Genesis Healthcare's (GEN) CEO George Hager on Q2 2016 Results - Earnings Call Transcript

| About: Genesis Healthcare, (GEN)

Genesis Healthcare, Inc. (NYSE:GEN)

Q2 2016 Earnings Conference Call

August 05, 2016 08:30 PM ET

Executives

Lori Mayer - Investor Relations

George Hager - Chief Executive Officer

Tom DiVittorio - Chief Financial Officer

Analysts

Frank Morgan - RBC Capital Markets

A.J. Rice - UBS

Dana Hambly - Stevens

Chad Vanacore - Stifel

Rich Anderson - Mizuho Securities

Joanna Gajuk - Bank of America

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a Q&A session. [Operator Instructions]. I would now like to turn the call over to Lori Mayer.

Lori Mayer

Good morning and thank you for joining us today. We filed our earnings press release yesterday afternoon. This announcement is available in the Investor Relations section of our website at www.genesishcc.com. A replay of this call will also be available on our website for one year.

Before we begin, I would like it 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 should 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 that are encouraged to review our SEC filings for a more completion 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, change in 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 EBITDAR, 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 in its GAAP to non-GAAP reconciliations contained in today's earnings release.

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

George Hager

Thank you, Lori. Good morning, everyone, and thank you for joining us this morning. I will make my comments brief this morning, highlighting our significant accomplishments this quarter. I would like to emphasize the four most important takeaways from the quarter. I will then turn the call over to Tom DiVittorio, our Chief Financial Officer, for more details on our earnings, balance sheet and guidance.

The first of those four takeaways relates to our operating results for the quarter, which were very strong despite continued although moderating census pressure. Even though our second quarter produced a modest decline in EBITDAR versus the prior year, our organization demonstrated incredible resilience and the unique abilities to adjust our cost structure to our lower census levels. Additionally, it is important to note that our census declines are impacted in part by our efforts to position the Company to succeed in an evolving world of value-based reimbursement.

Our initiatives to reduce hospital readmissions and overall episodic costs negatively impact short-term performance but are absolutely necessary to position Genesis for long-term growth and success. We continue to be very optimistic about our accountable care and bundled payment programs. The positive financial results from these programs are recognized on a retrospective basis and will be realized most significantly in 2017.

Secondly, through the completion of the refinancing and amendment of our major credit instruments, we have created financial stability that will provide Genesis with the necessary flexibility to execute our multifaceted growth plans. The capital transaction highlights include the refinancing of our term loan agreement with extended terms, market rate interest costs and the elimination of any cost of pre-payment. We also achieved complete alignment with our major credit partners.

Second, the resetting of our covenants in our major credit instruments. These covenants now better match the current operating metrics of the Company. And, thirdly, we reached agreement to restructure our long-term leases with Sabra, resulting in long-term stability and reduced rents post 2020 to 2021 that reflect current market and sustainable lease coverage.

In addition to these extremely important refinancing transactions, we continued to pursue opportunities with our landlords to reduce overall lease leverage and to reduce the diluted impact of lease escalators that exceed the current organic growth rates of the post-acute industry. Let me assure you that the long-term sustainability of our capital structure is our highest priority.

Thirdly, we have reached agreement in principle on the financial terms of a settlement with the Department of Justice that allows us to put our four legacy matters behind us. We appreciate the constructive dialogues of the Department of Justice, including an agreement to a five year payment plan that will not materially impact the liquidity and/or the free cash flow of the Company.

Fourth, which is our greatest unrealized opportunity, China. We continue to be encouraged by the receptivity in China through our innovative rehabilitation therapy programs. We expect to have 13 operating sites in China by the end of the third quarter of 2016. Our opportunity in China is real and substantive. We are currently evaluating our options to independently capitalize and recognize the value of our initiatives in China.

In closing, the four significant takeaways of our second quarter are the improved and stabilization of our operating performance, realizing moderating census pressure. We made significant strides in improving the stability and sustainability of our capital structure. And we believe there are significant opportunities to come. Third, we reached the settlement with the Department of Justice which eliminates a significant overhang and we achieved that with minimal impact on the liquidity of the Company. And last, we continued to develop our initiatives in China realizing significant upside potential.

We believe that our long-standing industry-recognized commitment to clinical and operational excellence, combined with our stronger and improving financial foundation, should allow the financial markets to recognize the significant upside potential in the continued development of first, Genesis Physician Services. The only captive significant company in the industry and the only post-acute care sponsored accountable care organization in the market. Currently managing over $800 million of annual Medicare spend, related to over 15,000 Medicare beneficiaries.

Second, Genesis Rehab Services. Now the largest contract therapy company in the country. And its ability to synergistically and accretively consolidate a very fragmented industry. And thirdly, the unlimited opportunity to grow GRS in China. Genesis HealthCare is the nation's largest provider of post-acute services will continue its longstanding tradition of strategic innovation, dedicated to meeting the needs of our increasingly aging population.

Before I turn the call over to Tom to discuss our financial results in more detail, I would like to take this opportunity to thank the hundred thousand strong employees of Genesis that provide the highest level of care to the tens of thousands of frail elderly who are in desperate need of that a care 24 hours a day 7 days a week. Thank you for your service and your commitment. With that, I will turn the call over to Tom DiVittorio, our Chief Financial Officer.

Tom DiVittorio

Thank you, George. Good morning everyone. I will start with a recap of our second quarter results, then move to the balance sheet and finally to guidance. I'll also provide a brief overview of changes to our non-GAAP disclosures. So starting with operating results.

Revenue of $1.438 billion in 2Q 2016 grew 1.3% over revenue in 2Q 2015 fueled by net acquisition and new build facility growth in excess of divestitures. As George pointed out, our year-over-year skilled census decline in the second quarter of 2016 moderated from the first quarter and was in line with our projections. The percentage of same-store average daily skilled patients declined 9.5% in the second quarter 2016 versus the second quarter 2015. This compares to a 12% decline in 1Q 2016 versus 1Q 2015.

Despite the official start of the mandated CJR Bundled Payment initiative effective April 1st, Genesis did not see any further decline in its skilled census nor did we experience any new developments or trends with respect to division of skilled patients away from our setting, our skilled patient length of stay in 2016 continues to run about 5% or one day below the prior year, which is vitally important to our long-term success as we transition to pay-for-value. As a result of our participation in accountable care and Bundled Payment programs, we expect to recapture in future periods some of the current year lost revenue caused by our success managing down episodic cost.

Adjusted EBITDAR was $189.4 million in 2Q 2016 compared to adjusted EBITDAR of $198 million reported in 2Q 2015. As anticipated, the 2016 quarter includes $5 million of higher same-store professional liability and bad debt expense which was discussed on our fourth quarter 2015 conference call and reflected in our 2016 guidance. Adjusting for these expenses, EBITDAR on this basis in 2Q 2016 was down just $3.6 million or 1.9%.

Cash rent grew $5 million in 2Q 2016 versus 2Q 2015, with $3.5 million of the increase have been scheduled rent escalators and the remaining 1.5 million attributed to rent of newly acquired and built facilities. Adjusted EBITDA of $63 million in 2Q 2016 exceeded census estimates of $57.6 million, our solid performance this quarter is attributed to effective management of the controllable aspects of our business. This includes adjusting our variable expenses to better align with recent changes in census volume. Organizationally, we are more focused than ever on managing day-to-day costs relative to our occupancy.

Integration of the recently completed Revera transaction is going well with no surprises to report. Regarding the Skilled Healthcare integration, it's been nearly 18 months since completion of the combination and we successfully reached our target of $25 million of run-rate synergies by mid-2016. The conversion of Skilled Healthcare's decentralized billing and selection function to Genesis' centralized platform is complete. We continue to be encouraged by improvement in collection metrics of the initial group of skilled facilities that fully quartered to the Genesis platform and we're optimistic our bad debt expense will decline over time.

Now turning to the balance sheet, on July 29th we entered into a new $120 million term loan agreement with our long-term business partners Welltower and Omega. The proceeds, along with available cash, were used to fully satisfy the $156.5 million obligation under our prior term loan scheduled to mature in December of 2017. With this refinancing, we extended maturity for this component of our capital structure out to 2020 at market rate pricing. Refinancing this loan with supportive long-term credit partners simplifies the complexion of our debt holders while providing us greater flexibility to operate, grow and pay down the loan without penalty.

The annual pro forma impact to pre-tax cash paid interest expense as a result of the term loan refinancing is only $600,000, less than a 40 basis point increase to the prior instrument. We're very pleased with the results of this refinancing and the support received from our long-term partners Welltower and Omega. On July 29th we also amended our revolving credit facility. The amended facility which matures in February 2020 retains its $550 million commitment size with no change to our previous borrowing availability. The amendment resets financial covenants effective June 30, 2016 to reflect the current and projected operating levels of the business with 20% to 25% cushion to current and projected EBITDA.

The amendment includes slightly elevated pricing across the three facility tranches, resulting in a pro forma increase to annual pre-tax cash paid interest expense of approximately $1.7 million, an increase of less than 30 basis points. This important amendment ensures our continued access to attractively priced capital to support our working capital needs.

Also on July 29th we entered into agreements, amended agreement with Welltower, Sabra, Omega with respect to our master leases and our real estate bridge loan with Welltower. All agreements, reset financial covenants effective June 30th, 2016 to the same 20% to 25% cushion to current and projected EBITDA. We made excellent progress on the bridge loan refinancing initiatives so far this year.

During the quarter, we closed on $52.2 million of HUD guaranteed mortgages. Year-to-date we have closed HUD guaranteed loans of $129.1 million, which along with asset sale proceeds of $54.1 million have paid down our real estate bridge loans over $183 million. The average fixed interest rate on the completed HUD loans is 4% with maturities ranging from 30 years to 35 years. We continue to expect to refinance the remaining $311 million of real estate bridge loans with lower cost, longer term HUD guaranteed mortgages or other permanent financing between now and the end of the year.

During the second quarter, we closed or have binding commitments to close on three transactions that reduce our overall leverage, improve free cash flow and enhance the credit profile of Genesis. First, in May we completed the sale of our non-core hospice and homecare business for $84 million. The sale generated $72 million of cash proceeds and a $12 million short-term note that we expect to collect before the end of the year. The cash proceeds were used to repay the previously the previous term loan facility and we will use the proceeds of the short-term note to pay down our new term loan facility.

The hospice and homecare business generated revenue in EBITDA in 2015 of $70 million and $9 million respectively. Yielding a 9.3 times valuation multiple on the sale. The Company recorded a $43.8 million book gain on the transaction, which is not reflected in our adjusted EBITDAR or adjusted EBITDA.

Second, in May we purchased the real estate of five previously leased centers for $55 million. These facilities are located in our core Maryland, New Jersey and North Carolina markets. The annual cash pay rent on these centers was $6.3 million.

We financed the purchase with a $44 million three year real estate loan issued by a third-party bank at an annual interest rate of 4%. This transaction yields an annual decrease in cash pay fixed charges of $4.5 million. We expect to refinance the bridge loan with HUD debt on or around the end of 2016.

And last, we've entered into an agreement to divest of nine currently leased non-core assisted living facilities. The annual lease cost of these facilities is $5 million. The facilities produce no EBITDA and are not strategic to Genesis. After CapEx, this divestiture is cash flow positive and eliminates the ongoing burden of lease escalators. We expect to close on the divestiture in the second half of this year. Although these three transactions may be individually insignificant, they illustrate the types of things we have done and will continue to do to strengthen the credit profile of Genesis while focusing our internal resources on core businesses in core markets. We are actively pursuing additional opportunities to reduce our leverage and the burden of lease escalators.

To recap, over the last 90 days we effectively addressed all the near-term balance sheet risks we faced this time last quarter. Today, our capital structure is more stable, we strengthened and improved the complex of our debt holder, we resolved near and long-term covenant risks. And as a result of our divestiture activities, reduced our absolute funded debt levels. Before I discuss our outlook for 2016, I want to provide a brief overview of changes to Genesis' presentation of non-GAAP financial measures in response to the SEC's recently updated compliance and disclosure interpretations for non-GAAP financial measures. Among other things, there are three primary changes to our presentation. One, we no longer provide a tabular full income statement style reconciliation of GAAP to non-GAAP financial information. We now provide a vertical presentation that reconciles the Company's GAAP basis net income or loss to EBITDAR, EBITDA, adjusted EBITDAR and adjusted EBITDA.

The new reconciliation approach and the updated guidance by the SEC do not facilitate or support the computation of adjusted diluted earnings-per-share previously reported by the Company and included is our forward-looking guidance. Also, the new reconciliation approach does not accommodate our previous disclosure of the non-GAAP pro forma results for 2015 as if Genesis and Skilled Healthcare were combined effective January 1, 2015. This only -- this change only impacts our presentation of fiscal 2015 for the month of January that Skilled was not consolidated with Genesis. This information, however, can still be found in our previous filings. Two, we no longer provide the non-GAAP financial measure of free cash flow. And, three, our prior definitions of EBITDAR and EBITDA have been revised and can be found in our earnings release and our future public filings. Our prior definitions of adjusted EBITDAR and adjusted EBITDA are unchanged.

Moving now to our 2016 outlook, we are reaffirming our previously issued guidance as follows. Revenues of $5.65 billion to $5.75 billion, adjusted EBITDAR of $710 million to $740 million and adjusted EBITDA of $208 million to $238 million. Fixed charge coverage at the mid-point of the guidance range is approximately 1.25 times. And finally as previously mentioned, pursuant to the SEC's updated guidance regarding non-GAAP measures, the Company is withdrawing its 2016 adjusted diluted EPS and free cash flow guidance.

With that, Melissa, please open the line for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Frank Morgan, RBC Capital Markets.

Frank Morgan

Good morning. Certainly some encouraging news on that decline in the skilled mix issue, but I'm just curious from a labor management standpoint do you feel like you have really got labor productivity maximized currently? But at the same time, how do you deal with the issues we hear about in a lot of markets with higher labor costs and demand for nurses? Thanks.

George Hager

Well, Frank, I would say that there's continued opportunity in terms of labor efficiency, particularly on the inpatient side of our business. You know, keeping in mind that we have over a portfolio of over 500 facilities across the country. And we've got some facilities that manage labor extraordinarily well and we have a number of facilities that where there's potential for improvement. So we believe that there's a lot of upside potential therein continuing to perform better on the labor management front.

You know, with respect to labor costs, we continue to see the same things that we have seen in recent past, and that is there are certain markets where we experience some labor pressure and it might be the result of availability of staff and we aggressively address those cases on a case by case basis. But still, we are not seeing what I would call a widespread impact of wage inflation, nursing turnover or availability of staff across the platform.

Frank Morgan

And in terms of one of your competitors called out having to use more contract labor, any comments on that in terms of your portfolio?

Tom DiVittorio

You know, Frank, I would say on a year-over-year basis we're not seeing any material movement there in the use of purchased services with respect to clinical staff. Again, there are cases on a market-by-market basis, typically in very rural markets where there could be some issues with availability of staff. But I think if you look at the footprint of our facilities, we're very highly densely concentrated in a lot of metro areas and it say in those areas we have less issues with finding and attracting the right staffing levels.

George Hager

And, Frank, obviously with the declining census levels that reflect, that represents less demand for labor as well. And I think to your first question of improving operating efficiency and labor management, we still continue to have also a strategic asset and benefit in owning our own staffing company. And we are continuing to critically evaluate how to more effectively use that staffing company to better manage on a near-term basis, fluctuating demand and need for labor. So I think that the strategic asset of the staffing business will pay dividends for us in the future as we continue to look at ways to improve labor management efficiency.

Frank Morgan

One follow-up question on the guidance. Certainly it looks like relative to your first half performance the, you should be able to get to that guidance range, but I was just curious if you could provide any additional color on you the sort of puts and takes that could make that number skew toward the high-end of the range versus the low end. And I know Tom mentioned bad debt expenses hopefully improving with this full integration of skilled. Maybe a little more color, is any of that baked into the number and if not when should we get the benefit of that? Thanks.

George Hager

You know, Frank, if you just double the first quarter, which one, or the first half, one could do that and you would get to an EBITDA number of [233], which is well above the mid-point of our range. But I think everyone is aware that at least historically there is seasonality in this business. The third quarter, specifically the two summer months of July and August are typically low months in this industry from the census perspective. We've also, no secret, had issues in the prior two years in the fourth quarter.

So we are optimistic on the back six months, but we continue to be conservative and cautious in our guidance, but we feel good about the performance for the first six months. To Tom's point of continued upside and labor management efficiency we have recently initiated another round of cost initiatives at the center level focusing in the non-nursing cost areas that we believe will continue to allow us to improve performance in the back half. So the math would tell you we should be at the upper end but, once again, we are going to still guide on a conservative basis here.

Frank Morgan

Yes. And just one final one here and I will hop. You made a comment about a complete alignment with your creditors. Other than just the basic resetting of the covenants, is there any other commentary around what that means or does that pretty much capture it? Thanks.

George Hager

Well, Frank, what we meant by that and I think there's been some questions and some criticism of our, and Welltower and Omega's financing the takeout of our term loan and we quite frankly would have thought the market would have recognized the tremendous value of having an informed, interested and more friendly credit partner taking that piece, which is a very small piece, understanding less than 2% of our total debt capitalization. I think it's no secret that the types of investors principally hedge fund based that look at second lien and unsecured loans of this type are much more aggressive and opportunistic than traditional lending institutions and clearly more aggressive and opportunistic than Welltower and Omega would be in supporting the total capitalization of our Company. So those more aggressive institutions would typically place much tighter restrictions in the form of negative covenants that would restrict our growth and typically impose significant pre-payment costs to exit the loan.

So we've saw the refinancing and we very much appreciate the support of Welltower and Omega as very prudent in providing tremendous stability to our Company's capital structure for the foreseeable future. With that being said we're going to continue to look to refinance that loan with the right credit party and for the right terms. But at this point, alignment means that we really have a capital structure, a debt capitalization with the right partners that support the long-term strategic interest of the Company.

Operator

And your next question comes from the line of A.J. Rice, UBS.

A.J. Rice

Hi everybody. Just a couple things to try to make sure I understand what's going on. So in the midst of this financial restructuring, I guess Welltower and Omega step-up and contribute new money through the refinancing of the term loan. Sabra, is there, I mean, is a way to think about it that was their contribution to help you get on a little more stable footing? And Sabra's contribution was to rework their loans and sort of all of a package and that's what each side contributed? Is that the way to think about it?

Tom DiVittorio

I think that's a good way to think about it, A J. I mean, our interest with Sabra was different. Which was really, recognizing the amount of rents that really exceed current market coverage levels.

A.J. Rice

Right.

Tom DiVittorio

And acknowledging that those rents will go away in the relative near-term, 2020 and 2021 rendering our lease portfolio with Sabra more sustainable and more market-based from a coverage perspective. We also received support from Sabra to critically evaluate certain markets that we do not have the density in that we would like to really continue to invest and create value in.

So we will selectively look at exiting certain assets that are not part of the long-term growth strategy of the Company. So I mean it was, we received tremendous cooperation from all of those major credit parties which we very much appreciate.

A.J. Rice

And just it may be out there but I haven't seen it. On the Sabra piece, are there still even though you reset the rent, are there still escalators between now and the time of maturity that are still in place? Did they change in any way?

And then on the comment around the coverage cushion that you have, does that do those coverage ratios step-up over time? And give us a flavor for how they are or step down over time rather or how do they change over time I guess is the best way to describe it.

George Hager

So, A.J., the first question around escalators, no changes to escalators within the existing Sabra or frankly any of the master leases that we amended. So no change to escalators. With respect to coverage, I think what you're referring to are just our covenants in total.

A.J. Rice

Right.

George Hager

All of the, sure. So the covenants when we describe 20% to 25% EBITDA cushion to current and projected EBITDA, there are step-ups and step downs in all of those covenants over the course of the next five years relative to the Company's projections. But always maintaining relative to those projections a 20% to 25% cushion to projected EBITDA.

A.J. Rice

Okay. And then just quickly on the comments around what you're seeing on bundled payments and your initiatives to try to focus on episodes of care and cost savings. You know, one of the tricky things for all of us I think is as we look at CJR rolling out in April, we have some providers that are especially health systems that are talking about how they're changing referral patterns and trimming length of stay and post-acute and all that. It's just hard to know how pervasive that is, how engaged the providers are. Obviously in the first year for hospital that plays, that takes this on, or that's in the committed market, there's no downside if they miss the market. So it's just not clear whether, how engaged people are at this point other than, obviously, we know people at the leading-edge are engaged. Can you give us any flavor of what you, wherever we are four months or five months into it? Do you think in the markets that it's relevant what we see today is really what we're going to see or do you think there's much addition on that?

Tom DiVittorio

Yes, A.J. We would be glad to give you insight on that and [actually] the data that we have look at has been a little surprising even to ourselves. But let's start with CJR and then maybe even mover the discussion to the recently announced addition to bundles under this type of program in the cardiac area. But when we look at the second quarter of 2016, which is the first quarter of the implementation of CJR, only approximately just about 2%, slightly more than 2%, of our admissions are in the C JV bundles. And if we actually go back and look at the second quarter of 2015, surprisingly only about 2% of our admissions were in the CJR bundles. So what that has told us, which is upon reflection, shouldn't have been a surprise is the diversion and the bypassing and the skilled nursing asset for simple joint replacements with patients with minimal comorbid conditions has been occurring for these last two or three years. Most of the major orthopedic groups in our core markets look to send those patients directly home and have been for the last two or three years.

So the reality is CJR had virtually no impact on our business and does not have an impact on our business and we do not expect it to have any impact on our business. As we look forward into the cardiac bundles that were recently announced, also our admissions and we have, the data is a little bit old, but I know, I think its representative and would not know why it would change, about 2.5% of our admissions are in those bundles. The cardiac bundles I think present a very different opportunity for us. The patients that are coming to us post cardiac surgery, when you look at those bundles in myocardial infarction and coronary artery bypass graft, those are patient that typically have significant comorbid conditions and that is why they have been historically coming to the skilled nursing industry. We believe we have tremendous opportunity to actually take market share and take advantage of our existing evidence-based pathways that we have built with our acute care partners and our current heart failure capability in cardiac specialty rehab programs. So we think these programs actually in the near to medium term on the margin should be positive. But any downside risk is minimal because it's just not a big part of our business and has not been a big part of our business.

Operator

[Operator Instructions]. And your next question comes from the line of Dana Hambly, Stevens.

Dana Hambly

Good. Thanks. Good morning. George, I just wanted to understand that last comment, you said 2% of your admissions this year and last year were in those specific DRGs, those two DRGs in the CJR bundles.

George Hager

The data we're looking at is older than that, Dana, because we just don't have that current data, but our historic data tells us that about 2% of our admissions are in those bundles. No reason to believe that our admission volumes in those bundles have increased in the most recent time frame.

Dana Hambly

Okay. That's helpful. When you look at the total portfolio now and I appreciate how busy you guys have been the last 90 days, but looking at the 500 facilities, is there any way to frame how many buildings maybe where you could buy the real estate or cease leases? Kind of, what kind of lease expense you're looking at that you may be able to re-negotiate? Anything in and around that.

George Hager

Dana, it's, I wish we were farther along in a lot of the activities that we have been pursuing for some time now to be able to give you more clarity there. We can't. I would just want to emphasize that our current landlords continue to be very supportive and they understand the need to restructure and allow Genesis greater flexibility from a capital perspective in growing the business in the medium to long-term.

So I will tell you that we have many active discussions. I can't give you guidance on when those discussions will come to fruition, but I will tell you, I will tell you that there were very cooperative and collaborative discussion going on with our major landlords to deal with some of the issues inherent in our current lease structure.

Dana Hambly

Okay. Fair enough. The Genesis Physician Services, how many doctors do you employ now and how has that grown over the past couple years and how many facilities does that cover?

George Hager

I don't know if you can get the number of facilities that we cover, but we he had about, we have a little over 400 employed physicians and nurse practitioners and physician assistants. And once again, we are the only and by far the largest snippets company, captive snippets company in the industry. We began building that company 10 years ago, Dana, recognizing the need to significantly increase the presence of the physician in the skilled nursing asset and operation in light of the increasing acuity of the patient we were caring for.

That is obviously now allowed us to do things like apply for and be approved as the only post-acute care sponsored ACO. It's really to Genesis position services that we are an ACO and we receive attribution of many of the patients in our own facilities. You know, GPS, though, as a model is much more actively developed in the old Genesis core markets in the Northeast and Mid-Atlantic and we are continuing to look to roll out GPS as aggressively as we can.

We recently hired a senior clinical officer from Aetna, Dr. Richard Feifer, who brings tremendous, tremendous experience and ability to allow us to attract and grow GPS in greater scale. You know, Dr. Feifer obviously comes from the [payer] world which is also incredibly valuable as he joins forces with Jason Feuerman, our senior executive hired from the Cigna organization, to drive our managed-care and value-based strategy. So that's the scale. We would like to drive the growth in that business as much as we can. Today, we believe based on our the data we are looking at that we are gain sharing upside only on about $800 million of Medicare spend related to over 15,000 Medicare beneficiaries.

Dana Hambly

Okay. All right. Sorry go ahead.

George Hager

Just a couple add on to your question there. Since 2010 we have grown the number of physicians and nurse practitioners employed by Genesis from about 175 in 2010 to over 400 today, so well over 200% increase and then the number of skilled nursing facilities of Genesis that are today covered by our own physician service group is about 75% of our SNF, so roughly 350 of our SNF have coverage today.

Dana Hambly

Okay. Great. And the last one, Tom. Do you have projections for this year on cash interest and CapEx?

Tom DiVittorio

Sure. Our CapEx is about $85 million.

Dana Hambly

Okay.

Tom DiVittorio

And our cash interest is around $82 million.

Operator

And your next question comes from the line of Chad Vanacore, Stifel.

Chad Vanacore

I just wanted to comment on Dana's question on these physicians from a different standpoint which were, I think, in the beginning of the year you had thought about 100 million to 150 million of sales non-strategic assets. Can you update us where you are and where your thinking on that is now?

George Hager

Yes. Those were, that number, Chad, related and those discussions typically to our non-core ancillary businesses. You know, the largest of that which was Signature, which as Tom said was sold for $84 million. But in total we're about spot-on the mid-point of the range of those proceeds with the variety of smaller transaction below Signature that we have executed in 2015 and the first half of 2016. So we're spot-on that guidance. The only asset that we contemplated possibly disposing of as non-core was our staffing business. But as you mentioned earlier, I think that business has potentially much more strategic value than we originally appreciated. And I think we'll look to retain that business for the foreseeable future and leverage its potential throughout Genesis.

Chad Vanacore

Okay. And then just thinking about maybe potential RAC audits and therapy utilization, have you actually seen any pickup in audit activity or do you have an update there?

Tom DiVittorio

Chad, we have seen no uptick in audit activity and we have not had any requests for information for the Company around RAC audits specific to the therapy issue that has been discussed in recent quarters. So it's been really silent on that end and the types of audits that we're engaged in-right now I would describe as routine.

Chad Vanacore

All right. Thanks, Tom. And then just thinking about legacy skilled health performance, you said integrate now, the synergies are achieved. Are those businesses still lagging behind at the core Genesis portfolio or have they stepped up in recent quarters?

George Hager

Chad, I think in all honesty they're still lagging some and I would say, and I think we mentioned this in prior calls, if we had 20, 20 hindsight we would have made some changes in operational leadership sooner than we did. We have moved our most experienced operating executive out to run the West, which is where the majority of the skilled assets are. He has made significant strides in stabilizing the West and driving increasingly strong relationships with the acute care partners in core markets that we have greater density in. And we like the Southern California markets, Orange County, LA County, the Albuquerque and other New Mexico markets. The Denver market is an interesting market for us to name a few. So, we still see significant upside in the West from the skilled portfolio.

Chad Vanacore

All right. Thanks. And then one last one for me. It looks like labor expense was actually pretty good. Are you, do you think that you can actually improve that metric or where do you think we go from here?

George Hager

Chad, as we mentioned to Frank, I mean, with a portfolio this size there's always opportunities for us to improve the performance of facilities that are not meeting their potential with respect to managing all sort of aspects of the business. But labor being the largest cost, there continues to be I think a lot of opportunities there.

So yes, I mean, but widespread across the organization, I think we're doing a really good job. And this quarter I think is a reflection of that generally of managing the variable aspects of the business. But there is definitely opportunity for us for improvement in pockets across the platform.

Chad Vanacore

And is that mostly flexing staffing ratios an optimizing that?

George Hager

Yes.

Chad Vanacore

Okay. All right. That's it for me. Thanks.

Operator

And your next question comes from the line of Rich Anderson, Mizuho Securities.

Rich Anderson

Hey, thanks. I just had a question. Early on in the conversation you said you were surprised by the market reaction to some of the steps the REITs had taken to help you out. And so I just, I was going to hypothesize, say the situation was reversed and there was a distress situation on their side and they came to you and said we need a rent increase of significant portions to continue on, how do you think the market would react to that in terms of Genesis stock?

George Hager

We're not in the business of hypothesizing unrealistic scenarios so couldn't comment on that. I apologize.

Rich Anderson

But I mean why do you think the market, I am just curious why you were surprised by the market's reaction?

George Hager

Because I believe that what Sabra or what Omega and what Welltower did was extraordinarily prudent. And ultimately, value creating for their investors and for ours. I think they do have a vested interest in our equity investors. The stronger the financial and credit profile of Genesis, the stronger the value of their rental stream from Genesis is. So extremely thoughtful and value creating for their investment, for their investors and for ours.

Operator

And your next question comes from the line of Joanna Gajuk, Bank of America.

Joanna Gajuk

Good morning. Thanks for taking the question. So in terms of the discussion around labor costs, it seems like you are saying that you are not seeing any widespread pressure. But is there any comment or any impact potential from the Overtime Rule that's going to affect later this year?

George Hager

Joanna, that does affect a few of our markets. You know, in many cases we're not terribly far off those minimum wage levels. To the extent that they affect certain of our facilities in those markets, we have of course built that into our guidance for the balance of the year and will be included is our views of next year as well.

Joanna Gajuk

Okay. And then in terms of the specifics in the quarter, the 3.8 million severance and structuring cost, was that all in the [indiscernible]?

George Hager

Sorry. Repeat the question.

Joanna Gajuk

The 3.8 million of severance and restructuring costs that are disclosed on page 13 of the reconciliation, so is that included in the [SWD] (ph) or is it partially in other line items?

George Hager

It's in, it's partially in salaries, wages and partially in corporate expenses. And I got your email, we can send you the detail that you're looking for offline.

Joanna Gajuk

Okay. Perfect. No, I was just trying to compare those ratios by excluding items because you no longer have the detailed table where each item belongs. So that would be helpful. And then I guess the other question that I had, also I appreciate the comments on the same-store skilled census progression. But is there any way to kind of flash out what the same-store EBITDAR would be in the sense that the multiple moving parts around divestitures and acquisitions? So I don't know if there's anything to kind of compare the quarter, Q2 versus Q1 because in Q1 you were kind of saying that, kind of same-store EBITDA was down 4% to 5%. So I'm trying to see whether there was any comparison you can make in Q2 on that similar metric.

George Hager

Well, the impact of acquisitions and divestitures was very immaterial on a net basis for the quarters.

Joanna Gajuk

Okay. So it's …

George Hager

Look at result, that's substantial same-store results.

Joanna Gajuk

Okay. That's fair. And then last, a very quick question. I know you were highlighting the China, I guess a progress there. So can you quantify the investment level that you are making, that you project to make in the near future in China?

George Hager

Joanna, we, our Board has approved, I haven't really added up the total, approximately $10 million of total investment. We have stretched that investment extremely efficiently to have 13 sites in operation by the end of the third quarter of 2016. And in fact opened up our first PowerBack facility just east of Beijing this quarter and there was no capital invested in the physical plants in that building. That building was built by the Chinese government.

So we are being extremely cautious around capital investment. That being said, as we have now spent coming on two years in pursuing opportunities and receiving tremendous support throughout the country for our programming, we will evaluate before the end of 2016 our opportunities to independently capitalize the significant growth opportunities in China.

Joanna Gajuk

Great, thank you so much.

Operator

And there's no further questions at this time.

George Hager

Well, appreciate everyone's interest and continued interest in Genesis. We look forward to speaking to you again at the end of the third quarter. Thank you all for your participation.

Operator

Thank you for joining today's conference call. You may now disconnect your line.

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