KENNETT SQUARE, PA — Genesis Healthcare, Inc. (NYSE: GEN) announced operating results for the third quarter ended September 30, 2020, and provided an update regarding the impact of the 2019 novel coronavirus (COVID-19) pandemic on its business.
“The virus continues to have a significant adverse impact on the Company’s revenues and expenses, particularly in hard-hit Mid Atlantic and Northeastern markets,” stated George V. Hager, Jr., Chief Executive Officer of Genesis. “While we are grateful for federal and state financial support received and committed to date, the stimulus funds recognized in the third quarter of 2020 fell nearly $60 million short of the Company’s COVID-19 related costs and the estimated impact of lost revenue. Given the persistence of the virus, its intensification as we approach the winter months and the slow pace of recovery in occupancy, the Company remains reliant on adequate and timely government-sponsored financial support to meet its obligations to patients, residents, caregivers and stakeholders.”
“Our admiration and respect for all of our employees, who have been true heroes for the last eight months, only increases as they have come to work each and every day despite challenging conditions to care for our patients and residents. We are truly blessed by and grateful for their dedication and compassion.”
Third Quarter 2020 Results
- US GAAP revenue in the third quarter of 2020 was $0.94 billion compared to $1.12 billion in the third quarter of 2019;
- US GAAP net (loss) income attributable to Genesis Healthcare, Inc. in the third quarter of 2020 was $(62.8) million compared to $46.1 million in the third quarter of 2019;
- Adjusted EBITDA in the third quarter of 2020, which excludes the estimated impact of COVID-19, was $62.2 million compared to $34.7 million in the third quarter of 2019; and
- Adjusted EBITDAR in the third quarter of 2020, which excludes the estimated impact of COVID-19, was $148.4 million.
The Company estimates the COVID-19 pandemic reduced earnings nearly $60 million in the third quarter of 2020. Specifically, the Company recognized $34 million of federal relief grants and other support under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and $30 million of additional funding provided by certain states. The recognition of these funds in the Company’s operating results served partially to offset the estimated $124 million impact of COVID-19 related to lost revenue and incremental expenses incurred in the third quarter of 2020.
COVID-19 UPDATE AND OUTLOOK
Within Genesis facilities, approximately 70% of patient and resident positive COVID-19 cases have occurred in its facilities located in the states of New Jersey, Connecticut, Massachusetts, Pennsylvania and Maryland, which correspond to many of the largest initial community outbreak areas across the country. Genesis facilities in these five states represent 45% of its total operating beds.
The Company’s net revenues for the three and nine months ended September 30, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. The Company’s skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 75.4% for the three months ended September 30, 2020. The Company’s operating occupancy in the month of October 2020 of 76.5% grew approximately 240 basis points from an operating occupancy low point of 74.2% in the month of June 2020.
The Company’s occupancy decreased in the early months of the pandemic following the efforts of referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of self-imposed admission holds in those Genesis facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals who either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.
After taking into account a commensurate reduction in related and direct operating expenses, the Company estimates lost revenue caused by COVID-19 reduced earnings by approximately $71 million and $145 million for the three and nine months ended September 30, 2020, respectively. The impact of COVID-19 on the Company’s occupancy and net revenues for the remainder of 2020 will depend on future developments, which are highly uncertain and cannot be predicted, including the pace of recovery in occupancy, the future scope and severity of COVID-19, and the actions taken by public and private entities in response to the pandemic.
The Company’s operating expenses for the three and nine months ended September 30, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the three months and nine months ended September 30, 2020, the Company estimates it incurred approximately $52 million and $205 million, respectively, of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs, and the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients.
Government Sponsored Relief Programs.
Since March 31, 2020, the company’s usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the CARES Act. Specifically, in April 2020, the Company applied for and received $157 million of advanced Medicare payments, and from April through September 2020, received approximately $254 million of relief grants and other forms of federal support, of which $222 million was recognized and $32 million was recorded as deferred revenue.
In addition, the Company has elected to implement the CARES Act payroll tax deferral program, which is expected to preserve, on an interest-free basis, approximately $90 million of cash representing the employer portion of payroll taxes estimated to be incurred between March 27, 2020 and December 31, 2020, of which approximately $65 million was realized through September 30, 2020. The advance Medicare payments of $157 million, which are also interest-free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding has been committed by a number of states in which the Company operates, currently estimated at $85 million, of which approximately $76 million was recognized in net revenue through September 30, 2020.
Liquidity and Going Concern Considerations
The Company performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
In completing its going concern assessment, the Company considered the uncertainties relating to the impact of COVID-19 on its future results of operations as well as its current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s indebtedness and other conditional and unconditional obligations due within 12 months following the date its financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.
In response to COVID-19 and other conditions that raise substantial doubt about the Company’s ability to continue as a going concern, the Company has taken the following measures:
- The Company applied for and received government-sponsored financial relief related to the pandemic;
- The Company is utilizing the CARES Act payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, 50% to be repaid by December 31, 2021 and 50% to be repaid by December 31, 2022;
- While it vigorously advocates, for itself and the skilled nursing industry, regarding the need for additional government-sponsored funding, the Company continues to explore and to take advantage of existing government sponsored funding programs implemented to support businesses impacted by COVID-19;
- The Company continues to seek and implement measures to adapt its operational model to function for the long-term in a COVID-19 environment;
- The Company has pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity; and
- The Company is exploring and evaluating a number of strategic and other alternatives to manage and to improve its liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.
These measures and other plans and initiatives are needed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond the Company’s control or may not be available on terms acceptable to the Company, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued.
Further, even if the Company receives additional funding support from government sources and/or is able to execute successfully all of its these plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events or circumstances could force the Company to seek reorganization under the U.S. Bankruptcy Code.
Medicare Shared Savings Program (MSSP)
LTC ACO, the first long-term care sponsored Accountable Care Organization (“ACO”) in the United States and a subsidiary of Genesis, recently received a positive reconciliation and settlement under the MSSP for the 2019 performance year and as a result, generated shared savings for the second consecutive year.
During 2019, Genesis managed approximately 5,800 Medicare fee-for-service beneficiaries under the MSSP with annualized Medicare spend of more than $160 million. In 2019, the MSSP required the LTC ACO to save at least 2.8% of the total Medicare spend under management to share in up to 62.5% (50% applicable to the first half of the year and 75% for the second) of the savings with Centers for Medicare and Medicaid Services (CMS).
In August 2020, CMS notified Genesis that it reached the minimum savings rate in program year 2019 set by CMS required for gain share. In October of 2020, the LTC ACO received MSSP shared savings of approximately $18.8 million and income of approximately $17.0 million net of participating provider distributions, of which $10.3 million was recognized as income during the quarter ended September 30, 2020.
Also during the quarter ended September 30, 2020, Genesis recognized $3.1 million of estimated MSSP shared savings income for the 2020 program year.
Genesis continues to exit challenged facilities and certain low-density markets in order to focus on investment and growth in core markets. During the third quarter of 2020, Genesis sold the real estate and operations of one facility.
The sold facility generated approximate annual net revenue of $10 million, Adjusted EBITDA of $1 million and a pre-tax net income of $0.2 million. This transaction resulted in the repayment of over $5 million of indebtedness.
The Company exited operations of an additional nine facilities thus far during the fourth quarter of 2020. In total, these nine facilities generated approximate annual net revenue of $91 million, Adjusted EBITDA of $4 million and a pre-tax net loss of $2 million. These transactions resulted in the repayment of approximately $22 million of indebtedness.
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