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Genesis Healthcare, Inc. (GEN)

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Genesis Healthcare, Inc. (GEN)

Q3 2017 Earnings Conference Call

November 09, 2017, 08:30 ET

Executives

Lori Mayer - IR

George Hager - CEO and Director

Thomas DiVittorio - CFO, SVP, Treasurer and Assistant Secretary

Analysts

Chad Vanacore - Stifel, Nicolaus & Company

Joanna Gajuk - Bank of America Merrill Lynch

Dana Hambly - Stephens Inc.

Presentation

Operator

Good morning. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2017 earnings call. [Operator Instructions]. Thank you. Ms. Lori Mayer, you may begin your conference.

Lori Mayer

Good morning, and thank you for joining us today. We issued our earnings press release last evening. This announcement is available in the Investor Relations section of our website at genesishcc.com. A replay of this call will also be available on our website for 1 year.

Before we begin, I would like to quickly review a few housekeeping matters. First, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities law, Genesis HealthCare and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes that arise as a result from new information, future events, changing circumstances or for any other reason.

In addition, any operation we mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities as well as the use of the terms we, us, our and similar verbiage are not meant to imply that Genesis HealthCare has direct operating assets, employees or revenue or that any of the various operations are operated by the same entity.

Our discussion today and the information in our earnings release and in our public filings include references to adjusted EBITDAR, EBITDA, adjusted EBITDA, which are non-GAAP financial measures. We believe the presentation of non-GAAP financial measures provides useful information to investors regarding our results because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business, but such non-GAAP financial measures should not be relied upon at the exclusion of GAAP financial measures. Please refer to the company's reasons for non-GAAP financial disclosures and its GAAP to non-GAAP reconciliations contained in today's earnings release.

And with that, I’ll turn the call over to George Hager, CEO of Genesis HealthCare.

George Hager

Thank you, Lori. Good morning, and thank you for joining us today. Yesterday, we made very important and positive announcement that we have reached preliminary nonbinding agreements to restructure our leases and loans with Welltower and Sabra. The objective of these restructuring plans is to establish a strengthened and sustainable capital structure that provides Genesis with the free cash flow and liquidity necessary to execute on our long-term business plan.

We also reported our third quarter 2017 results. Tom DiVittorio, our CFO, will provide additional color and details around the results later on the call.

My comments this morning will focus on the restructuring plans, our value-based initiatives and our response to the recent hurricanes. But first, let me give my perspective on the macro challenges impacting operating performance across our sector. The margin compression we are seeing across the industry is driven by a confluence of events. Total occupancy and, in particular, skilled patient occupancy continues to be under significant pressure, caused by the growing number of utilization management strategies occurring across the continuum as value-based initiatives are further developed and implemented.

Furthermore, within the more profitable skilled mix category of patients, migration toward Managed Medicare products continues to occur. Managed Medicare admissions inherently yield about a 20% reduction in length of stay and about a 10% to 15% lower rate per patient day as compared to traditional Medicare. These top line pressures are further exacerbated by the fact that government-sponsored reimbursement rate growth is not keeping pace with inflation and cost, particularly nursing labor costs amid a strengthening labor market. And unfortunately, unlike other industries, with the majority of our revenue coming from government-sponsored payment plans, skilled nursing operators have no ability to pass these incremental costs along to our customers.

Clearly, this has been the most protracted and complex down cycle in our history. More recently, as these pressures had continued to mount, we have begun to see operators of all sizes forced into receivership or other formal restructuring proceedings. That is why I cannot emphasize enough how appreciative I am of the long-standing collaborative partnerships we have with both Welltower and Sabra. And in difficult times as partners, our interests clearly overlap.

As you can imagine, there are a number of moving parts to these restructuring plans that we have announced, and there are a number of conditions that must occur for Genesis to realize the full economic benefits of the restructuring plan. Those conditions include the sale of Genesis-leased assets to new landlords and reduced markets [indiscernible] and reduced escalators.

Subject to the conditions, we estimate that total impact of the restructuring plans to be between $80 million to $100 million of permanent annual reduced fixed charge coverages. We expect these agreements will result in at least $54 million of permanent annual rent savings, beginning in the first quarter of 2018. We expect additional fixed charge reductions through the refinancing and restructuring of certain of our debt agreements and from the repayment of debt from a limited number of asset sales.

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