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Edited Transcript of GEN earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Genesis Healthcare Inc Earnings Call

FOOTHILL RANCH Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Genesis Healthcare Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George V. Hager

Genesis Healthcare, Inc. - CEO & Director

* Lori Mayer

Genesis Healthcare, Inc. - VP of IR, Brand Management & Marketing Communications

* Thomas DiVittorio

Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Frank George Morgan

RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2019 earnings call. (Operator Instructions)

I would like to hand the conference over to your speaker today, Ms. Lori Mayer. Thank you. You may begin.

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Lori Mayer, Genesis Healthcare, Inc. - VP of IR, Brand Management & Marketing Communications [2]

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Good morning, and thank you for joining us today. We issued our earnings press release earlier this morning. This announcement is available on 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 differ materially 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 laws, 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 and adjusted EBITDA, which are non-GAAP financial measures. We believe that 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

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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.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [3]

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Thank you, Lori. Good morning, and thank you for joining us. I'll apologize in advance for my voice. Hopefully, you can all hear me.

I will focus my comments this morning on our progress with our strategic initiatives, including our portfolio management, real estate acquisitions and value-based programs. I will then turn the call over to Tom DiVittorio, Genesis' Chief Financial Officer, who'll provide more details on our quarterly results and other updates before opening the line for questions. Overall, we had another solid quarter, highlighted by continued same-store occupancy, providing further evidence that we reach the census low point back in the fourth quarter of 2018. The fundamentals of the business continue to trend positively.

First, regarding our strategic initiatives, I would like to update you on our portfolio optimization activities. During the third quarter of 2019, we divested, exited or closed the operations of 22 noncore facilities. Year-to-date, through October 1, 2019, we exited a total of 43 facilities, with approximate annual revenue of $366 million, adjusted EBITDA of $11.5 million and a pretax loss of $10.3 million. These transactions resulted in a reduction of approximately $6.9 million of annual cash lease payments and the repayment of $154 million of indebtedness.

The divestiture transactions did reflect continued robust demand for our skilled nursing facility beds and valuations per bed that exceeded our expectations. In addition to facility divestitures, we are also pursuing creative joint venture structures, designed to take advantage of strong local operating resources in a number of our western markets. These joint ventures will allow us to realize the benefits of combining successful local operators, with the scale, infrastructure and technology platform of the largest national provider. We will update you when our JV negotiations have been finalized.

Before I leave this subject, I would like to highlight our cumulative progress in streamlining our portfolio over these last several years. Currently, 76% of our facilities are located in Genesis' historical markets east of the Mississippi. We will continue to drive Genesis back to a successful operating model that prioritized local market density, long-standing hospital and payer relationships and consistently positive clinical results.

Next, I would like to update you on our real estate transactions. As we've discussed previously, we are looking to acquire back a significant component of our real estate. We think ownership of a higher percentage of our real estate will continue to improve the capital structure of the company. Subsequent to September 30, 2019, we announced that we made an investment with a private investor, involving 18 skilled nursing facilities previously leased from Second Spring Healthcare Investments and Welltower. Through this investment, we gained approximately a 30% interest in the entity that owns the real estate of the 18 facilities.

We also acquired a fixed price purchase option to acquire the real estate in 2024 at a 10% premium above the original acquisition cost. This is the third unique investment transaction we have completed over the last 2 years. Each of these transactions focuses on ownership or the right to obtain ownership in our underlying real estate. The purchase options in these transactions are exercisable between 2023 and 2026. Upon the exercise of these options, our debt service cost will be reduced by approximately $23 million or 40% on an annualized basis.

We have previously stated it was our goal to own or obtain the ownership rights to purchase at least 30% of our portfolio by the end of 2020. At this time, I feel comfortable raising our goal to 35% by the end of 2020, given the transactions that are currently in process.

Moving on to our accountable care organization, the only long-term care-focused ACO in the country. For those of you who are not familiar, the Genesis Healthcare ACO participated in the Medicare shared savings plan in an upside-only, no risk track for the 2018 performance period. This track allowed us to retain 50% of any realized savings generated in the program. During 2018, the company managed approximately 6,400 Medicare fee-for-service beneficiaries under the MSSP program with an annualized Medicare spend of more than $155 million. In August 2019, CMS shared positive news that we reached the minimum savings rate required to recognize income from the MSSP for the 2018 performance period. This is a very significant milestone that validates our participation in the MSSP and our ability to successfully manage costs and outcomes in this innovative value-based program. Tom will discuss our income recognition in more detail shortly.

Effective July 1, 2019, the ACO entered into a new MSSP risk track. Going forward, our ACO can achieve 75% of the realized savings, but it is also now subject to downside risk. With increased confidence in our performance analytics and our valuable insights we have gained into the value-based system, we expect to receive a favorable reconciliation for the 2019 performance period as well.

Finally, our Genesis Healthcare ACO has changed its name to LTC ACO. We plan to aggressively market to other non-Genesis long-term care nursing facilities and clinical providers over the coming year. We believe that the membership in our ACO can be significantly expanded, not only inside Genesis but also more broadly throughout the SNF industry as we achieve positive patient outcomes as well as positive financial results. Our ACO is an increasingly important element of our growth strategy as we move forward.

Before I close and turn the call over to Tom, I would like to comment on PDPM. As you know, CMS implemented this new reimbursement system effective October 1, 2019. We remain optimistic that this new model is positive for Genesis and for our patients. Our transition to PDPM has gone smoothly as we were well prepared for the changes. Last quarter, we mentioned that we would be able to reduce our cost of providing therapy services by 10% to 12%, while using more cost-effective modalities. We have successfully met this goal, which should result in approximately $30 million of reduced annual operating cost for our Genesis centers. The company will start to see these benefits in the fourth quarter of 2019.

Looking forward to the last quarter of 2019 and into 2020, I continue to be very optimistic that our unique investment strategies and portfolio optimization, our ACO and our other value-based initiatives, our strong ancillary platforms, including Genesis Rehab Services and CareerStaff as well as the positive impact of PDPM will position us well for sustained growth in the near and mid-term future. As always, I would like to thank our leadership team and the thousands of nurses, CNAs and therapists across the country for their continued dedication and commitment to care for our patients and residents with compassion.

I will now turn the call over to Tom.

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Thomas DiVittorio, Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary [4]

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Thanks, George. Good morning, everyone. My comments today will focus on operating results and trends, and then we'll open up the line for any questions you may have. I'm going to start with the top line. Revenue in 3Q '19 of $1.12 billion declined $94 million or 7.7% from 3Q '18. Of this $94 million decline in revenue, $104 million is attributed to the impact of divestitures, net of acquisitions, and $15 million is attributed to lower revenue in our Rehab Services segment following the cancellation of low-margin therapy contracts. The revenue decline was offset by approximately $9 million of gross revenue recognized under the MSSP and approximately $16 million or 170 basis points of same-store revenue growth in our inpatient services segment. This is the fourth consecutive quarter of organic revenue growth in our inpatient business and the greatest level of growth over the 4-quarter period.

Adjusted EBITDAR of $134.7 million in 3Q '19 decreased $11.2 million from 3Q '18. $10.5 million of this decline is from the impact of divestitures net of acquisitions. After taking this into account, our results in 3Q '19 were relatively flat with 3Q '18.

A few other factors also impacting earnings this quarter. First, we saw $4 million of incremental labor costs in our inpatient business, reflecting wage inflation that exceeded recent run rates. That wage inflation was offset by the favorable MSSP income recognized in the quarter. With further regard to the $6.4 million of MSSP income recognized this quarter, $1.7 million relates to the final reconciliation and settlement of the 2018 performance year and $4.7 million represents the net MSSP income accrued for the first 9 months of the 2019 performance year. We expect to recognize MSSP income in 4Q '19 at the same run rate of about $1.6 million per quarter, which represents approximately 50% of our currently projected MSSP income for performance year 2019. We will true-up our estimates for 2019 [in] '20 when we receive the final CMS reconciliation and settlement.

There were 2 additional factors impacting this quarter that I would like to highlight: One, we experienced some temporary margin compression in our rehabilitation therapy business related to the challenges of implementing operational changes in advance of the October 1 transition to PDPM, which we estimate impacted the earnings of our rehab business in the third quarter by $4 million. And finally, there was approximately $4 million of estimated reimbursement that we did not recognize this quarter due to legislative delays or administrative matters involving 2 state Medicaid programs. We expect resolution of these matters by the time we report our fourth quarter results. This additional reimbursement would be retroactive to July 1, 2019, and would remain in our go-forward run rate.

With respect to patient mix and occupancy, skilled days mix in 3Q '19 of 17.6% declined 30 basis points from the prior year quarter. Of the 30 basis point decline in skilled mix, approximately half is due to growth in our long-term care census, with the remainder due to lower skilled patient admissions. This is the lowest rate of decline in skilled census in over 4 years.

Regarding skilled patient admissions, during the third quarter of 2019, we experienced a decline of only 70 basis points as compared to the third quarter of 2018. 70 basis points is, by far, the lowest rate of year-over-year decline in skilled census admissions in nearly 3 years and compares to an average skilled patient admission decline of 390 basis points over the past 4 quarters. This time last year, we were excited to report that we had reached an important milestone in showing same-store year-over-year occupancy growth after 4 consecutive years of decline. We are increasingly optimistic that our current portfolio of assets is nearing the same inflection point with respect to skilled mix.

Touching briefly now on length of stay, the average length of stay of Medicare and Medicare Advantage skilled patients discharged to home remains flat for the seventh consecutive quarter. And finally, operating occupancy in 3Q '19 of 87.3% increased 300 basis points from the prior year quarter. We estimate that 90 basis points of this increase represents same-store occupancy growth and the remainder represents the impact of divesting properties having below average occupancy.

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fourth consecutive quarter of same-store occupancy growth and the highest level of growth thus far.

On the topic of wage inflation, 3Q '19 wage inflation for nonovertime worked hours by our employed nursing staff grew 3.4% over 3Q '18. Including overtime hours and agency costs, our all-in nursing wage costs per worked hour grew 4.5% in 3Q '19 over 3Q '18. This is a 70 basis point increase in the all-in nursing wage inflation that we reported last quarter. This rate of wage inflation is specific to our nursing function, where we continue to see the greatest wage pressure. The nursing function represents about 50% of our labor force. Wage inflation in the other half of our labor force approximated 2.5%. So in the aggregate, Genesis' overall wage inflation rate in 3Q '19 was about 3.5% or 60 basis points higher than the rate reported last quarter.

As previously mentioned, we estimate that this elevation in wage inflation this quarter as compared to where we ran in the second quarter, impacted 3Q '19 earnings by about $4 million. Now to reimbursement rates. The same-store weighted average reimbursement rate growth from our payers in 3Q '19 was approximately 2%, which is on the low end of the 2% to 3% range we guided to last quarter. As I previously mentioned, there is $4 million of 3Q '19 reimbursement that we expect will be recognized next quarter related to the 3Q '19 period. Taking this $4 million into account on a pro forma basis moves our 3Q '19 weighted average reimbursement rate growth to 2.5%, which is at the midpoint of our previously provided guidance range. As we look ahead over the next 6 to 12 months, the 2.4% net Medicare market basket increase that began October 1, along with the -- with a positive Medicaid outlook in several of our key states, should continue to support weighted average reimbursement rate growth for Genesis of between 2% and 3%.

To recap the quarter, we are very pleased with the continued strength in the top line performance metrics of our inpatient business. We are confident that our planning and execution around the transition to PDPM will result in positive outcomes for patients and lower operating costs for the company.

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need to generate positive earnings under the MSSP. And last, our momentum around portfolio optimization and creative partnership structures has and will continue to strengthen the overall portfolio of assets under our management and position the company to meaningfully reduce its fixed charges in the future through greater facility ownership.

With that, Sherri, you can open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of A.J. Rice from Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [2]

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Just a couple of questions. Maybe, first, a follow-up on the labor comments. I guess I'm not 100% clear. Are you saying that something unusual happened with respect to labor in the third quarter that will mitigate? Or do you think that's just a tightening of the market, and we will see a little bit of an uptick in labor pressure going forward from here?

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Thomas DiVittorio, Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary [3]

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A.J., it's a tough one to pinpoint. I would say it's maybe a little bit of both. Keeping in mind that this quarter is typically a very difficult quarter from a labor standpoint. It's a high vacation season. You've got to replace a lot of shifts. And when you're already in a tight market, I think that, that can tend to add some additional pressure seasonally to that rate of inflation that we're seeing. And I think that some of the inflation that you're seeing is us making the appropriate investments that we need to make in very tough labor markets, where we would expect to see some return, if you will, on that and our ability in the future to improve retention, add new hires that we need to add and ultimately reduce our reliance on agent nurses. So I do think that we may see some moderation to that as we move into the fourth quarter.

And we're also working on just a laundry list of strategies to work through some of those labor issues in some of the markets where we're seeing the greatest pressure, including better leveraging our own staffing business to fill some of those shifts. We've actually increased the penetration of our own staffing business by about 100% in the past year. So we're making some good headway there and just putting together a lot of other programs to help develop CNA trading and other educational things that we need to do in markets so that we can, in effect, grow our own labor pool.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. One of the other post-acute players was saying that they thought PDPM -- the reimbursement change was beginning to have a little bit of impact, particularly early here in the fourth quarter on the relative tightness of therapists that they were seeing some easing there. On that -- have you seen that? And is that potentially a meaningful help to you?

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [5]

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Yes. A.J., there's no question that as the industry looks to provide therapy through more efficient modalities such as group concurrent therapy. And by the way, just as we look at group concurrent therapy as we participate in the BPCI program, putting some resource studies and found that use of -- appropriate use of group concurrent therapy can actually be, if not, at least equal, if not better, or more efficacious than one-on-one therapy in certain cases. But what you'll find there is if you provide therapy with more cost -- with more efficient modalities, you need less therapy resource. So we made some public statements that people might have seen that we actually reduced our therapy complement by approximately 600 therapists out of 8,000 FTEs. And my guess is others did the same. So I think with lower staffing levels in the therapy gyms throughout the industry, I think that would ease any wage pressure, and that assessment is accurate. We don't see any wage pressure whatsoever in the therapy side of the business.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay. And when you think about your therapy business, as we go in through this reimbursement change, are you expecting it to decline further? Are we seeing pretty much what we have? And at what point do you think you would be at a point where you might start growing -- seeing growth against sequential quarterly basis?

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [7]

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Yes. A.J., I think right now, I think you should project pretty much flat. And hopefully, your organic growth comes from census -- positive census movement in the industry. So as the census continues to grow in the industry, Tom talked about, we will provide the inflection point on skilled mix. I think organic growth in the skilled nursing industry will also drive organic growth going forward in the rehab segment. But I would look at the rehab segment being flat, we're going to look at 10% to 12% revenue cut in our third-party business to take into effect the impact of PDPM. We've adjusted our cost structure to completely offset that. So you should look at declining top line, flat margins as we look forward in the near term, and then hopefully, organic growth tied to census growth in the industry. And our rehab segment being the largest in

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some magnitude. We'll continue to look at utilizing some of our innovative programming. And obviously, the knowledge base that we have with our own centers to try to drive market share growth and look at obtaining new third-party contracts through our GRS segment.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [8]

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Okay. One last question, sort of a technical one. The hospital companies and the managed care companies have talked a lot about this extra business day in the third quarter. I'm not really sure whether that's -- it's a help or a hurt to you, but what kind of -- what impact did that have? It was unusual to have an extra Monday in the quarter.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [9]

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No impact for us. So I don't know what that would mean for them.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [10]

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Yes. Well, extra volume, they were saying, basically, whatever side you're on...

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [11]

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I don't know if they have an extra admission day, but we have the same debt number of (inaudible) revenue days in the third quarter this year as we did last year.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [12]

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Okay. Yes. I didn't know if it -- I assumed you would've called it out if it made a difference, but I just wanted to ask.

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Operator [13]

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Your next question comes from the line of Joanna Gajuk from Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [14]

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So I appreciate the commentary on the Medicaid outlook and the all-in rates you expect to sort of get back some of the delayed revenues in 2 states. So can you also frame for us how we should think about occupancy growth next year, just to close that loop on the kind of top line, how you think about that going forward?

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [15]

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Yes. Joanna, look, we have continued to see census growth. I don't think what anyone should project significant growth, but I think we see modest, sustained growth, and it looks like we're very close to the inflection point on skilled mix so throughout the entirety of '19, we've seen decline even though reduced declines in skilled mix. We hope to see that we will see modest skilled mix growth and modest top line growth going forward. We think our assets are well positioned. The market, which now define ourselves with some of our portfolio optimization activities in the markets that we operate well in, where we have good density, good concentration of assets, good diversity of clinical skill and clinical programs as well as solid payer and acute care relationships. So we think we're well positioned. I think the industry will continue to see modest gains in census over 2020 and going forward.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [16]

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Great. That's very helpful here. And in terms of -- you flagged out headwinds in Q3 in your rehab segment in preparation for the PDPM changes? So is it all done? Or there will be some incremental costs still in Q4 related to those preparation?

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [17]

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We have some severance-related costs that we'll recognize in the month of October, Joanna. They're not material as we reduced our therapy component by about 600 FTEs. But other than that, the cost issues are behind us. And once again, we got very positive reaction from our third-party customers. And I think we are very well positioned going forward.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [18]

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Okay. That's great. And the last question. So obviously, you -- it sounds like you have a very nice pipeline of this innovative type of transactions and you increased kind of your target of the asset ownership. So can you give us a bit more flavor in terms of what are the parties that are interested in this transaction? And what kind of the reasons drive them to move forward with that? That will be last question for me.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [19]

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Yes. The partners in our first 3 transactions, I would describe them as principally more family office-type private equity money that really is more real estate focused. I think the attractiveness to our investment partner is -- are multifaceted. One, our partners share a very positive longer-term view of the success of the skilled nursing industry. They agree with us that the supply-demand fundamentals will continue to work in our favor -- and as we go out in time materially in our favor.

As I said, there are real estate-oriented. And as we buy this real estate, we are able to put very attractive, low-cost nonrecourse debt financing on these assets, which significantly reduces the cost of capital associated with the ownership of real estate in the space. So the ability to lever with low-cost attractive nonrecourse financing, also supporting, as I said in my comments, above-expected per-bed values, especially in our core markets. And lastly, they see a positive

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So instead of the real estate being adverse to the operations, what is very positive about these transactions is an alignment of the real estate and the operator.

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Operator [20]

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Your next question comes from the line of Frank Morgan from RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [21]

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Yes. I'd like to stay on the subject of the real estate portfolio. Just curious how much additional divestitures you have to -- you think you have to go. So not so much converting to ownership, but just outright divestitures.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [22]

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Frank, we are pretty much -- we're substantially done. We have some assets in some of our Midwestern states that -- very rural states that we are in the process of exiting, less than 10 -- around 10 properties. And that will leave us. Our residual markets will be all markets where we have a good amount of concentration and density. As I said in my comments though, the only other transaction structure we're looking at is possibly joint venturing in some of our western markets. And we have experimented with that for the last several months. And we see some potential positive outcomes from combining local successful operators in a joint venture structure with our scale, our infrastructure, our technology platform. And there are certain markets that I would argue we haven't operated as well as I'd like to in, principally out west, not our core markets and this JV structure that we're pursuing, we think potentially could be very, very positive. So even though it's not an outline divestiture, it is a different structure where we will supplement our operating resources in certain of those markets and go into a joint ownership structure of the operating business.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [23]

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Got you. And I think you mentioned also on the divestitures, you were getting better valuations than you had expected. But just curious, any kind of valuation metrics you could share with us, whether it's maybe per bed value? What kind of valuations did you end up getting for a lot of those assets?

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [24]

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Frank, look, every market is different, I mean -- and widely different. And a lot of it is based on

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protection, and therefore, you have significant amounts of excess supply of beds. You might put a state like Texas in that category or a state that already find itself with a lot of excess bed supply like Massachusetts. Valuations in those states would be lower. But in our core -- in many of our core markets in the mid-Atlantic and the southeast, far west, the demand in the per bed values are -- continue to be very strong and north of $100,000 a bed, up to $200,000 a bed in many of those core markets.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [25]

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Wow. Got you. Maybe a Tom question, I'll give your voice a chance to rest. On the new shared savings program, the new one that you're entering into, I'm just curious about the size of this one relative to the one you're in today. I understand this one has more of a risk component to it, but it also has more upside. So in terms of just number of fee-for-service lives, is it a similar size? And should we think of -- I'm just trying to think about what the potential savings there could or your ability to earn on that new program?

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Thomas DiVittorio, Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary [26]

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Frank, the size of the program is very similar in '19 as '18, but we would expect that to continue to grow. As George pointed out, as we look for opportunities not only to penetrate our own captive business, but businesses outside of our 4 walls.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [27]

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And if I can just add to that, this is a somewhat of a unique program with an annual CMS reconciliation. And I think what you should expect is that we will recognize our income conservatively in quarters 1, 2 and 4 and then true-up each year when we get our reconciliation in the third quarter of each year. We are very optimistic and expect that the income from our ACO in 2020 will exceed what we've recognized in '19. So we think that you should include that as part of our recurring income base.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [28]

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Got you. And then maybe hopping onto that wage question, were there any particular markets where you saw that? And you define the inflation being higher in the nursing population. Are you talking about just like skilled nursing like RN, LPN? Are you talking about nurses age, they also get counted in that bucket.

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Thomas DiVittorio, Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary [29]

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The age do get counted in that bucket. And Frank, it's that position where we see the greatest pressure in this very strong market. So you've got -- there's a lot of other options available to those folks if your wages

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and quite honestly, that's -- that -- we're seeing pressure in that position more than we are, let's say, in the RN or LPN ranks. As far as geography goes, as we sort of take a step back, where we see the most acute pressure in the nursing function, but even beyond the nursing function inside the centers is in rural markets. So when you've got -- for instance, I mentioned, overall, 4.5% all-in nursing wage inflation. We've got states like Maine and Vermont that are low double-digits, 10%, 11%, 12% in this quarter. Now some of that's reactive and sort of resetting the bar. But it just gives you a little indication. And another way to look at it. We looked at states where we have more than 30% of our beds categorized as rural versus urban. And in those states where we have that level of concentration, the nursing wage inflation this period was 7.5% as compared to that 4.5% across the whole portfolio. So rural markets are clearly tougher than what we're seeing in the urban markets.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [30]

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Got you. One last question on the decline in the skill mix, the reduction in the -- amount of the decline in the skilled mix. Is that -- do you think that's more a function of how your

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has evolved with all the divestitures and the refinement activity? Or do you think it's more of a macro call that you think you can make about

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with overall skill mix?

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Thomas DiVittorio, Genesis Healthcare, Inc. - CFO, Executive VP, Treasurer & Assistant Secretary [31]

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Yes. Frank, I think, look, we're monitoring that very closely. It reminds us very much of us watching sort of the occupancy trends, where if you graph that out over a number of years, you would just see this continual sort of downward slope that, and the last couple of quarters, has really started to flatten. So maybe a point I'll make where you were going is, there's no doubt that the portfolio that we're managing today, as George mentioned, is much more stable. The clinical performance there is going to be more consistent. It's in markets where we have a lot of clinical capability. So I do think that there's some greater stability in the skilled mix in the business, the portfolio that we're operating today. But that said, even if you did all this on a same-store basis, you would definitely see this trajectory declining in terms of the level of -- a deceleration of the decline. And so we're hopeful that we are hitting sort of a real inflection point, and we can see some organic growth here in the not-too-distant future.

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Operator [32]

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There are no further question at this time. Presenters, you may continue.

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George V. Hager, Genesis Healthcare, Inc. - CEO & Director [33]

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Well, we appreciate everyone joining us for the call this morning. And as always, Tom, myself and Lori and the rest of the Genesis team are available for any questions that you might have after the call. Thank you again for joining us this morning.

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Operator [34]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.