~~The ABL Credit Facilities have a five year term and proceeds~~Ohio that were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days priorsubject to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed. In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of $83.8 million in current installments of long-term debt at June 30, 2018. Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.

~~Term Loan Amendment~~

On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower Inc. (Welltower) and Omega Healthcare Investors, Inc. (Omega) (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan).

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The 2018 Term Loan will mature July 29, 2020 and bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind. The Term Loan Amendment also changes the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind.

~~Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.~~

~~Welltower Master Lease Amendment~~

~~On February 21, 2018, we entered into a definitive agreement~~master lease with Welltower ~~to amend the Welltower Master Lease~~ (the Welltower Master ~~Lease Amendment)~~Lease). The ~~Welltower Master Lease Amendment reduces our~~nine divested facilities had aggregate annual ~~base rent payment by $35.0~~revenue of $90.2 million ~~effective retroactively as~~and annual pre-tax net loss of ~~January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5%~~$6.0 million. We recognized a loss on ~~April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term~~exit reserves of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35.0$3.3 million.

~~Omnibus Agreement~~

On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan to, among other things, accommodate a refinancing of our existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our other material debt and lease obligations. See ~~Term Loan Amendment~~ ~~above.~~

In connection with the Omnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of our Class A Common Stock at an exercise price equal to $1.33 per share. Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions. The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.

~~Welltower Real Estate Loans Amendment~~

On February 21, 2018, we entered into an amendment (the Real Estate Loan Amendments) to the Welltower real estate loan (Welltower Real Estate Loans) agreements. The Real Estate Loan Amendments adjust the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind. Previously, these loans carried a 10.25% cash pay interest rate that increased by 0.25% annually on January 1.

In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans. In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount. As of June 30, 2018, we secured repayments or commitments totaling approximately $82 million.

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~~MidCap Real Estate Loans~~

On March 30, 2018, we entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of June 30, 2018. The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.

~~Lease Transactions and Divestitures~~

~~Sabra Divestitures~~

On April 1, ~~2018,~~2019, we divested ~~five skilled nursing facilities. All five~~the operations of ~~the skilled nursing facilities, three~~one behavioral health center located in ~~Massachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra).~~California upon the lease’s expiration. The ~~five skilled nursing facilities~~center generated annual revenues of ~~$28.5~~$3.1 million and pre-tax net loss of ~~$2.9~~$0.3 million. The divestiture resulted in a loss of $0.1 million.

On May ~~4, 2018, Sabra completed~~1, 2019, we divested the operations of two skilled nursing facilities located in Connecticut that were subject to the Welltower Master Lease. The facilities generated annual revenues of $18.0 million and pre-tax net loss of $1.6 million. The divestiture resulted in a loss of $0.8 million.

On May 1, 2019, we divested the real property and operations of five skilled nursing facilities in California for a sale price of $56.5 million. See Note 7 – “Property and ~~lease termination~~Equipment.” Loan repayments of $41.8 million were paid on the facilities at closing, as discussed in Note 9 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million.

On June 30, 2019, we divested the operations of one skilled nursing facility in ~~California that had been closed in 2017.~~Ohio. The facility generated annual revenues of $6.7 million and pre-tax net loss of $1.3 million. We recognized a ~~net gain on the write off~~loss of ~~certain lease liabilities, offset by exit costs, of $0.7~~$0.3 million on the ~~six~~exit of operations.

On July 1, 2019, we completed the closure of one skilled nursing ~~facilities.~~facility in Massachusetts that remains subject to a master lease with Omega. The facility generated annual revenues of $5.4 million and pre-tax net loss of $1.7 million. The closure resulted in a loss on exit of $0.2 million recognized in the six months ended June 30, 2019.

On ~~June~~July 1, ~~2018, Sabra completed~~2019, we divested the ~~sale and lease termination~~operations of 12three skilled nursing facilities located in ~~Florida~~Ohio that were subject to a master lease with Omega Healthcare Investors, Inc. (Omega). The facilities generated annual revenues of $21.6 million and ~~New Hampshire. As~~pre-tax net loss of $0.3 million. The divestiture resulted in a ~~result~~loss of $0.8 million recognized in the ~~sale,~~six months ended June 30, 2019. Upon divestiture, we ~~will receive~~received an annual rent credit of ~~$12.0 million for the remainder of the lease term. We continue to operate these facilities under a new lease with a new landlord, Next Healthcare. See Note 16 – “Related Party Transactions.” As a result of the sale, we recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $7.0~~$1.9 million.

On ~~June 29, 2018, Sabra completed~~August 1, 2019, we divested the ~~sale and lease termination~~operations of ~~eight~~six leased skilled nursing facilities located in Ohio, marking an exit from the inpatient business in this state. The facilities generated annual revenues of $39.2 million and pre-tax net loss of $1.9 million.

On August 1, 2019, we divested the operations and sold the real property of one assisted/senior living facility located in ~~seven different states. As~~California for a ~~result~~sale price of ~~the sale, we will receive an annual rent credit of $7.4 million for the remainder of the lease term. We continue to operate these facilities under a lease agreement with a new landlord.~~$4.7 million. The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million As a result of the sale, we recognized accelerated depreciation expense of $3.6 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $2.9 million.

~~Second Spring Divestitures~~

On June 1, 2018 and on June 13, 2018, Second Spring Healthcare Investments (Second Spring) completed the sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey, respectively. The combined 12 skilled nursing facilitiesfacility generated annual revenues of ~~$146.2~~$2.7 million and pre-tax net loss of $19.3 million. As a result of the sale and lease termination, the Company recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5$0.2 million. The ~~resulting gain of $21.2 million was offset by $6.3 million of exit costs. In the three months ended~~facility has been classified as an asset held for sale at June 30, ~~2018, there was accelerated depreciation expense of $5.3 million on the property and equipment sold.~~

~~Other Lease Amendments and Divestitures~~

For the six months ended June 30, 2018, we divested or amended the lease agreements to six other skilled nursing facilities. The lease agreement to one behavioral outpatient clinic expired on June 30, 2018. As a result of these lease amendments and divestitures, we recognized a loss2019. See Note 14 – “Assets Held for ~~exit costs and the write off of certain lease assets of $3.3 million.~~Sale.”

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On August 1, 2019, we divested the operations of one leased skilled nursing facility in Utah. The facility generated annual revenues of $4.7 million and pre-tax net loss of $0.6 million.

We are currently assessing the impact that the August 1, 2019 divestitures will have on our consolidated financial statements.

Acquisitions

On June 1, 2019, we acquired the operations of one skilled nursing facility in New Mexico. The new facility has approximately 80 beds and generates approximate annual net revenue of $3.4 million. The facility is leased from Omega and is classified as an operating lease. We expect the facility’s 2019 pre-tax net income to be de minimis.

Lease Amendments

Between January 31, 2019 and February 7, 2019, we amended the Welltower Master Lease several times to reflect the lease termination of 24 facilities, including the 15 facilities sold and now leased from the Next Partnership. As a result of the lease termination on the 24 facilities, we received annual rent credits of $23.4 million from Welltower. ROU assets and lease obligations of $221.3 million and $241.6 million, respectively, were written off resulting in a gain of $20.3 million.

On March 8, 2019, we amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed our option to purchase certain facilities under the lease and adjusted certain financial covenants. In ~~total for~~conjunction with the ~~six months ended June 30, 2018,~~amendment, one facility located in Ohio was closed. The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The divestiture resulted in a loss of $0.2 million.

On May 1, 2019, we ~~recorded~~amended the Welltower Master Lease to reflect the lease termination of two facilities and received annual rent credits of $0.6 million. ROU assets and lease obligations of $5.1 million and $5.6 million, respectively, were written off resulting in a ~~net~~ gain onof $0.5 million.

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

Five-Star Quality Rating System

In April 2019, the Centers for Medicare and Medicaid Services (CMS) implemented changes to the Five-Star Quality Rating System. These changes include revisions to the inspection process, adjustment of staffing rating thresholds, including increased emphasis on registered nurse staffing, implementation of new quality measures and changes in the scoring of various quality measures. CMS added two new quality measures: long-stay emergency department transfers and long-stay hospitalizations. CMS also established separate quality ratings for short-stay and long-stay residents and will now provide separate short-stay and long-stay ratings in addition to the overall quality measure rating.

The impact of the most recent five star rating methodology is expected to be significant across the industry. CMS estimates the changes will cause 47% of all nursing centers to lose stars in their "Quality" ratings. In addition, 33% will lose stars in their "Staffing" ratings, and 36% will lose stars in their "Overall" ratings. Accordingly, despite no significant changes in our staffing levels or quality of our care, these changes to the staffing and quality thresholds will have a negative impact on our star rating in 2019.

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Centers for Medicare and Medicaid Services Final Rules

On July ~~31, 2018,~~30, 2019, CMS released a final ~~payment and quality measure rules~~rule for skilled nursing facilities prospective payment services (SNF PPS) for fiscal year 2020 Medicare Part A ~~fee for~~ services. The final ~~rules address three~~rule made revisions from the proposed rule for the Patient Driven Payment Model (PDPM) market basket increase and additional modifications to the skilled nursing facility Quality Reporting Program (QRP). PDPM will replace the existing case-mix classification methodology, the Resource Utilization Groups, Version IV (RUG-IV) at the beginning of fiscal year 2020. The final rule addresses specific issue areas, discussed below, related to the fiscal year ~~2019~~2020 requirements. ~~Additionally, the rule introduced changes in the payment and case-mix methodology for Part A skilled nursing services, which will be implemented at the beginning of fiscal year 2020 (October 1, 2019).~~

Skilled Nursing Facility Medicare Part A Payment Rates

The final ~~rules establish~~rule provides for a net SNF PPS market basket ~~increase~~update factor for skilled nursing facilities of 2.4% ~~as mandated under the Bipartisan Budget Act of 2018~~ effective October 1, ~~2018. Reimbursement for~~2019. This is a full market basket update of 2.8% with no forecast error incurred and a 0.4% multifactor productivity adjustment.

Patient-Driven Payment Model (PDPM)

CMS has finalized the implementation of PDPM in a budget neutral manner and has updated the unadjusted federal per diems and related case mix groups (CMGs) and related Case Mix Indices (CMIs). To achieve budget neutrality, the unadjusted PDPM CMIs were multiplied by 1.46 so the total estimated payments under PDPM would be equal to the total actual payments under RUG-IV.

CMS has updated the PDPM payment year by refreshing fiscal year ~~2019 will be based~~2017 data with fiscal year 2018 data and applying a standardization multiplier and a budget neutrality multiplier for each of the PDPM rate components.

Under CMIs, there are differences between RUG-IV and PDPM in terms of patient classifications and billing. CMS has reflected these differences by modifying the PDPM case mixed adjusted federal rates and associated indexes through the application of a CMI multiplier for each PDPM Group.

PDPM utilizes a combination of six components to determine the amount of the per diem payment. Five of the components are case-mix adjusted, meaning they are intended to cover the utilization of skilled nursing facility resources that vary according to patient characteristics. These components are as follows: physical therapy (PT), occupational therapy (OT), speech-language pathology (SLP), non-therapy ancillary (NTA) services, and nursing. The sixth component is non-case-mix adjusted, meaning it is intended to cover those skilled nursing facility resources that do not vary by patient. The PT, OT, and NTA components are also subject to a variable adjustment factor that serves to adjust the per diem payment over the course of the patient’s stay. PT and OT services have variable per diem adjustments beginning on the ~~current~~21st day of the Medicare stay and further adjusted every seven days thereafter. NTA services have variable per diem adjustments beginning on the 4th day of the Medicare stay. PDPM utilizes patient specific, data-driven characteristics to classify patients into payment ~~methodology using~~groups within each of the ~~Resource Utilization~~ six components, which are used as the basis for the payment amount.

Group ~~Version IV (RUG-IV) model~~Therapy Under PDPM

CMS has revised the definition of skilled nursing facility group therapy so that it aligns with ~~no significant changes~~the group therapy definition used in the ~~patient classification system.~~inpatient rehabilitation facility setting effective October 1, 2019. The new definition defines group therapy in the skilled nursing facility Medicare Part A setting as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

PDPM also revises the limits on group and concurrent therapy. RUG-IV included a 25% limit per discipline (PT, OT, SLP), for group therapy and did not impose a limit for concurrent therapy. PDPM includes a 25% limit per discipline (PT, OT, SLP), for both combined group and concurrent therapy.

Skilled Nursing Facility - Quality MeasuresReporting Program (SNF QRP):

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed new data reporting requirements for certain Post-Acute-Care (PAC) providers. The IMPACT Act requires that each skilled nursing facility submit their quality measures data. Beginning with fiscal year 2018, and each subsequent year, if a skilled nursing facility does not submit required quality data, their payment rates for the year are reduced by 2.0% for that fiscal year. Application of the 2.0% reduction

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may result in payment rates for a fiscal year being less than the preceding fiscal year. In addition, reporting-based reductions to the market basket increase factor will not be cumulative; they will only apply for the fiscal year involved. A skilled nursing facility will receive a notification letter from its Medicare administrator contractor if it was non-compliant with the Quality Reporting Program reporting requirements and is subject to the payment reduction.

Current performance measures mandated for the SNF QRP for fiscal year 2019 were established in the final SNF PPS rules adopted on August 4, 2017 (FY 2018 SNF PPS Rules). The final rules summarize these requirements, finalize adoption of a new measure removal factor for previously adopted SNF QRP measures, review the quality measures currently adopted for the fiscal year 2020 SNF QRP and finalize the intention to specify new measures to be adopted no later than October 1, 2019 for the fiscal year ~~2022~~2020 SNF QRP. CMS has finalized the decision to adopt two Transfer of Health Information quality measures and standardized patient assessment data elements that skilled nursing facilities would be required to begin reporting with respect to admissions and discharges that occur on or after October 1, 2020. The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing facilities affiliated with acute care facilities, and all non-critical access hospital swing-bed rural hospitals. Under the SNF QRP, a skilled nursing facility’s annual market basket percentage is reduced by two percentage points if the skilled nursing facility does not submit quality measure data in accordance with thresholds set by the The Improving Medicare Post-Acute Care Transformation Act of 2014. Final fiscal year 2019 SNF PPS rules (FY 2019 SNF PPS Rules) specified that skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance. Lastly, CMS has finalized the proposal to publicly display the quality measure, Drug Regimen Review Conducted With Follow-Up for Identified Issues- PAC SNF QRP.

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program ~~(SNF-VBP Program)~~

~~The Protecting Access to Medicare Act of 2014, enacted on April 1, 2014, authorized a~~Under the SNF-VBP Program, ~~that requires~~ CMS began to ~~adopt a SNF-VBP Program payment adjustment for skilled nursing facilities effective~~withhold 2.0% of Medicare payments starting October 1, ~~2018. The FY~~ 2018, SNF PPS Rules provide detailed instructions for the SNF-VBP Program. The FY 2018 SNF PPS Rules adopted the Skilled Nursing Facility Readmission Measure as the skilled nursing facility 30-day all-cause readmission measure for the SNF-VBP Program. The FY 2019 SNF PPS Rules reiterate these instructions and affirm that effective October 1, 2018, skilled nursing facilities will experience a two percent withhold to fund the incentive payment ~~pool. Simultaneously, based upon performance,~~pool and will redistribute 60% of the withheld payments back to skilled nursing facilities. All skilled nursing facilities will ~~have~~receive an ~~opportunity~~incentive multiplier to ~~have~~apply to each of their ~~reimbursement~~RUG rates ~~adjusted~~ for the fiscal year that will provide an incentive ~~payments based on their performance under the SNF-VBP Program.~~

payment, a full RUG payment, or a reduction. All skilled nursing facilities ~~will~~ receive two scores, one for achievement and the other for improvement of their hospital readmission measure over the designated reporting period. All skilled nursing facilities ~~will be~~are ranked from high to low based on the higher of the two scores. The highest ranked facilities will receive the highest payments, and the lowest ranked facilities will receive payments that are less than what they otherwise would have received without the SNF-VBP Program.

~~The FY 2019 SNF PPS Rules also account for social risk factors in~~ Of the 2.0% withheld under the SNF-VBP Program, we expect to retain 1.3% based on performance.

In the fiscal year 2020 final rule, most elements of the program remain the same. The final rule reiterates the decision to transition to fiscal year data from calendar year data for baseline and ~~finalizes~~performance year calculations for FY 2020 SNF VBP Program, estimation of 2022 benchmarks and finalized the ~~numerical values~~proposal to rename the future skilled nursing facility readmission measure without actually changing the measurement itself. Two changes that were proposed for the fiscal year 2020 program that have been finalized under the final rule include (1) the change of the phase one correction process to a 30-day deadline and (2) the suppression of data for facilities with fewer than 25 eligible stays for a baseline or performance period. CMS has finalized the following related to the VBP Score Reports: if a skilled nursing facility has fewer than 25 eligible stays during the baseline period for a program year, CMS would not display the baseline Risk Standard Readmission Rate (RSRR) or improvement score, though CMS would still display the performance period RSRR, achievement score and total performance score if the skilled nursing facility ~~30-day all-cause readmission measure for~~had sufficient data during the fiscal year 2021 SNF-VBP Program, based on the fiscal year 2017 baseline period, finalizes scoring policy for skilled nursing facilities without sufficient baseline period data, finalizes SNF-VBP Program scoring adjustment for low-volume skilled nursing facilities and establishes an extraordinary circumstances exception policy for the SNF-VBP Program.

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~~New Patient-Driven Payment Model (PDPM)~~

~~This final rule replaces the existing case-mix classification methodology, the Resource Utilization Groups, Version IV (RUG-IV) model, with~~performance period; (2) if a ~~revised case-mix methodology called the Patient-Driven Payment Model (PDPM) beginning on October 1, 2019. CMS finalized the PDPM to replace the current Medicare Part A fee for service~~ skilled nursing facility ~~payment model, RUG IV. PDPM is~~has fewer than 25 eligible stays during the performance period for a ~~per diem payment, comprised of the sum of five payment components. Payments taper for physical therapy~~program year and occupational therapy beginning on day 20 and then every seven days of the Medicare stay. Payments taper for non-therapy ancillary services beginning on day three of the Medicare stay. There are two required minimum data set (MDS) assessments, the admission assessment and discharge assessment. There is one optional MDS assessment, the interim payment assessment. Under PDPM, physical therapists, occupational therapists and speech-language pathologists can deliver up to 25 percent of a patient’s treatment time using concurrent or group therapy modalities combined.

PDPM is expected to better account for patient characteristics by relating payment to patients' conditions and clinical needs rather than on volume-based services. The PDPM is required to be budget neutral relative to the current RUG-IV model such that aggregate Medicare outlays toreceives an assigned skilled nursing ~~facilities is~~facility performance score as a result, CMS would report the assigned skilled nursing facility performance score and would not ~~intended to change. The new model is designed to more accurately reflect resource utilization without incentivizing inappropriate care delivery.~~display the performance period RSRR, the achievement score or improvement score; and (3) if a skilled nursing facility has zero eligible cases during the performance period for a program year, CMS would not display any information for that skilled nursing facility.

Decisions Regarding Skilled Nursing Facility Payment

In addition to setting the payment rules for skilled nursing facility services using the SNF-VBP Program, CMS annually adjusts its payment rules for other acute and post-acute service providers including hospitals and home health agencies using a similar SNF-VBP Program. It is important to understand the Medicare program and that its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins.

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Requirements of Participation

On October 4, 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.

Changes finalized in this rule include:

Strengthening the rights of long-term care facility residents.

Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse.

Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents.

Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences.

Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services.

Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use.

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The regulations became effective on November 28, 2016. CMS is implementing the regulations using a phased approach. The phases are as follows:

Phase 1: The regulations included in Phase 1 were implemented by November 28, 2016.

Phase 2: The regulations included in Phase 2 were implemented by November 28, 2017.

Phase 3: The regulations included in Phase 3 must be implemented by November 28, 2019.

Some regulatory sections are divided among more than one phase, and some of the more extensive new requirements have been placed in later phases to allow facilities time to successfully prepare to achieve compliance.

The total costs associated with implementing the new regulations have been absorbed into our general operating costs. Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations. We have substantially complied with the regulations imposed through the Phase 1 and Phase 2 implementation.

Proposed Rule

On July 16, 2019, CMS announced a proposed rule to remove requirements of participation identified as unnecessary, obsolete, or excessively burdensome on long-term care facilities. The rule is part of the agency’s five-part approach to ensuring a high-quality long-term care facility system that focuses on strengthening requirements for such facilities, working with states to enforce statutory and regulatory requirements, increasing transparency of facility performance, and promoting improved health outcomes for facility residents.

This proposed rule would increase facilities’ ability to devote their resources to improving resident care. This would be achieved by the elimination or reduction in the hours and resources that clinicians and providers spend on obsolete and redundant requirements that could impede or divert resources away from the provision of high-quality resident care. Many of the proposed provisions would simplify and/or streamline the Medicare health and safety standards long-term care facilities must meet in order to serve their residents. Importantly, in identifying opportunities for reducing burden, CMS would maintain resident health and safety standards.

In order to give facilities enough time to respond to these proposed changes, CMS also proposes to delay the implementation of certain Phase 3 quality assurance and performance improvement program and compliance and ethics related requirements that are

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directly impacted by the proposed changes in the regulation to one year following the effective date of this proposed rule, if finalized, to avoid confusion and promote transparency.

CMS will accept comments on the proposed rule through September 16, 2019.

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.

“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.

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“Skilled Mix” refers collectively to Medicare and Insurance payor sources.

“Therapist Efficiency” is computed by dividing billable labor minutes related to patient care by total labor minutes for the period.

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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 June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Financial Results (in thousands)
Net revenues	$	1,272,360	$	1,341,276	$	2,573,432	$	2,730,408	$	1,145,052	$	1,272,360	$	2,306,692	$	2,573,432
EBITDA		117,707		81,815		175,921		188,630		72,098		117,707		136,778		175,921
Adjusted EBITDAR		163,326		175,351		313,943		341,041		156,019		163,326		304,516		313,943
Adjusted EBITDA		131,215		137,117		248,761		266,707		61,433		131,215		115,869		248,761
Net loss attributable to Genesis Healthcare, Inc.		(39,612)		(65,156)		(108,150)		(115,917)		(4,819)		(39,612)		(20,082)		(108,150)

INPATIENT SEGMENT:


	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Occupancy Statistics - Inpatient
Available licensed beds in service at end of period		46,353			52,303			46,353			52,303
Available operating beds in service at end of period		44,408			50,182			44,408			50,182
Available patient days based on licensed beds		4,213,333			4,759,573			8,378,173			9,466,843
Available patient days based on operating beds		4,036,602			4,567,679			8,027,459			9,087,860
Actual patient days		3,496,046			3,840,181			6,977,410			7,681,223
Occupancy percentage - licensed beds		83.0	%		80.7	%		83.3	%		81.1	%
Occupancy percentage - operating beds		86.6	%		84.1	%		86.9	%		84.5	%
Skilled mix		18.2	%		18.9	%		18.6	%		19.6	%
Average daily census		38,418			42,200			38,549			42,438
Revenue per patient day (skilled nursing facilities)
Medicare Part A	$	528		$	528		$	526		$	526
Insurance		454			461			456			458
Private and other		364			337			361			335
Medicaid		231			223			231			223
Medicaid (net of provider taxes)		211			204			211			204
Weighted average (net of provider taxes)	$	277		$	274		$	278		$	275
Patient days by payor (skilled nursing facilities)
Medicare		344,916			400,370			704,651			834,094
Insurance		252,272			285,935			518,739			591,221
Total skilled mix days		597,188			686,305			1,223,390			1,425,315
Private and other		193,603			227,920			379,838			454,823
Medicaid		2,505,024			2,726,538			4,975,038			5,405,661
Total Days		3,295,815			3,640,763			6,578,266			7,285,799
Patient days as a percentage of total patient days (skilled nursing facilities)
Medicare		10.5	%		11.0	%		10.7	%		11.4	%
Insurance		7.7	%		7.9	%		7.9	%		8.2	%
Skilled mix		18.2	%		18.9	%		18.6	%		19.6	%
Private and other		5.9	%		6.3	%		5.8	%		6.2	%
Medicaid		75.9	%		74.8	%		75.6	%		74.2	%
Total		100.0	%		100.0	%		100.0	%		100.0	%
Facilities at end of period
Skilled nursing facilities
Leased		311			341			311			341
Owned		37			44			37			44
Joint Venture		20			5			20			5
Managed *		12			35			12			35
Total skilled nursing facilities		380			425			380			425
Total licensed beds		46,108			52,232			46,108			52,232
Assisted/Senior living facilities:
Leased		21			19			21			19
Owned		3			4			3			4
Joint Venture		1			1			1			1
Managed		2			2			2			2
Total assisted/senior living facilities		27			26			27			26
Total licensed beds		2,233			2,209			2,233			2,209
Total facilities		407			451			407			451

Total Jointly Owned and Managed— (Unconsolidated)		14			15			14			15

4547

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~~INPATIENT SEGMENT:~~

Three months ended  June 30,

Six months ended June 30,


2018

2017


2018

2017

Occupancy Statistics - Inpatient

Available licensed beds in service at end of period

52,303

55,247

52,303

55,247

Available operating beds in service at end of period

50,182

53,265

50,182

53,265

Available patient days based on licensed beds

4,759,573

5,027,477

9,466,843

10,004,387

Available patient days based on operating beds

4,567,679

4,849,175

9,087,860

9,651,290

Actual patient days

3,840,181

4,102,031

7,681,223

8,224,551

Occupancy percentage - licensed beds

80.7
%

81.6
%

81.1
%

82.2
%
Occupancy percentage - operating beds

84.1
%

84.6
%

84.5
%

85.2
%
Skilled mix

18.9
%

19.7
%

19.6
%

20.3
%
Average daily census

42,200

45,077

42,438

45,440

Revenue per patient day (skilled nursing facilities)

Medicare Part A

$
528

$
530

$
526

$
527

Insurance

461

461

458

456

Private and other

337

328

335

323

Medicaid

223

218

223

218

Medicaid (net of provider taxes)

204

198

204

198

Weighted average (net of provider taxes)

$
274

$
272

$
275

$
273

Patient days by payor (skilled nursing facilities)

Medicare

400,370

462,145

834,094

959,782

Insurance

285,935

304,107

591,221

624,418

Total skilled mix days

686,305

766,252

1,425,315

1,584,200

Private and other

227,920

259,577

454,823

522,875

Medicaid

2,726,538

2,872,360

5,405,661

5,713,784

Total Days

3,640,763

3,898,189

7,285,799

7,820,859

Patient days as a percentage of total patient days (skilled nursing facilities)

Medicare

11.0
%

11.9
%

11.4
%

12.3
%
Insurance

7.9
%

7.8
%

8.2
%

8.0
%
Skilled mix

18.9
%

19.7
%

19.6
%

20.3
%
Private and other

6.3
%

6.7
%

6.2
%

6.7
%
Medicaid

74.8
%

73.6
%

74.2
%

73.0
%
Total

100.0
%

100.0
%

100.0
%

100.0
%
Facilities at end of period

Skilled nursing facilities

Leased

341

363

341

363

Owned

44

44

44

44

Joint Venture

5

5

5

5

Managed *

35

35

35

35

Total skilled nursing facilities

425

447

425

447

Total licensed beds

52,232

55,105

52,232

55,105

Assisted/Senior living facilities:

Leased

19

19

19

19

Owned

4

4

4

4

Joint Venture

1

1

1

1

Managed

2

2

2

2

Total assisted/senior living facilities

26

26

26

26

Total licensed beds

2,209

2,182

2,209

2,182

Total facilities

451

473

451

473

Total Jointly Owned and Managed— (Unconsolidated)

15

15

15

15

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REHABILITATION THERAPY SEGMENT**:


	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenue mix %:
Company-operated		37	%		38	%		37	%		38	%		36	%		37	%		36	%		37	%
Non-affiliated		63	%		62	%		63	%		62	%		64	%		63	%		64	%		63	%
Sites of service (at end of period)		1,424			1,528			1,424			1,528			1,203			1,424			1,203			1,424
Revenue per site	$	158,619		$	149,634		$	315,914		$	307,594		$	153,373		$	158,619		$	302,642		$	315,914
Therapist efficiency %		68	%		68	%		68	%		68	%		73	%		68	%		72	%		68	%

* ~~Includes~~2018 includes 20 facilities located in Texas for which the real estate iswas owned by Genesis

** Excludes respiratory therapy services.

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 Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net ~~loss~~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

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business unit and the employees responsible for business unit performance. Consequently, we use these Non-GAAP Financial

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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 impairment charges, federal and state income tax expenses, the operating results of our discontinued 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 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:

(Gain) loss 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 losses or gains 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.

~~Table of Contents~~

Other ~~(income) loss.~~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.

Table of Contents

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.~~

~~Customer receivership and other related charges.~~ We excluded the non-cash costs of a $35.6 million charge recorded in the three and six months ended June 30, 2017 related to customer receivership proceedings and the related respective write-down of unpaid accounts receivable. We believe these charges were caused by the challenging operating environment, particularly for highly levered customers of our rehabilitation therapy business. Accordingly, we believe these costs do not accurately 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.

Goodwill and identifiable intangible asset impairments.We exclude non-cash goodwill and identifiable intangible asset impairment charges because we believe that including them does not reflect the ongoing operating performance of our operating businesses.

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.

~~(Income) losses~~Loss (income) of newly acquired, constructed or divested businesses. The acquisition and construction of new businesses is an element of our growth strategy. 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.

~~Other Items.~~ From time to time we incur costs or realize gains that we do not believe reflect the underlying performance of our operating businesses. In the current reporting period, we incurred the following expenses that we believe are non-recurring in nature and do not reflect the ongoing operating performance of our operating businesses.

~~(1)~~

Regulatory defense and related ~~costs –~~costs. We exclude the costs of investigating and defending the inherited legal matters associated with prior ~~transactions .~~transactions. We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect ~~the~~ underlying performance of our operating businesses.

Other non-recurring costs. In the three and six months ended June 30, 2019 and June 30, 2018, 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.

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Adjusted EBITDA

The following table provides a reconciliation of the non-GAAP performance measurement EBITDA and Adjusted EBITDA from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018

Net loss attributable to Genesis Healthcare, Inc.	$	(4,819)	$	(39,612)	$	(20,082)	$	(108,150)
Adjustments to compute EBITDA:
Net loss attributable to noncontrolling interests		(4,164)		(23,245)		(13,983)		(63,380)
Depreciation and amortization expense		28,268		63,495		66,463		114,998
Interest expense		52,975		117,955		104,491		232,992
Income tax benefit		(162)		(886)		(111)		(539)
EBITDA	$	72,098	$	117,707		136,778		175,921
Adjustments to compute Adjusted EBITDA:
(Gain) loss on early extinguishment of debt		(24)		(501)		(24)		9,785
Other income		(23,413)		(22,220)		(40,330)		(22,152)
Transaction costs		8,823		3,112		10,084		15,207
Long-lived asset impairments		900		27,257		900		55,617
Goodwill and identifiable intangible asset impairments		—		1,132		—		1,132
Severance and restructuring		673		3,493		2,119		6,333
Loss (income) of newly acquired, constructed, or divested businesses		865		(925)		2,744		2,175
Stock-based compensation		1,748		2,129		3,835		4,556
Regulatory defense and related costs		—		31		—		140
Other non-recurring costs		(237)		—		(237)		47
Adjusted EBITDA	$	61,433	$	131,215	$	115,869	$	248,761

Additional lease payments not included in GAAP lease expense	$	11,302	$	74,564	$	24,869	$	152,496
Total cash lease payments made pursuant to operating leases, finance leases and financing obligations		105,888		106,675		213,516		217,678

Adjusted EBITDAR

We use Adjusted EBITDAR as one measure in determining 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 industry. 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. ~~See the reconciliation of net loss attributable to Genesis Healthcare, Inc. included herein.~~

Three months ended June 30,

Six months ended June 30,


2018

2017


2018

2017

Net loss attributable to Genesis Healthcare, Inc.

$
(39,612)

$
(65,156)

$
(108,150)

$
(115,917)
Adjustments to compute EBITDA:

Loss from discontinued operations, net of taxes

—

47

—

68
Net loss attributable to noncontrolling interests

(23,245)

(40,394)

(63,380)

(73,246)
Depreciation and amortization expense

63,495

60,227

114,998

124,596
Interest expense

117,955

124,288

232,992

249,042
Income tax (benefit) expense

(886)

2,803

(539)

4,087
EBITDA

$
117,707

$
81,815

175,921

188,630
Adjustments to compute Adjusted EBITDA:

(Gain) loss on early extinguishment of debt

(501)

2,301

9,785

2,301
Other (income) loss

(22,220)

4,190

(22,152)

13,224
Transaction costs

3,112

3,781

15,207

6,806
Customer receivership and other related charges

—

35,566

—

35,566
Long-lived asset impairments

27,257

—

55,617

—
Goodwill and identifiable intangible asset impairments

1,132

—

1,132

—
Severance and restructuring

3,493

514

6,333

4,694
(Income) losses of newly acquired, constructed, or divested businesses

(925)

6,276

2,175

10,269
Stock-based compensation

2,129

2,480

4,556

4,766
Regulatory defense and other related costs (1)

31

194

187

451
Adjusted EBITDA

$
131,215

$
137,117

$
248,761

$
266,707

Additional lease payments not included in GAAP lease expense

$
74,564

$
86,704

$
152,496

$
173,328
Total cash lease payments made pursuant to operating leases, capital leases and financing obligations

106,675

124,938

217,678

247,662

~~Table of Contents~~

The following table provides a reconciliation of the non-GAAP valuation measurement Adjusted EBITDAR from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):

Three months ended June 30,

Six months ended June 30,


2018

2017


2018

2017

Net loss attributable to Genesis Healthcare, Inc.

$
(39,612)

$
(65,156)

$
(108,150)

$
(115,917)
Adjustments to compute Adjusted EBITDAR:

Loss from discontinued operations, net of taxes

—

47

—

68
Net loss attributable to noncontrolling interests

(23,245)

(40,394)

(63,380)

(73,246)
Depreciation and amortization expense

63,495

60,227

114,998

124,596
Interest expense

117,955

124,288

232,992

249,042
Income tax (benefit) expense

(886)

2,803

(539)

4,087
Lease expense

32,111

38,234

65,182

74,334
(Gain) loss on early extinguishment of debt

(501)

2,301

9,785

2,301
Other (income) loss

(22,220)

4,190

(22,152)

13,224
Transaction costs

3,112

3,781

15,207

6,806
Customer receivership and other related charges

—

35,566

—

35,566
Long-lived asset impairments

27,257

—

55,617

—
Goodwill and identifiable intangible asset impairments

1,132

—

1,132

—
Severance and restructuring

3,493

514

6,333

4,694
(Income) losses of newly acquired, constructed, or divested businesses

(925)

6,276

2,175

10,269
Stock-based compensation

2,129

2,480

4,556

4,766
Regulatory defense and other related costs (1)

31

194

187

451
Adjusted EBITDAR

$
163,326

$
175,351

$
313,943

$
341,041

Table of Contents


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018

Net loss attributable to Genesis Healthcare, Inc.	$	(4,819)	$	(39,612)	$	(20,082)	$	(108,150)
Adjustments to compute Adjusted EBITDAR:
Net loss attributable to noncontrolling interests		(4,164)		(23,245)		(13,983)		(63,380)
Depreciation and amortization expense		28,268		63,495		66,463		114,998
Interest expense		52,975		117,955		104,491		232,992
Income tax benefit		(162)		(886)		(111)		(539)
Lease expense		94,586		32,111		188,647		65,182
(Gain) loss on early extinguishment of debt		(24)		(501)		(24)		9,785
Other income		(23,413)		(22,220)		(40,330)		(22,152)
Transaction costs		8,823		3,112		10,084		15,207
Long-lived asset impairments		900		27,257		900		55,617
Goodwill and identifiable intangible asset impairments		—		1,132		—		1,132
Severance and restructuring		673		3,493		2,119		6,333
Loss (income) of newly acquired, constructed, or divested businesses		865		(925)		2,744		2,175
Stock-based compensation		1,748		2,129		3,835		4,556
Regulatory defense and related costs		—		31		—		140
Other non-recurring costs		(237)		—		(237)		47
Adjusted EBITDAR	$	156,019	$	163,326	$	304,516	$	313,943

Results of Operations

Same-store Presentation

We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare. We are also focused on “right-sizing” our operations to fit that new environment and to divest underperforming and non-strategic assets, many of which ~~came to us~~were consolidated as part of larger acquisitions in recent years to achieve the net overall growth strategy.

We define our same-store inpatient operations as those skilled nursing and assisted 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 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 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.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and all related amendments (ASC 606). The requirements of ASC 606 were effective for us beginning January 1, 2018 and were applied using the modified retrospective method. Because prior year periods were not restated through this methodology, the new presentation could affect the direct, same-store comparability of revenue and operating expense, however, there is no impact to comparability of EBITDA for all

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~~periods presented. See Note 4 – “NetRevenues and Accounts Receivable.” The impact of the adoption of ASC 606 will be noted in these Results of Operations where comparability issues exist.~~

Three Months Ended June 30, ~~2018~~2019 Compared to Three Months Ended June 30, ~~2017~~2018

A summary of our unaudited results of operations for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017~~2018 follows (in thousands, except percentages):


	Three months ended June 30,												Three months ended June 30,
	2018				2017				Increase / (Decrease)				2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue						Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	1,065,310	83.8	%	$	1,130,525	84.2	%	$	(65,215)	(5.8)	%	$	964,541	84.2	%	$	1,065,310	83.7	%	$	(100,769)	(9.5)	%
Assisted/Senior living facilities		23,742	1.9	%		24,125	1.8	%		(383)	(1.6)	%		23,702	2.1	%		23,742	1.9	%		(40)	(0.2)	%
Administration of third party facilities		2,300	0.2	%		2,319	0.2	%		(19)	(0.8)	%		2,054	0.2	%		2,300	0.2	%		(246)	(10.7)	%
Elimination of administrative services		(743)	(0.1)	%		(385)	—	%		(358)	93.0	%		(799)	(0)	%		(743)	(0.1)	%		(56)	7.5	%
Inpatient services, net		1,090,609	85.8	%		1,156,584	86.2	%		(65,975)	(5.7)	%		989,498	86.4	%		1,090,609	85.7	%		(101,111)	(9.3)	%

Rehabilitation therapy services:
Total therapy services		234,674	18.4	%		242,917	18.1	%		(8,243)	(3.4)	%		192,906	16.8	%		234,674	18.4	%		(41,768)	(17.8)	%
Elimination intersegment rehabilitation therapy services		(88,887)	(7.0)	%		(94,496)	(7.0)	%		5,609	(5.9)	%
Third party rehabilitation therapy services		145,787	11.4	%		148,421	11.1	%		(2,634)	(1.8)	%
Elimination of intersegment rehabilitation therapy services														(71,971)	(6.3)	%		(88,887)	(7.0)	%		16,916	(19.0)	%
Third party rehabilitation therapy services, net														120,935	10.5	%		145,787	11.4	%		(24,852)	(17.0)	%

Other services:
Total other services		51,345	4.0	%		44,221	3.3	%		7,124	16.1	%		45,489	4.0	%		42,946	3.4	%		2,543	5.9	%
Elimination intersegment other services		(15,381)	(1.2)	%		(7,950)	(0.6)	%		(7,431)	93.5	%
Third party other services		35,964	2.8	%		36,271	2.7	%		(307)	(0.8)	%
Elimination of intersegment other services														(10,870)	(0.9)	%		(6,982)	(0.5)	%		(3,888)	55.7	%
Third party other services, net														34,619	3.1	%		35,964	2.9	%		(1,345)	(3.7)	%

Net revenues	$	1,272,360	100.0	%	$	1,341,276	100.0	%	$	(68,916)	(5.1)	%	$	1,145,052	100.0	%	$	1,272,360	100.0	%	$	(127,308)	(10.0)	%


	Three months ended June 30,												Three months ended June 30,
	2018				2017				Increase / (Decrease)				2019				2018				Increase / (Decrease)
			Margin				Margin								Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	124,687	11.4	%	$	144,663	12.5	%	$	(19,976)	(13.8)	%	$	87,649	8.9	%	$	124,687	11.4	%	$	(37,038)	(29.7)	%
Rehabilitation therapy services		32,328	13.8	%		(16,908)	(7.0)	%		49,236	(291.2)	%		25,586	13.3	%		32,328	13.8	%		(6,742)	(20.9)	%
Other services		1,036	2.0	%		214	0.5	%		822	384.1	%		1,248	2.7	%		1,036	2.0	%		212	20.5	%
Corporate and eliminations		(40,344)	—	%		(46,154)	—	%		5,810	(12.6)	%		(42,385)	—	%		(40,344)	—	%		(2,041)	5.1	%
EBITDA	$	117,707	9.3	%	$	81,815	6.1	%	$	35,892	43.9	%	$	72,098	6.3	%	$	117,707	9.3	%	$	(45,609)	(38.7)	%

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



	Three months ended June 30, 2018												Three months ended June 30, 2019
			Rehabilitation												Rehabilitation
	Inpatient		Therapy		Other								Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated		Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,091,352	$	234,674	$	51,325	$	20	$	(105,011)	$	1,272,360	$	990,297	$	192,906	$	45,325	$	164	$	(83,640)	$	1,145,052
Salaries, wages and benefits		489,778		187,946		28,030		—		—		705,754		442,028		154,855		29,276		—		—		626,159
Other operating expenses		439,224		14,400		21,943		—		(105,012)		370,555		389,637		12,130		14,402		—		(83,641)		332,528
General and administrative costs		—		—		—		39,046		—		39,046		—		—		—		35,562		—		35,562
Lease expense		31,494		—		316		301		—		32,111		93,557		335		338		356		—		94,586
Depreciation and amortization expense		56,750		3,138		168		3,439		—		63,495		22,328		3,112		174		2,654		—		28,268
Interest expense		93,028		13		9		24,905		—		117,955		29,051		13		8		23,903		—		52,975
Gain on extinguishment of debt		—		—		—		(501)		—		(501)
Gain on early extinguishment of debt														—		—		—		(24)		—		(24)
Investment income		—		—		—		(1,631)		—		(1,631)		—		—		—		(2,143)		—		(2,143)
Other income		(22,220)		—		—		—		—		(22,220)
Other (income) loss														(23,474)		—		61		—		—		(23,413)
Transaction costs		—		—		—		3,112		—		3,112		—		—		—		8,823		—		8,823
Long-lived asset impairments		27,257		—		—		—		—		27,257		900		—		—		—		—		900
Goodwill and identifiable intangible asset impairments		1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(352)		390		38
(Loss) income before income tax benefit		(25,091)		29,177		859		(68,299)		(389)		(63,743)
Equity in net loss (income) of unconsolidated affiliates														—		—		—		1,910		(1,934)		(24)
Income (loss) before income tax benefit														36,270		22,461		1,066		(70,877)		1,935		(9,145)
Income tax benefit		—		—		—		(886)		—		(886)		—		—		—		(162)		—		(162)
(Loss) income from continuing operations	$	(25,091)	$	29,177	$	859	$	(67,413)	$	(389)	$	(62,857)
Income (loss) from continuing operations													$	36,270	$	22,461	$	1,066	$	(70,715)	$	1,935	$	(8,983)


	Three months ended June 30, 2017												Three months ended June 30, 2018
			Rehabilitation												Rehabilitation
	Inpatient		Therapy		Other								Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated		Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,156,969	$	242,917	$	44,144	$	77	$	(102,831)	$	1,341,276	$	1,091,352	$	234,674	$	42,926	$	20	$	(96,612)	$	1,272,360
Salaries, wages and benefits		508,509		201,944		28,949		—		—		739,402		489,778		187,946		28,030		—		—		705,754
Other operating expenses		462,158		22,308		14,681		—		(102,831)		396,316		439,224		14,400		13,544		—		(96,613)		370,555
General and administrative costs		—		—		—		41,151		—		41,151		—		—		—		39,046		—		39,046
Lease expense		37,449		7		300		478		—		38,234		31,494		—		316		301		—		32,111
Depreciation and amortization expense		51,837		3,866		172		4,352		—		60,227		56,750		3,138		168		3,439		—		63,495
Interest expense		103,325		14		10		20,939		—		124,288		93,028		13		9		24,905		—		117,955
Loss on extinguishment of debt		—		—		—		2,301		—		2,301
Gain on early extinguishment of debt														—		—		—		(501)		—		(501)
Investment income		—		—		—		(1,392)		—		(1,392)		—		—		—		(1,631)		—		(1,631)
Other loss		4,190		—		—		—		—		4,190
Other income														(22,220)		—		—		—		—		(22,220)
Transaction costs		—		—		—		3,781		—		3,781		—		—		—		3,112		—		3,112
Customer receivership and other related charges		—		35,566		—		—		—		35,566
Long-lived asset impairment charges														27,257		—		—		—		—		27,257
Goodwill and identifiable intangible asset impairments														1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(563)		475		(88)		—		—		—		(352)		390		38
(Loss) income before income tax expense		(10,499)		(20,788)		32		(70,970)		(475)		(102,700)
Income tax expense		—		—		—		2,803		—		2,803
(Loss) income before income tax benefit														(25,091)		29,177		859		(68,299)		(389)		(63,743)
Income tax benefit														—		—		—		(886)		—		(886)
(Loss) income from continuing operations	$	(10,499)	$	(20,788)	$	32	$	(73,773)	$	(475)	$	(105,503)	$	(25,091)	$	29,177	$	859	$	(67,413)	$	(389)	$	(62,857)

Net Revenues

Net revenues for the three months ended June 30, ~~2018~~2019 decreased by ~~$68.9~~$127.3 million, or ~~5.1%~~10.0%, as compared with the three months ended June 30, ~~2017.~~2018.

Inpatient Services – Revenue decreased ~~$66.0~~$101.1 million, or ~~5.7%~~9.3%, in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. On a same-store basis, inpatient services revenue increased $13.0 million, or 1.4%, excluding 2468 divested underperforming facilities and the acquisition or development of ~~two~~12 additional ~~facilities on comparability, and the $19.0 million revenue reduction for the adoption of ASC 606, inpatient services revenue declined $21.0 million, or 1.9%.~~facilities. This same-store ~~decrease~~increase is ~~principally~~ due to aincreasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the ~~occupancy~~skilled mix of our inpatient facilities. For the past several years, census and skilled mix ~~of legacy Genesis inpatient facilities, partially offset~~trends have been affected by ~~increased payment rates. We attribute the decline in occupancy and skilled mix principally to the impact of~~ healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care ~~payers~~payors and conveners to divert certain skilled nursing referrals to home health or other ~~community based~~community-based care settings. While overall census is recovering as compared with the preceding year, the skilled mix continued to deteriorate. We believe population demographics will present opportunities in the near future to recapture census, and to some extent skilled mix, where it was lost through reform measures. As recently as the fourth fiscal quarter of 2018, we saw the decline of overall occupancy rates moderate and approximate those of the comparable period in 2017, and in the three months ended June 30, 2019, we saw

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overall occupancy rates exceed that of the same period in 2018 by 250 basis points. However, at the same time, skilled mix in the three months ended June 30, 2019 lagged the same period in 2018 by 70 basis points.

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “~~Key~~“Key Performance and Valuation ~~Measures~~”Measures” in this MD&A for quantification of the census trends and revenue per patient day.

Rehabilitation Therapy Services – Revenue decreased ~~$2.6~~$24.9 million, or ~~1.8%~~17.0% comparing the three months ended June 30, ~~2018~~2019 with the same period in ~~2017.~~2018. Of that decrease, ~~$22.5~~$20.8 million is due to lost contract business, offset by ~~$18.8~~$6.2 million attributed to new contracts. The ~~adoption~~remaining decrease of ~~ASC 606 resulted in a reduction of revenue of $2.9 million. The remaining increase of $4.0~~$10.3 million is principally due to ~~higher rates to existing contract customers and increased Medicare Part B rates, partially offset by~~ reduced volume of services provided to existing customers, and partially offset with higher rates to existing contract customers.

Other Services – Revenue decreased ~~$0.3~~$1.3 million, or ~~0.8%~~3.7% in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. Our other services revenue is comprised mainly of our physician services and staffing services ~~businesses,~~businesses. Revenue in our physician services business was relatively flat ~~with increased service revenue in the physician service business offset by some regional reduction in volumes of~~period over period, however, our staffing services ~~business.~~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 8.8% in the three months ended June 30, 2019 as compared with the same period in 2018, its revenue from external customers has decreased 6.7% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and provides a great benefit to our inpatient and rehabilitation therapy segments as record low unemployment nationally makes recruiting difficult.

EBITDA

EBITDA for the three months ended June 30, ~~2018 increased~~2019 decreased by ~~$35.9~~$45.6 million, or ~~43.9%~~38.7%, as compared with the three months ended June 30, ~~2017.~~2018. Excluding the impact of (gain) loss on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and goodwill and identifiable intangible asset impairments, EBITDA decreased ~~$1.2~~$68.1 million, or ~~0.9%~~53.8% when compared with the same period in ~~2017. The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented.~~2018. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased by ~~$20.0~~$37.0 million, or ~~13.8%~~29.7% for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. Excluding the impact of other (income) loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased ~~$18.0~~$65.8 million, or ~~12.1%~~50.3% when compared with the same period in ~~2017.~~2018. On a ~~same store~~same-store basis, the inpatient EBITDA as adjusted decreased ~~$19.1~~$53.9 million. Of that same-store decline, lease expense increased $61.5 million, principally resulting from the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases (Topic 842) effective January 1, 2019. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements.” See also Note 8 – “Leases.” Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in an increase of ~~$8.9~~$7.9 million EBITDA as adjusted in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies, ~~and within normal claims reporting patterns of our same-store operations,~~ we are also seeing reduced pressures ~~in particular~~particularly in our general and professional liability claims experience. ~~We believe this~~The reduction in the provision for general and professional liability for the three months ended June 30, 2019 as compared with the same period in 2018 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort ~~reforms~~reform, claim settlements, and other risk management initiatives. Offsetting some of the positive trends in key states that have had historically high rates of claims volume and severity as well as a recognition by the plaintiffs firms that this industry cannot sustain the level of claims historically brought by them. Reductions in salaries, wages and benefits, beyond those related toprofessional liability experience, self-insured ~~workers compensation and~~ health benefits ~~are principally attributed~~on the same-store population saw an increase over the prior year quarter due to ~~the transition from in-house to fully outsourced dietary support functions~~some singularly large claims that presented early in ~~the second fiscal quarter~~2019. Same-store staffing costs, net of ~~2017. That transition resulted in a shift of a commensurate amount of cost to~~nursing agency and other purchased services, ~~expense in other operating expenses. This reduction in salaries is partially offset with nursing~~increased $4.1 million. Nursing wage inflation ~~which~~ increased ~~3.3%~~4.1%, while non-nursing wage inflation increased 2.5% in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017. On a same-store basis, lease expense for the three months ended June 30,~~ 2018, as compared with the same period in 2017 decreased $4.2 million. This reduction is principally due to the benefit of one-quarter of the Sabra rent reduction, offset by the non-cash straight-line adjustments to those operating leases. See “~~Restructuring Transactions – Sabra Master Leases” in this MD&A.~~respectively. The remaining ~~$32.2~~$3.8 million ~~decrease~~increase in EBITDA, as adjusted, of the segment is attributed to ongoing expense management and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix ~~and overall occupancy~~ of our inpatient facilities described above under “Net ~~Revenues~~Revenues.,” ~~and accelerating nursing wage inflation previously discussed.~~

Rehabilitation Therapy Services – EBITDA ~~increased~~decreased by ~~$49.2~~$6.7 million, or ~~291.2%~~20.9%, for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017. Excluding the impact~~2018. Of this decrease, $4.4 million is principally attributed to reduced revenue volume and pricing from existing customers, and partially offset with overhead cost reductions and reductions of ~~other loss and customer receivership and other related charges EBITDA as adjusted increased $13.7 million, or 73.3% when compared~~start-up losses in our operations

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in China. Higher costs of labor was largely offset with ~~the same period~~therapist efficiency which improved to 72.7% in ~~2017. New therapy contracts and net pricing increases exceeded lost contracts by $2.2 million. Startup losses of our operations in China for~~ the three months ended June 30, ~~2018~~2019 compared with 68.2% in the comparable period in the prior year. In addition, EBITDA decreased ~~$2.1~~by $2.3 million due to lost therapy contracts exceeding new contracts in the three months ended June 30, 2019 as compared with the same period in 2017. The remaining increase of EBITDA as adjusted of $9.4 million is principally attributed to overhead cost reductions, favorable average costs of labor and rate increases, partially offset by therapist efficiency which declined to 68.2% in the three months ended June 30, 2018 compared with 68.0% in the comparable period in the prior year.

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Currently, we operate through affiliates in China a total of 13 locations comprised of the four rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in five hospital joint ventures and three nursing homes. Startup and development costs of these Chinese ventures are expected to exceed revenues for the remainder of fiscal 2018.

Other Services —– EBITDA increased ~~$0.8~~$0.2 million, or ~~384.1%~~20.5%, for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017. This~~2018. The EBITDA of our staffing services business was generally flat comparing these periods. The marginal increase in our physician services business was principally driven by increased ~~productivity in~~physician and nurse practitioner encounters, coupled with improved reimbursement rates, partially offset by increased administrative costs of practice management, including support of our ~~physician services business.~~accountable care organization.

Corporate and Eliminations —– EBITDA ~~increased $5.8~~decreased $2.0 million, or ~~12.6%~~5.1%, for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. EBITDA of our corporate function includes ~~other income, charges, gains or~~gain on early extinguishment of debt and losses associated with transactions that, in our chief operating decision maker’s view, are outside of the scope of our reportable segments. These 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 ~~$3.5~~$6.2 million of the net ~~increase~~decrease in EBITDA. Corporate overhead costs decreased ~~$2.1~~$3.5 million, or ~~5.1%~~8.9%, in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of ~~$0.2~~$0.7 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity ~~method.~~

~~Loss on early extinguishment of debt~~ – On March 6, 2018, we entered into a new asset based lending facility agreement, qualifying as an extinguishment of the previous revolving credit facility. An overaccrual of fees associated with the extinguishment was reversed in the three months ended June 30, 2018. See Note 3 – “~~Significant Transactions~~method and ~~Events – Restructuring Transactions” and Note 8 – “Long-term Debt.~~”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~~income for the three months ended June 30, ~~2018~~2019 principally represents non-cash gains on leases exited or modified in the ~~period. Other loss recognized for the three months ended June 30, 2017 was a net $4.2 million, attributable primarily to non-cash exit costs of leases exited in that~~ period.

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 June 30, 2019 and 2018 ~~and 2017~~ were ~~$3.1~~$8.8 million and ~~$3.8~~$3.1 million, respectively.

Long-lived asset impairments — In the three months ended June 30, 2019 and 2018, we recognized impairments of property and equipment of $0.9 million and $27.3 ~~million.~~million, respectively. 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 1413 – “Asset Impairment Charges - Long-Lived ~~Assets with a Definite Useful Life.~~”

~~Goodwill and identifiable intangible asset impairments~~ — In the three months ended June 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $1.1 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 14 – “Asset Impairment Charges -Identifiable Intangible~~ Assets with a Definite Useful Life.”

Other Expense

The following discussion applies to the consolidated expense categories between consolidated EBITDA and income (loss) ~~income~~ from continuing operations of all reportable segments, ~~other services,~~ corporate and eliminations in our consolidating statement of operations for the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018.

Depreciation and amortization — Each of our reportable segments ~~other services~~ and corporate overhead have depreciating property, plant and equipment, including ~~depreciation on leased properties accounted for as capital leases or as a financing~~

~~Table~~amortization of ~~Contents~~

~~obligation.~~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 ~~increased $3.3~~decreased $35.2 million in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. On a same-store basis, depreciation and amortization decreased ~~$2.7~~$28.0 million in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018. Of this decrease, approximately $16.5 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The ~~three months ended June 30, 2017 included $2.2~~impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” In the inpatient services segment, $9.3 million of ~~amortization expense related to intangible management contracts of third party operations in Texas. Those contracts became impaired during third quarter 2017 when~~ the ~~Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the three months ended June 30, 2018. The remaining~~ decrease ~~of $0.5 million~~ is principally due to prior year acceleration related to multiple lease transactions. The remaining $2.2 million of decrease is principally due to asset impairments and assets reaching the ~~classification~~end of assets held for sale, which did not depreciate in the current period, the impact of reduced carrying values of recently impaired assets, and partially offset by the impact of recent lease amendments in the inpatient services segment.their depreciable term.

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decreased ~~$6.3~~$65.0 million in the three months ended June 30, ~~2018~~2019 as compared with the same period ~~2017.~~2018. On a ~~same store~~same-store basis, interest expense is down ~~$5.6~~$58.7 million in the three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017. That~~2018. Of this decrease, approximately $62.4 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” The remaining increase of $3.7 million is principally ~~attributed~~the result of consolidating debt and associated interest expense of a real-estate partnership in the first quarter of 2019, which was determined to ~~the net impact~~be a VIE. See Note 1 – “General Information – Basis of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for as a financing obligation, and resulted in a lower effective interest rate. That reduction in financing lease interest is partially offset by the increased cost of our revolving credit facilities. See “~~Restructuring Transactions~~Presentation.” ~~in this MD&A.~~

Income tax ~~expense~~benefit — For ~~the~~ three months ended June 30, ~~2018,~~2019, we recorded income tax benefit of $0.2 million from continuing operations representing an effective tax rate of 1.8% compared to an income tax benefit of $0.9 million from continuing operations, representing an effective tax rate of 1.4% ~~compared to an income tax expense of $2.8 million from continuing operations, representing an effective tax rate of (2.7)%~~ for the same period in ~~2017.~~2018. 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 June 30, ~~2018,~~2019, we have determined that the valuation allowance is still necessary.

Net Loss Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for ~~the~~ three months ended June 30, ~~2018~~2019 as compared with the same period in ~~2017.~~2018.

Net loss 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 7.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of approximately 34.2%. For the three months ended June 30, 2019 and 2018, a loss of $2.0 million and $23.7 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 three months ended June 30, 2019 and 2018, (loss) income of $(2.2) million and $0.5 million, respectively, has been attributed to these unaffiliated third parties.

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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

A summary of our unaudited results of operations for the six months ended June 30, 2019 as compared with the same period in 2018 follows (in thousands, except percentages):


	Six months ended June 30,
	2019				2018				Increase / (Decrease)
	Revenue		Revenue		Revenue		Revenue
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
Revenues:
Inpatient services:
Skilled nursing facilities	$	1,946,937	84.3	%	$	2,160,612	84.0	%	$	(213,675)	(9.9)	%
Assisted/Senior living facilities		47,351	2.1	%		47,246	1.8	%		105	0.2	%
Administration of third party facilities		4,301	0.2	%		4,552	0.2	%		(251)	(5.5)	%
Elimination of administrative services		(1,599)	—	%		(1,470)	—	%		(129)	8.8	%
Inpatient services, net		1,996,990	86.6	%		2,210,940	86.0	%		(213,950)	(9.7)	%

Rehabilitation therapy services:
Total therapy services		387,977	16.8	%		471,251	18.3	%		(83,274)	(17.7)	%
Elimination of intersegment rehabilitation therapy services		(146,202)	(6.3)	%		(181,633)	(7.1)	%		35,431	(19.5)	%
Third party rehabilitation therapy services, net		241,775	10.5	%		289,618	11.2	%		(47,843)	(16.5)	%

Other services:
Total other services		87,607	3.8	%		85,774	3.3	%		1,833	2.1	%
Elimination of intersegment other services		(19,680)	(0.9)	%		(12,900)	(0.5)	%		(6,780)	52.6	%
Third party other services, net		67,927	2.9	%		72,874	2.8	%		(4,947)	(6.8)	%

Net revenues	$	2,306,692	100.0	%	$	2,573,432	100.0	%	$	(266,740)	(10.4)	%


	Six months ended June 30,
	2019				2018				Increase / (Decrease)
			Margin				Margin
	Dollars		Percentage		Dollars		Percentage		Dollars		Percentage
EBITDA:
Inpatient services	$	161,122	8.1	%	$	222,130	10.0	%	$	(61,008)	(27.5)	%
Rehabilitation therapy services		52,354	13.5	%		54,658	11.6	%		(2,304)	(4.2)	%
Other services		926	1.1	%		1,183	1.4	%		(257)	(21.7)	%
Corporate and eliminations		(77,624)	—	%		(102,050)	—	%		24,426	(23.9)	%
EBITDA	$	136,778	5.9	%	$	175,921	6.8	%	$	(39,143)	(22.3)	%

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


	Six months ended June 30, 2019
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	1,998,589	$	387,977	$	87,390	$	217	$	(167,481)	$	2,306,692
Salaries, wages and benefits		898,790		311,947		57,832		—		—		1,268,569
Other operating expenses		791,569		23,087		27,891		—		(167,481)		675,066
General and administrative costs		—		—		—		71,094		—		71,094
Lease expense		186,523		665		680		779		—		188,647
Depreciation and amortization expense		54,200		6,276		348		5,639		—		66,463
Interest expense		56,091		27		17		48,356		—		104,491
Gain on early extinguishment of debt		—		—		—		(24)		—		(24)
Investment income		—		—		—		(4,007)		—		(4,007)
Other (income) loss		(40,315)		(76)		61		—		��		(40,330)
Transaction costs		—		—		—		10,084		—		10,084
Long-lived asset impairments		900		—		—		—		—		900
Equity in net loss (income) of unconsolidated affiliates		—		—		—		1,386		(1,471)		(85)
Income (loss) before income tax benefit		50,831		46,051		561		(133,090)		1,471		(34,176)
Income tax benefit		—		—		—		(111)		—		(111)
Income (loss) from continuing operations	$	50,831	$	46,051	$	561	$	(132,979)	$	1,471	$	(34,065)

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	Six months ended June 30, 2018
			Rehabilitation
	Inpatient		Therapy		Other
	Services		Services		Services		Corporate		Eliminations		Consolidated
Net revenues	$	2,212,410	$	471,251	$	85,721	$	53	$	(196,003)	$	2,573,432
Salaries, wages and benefits		996,808		387,777		56,939		—		—		1,441,524
Other operating expenses		895,025		28,816		26,878		—		(196,004)		754,715
General and administrative costs		—		—		—		78,921		—		78,921
Lease expense		63,928		—		643		611		—		65,182
Depreciation and amortization expense		101,080		6,332		337		7,249		—		114,998
Interest expense		186,647		27		18		46,300		—		232,992
Loss on early extinguishment of debt		—		—		—		9,785		—		9,785
Investment income		—		—		—		(2,678)		—		(2,678)
Other (income) loss		(22,230)		—		78		—		—		(22,152)
Transaction costs		—		—		—		15,207		—		15,207
Long-lived asset impairments		55,617		—		—		—		—		55,617
Goodwill and identifiable intangible asset impairments		1,132		—		—		—		—		1,132
Equity in net (income) loss of unconsolidated affiliates		—		—		—		(506)		764		258
(Loss) income before income tax benefit		(65,597)		48,299		828		(154,836)		(763)		(172,069)
Income tax benefit		—		—		—		(539)		—		(539)
(Loss) income from continuing operations	$	(65,597)	$	48,299	$	828	$	(154,297)	$	(763)	$	(171,530)

Net Revenues

Net revenues for the six months ended June 30, 2019 decreased by $266.7 million, or 10.4%, as compared with the six months ended June 30, 2018.

Inpatient Services – Revenue decreased $214.0 million, or 9.7%, in the six months ended June 30, 2019 as compared with the same period in 2018. On a same-store basis, inpatient services revenue increased $14.1 million, or 0.7%, excluding 74 divested underperforming facilities and the acquisition or development of 12 additional facilities. This same-store increase is due to increasing census volume and payor rates, primarily in our Medicaid population, partially offset by continued decline in the skilled mix of our inpatient facilities. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings. While overall census is recovering as compared with the preceding year, the skilled mix continued to deteriorate. We believe population demographics will present opportunities in the near future to recapture census where it was lost through reform measures. As recently as the fourth fiscal quarter of 2018, we saw the decline of overall occupancy rates moderate and approximate those of the comparable period in 2017, and in the six months ended June 30, 2019, we saw overall occupancy rates exceed that of the same period in 2018 by 240 basis points. However, at the same time, skilled mix in the six months ended June 30, 2019 lagged the same period in 2018 by 100 basis points.

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day.

Rehabilitation Therapy Services – Revenue decreased $47.8 million, or 16.5% comparing the six months ended June 30, 2019 with the same period in 2018. Of that decrease, $45.6 million is due to lost contract business, offset by $11.5 million attributed to new contracts. The remaining decrease of $13.7 million is principally due to reduced volume of services provided to existing customers, and partially offset with higher rates to existing contract customers.

Other Services – Revenue decreased $4.9 million, or 6.8% in the six months ended June 30, 2019 as compared with the same period in 2018. Our other services revenue is comprised mainly of our physician services and staffing services businesses. Revenue in our physician services business was relatively flat period over period, however, our 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 4.9% in the six months ended June 30, 2019 as compared with the same period in 2018, its revenue from external customers has decreased 9.1% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, and provides a great benefit to our inpatient and rehabilitation therapy segments as record low unemployment nationally makes recruiting difficult.

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EBITDA

EBITDA for the six months ended June 30, 2019 decreased by $39.1 million, or 22.3%, as compared with the six months ended June 30, 2018. Excluding the impact of (gain) loss on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and goodwill and identifiable intangible asset impairments, EBITDA decreased $128.1 million, or 54.4% when compared with the same period in 2018. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased by $61.0 million, or 27.5% for the six months ended June 30, 2019 as compared with the same period in 2018. Excluding the impact of other (income) loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $134.9 million, or 52.6% when compared with the same period in 2018. On a same-store basis, the inpatient EBITDA as adjusted decreased $114.6 million. Of that same-store decline, lease expense increased $122.0 million, principally resulting from the adoption of Topic 842, which became effective on January 1, 2019. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements.” See also Note 8 – “Leases.” Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in an increase of $6.3 million EBITDA as adjusted in the six months ended June 30, 2019 as compared with the same period in 2018. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures particularly in our general and professional liability claims experience. The reduction in the provision for general and professional liability for the six months ended June 30, 2019 as compared with the same period in 2018 is the result of favorable prior year claim development and lower current year loss exposures. The favorable development is due to the combination of the ongoing impact of tort reform, claim settlements, and other risk management initiatives. Offsetting some of the positive trends in professional liability experience, self-insured health benefits on the same-store population saw an increase over the prior year quarter due to some singularly large claims that presented early in 2019. Same-store staffing costs, net of nursing agency and other purchased services, increased $6.1 million. Nursing wage inflation increased 3.9% while non-nursing wage inflation increased 1.6% in the six months ended June 30, 2019 as compared with the same period in 2018, respectively. The remaining $7.2 million increase in EBITDA, as adjusted, of the segment is attributed to ongoing expense management and increased census volume in our skilled nursing facilities, partially offset by the continued pressures on skilled mix of our inpatient facilities described above under “Net Revenues.”

Rehabilitation Therapy Services – EBITDA decreased by $2.3 million, or 4.2%, for the six months ended June 30, 2019 as compared with the same period in 2018. Lost therapy contracts exceeded new contracts by $5.9 million in the six months ended June 30, 2019 as compared with the same period in 2018. The remaining increase of $3.6 million is principally attributed to overhead cost reductions and reductions of start-up losses in our operations in China, partially offset with reduced service volume and pricing to existing customers. Higher costs of labor was largely offset with therapist efficiency which improved to 72.2% in the six months ended June 30, 2019 compared with 67.9% in the comparable period in the prior year.

Other Services — EBITDA decreased $0.3 million, or 21.7%, for the six months ended June 30, 2019 as compared with the same period in 2018. The EBITDA of our staffing services business was generally flat comparing these periods. This decrease in our physician services business was principally driven by increased administrative costs of practice management, including support of our accountable care organization, partially offset with increased physician and nurse practitioner encounters.

Corporate and Eliminations — EBITDA increased $24.4 million, or 23.9%, for the six months ended June 30, 2019 as compared with the same period in 2018. EBITDA of our corporate function includes (gain) loss on early extinguishment of debt and losses associated with transactions that, in our chief operating decision maker’s view, are outside of the scope of our reportable segments. These 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 $14.9 million of the net increase in EBITDA. Corporate overhead costs decreased $7.8 million, or 9.9%, in the six months ended June 30, 2019 as compared with the same period in 2018. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $1.7 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

Table of Contents

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 six months ended June 30, 2019 and 2018 were $10.1 million and $15.2 million, respectively.

Long-lived asset impairments — In the six months ended June 30, 2019 and 2018, we recognized impairments of property and equipment of $0.9 million and $55.6 million, respectively. 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.”

Other Expense

The following discussion applies to the consolidated expense categories between consolidated EBITDA and income (loss) from continuing operations of all reportable segments, corporate and eliminations in our consolidating statement of operations for the six months ended June 30, 2019 as compared with the same period in 2018.

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 $48.5 million in the six months ended June 30, 2019 as compared with the same period in 2018. On a same-store basis, depreciation and amortization decreased $38.0 million in the six months ended June 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $32.7 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” In the inpatient services segment, $2.6 million of the decrease is principally due to prior year acceleration offset by current year acceleration related to multiple lease transactions. The remaining $2.7 million of decrease is principally due to asset impairments and assets reaching the end of their depreciable term.

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 or financing obligations. Interest expense decreased $128.5 million in the six months ended June 30, 2019 as compared with the same period 2018. On a same-store basis, interest expense is down $116.2 million in the six months ended June 30, 2019 as compared with the same period in 2018. Of this decrease, approximately $122.4 million resulted from the adoption of Topic 842, which was effective on January 1, 2019 for us. The impact to our financial position and statements of operation from the adoption of this accounting standard is more fully described in Note 1 – “General Information - Recently Adopted Accounting Pronouncements” and Note 8 – “Leases.” The remaining increase of $8.3 million is principally the result of higher rates of interest incurred in the six months ended June 30, 2019 on the debt instruments impacted by the financial restructuring, which was not fully realized in the prior year period, in addition to consolidating debt and the associated interest expense of a real-estate partnership in the first quarter of 2019, which was determined to be a VIE. See Note 1 – “General Information – Basis of Presentation” and Note 9 – “Long-Term Debt.”

Income tax benefit — For the six months ended June 30, 2019, we recorded income tax benefit of $0.1 million from continuing operations representing an effective tax rate of 0.3% compared to an income tax benefit of $0.5 million from continuing operations, representing an effective tax rate of 0.3% for the same period in 2018. 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 June 30, 2019, we have determined that the valuation allowance is still necessary.

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Net Loss Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the six months ended June 30, 2019 as compared with the same period in 2018.

Net loss attributable to noncontrolling interests — On February 2, 2015, 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 ~~4.8~~7.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of ~~36.8%~~approximately 34.2%. For the ~~three~~six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, a loss of ~~$23.8~~$12.2 million and ~~$40.9~~$64.4 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 ~~variable interest entities (VIEs)~~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 June 30, 2018 and 2017, income of $0.5 million and $0.6 million, respectively, has been attributed to these unaffiliated third parties.~~

~~Table of Contents~~

~~Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017~~

~~A summary of our unaudited results of operations for the~~ six months ended June 30, 2019 and 2018, ~~as compared with the same period in 2017 follows (in thousands, except percentages):~~

Six months ended June 30,

2018

2017

Increase / (Decrease)


Revenue

Revenue

Revenue

Revenue



Dollars

Percentage

Dollars

Percentage

Dollars

Percentage

Revenues:

Inpatient services:

Skilled nursing facilities

$
2,160,612

83.9
%
$
2,300,450

84.1
%
$
(139,838)

(6.1)
%
Assisted/Senior living facilities

47,246

1.8
%

48,077

1.8
%

(831)

(1.7)
%
Administration of third party facilities

4,552

0.2
%

4,752

0.2
%

(200)

(4.2)
%
Elimination of administrative services

(1,470)

—
%

(769)

—
%

(701)

91.2
%
Inpatient services, net

2,210,940

85.9
%

2,352,510

86.1
%

(141,570)

(6.0)
%

Rehabilitation therapy services:

Total therapy services

471,251

18.3
%

499,134

18.3
%

(27,883)

(5.6)
%
Elimination intersegment rehabilitation therapy services

(181,633)

(7.1)
%

(195,026)

(7.1)
%

13,393

(6.9)
%
Third party rehabilitation therapy services

289,618

11.2
%

304,108

11.2
%

(14,490)

(4.8)
%

Other services:

Total other services

99,853

3.9
%

90,267

3.3
%

9,586

10.6
%
Elimination intersegment other services

(26,979)

(1.0)
%

(16,477)

(0.6)
%

(10,502)

63.7
%
Third party other services

72,874

2.9
%

73,790

2.7
%

(916)

(1.2)
%

Net revenues

$
2,573,432

100.0
%
$
2,730,408

100.0
%
$
(156,976)

(5.7)
%

Six months ended June 30,

2018

2017

Increase / (Decrease)




Margin



Margin




Dollars

Percentage

Dollars

Percentage

Dollars

Percentage

EBITDA:

Inpatient services

$
222,130

10.0
%
$
276,847

11.8
%
$
(54,717)

(19.8)
%
Rehabilitation therapy services

54,658

11.6
%

4,481

0.9
%

50,177

1,119.8
%
Other services

1,183

1.2
%

315

0.3
%

868

275.6
%
Corporate and eliminations

(102,050)

—
%

(93,013)

—
%

(9,037)

9.7
%
EBITDA

$
175,921

6.8
%
$
188,630

6.9
%
$
(12,709)

(6.7)
%

~~Table~~(loss) income of ~~Contents~~

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

Six months ended June 30, 2018

Rehabilitation

Inpatient

Therapy

Other


Services

Services

Services

Corporate

Eliminations

Consolidated

Net revenues

$
2,212,410

$
471,251

$
99,800

$
53

$
(210,082)

$
2,573,432

Salaries, wages and benefits

996,808

387,777

56,939

—

—

1,441,524

Other operating expenses

895,025

28,816

40,957

—

(210,083)

754,715

General and administrative costs

—

—

—

78,921

—

78,921

Lease expense

63,928

—

643

611

—

65,182

Depreciation and amortization expense

101,080

6,332

337

7,249

—

114,998

Interest expense

186,647

27

18

46,300

—

232,992

Loss on early extinguishment of debt

—

—

—

9,785

—

9,785

Investment income

—

—

—

(2,678)

—

(2,678)

Other (income) loss

(22,230)

—

78

—

—

(22,152)

Transaction costs

—

—

—

15,207

—

15,207

Long-lived asset impairments

55,617

—

—

—

—

55,617

Goodwill and identifiable intangible asset impairments

1,132

—

—

—

—

1,132

Equity in net (income) loss of unconsolidated affiliates

—

—

—

(506)

764

258

(Loss) income before income tax benefit

(65,597)

48,299

828

(154,836)

(763)

(172,069)

Income tax benefit

—

—

—

(539)

—

(539)

(Loss) income from continuing operations

$
(65,597)

$
48,299

$
828

$
(154,297)

$
(763)

$
(171,530)

Six months ended June 30, 2017

Rehabilitation

Inpatient

Therapy

Other


Services

Services

Services

Corporate

Eliminations

Consolidated

Net revenues

$
2,353,279

$
499,134

$
89,940

$
327

$
(212,272)

$
2,730,408

Salaries, wages and benefits

1,089,932

414,696

59,268

—

—

1,563,896

Other operating expenses

901,002

43,645

29,762

—

(212,272)

762,137

General and administrative costs

—

—

—

86,237

—

86,237

Lease expense

72,766

14

595

959

—

74,334

Depreciation and amortization expense

107,817

7,613

339

8,827

—

124,596

Interest expense

206,642

28

19

42,353

—

249,042

Loss on early extinguishment of debt

—

—

—

2,301

—

2,301

Investment income

—

—

—

(2,501)

—

(2,501)

Other loss (income)

12,732

732

—

(240)

—

13,224

Transaction costs

—

—

—

6,806

—

6,806

Customer receivership and other related charges

—

35,566

—

—

—

35,566

Equity in net (income) loss of unconsolidated affiliates

—

—

—

(1,131)

909

(222)

Loss before income tax expense

(37,612)

(3,160)

(43)

(143,284)

(909)

(185,008)

Income tax expense

—

—

—

4,087

—

4,087

Loss from continuing operations

$
(37,612)

$
(3,160)

$
(43)

$
(147,371)

$
(909)

$
(189,095)

~~Net Revenues~~

~~Net revenues for the six months ended June 30, 2018 decreased by $157.0 million, or 5.7%, as compared with the six months ended June 30, 2017.~~

~~Inpatient Services~~ – Revenue decreased $141.6 million, or 6.0%, in the six months ended June 30, 2018 as compared with the same period in 2017. On a same-store basis, excluding 49 divested underperforming facilities and the development of two additional facilities on comparability, and the $40.3 million revenue reduction for the adoption of ASC 606, inpatient services revenue declined $22.0 million, or 1.0%. This same-store decrease is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates. We attribute the decline in occupancy and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.

~~Table of Contents~~

~~For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day.~~

~~Rehabilitation Therapy Services~~ – Revenue decreased $14.5 million, or 4.8% comparing the six months ended June 30, 2018 with the same period in 2017. Of that decrease, $48.9 million is due to lost contract business, offset by $39.6 million attributed to new contracts. The adoption of ASC 606 resulted in a reduction of revenue of $6.2 million. The remaining increase of $1.0 million is principally due to higher rates to existing contract customers and increased Medicare Part B rates, partially offset by reduced volume of services provided to existing customers.

~~Other Services~~ – Revenue decreased $0.9 million, or 1.2% in the six months ended June 30, 2018 as compared with the same period in 2017. Our other services revenue, comprised mainly of our physician services and staffing services businesses, was relatively flat with increased service revenue in the physician service business offset by some regional reduction in volumes of our staffing services business.

~~EBITDA~~

EBITDA for the six months ended June 30, 2018 decreased by $12.7 million, or 6.7%, as compared with the six months ended June 30, 2017. Excluding the impact of (gain) loss on extinguishment of debt, other (income) loss, transaction costs , customer receivership and related charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $11.0 million, or 4.5% when compared with the same period in 2017. The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

~~Inpatient Services~~ – EBITDA decreased by $54.7 million, or 19.8% for the six months ended June 30, 2018 as compared with the same period in 2017. Excluding the impact of other loss, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $32.9 million, or 11.4% when compared with the same period in 2017. On a same store basis, the inpatient EBITDA as adjusted decreased $14.1 million. Of that same-store decline, our self-insurance programs resulted in an increase of $19.1 million EBITDA as adjusted in the six months ended June 30, 2018 as compared with the same period in 2017. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we are also seeing reduced pressures in particular in our general and professional liability claims experience. We believe this is due to the combination of tort reforms in key states that have had historically high rates of claims volume and severity as well as a recognition by the plaintiffs firms that this industry cannot sustain the level of claims historically brought by them. Reductions in salaries, wages and benefits, beyond those related to self-insured workers compensation and health benefits, are principally attributed to the transition from in-house to fully outsourced dietary support functions in the second fiscal quarter of 2017. That transition resulted in a shift of a commensurate amount of cost to purchased services expense in other operating expenses. On a same-store basis, lease expense for the six months ended June 30, 2018 as compared with the same period in 2017 decreased $5.4 million. This reduction is principally due to the benefit of two quarters of the Sabra rent reduction, offset by the non-cash straight-line adjustments to those operating leases. See “~~Restructuring Transactions – Sabra Master Leases~~” in this MD&A. The remaining $57.4 million decrease in EBITDA, as adjusted, of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “~~Net Revenues.” Nursing wage inflation was relatively flat comparing the six months ended June 30, 2018 as compared with the same period in 2017.~~

~~Rehabilitation Therapy Services~~ – EBITDA increased by $50.2 million, or 1,119.8%, for the six months ended June 30, 2018 as compared with the same period in 2017. Excluding the impact of customer receivership and other related charges, EBITDA as adjusted increased $13.9 million, or 34.0% when compared with the same period in 2017. New therapy contracts and service fees exceeded lost contracts by $0.5 million. Startup losses of our operations in China for the six months ended June 30, 2018 decreased $3.2 million as compared with the same period in 2017. The remaining increase of EBITDA as adjusted of $10.2 million is principally attributed to overhead cost reductions, favorable average costs of labor and rate increases, partially offset by contraction of services to existing customers referenced above in “Net Revenues”, higher average costs of labor and by therapist efficiency which declined to 67.9% in the six months ended June 30, 2018 compared with 68.0% in the comparable period in the prior year.

~~Table of Contents~~

~~Other Services~~ — EBITDA increased $0.9 million for the six months ended June 30, 2018 as compared with the same period in 2017. This improvement was principally driven by increased productivity in our physician service business.

~~Corporate and Eliminations~~ — EBITDA decreased $9.0 million, or 9.7%, for the six months ended June 30, 2018 as compared with the same period in 2017. EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments. These 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 $19.6 million of the net decrease in EBITDA. Corporate overhead costs decreased $7.3 million, or 8.5%, in the six months ended June 30, 2018 as compared with the same period in 2017. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining decrease in EBITDA of $0.2 million is primarily the result of a reduction in investment earnings from our unconsolidated affiliates accounted for on the equity method.

~~(Gain) loss on early extinguishment of debt~~ – On March 6, 2018, we entered into a new asset based lending facility agreement, qualifying as an extinguishment of the previous revolving credit facility, and resulting in the write-off of $9.8 million of deferred financing fees related to the previous revolving credit facility. See Note 3 – “~~Significant Transactions and Events – Restructuring Transactions” and Note 8 – “Long-term Debt.~~”

~~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, net, of $22.2 million for the six months ended June 30, 2018 principally represents non-cash gains on leases exited or modified in the period. Other loss recognized for the three months ended June 30, 2017 of $13.2 million, is principally attributable to the non-cash exit costs of leases exited in that period.

~~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 six months ended June 30, 2018 and 2017 were $15.2$(1.8) million and ~~$6.8 million, respectively.~~

~~Long-lived asset impairments~~ — In the six months ended June 30, 2018 we recognized impairments of property and equipment of $55.6 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 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.~~”

~~Goodwill and identifiable intangible asset impairments~~ — In the six months ended June 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $1.1 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 14 – “Asset Impairment Charges -Identifiable Intangible Assets with a Definite Useful Life.~~”

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~~Other Expense~~

The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the six months ended June 30, 2018 as compared with the same period in 2017.

~~Depreciation and amortization~~ — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. 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 $9.6 million in the six months ended June 30, 2018 as compared with the same period in 2017. On a same-store basis, depreciation and amortization decreased $11.1 million in the six months ended June 30, 2018 as compared with the same period in 2017 The six months ended June 30, 2017 included $4.4 million of amortization expense related to intangible management contracts of third party operations in Texas. Those contracts became impaired during third quarter 2017 when the Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the six months ended June 30, 2018. Depreciation and amortization expense in the six months ended June 30, 2018 decreased by $3.6 million for the combined impact of impairments of property and equipment and reassessed useful lives of certain long-lived assets. The remaining decrease of $7.1 million is principally due to divestiture activity in the 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 capital leases or financing obligations. Interest expense decreased $16.1 million in the six months ended June 30, 2018 as compared with the same period 2017. On a same store basis, interest expense is down $16.1 million in the six months ended June 30, 2018 as compared with the same period in 2017. That decrease is principally attributed to the net impact of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for as a financing obligation, and resulted in a lower effective interest rate. See “~~Restructuring Transactions” in this MD&A.~~

~~Income tax expense~~ — For the six months ended June 30, 2018, we recorded an income tax benefit of $0.5 million from continuing operations representing an effective tax rate of 0.3% compared to an income tax expense of $4.1 million from continuing operations, representing an effective tax rate of (2.2)% for the same period in 2017. 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 June 30, 2018, we have determined that the valuation allowance is still necessary.

~~Net Loss Attributable to Genesis Healthcare, Inc.~~

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the six months ended June 30, 2018 as compared with the same period in 2017.

~~Net loss attributable to noncontrolling interests~~ — On February 2, 2015, 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 4.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 36.8%. For the six months ended June 30, 2018 and 2017, a loss of $64.4 million and $74.3 million, respectively, has been attributed to the Class C common stock.

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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 six months ended June 30, 2018 and 2017, income of $1.0 ~~million and $1.1~~ 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):


	Six months ended June 30,				Six months ended June 30,
	2018		2017		2019		2018
Net cash provided by operating activities	$	11,469	$	69,127	$	36,081	$	11,469
Net cash (used in) provided by investing activities		(35,082)		43,736
Net cash provided by (used in) financing activities		108,047		(98,261)
Net increase in cash, cash equivalents and restricted cash and equivalents		84,434		14,602
Net cash used in investing activities						(162,208)		(35,082)
Net cash provided by financing activities						80,642		108,047
Net (decrease) increase in cash, cash equivalents and restricted cash and equivalents						(45,485)		84,434
Beginning of period		58,638		63,460		142,276		58,638
End of period	$	143,072	$	78,062	$	96,791	$	143,072

Net cash provided by operating activities in the six months ended June 30, ~~2018 decreased $57.7~~2019 increased $24.6 million compared with the same period in ~~2017.~~2018. The ~~decrease in cash provided by operations is principally due to an increase in trade payable disbursements in the~~ six months ended June 30, ~~2018 as compared to~~2019 are highlighted by an increase in cash provided of $38.4 million for the ~~six months ended June 30, 2017. The Restructuring Transactions executed~~collection of outstanding accounts receivable partially offset by an increase in ~~the first quarter~~cash used of ~~2018, as well as the acceleration of~~$10.7 million for payments ~~for self-insurance programs, resulted in significant paydown of trade payables that had accumulated through December 31, 2017.~~on accounts payable and other accrued expenses and other.

Net cash used in investing activities in the six months ended June 30, ~~2018~~2019 was ~~$35.1~~$162.2 million compared to net cash ~~provided by~~used in investing activities of ~~$43.7~~$35.1 million in the six months ended June 30, ~~2017. There were no asset sales in the six months ended June 30, 2018 compared to $79.6 million of asset sales in the same period in 2017.~~2018. Routine capital expenditures for the six months ended June 30, ~~2018 decreased~~2019 increased by ~~$6.7~~$9.4 million as compared with the same period in the prior year. In the six months ended June 30, 2019, there were asset purchases of $252.5 million as a result of the consolidation of the 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 as described in “Recent Transaction and Events – Next Partnership.” The six months ended June 30, 2019 also included $55.4 million in proceeds from the sale of five skilled nursing facilities in California. In comparison, the six months ended June 30, 2018 had no asset purchases or sales. The remaining incremental ~~use~~source of cash in the six months ended June 30, ~~2018~~2019 as compared to the same period in the prior year of ~~$5.9~~$0.4 million was due primarily to ~~purchases exceeding sales~~net joint venture investment and ~~maturities of marketable securities.~~restricted deposit activity.

Net cash provided by financing activities in the six months ended June 30, ~~2018~~2019 was ~~$108.0~~$80.6 million compared to net cash ~~used in~~provided by financing activities of ~~$98.3~~$108.0 million in the six months ended June 30, ~~2017.~~2018. The net ~~increase~~decrease in cash provided by financing activities of ~~$206.3~~$27.4 million is principally attributed to debt ~~borrowings~~repayments exceeding debt ~~repayments~~borrowings in the six months ended June 30, ~~2018~~2019 as compared to the same period in ~~2017.~~2018. In the six months ended June 30, 2019, we had proceeds from the issuance of debt of $170.6 million primarily resulting from the consolidation of the Next Partnership. In the six months ended June 30, 2018,

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we had proceeds from the issuance of debt of $562.4 million, which includes $438.0 million from the ABL Credit Facilities, $73.0 million from the MidCap Real Estate Loans, $40.0 million from the ~~2018~~expanded Term Loan Agreement and $10.9 million from the refinancing of a bridge loan with a HUD insured loan. ~~In the six months ended June 30, 2017, we received $17.5 million in proceeds from HUD insured financing on two skilled nursing facilities.~~ Repayment of long-term debt in the six months ended June 30, ~~2018~~2019 was ~~$457.4~~$90.0 million compared to ~~$99.4~~$457.4 million in the same period of the prior year. ~~The increase~~In the six months ended June 30, 2019, we repaid $27.7 million in ~~cash used was due primarily to~~MidCap Real Estate Loans and $14.2 million in HUD-insured loans using proceeds from the sale of five skilled nursing facilities in California 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. In the six months ended June 30, 2018, we paid $363.2 million in the retirement of our ~~prior Revolving Credit Facilities,~~terminated revolving credit facilities, $69.8 million in the paydown of Welltower Real Estate Loans and $9.9 million in the payoff of a bridge loan with the proceeds from a HUD-insured refinancing. In the six months ended June 30, 2017, we used $72.1 million of the proceeds from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa and the aforementioned $17.5 million in HUD proceeds to repay indebtedness. The remaining ~~increase~~decrease in cash used to repay long-term debt of ~~$4.7~~$6.4 million relates to ~~an increase~~a decrease in routine debt payments. In the six months ended June 30, ~~2018,~~2019, we had net ~~borrowings~~repayments under the revolving credit facilities of ~~$20.8~~$10.9 million as compared with ~~$19.3~~$20.8 million of net ~~repayments~~borrowings under the revolving credit facilities in the same period in ~~2017.~~2018. In the six months ended June 30, 2019, we paid debt issuance costs of $3.7 million resulting from the consolidation of the Next Partnership. In the six months ended June 30, 2018, we paid debt issuance costs of $16.7 million, which includes $13.6 million in fees for the ABL Credit Facilities and $2.9 million in fees for the MidCap Real Estate ~~Loans, compared to $2.7 million in debt issuance costs paid in the same period in 2017.~~Loans. In the six months ended June 30, ~~2017,~~2019, we received ~~$6.1~~contributions from a noncontrolling interest for $18.5 million ~~in tenant improvement allowances~~resulting from ~~landlords.~~the consolidation of the aforementioned Next Partnership. The remaining net increase in ~~net~~ cash used in financing activities of ~~$0.6~~$2.7 million ~~is due primarily to debt settlement costs~~ in the six months ended June 30, ~~2018.~~ 2019 compared to the same period in 2018 is primarily due to an increase in distributions to noncontrolling interests and repayments of finance lease obligations offset by a reduction in debt settlement costs.

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Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our ABL Credit Facilities.

The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our results of operations, restricted and unrestricted cash and cash equivalents and our available borrowing capacity.

At June 30, ~~2018,~~2019, we had total liquidity of $74.3 million consisting of cash ~~and cash equivalents~~on hand of ~~$78.9~~$42.7 million and available borrowings under our ABL Credit Facilities of ~~$55.6~~$31.6 million. During the six months ended June 30, ~~2018,~~2019, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.

~~Restructuring Transactions~~Financing Activities

~~Overview~~Welltower Loan Extensions

~~During the quarter ended June 30, 2018,~~On May 9, 2019, we entered into ~~a number~~two loan amendments with Welltower to (1) extend the maturity date of ~~agreements, amendments~~the Term Loan Agreement from July 29, 2020 to November 30, 2021 and ~~new financing facilities further described below in an effort~~(2) extend the maturity date of one of the notes payable from October 30, 2020 to strengthen significantly our capital structure. In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.December 15, 2021.

~~In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior Revolving~~ABL Credit Facilities ~~and eliminating its forbearance agreement. Also in connection with~~Amendment

On June 5, 2019, the ~~Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases. Financial covenants beginning in 2018~~ABL Credit Facilities were amended to ~~account for changes in our capital structure as a result of~~simultaneously increase the ~~Restructuring Transactions~~aggregate revolving credit facility commitment by $40.0 million and ~~to account for~~partially prepay the current business climate. We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants.

~~Asset Based Lending Facilities~~

~~On March 6, 2018, we entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million~~ first lien term loan facility ~~(b) a $200 million first lien~~by $40.0 million. The resulting commitment levels of the revolving credit facility and ~~(c) a $30 million delayed draw~~first lien term loan ~~facility.~~

~~The ABL Credit Facilities have a five-year term and proceeds~~facility were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed. In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of $83.8 million in current installments of long-term debt at June 30, 2018. Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.

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~~Term Loan Amendment~~

On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower and Omega (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan).

~~Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.~~

~~Welltower Master Lease Amendment~~

On February 21, 2018, we entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment). The Welltower Master Lease Amendment reduces our annual base rent payment by $35 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35 million.

~~Omnibus Agreement~~

On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40 million in new term loans and amend the current term loan to, among other things, accommodate a refinancing of our existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our other material debt and lease obligations. See ~~Term Loan Amendment~~ ~~above.~~

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~~Welltower Real Estate Loans Amendment~~

In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans. In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2.0 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount. As of June 30, 2018, we secured repayments or commitments totaling approximately $82 million.

~~MidCap Real Estate Loans~~

On March 30, 2018, we entered into the MidCap Real Estate Loans which have combined available proceeds of $75.0 million, $73.0 million of which was drawn as of June 30, 2018. The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.

~~Sabra Master Leases~~

In 2017, we entered into a definitive agreement with Sabra resulting in permanent and unconditional annual cash rent savings of $19 million, which became effective January 1, 2018. Sabra continues to pursue and we continue to support Sabra’s previously announced sale of our leased assets. At the closing of such sales, we expect to enter into lease agreements with new landlords for a majority of the assets currently leased with Sabra. For the six months ended June 30, 2018, we have terminated the Sabra lease agreement of 20 skilled nursing facilities and one assisted/senior living facility but continue to operate these facilities under new lease arrangements with different landlords. For the six months ended June 30, 2018, we have terminated the Sabra lease agreement and fully divested of six skilled nursing facilities.

~~Other Financing Activities~~

~~HUD Insured Refinancings~~

~~During the six months ended June 30, 2018, we completed one mortgage refinancing through HUD totaling $10.9~~$240.0 million and ~~retired fully a real estate loan of $9.9 million.~~$285.0 million, respectively.

Divestiture of Non-Strategic Facilities

Consistent with our strategy to divest assets in non-strategic markets, we have exited ~~the~~31 inpatient operations, ~~of 20~~including 29 skilled nursing facilities, one assisted/senior living facility and one behavioral health center in ~~five~~six states beginning January 1, 2019 through August 1, 2019, including:

The sale and lease termination of nine skilled nursing facilities located in New Jersey and Ohio between January 31, 2019 and February 7, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $3.3 million.

The closure of one skilled nursing facility located in Ohio on February 26, 2019. The facility remains subject to a master lease agreement. A loss was recognized totaling $0.2 million.

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The lease expiration of one behavioral health center located in California on April 1, 2019. A loss was recognized totaling $0.1 million.

The sale and lease termination of two skilled nursing facilities located in Connecticut on May 1, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $0.8 million.

The sale of five owned skilled nursing facilities located in California on May 1, 2019. A gain was recognized totaling $25.0 million.

The sale and lease termination of one skilled nursing facility located in Ohio on June 30, 2019. A loss was recognized totaling $0.3 million.

The closure of one skilled nursing facility located in Massachusetts on ~~February 28, 2018 that was~~July 1, 2019. The facility remains subject to a master lease agreement with ~~Welltower. A loss was recognized totaling $0.3 million.~~

~~The sale of five skilled nursing facilities located in Massachusetts and Kentucky on April 1, 2018 that were subject to a master lease agreement with~~ ~~Sabra. A gain was recognized totaling $0.3 million.~~

~~The lease expiration of one skilled nursing facility located in California on June 1, 2018. A loss was recognized totaling $0.9 million.~~

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The sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey on June 1, 2018 and June 13, 2018, respectively. These skilled nursing facilities were subject to a master lease agreement with Second Spring Healthcare Investments (~~Second Spring). A gain was recognized totaling $14.9 million.~~

~~The lease expiration of one behavioral outpatient clinic located in California on July 1, 2018.~~Omega. A loss was recognized totaling $0.2 million.

The sale and lease termination of three skilled nursing facilities located in ~~Indiana and Maryland~~Ohio on ~~August~~July 1, ~~2018~~2019 that were subject to a master lease ~~agreement~~ with ~~Welltower.~~Omega. A loss was recognized totaling $0.8 million.

The sale and lease termination of six skilled nursing facilities located in Ohio on August 1, 2019, marking an exit from the inpatient business in this state.

The sale ~~and lease termination~~ of one ~~skilled nursing~~owned assisted/senior living facility located in ~~Pennsylvania~~California on August 1, ~~2018 that was subject to a master lease agreement with Second Spring.~~2019.

The sale and lease termination of one leased skilled nursing facility located in ~~Texas~~ Utah on August 1, ~~2018.~~2019.

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 maximum capital expenditures. At June 30, ~~2018,~~2019, we were in compliance with all of the financial covenants contained in the Credit Facilities.

We have master lease agreements with Welltower, Sabra Health Care REIT, Inc., Omega and ~~Omega~~Second Spring Healthcare Investments (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 June 30, ~~2018,~~2019, we were in compliance with the covenants contained in the Master Lease Agreements.

We have atwo master lease agreement with Second Spring involving 52 of our facilities. We did not meet a financial covenant contained in this master lease agreement at June 30, 2018. We received a waiver for this covenant breach.

~~We have a master lease agreement~~agreements with Cindat Best Years Welltower JV LLC involving 28 of our facilities. We did not meet certain financial covenants contained in ~~this~~one of the master lease ~~agreement~~agreements involving nine of our facilities at June 30, ~~2018.~~2019. We received a waiver for ~~this~~these covenant ~~breach.~~breaches. At June 30, 2019, we are in compliance with the financial covenants contained in the other master lease agreement.

At June 30, ~~2018,~~2019, we did not meet certain financial covenants contained in ~~seven~~three leases related to 45five of our ~~facilities, which are not included in the Restructuring Transactions.~~facilities. We are and expect to continue to be 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 June 30, ~~2018.~~2019.

Our ability to maintain compliance with our covenants depends in part on management’s ability to increase revenue and control costs. 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 our quarterly covenant compliance requirements. 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 an even more significant impact on our financial position.

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, resulting in a concentration of risk. These include organizations that utilize our 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 us, 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 our rehabilitation therapy services business where ~~we have~~it has over ~~200~~160 distinct customers, many being chain operators with more than one location. ~~The four largest customers~~One customer, which is a related party of ~~our rehabilitation services business comprise $62.1~~ours, comprises $29.6 million, approximately ~~54%~~32%, of the ~~net~~gross outstanding contract receivables in the rehabilitation services business at June 30, ~~2018.~~ 2019. See Note 11 – “Related Party Transactions.” One former customer ~~which is a related party of ours,~~ comprises ~~$36.5~~$9.1 million, approximately ~~32%~~10%, of the ~~net~~gross outstanding contract receivables in the rehabilitation services business at June 30, ~~2018.~~2019. An adverse event impacting the solvency ~~of several~~ of these large customers resulting in their insolvency or other economic distress would have a material impact on us.

Financial Condition and Liquidity Considerations

The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (August 9, ~~2018)~~2019). Management considered the recent 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 before August 9, ~~2019.~~2020. Based upon such considerations, management determined that wethere are ~~able~~no known or knowable conditions or events that raise substantial doubt about our ability to continue as a going concern for 12 months following the date of issuance of these financial statements (August 9, ~~2018)~~2019).

Our results of operations ~~have been~~continue to be negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers. In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment. These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments, ~~accelerated in 2017.~~ persists.

~~In response to these issues, we entered into a number of agreements, amendments and new financing facilities described under~~ ~~Restructuring Transactions~~ above. In total, these agreements and amendments are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018. The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility. In connection withDuring the ~~Restructuring Transactions, we entered into the ABL Credit Facilities agreement, replacing our prior Revolving Credit Facilities. Also in connection with the Restructuring Transactions,~~six months ended June 30, 2019, we amended, or obtained waivers related to, the financial covenants inof all of our material ~~loan~~debt and lease agreements ~~and all but two of our material master leases. Financial covenants beginning in 2018 were amended~~ to account for these ongoing changes in our capital structure ~~as a result of the Restructuring Transactions~~ and business conditions. Although we are and project to ~~account for the current business climate. We received waivers from the counterparties to two~~be in compliance with all of our material ~~master leases, for which agreements~~debt and lease covenants through September 30, 2020, the ongoing uncertainty related to ~~amend financial covenants were not attained, with respect~~the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with ~~financial~~the covenants.

~~Risk and Uncertainties~~

Should we fail to comply with our debt and lease covenants at a future measurement date we could, absent necessary and timely waivers and/or amendments, be in default under certain of our existing debt and lease agreements. To the extent any ~~cross-default~~cross–default provisions ~~may~~ apply, the default could have ~~an even~~a more significant impact on our financial position.

Risk and Uncertainties

Although we are in compliance and project to be in compliance with our material debt and lease covenants, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with our covenants. Such uncertainty includes, changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010, ~~currently being considered in Congress,~~ among others.

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.

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Off-Balance Sheet Arrangements

~~Contractual Obligations~~

The following table sets forth our contractual obligations, including principal and interest, but excluding non-cash amortization of discounts or premiums and debt issuance costs established on these instruments, asAs of June 30, 2019 and December 31, 2018, ~~(in thousands).~~ we are 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.

More than


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1 Yr.

2-3 Yrs.

4-5 Yrs.

5 Yrs.

Asset based lending facilities

$
539,694

$
111,296

$
55,010

$
373,388

$
—

Term loan agreements

221,620

8,876

212,744

—

—

Real estate loans

410,610

23,355

50,174

337,081

—

HUD insured loans

427,078

14,270

28,540

28,540

355,728

Notes payable

105,861

10,249

78,628

16,984

—

Mortgages and other secured debt (recourse)

12,799

10,846

1,953

—

—

Mortgages and other secured debt (non-recourse)

24,035

2,511

4,923

4,527

12,074

Financing obligations

7,931,428

234,780

483,389

487,007

6,726,252

Capital lease obligations

3,863,996

91,414

181,912

189,910

3,400,760

Operating lease obligations

953,430

121,271

239,895

191,376

400,888

$
14,490,551

$
628,868

$
1,337,168

$
1,628,813

$
10,895,702

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~In the normal course~~This item is not applicable to smaller reporting companies.

Table of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.Contents

~~Interest Rate Exposure—Interest Rate Risk Management~~

Our ABL Credit Facilities and MidCap Real Estate Loans expose us to variability in interest payments due to changes in interest rates. As of June 30, 2018, there is no derivative financial instrument in place to limit that exposure.

~~A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $5.0 million increase in our annual interest expense.~~

Our investments in marketable securities as of June 30, 2018 consisted of investment grade government and corporate debt securities and money market funds that have maturities of five years or less. These investments expose us to investment income risk, which is affected by changes in the general level of U.S. and international interest rates and securities markets risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Interest rates are near historic lows, with a risk of interest rates increasing before our current investments mature. While we have the ability and intent to hold our investments to maturity today, rising interest rates could impact our ability to liquidate our investments for a profit and could adversely affect the cost of replacing those investments at the time of maturity with investment of similar return and risk profile. Despite the complex nature of exposure to the securities markets, given the low risk profile, we do not believe a 1% increase in interest rates alone would have a material impact on our net investment income returns.

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.

~~Table of Contents~~

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.

Changes in Internal Control Over Financial Reporting

~~Management determined that there~~During the six months ended June 30, 2019, we implemented certain internal controls in conjunction with our adoption of the new leasing standard, Topic 842. There were no other 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 1215 — “Commitments and ~~Contingencies—~~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 disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017,~~2018, which was filed with the SEC on March ~~16, 2018.~~18, 2019.

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.

Table of Contents

Item 5. Other Information

None.

~~Table of Contents~~

Item 6. Exhibits

(a)Exhibits.


Number		~~Description~~

	Description
10.1		Second Amendment, dated April 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent
10.2		Third Amendment, dated June 5, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent
10.3		Amendment No. 6, dated as of May 9, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent
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~~2002..
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~~2002..
32*		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002..
101.INS		XBRL Instance 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

________________

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

7067

Table of Contents

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:	August 9, ~~2018~~2019	By	/S/ GEORGE V. HAGER, JR.
			George V. Hager, Jr.
			Chief Executive Officer

Date:	August 9, ~~2018~~2019	By	/S/ THOMAS DIVITTORIO
			Thomas DiVittorio
			Chief Financial Officer
			(Principal Financial Officer and Authorized Signatory)

7168


Twelve months ended June 30,
2019	$	107,373
2020		11,019
2021		236,580
2022		219,897
2023		408,280
Thereafter		178,719
Total debt maturity	$	1,161,868


Twelve months ended June 30,	Capital Leases		Operating Leases
2019	$	91,414	$	121,271
2020		89,998		120,032
2021		91,913		119,863
2022		93,921		104,072
2023		95,988		87,304
Thereafter		3,400,760		400,888
Total future minimum lease payments		3,863,994	$	953,430
Less amount representing interest		(2,865,776)
Capital lease obligation		998,218
Less current portion		(2,159)
Long-term capital lease obligation	$	996,059


									More than
	Total		1 Yr.		2-3 Yrs.		4-5 Yrs.		5 Yrs.
Asset based lending facilities	$	539,694	$	111,296	$	55,010	$	373,388	$	—
Term loan agreements		221,620		8,876		212,744		—		—
Real estate loans		410,610		23,355		50,174		337,081		—
HUD insured loans		427,078		14,270		28,540		28,540		355,728
Notes payable		105,861		10,249		78,628		16,984		—
Mortgages and other secured debt (recourse)		12,799		10,846		1,953		—		—
Mortgages and other secured debt (non-recourse)		24,035		2,511		4,923		4,527		12,074
Financing obligations		7,931,428		234,780		483,389		487,007		6,726,252
Capital lease obligations		3,863,996		91,414		181,912		189,910		3,400,760
Operating lease obligations		953,430		121,271		239,895		191,376		400,888
	$	14,490,551	$	628,868	$	1,337,168	$	1,628,813	$	10,895,702