PACS Group Inc

Previous wording

We are a leading post-acute healthcare company primarily focused on delivering high-quality skilled nursing care through a portfolio of independently operated facilities. Founded in 2013, we are one of the largest skilled nursing providers in the United States based on number of facilities, with 218 post-acute care facilities across nine states serving over 20,000 patients daily. We also provide senior care, assisted living, and independent living options in some of our communities. Our significant historical growth has been primarily driven by our expertise in acquiring underperforming long-term custodial care skilled nursing facilities and transforming them into higher acuity, high value-add short-term transitional care skilled nursing facilities. We believe our success is driven in significant part by our decentralized, local operating model, through which we empower local leaders at each facility to operate their facility autonomously and deliver excellence in clinical quality and a superior experience for our patients. We provide our independently operated facilities with a comprehensive suite of technology, support, and back-office services that allow local leadership teams to focus more of their time and effort on providing quality care to patients. We believe our operating model delivers value to all of our healthcare stakeholders, including patients and families, referring providers, payors, and administrators and clinicians.

Current wording

We are a leading post-acute healthcare company primarily focused on delivering high-quality skilled nursing care through a portfolio of independently operated facilities. Founded in 2013, we are one of the largest skilled nursing providers in the United States based on number of facilities, with 220 post-acute care facilities across nine states serving over 22,000 patients daily. We also provide senior care, assisted living, and independent living options in some of our communities. Our significant historical growth has been primarily driven by our expertise in acquiring underperforming long-term custodial care skilled nursing facilities and transforming them into higher acuity, high value-add short-term transitional care skilled nursing facilities. We believe our success is driven in significant part by our decentralized, local operating model, through which we empower local leaders at each facility to operate their facility autonomously and deliver excellence in clinical quality and a superior experience for our patients. We provide our independently operated facilities with a comprehensive suite of technology, support, and back-office services that allow local leadership teams to focus more of their time and effort on providing quality care to patients. We believe our operating model delivers value to all of our healthcare stakeholders, including patients and families, referring providers, payors, and administrators and clinicians.

Previous wording

We aim to create value by identifying and acquiring underperforming custodial care facilities and converting them into higher-value short-term transitional care facilities by investing in clinical teams and processes and upgrading technology, equipment, training, staffing, aesthetics, and other aspects of the business. The resources and guidance offered by PACS Services is key to rapid integration of new facilities and provides our local leadership teams with an effective technology infrastructure, support tools, and regional support teams that allow local leadership to focus on operational improvements. Our facilities generally undergo an up to three-year post-acquisition transition period. During this period, we seek to implement best practices designed to realize and sustain the facility’s full potential. These practices often result in significant improvements to clinical quality and other operational metrics, including skilled mix, occupancy rates and payor contracting. We believe the results of our acquisition strategy are demonstrated by our high average QM Star rating and occupancy rate for Mature facilities of 4.2 and 95%, respectively, as of March 31, 2024. As of March 31, 2024, the average QM Star rating and occupancy rate for New facilities was 3.9 and 83%, respectively.

Current wording

We aim to create value by identifying and acquiring underperforming custodial care facilities and converting them into higher-value short-term transitional care facilities by investing in clinical teams and processes and upgrading technology, equipment, training, staffing, aesthetics, and other aspects of the business. The resources and guidance offered by PACS Services is key to rapid integration of new facilities and provides our local leadership teams with an effective technology infrastructure, support tools, and regional support teams that allow local leadership to focus on operational improvements. Our facilities generally undergo an up to three-year post-acquisition transition period. During this period, we seek to implement best practices designed to realize and sustain the facility’s full potential. These practices often result in significant improvements to clinical quality and other operational metrics, including skilled mix, occupancy rates and payor contracting. We believe the results of our acquisition strategy are demonstrated by our high average QM Star rating and occupancy rate for Mature facilities of 4.3 and 94%, respectively, as of June 30, 2024. As of June 30, 2024, the average QM Star rating and occupancy rate for New facilities was 4.1 and 84%, respectively.

Previous wording

On April 10, 2024, our registration statement on Form S-1 (File No. 333-233965) (Registration Statement) related to our IPO was declared effective by the SEC, and our common stock began trading on The New York Stock Exchange (NYSE), on April 11, 2024. Our IPO closed on April 15, 2024. As a result, our unaudited condensed combined/consolidated financial statements as of March 31, 2024 do not reflect the impact of our IPO. For additional information, See Note 15 – Subsequent Events to our unaudited condensed combined/consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

On April 10, 2024, our registration statement on Form S-1 (File No. 333-277893) (Registration Statement) related to our IPO was declared effective by the SEC, and our common stock began trading on The New York Stock Exchange (NYSE), on April 11, 2024. Our IPO closed on April 15, 2024.

Previous wording

During the three months ended March 31, 2024, we expanded our operations with the addition of nine stand-alone skilled nursing operations and one assisted living facility. These new operations added a total of 1,334 skilled nursing beds and 174 assisted living beds to be operated by our affiliated operating subsidiaries.

Current wording

During the six months ended June 30, 2024, we expanded our operations with the addition of eleven stand-alone skilled nursing operations and one assisted living facility. These new operations added a total of 1,501 skilled nursing beds and 174 assisted living beds to be operated by our affiliated operating subsidiaries.

Previous wording

Subsequent to March 31, 2024, our operations grew with the addition of one stand-alone facility through a long-term lease. The new operations added 122 skilled nursing beds operated by our affiliated operating subsidiaries. For further discussion of our real estate properties and expansions, see Note 12, “Operation Expansions” in the Notes to the condensed combined/consolidated financial statements.

Current wording

Subsequent to June 30, 2024, our operations grew with the addition of 28 stand-alone facilities through long-term leases across seven states, including four new states for the Company. Of the new facilities, 21 are leased from a new joint venture we entered into in which we own a 25.8% interest. The new operations added 1,450 skilled nursing beds and 831 assisted living and independent living beds operated by our affiliated operating subsidiaries. For further discussion of our real estate properties and expansions, see Note 12, “Operation Expansions”, in the Notes to the condensed combined/consolidated financial statements.

Previous wording

•Number of facilities — The total number of skilled nursing facilities that we operate. Excludes six and three assisted living and independent living facilities for the three months ended March 31, 2024 and 2023, respectively.

Current wording

•Number of facilities — The total number of skilled nursing facilities that we operate. Excludes six and three assisted living and independent living facilities for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

In addition to our results provided throughout that are determined in accordance with GAAP, we also present the following non-GAAP financial measures: EBITDA, Adjusted EBITDA and Adjusted EBITDAR (collectively, Non-GAAP Financial Measures). EBITDA and Adjusted EBITDA are performance measures. Adjusted EBITDAR is a valuation measure. These Non-GAAP Financial Measures have no standardized meaning defined by GAAP, and therefore have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. You should review the reconciliation of net income to the Non-GAAP Financial Measures in the table below, together with our audited combined/consolidated financial statements and the related notes in their entirety, and should not rely on any single financial measure. Additionally, other companies may define these or similar Non-GAAP Financial Measures with the same or similar names differently, and because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures to those of other companies.

Current wording

In addition to our results provided throughout that are determined in accordance with GAAP, we also present the following non-GAAP financial measures: EBITDA, Adjusted EBITDA and Adjusted EBITDAR (collectively, Non-GAAP Financial Measures). EBITDA and Adjusted EBITDA are performance measures. Adjusted EBITDAR is a valuation measure. These Non-GAAP Financial Measures have no standardized meaning defined by GAAP, and therefore have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. You should review the reconciliation of net (loss) income to the Non-GAAP Financial Measures in the table below, together with our audited combined/consolidated financial statements and the related notes in their entirety, and should not rely on any single financial measure. Additionally, other companies may define these or similar Non-GAAP Financial Measures with the same or similar names differently, and because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures to those of other companies.

Previous wording

EBITDA –We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before: other expense, net; provision for income taxes; and depreciation and amortization.

Current wording

EBITDA –We calculate EBITDA as net (loss) income, adjusted for net losses attributable to noncontrolling interest, before: other expense, net; provision for income taxes; and depreciation and amortization.

Previous wording

Adjusted EBITDA –We calculate Adjusted EBITDA as EBITDA further adjusted for non-core business items, which for the reported periods includes, to the extent applicable, costs incurred to acquire operations that are not capitalizable, gains on lease termination, and certain one-time expenses that are not representative of our underlying operating performance. Costs related to acquisitions include costs related to our acquisition of SNF facilities and providers, including related costs such as legal fees, financial and tax due diligence, consulting and escrow fees.

Current wording

Adjusted EBITDA –We calculate Adjusted EBITDA as EBITDA further adjusted for non-core business items, which for the reported periods includes, to the extent applicable, costs incurred to acquire operations that are not capitalizable, losses incurred from debt restructuring, gains on lease termination, stock-based compensation expense, loss from equity method investment in joint venture and certain one-time expenses that are not representative of our underlying operating performance. Costs related to acquisitions include costs related to our acquisition of SNF facilities and providers, including related costs such as legal fees, financial and tax due diligence, consulting and escrow fees. The loss related to our equity method investment in joint venture is a loss allocated to us from a discrete disposal recognized by one of our joint ventures.

Previous wording

The table below presents a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net income, the most directly comparable financial measure calculated in accordance with GAAP, on a combined/consolidated basis for the periods presented:

Current wording

The table below presents a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net (loss) income, the most directly comparable financial measure calculated in accordance with GAAP, on a combined/consolidated basis for the periods presented:

Previous wording

Patient and resident service revenue typically represents over 99% our total revenue. Patient and resident service revenue comprises skilled nursing services revenue, revenue generated from our senior assisted living services and revenue generated from certain ancillary services provided outside of routine contractual agreements. For the three months ended March 31, 2024, and 2023, skilled nursing services revenue represented over 99% of patient and resident service revenue.

Current wording

Patient and resident service revenue typically represents over 99% our total revenue. Patient and resident service revenue comprises skilled nursing services revenue, revenue generated from our senior assisted living services and revenue generated from certain ancillary services provided outside of routine contractual agreements. For the three and six months ended June 30, 2024 and 2023, skilled nursing services revenue represented over 99% of patient and resident service revenue.

Previous wording

We received funding from the U.S. Department of Health and Human Services (HHS) through the Provider Relief Fund (PRF) as we are the healthcare providers who diagnose, test, or care for individuals with cases of COVID-19 and have health care related expenses and lost revenues attributable to COVID-19. In 2023, this program ended and we do not expect to recognize any revenue based on funding through the PRF in the future.

Current wording

We received funding from the U.S. Department of Health and Human Services (HHS) through the PRF as we are the healthcare providers who diagnose, test, or care for individuals with cases of COVID-19 and have health care related expenses and lost revenues attributable to COVID-19. In 2023, this program ended and we do not expect to recognize any revenue based on funding through the PRF in the future.

Previous wording

General and administrative expense consists primarily of payroll and related benefits and travel expenses for our PACS Services personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees) and costs relating to our information systems. Historically, our general and administrative expense has not included any stock-based compensation. In connection with our IPO, we adopted the 2024 Plan and ESPP which had no impact on the results of operations through March 31, 2024. We anticipate that beginning in the second fiscal quarter of 2024, our general and administrative expense will include stock-based compensation.

Current wording

General and administrative expense consists primarily of payroll and related benefits and travel expenses for our PACS Services personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees) and costs relating to our information systems. Historically, our general and administrative expense has not included any stock-based compensation. In connection with our IPO in April 2024, we adopted the 2024 Plan and the 2024 ESPP. From this point forward, our general and administrative expense includes stock-based compensation.

Previous wording

We expect general and administrative expense to increase on an absolute dollar basis for the foreseeable future as we continue to increase investments to support our growth. We also expect that our costs will increase related to legal, audit, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, investor and public relations costs, and other expenses that we did not incur as a private company. We anticipate that general and administrative expense as a percentage of revenue will vary from period to period, but we expect to leverage these expenses over time as we grow our revenue.

Current wording

We expect general and administrative expense to increase on an absolute dollar basis for the foreseeable future as we continue to increase investments to support our growth. We also expect that our costs will increase related to legal, audit, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, investor and public relations costs, and other expenses that we will now incur as a public company. We anticipate that general and administrative expense as a percentage of revenue will vary from period to period, but we expect to leverage these expenses over time as we grow our revenue.

Previous wording

•Buildings and improvements - minimum of 5 years to a maximum of 40 years, but generally 30 years

Current wording

•Buildings and improvements - minimum of 5 years to a maximum of 40 years, generally 30 years

Previous wording

Patient and resident service revenue - Patient and resident service revenue increasedby $226.5 million to $934.3 million for the three months ended March 31, 2024, a 32.0% increase compared to the three months ended March 31, 2023. For the three months ended March 31, 2024 and 2023, skilled nursing services revenue represented more than 99.0% of patient and resident service revenue.

Current wording

Patient and resident service revenue - Patient and resident service revenue increased by $221.0 million to $981.4 million for the three months ended June 30, 2024, a 29.1% increase compared to the three months ended June 30, 2023. For the three months ended June 30, 2024 and 2023, skilled nursing services revenue represented more than 99.0% of patient and resident service revenue.

Previous wording

Skilled nursing services revenue increased by 31.4%, or $221.9 million, to $927.5 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This change was driven by an increase in operational beds of 5,194 from March 31, 2023 to March 31, 2024 leading to a 35.3% increase in patient days year-over-year. Additionally we experienced a consistent occupancy rate across all facilities of 91.1% for the three months ended March 31, 2024, compared to 91.8% for the three months ended March 31, 2023, following continued execution on our business model.

Current wording

Skilled nursing services revenue increased by 28.7%, or $217.1 million, to $973.1 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This change was driven by an increase in operational beds of 3,947 from June 30, 2023 to June 30, 2024 leading to a 24.8% increase in patient days year-over-year. Additionally, we experienced consistently high occupancy across all facilities of 91.0% for the three months ended June 30, 2024, a slight decrease as compared to 91.5% for the three months ended June 30, 2023. The decrease in occupancy across all facilities can be attributed to our New facilities only being 84.2% occupied for the three months ended June 30, 2024 compared to 88.3% for the three months ended June 30, 2023.

Previous wording

Our skilled nursing services revenue was impacted by developments in our average daily rates and fluctuations in our payor sources. Our average Medicare daily rates increased by 11.0%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

Current wording

Our skilled nursing services revenue was impacted by developments in our average daily rates and fluctuations in our payor sources. Our average Medicare daily rates increased by 9.5%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Previous wording

Our average Medicaid rates increased 5.3% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state relief revenue we recorded.

Current wording

Our average Medicaid rates increased 3.5% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state relief revenue we recorded.

Previous wording

Other revenue - Other revenue increased by 75.5% to $0.4 million for the three months ended March 31, 2024, compared to the same period in the prior year.

Current wording

Other revenue - Other revenue increased by 86.7% to $0.4 million for the three months ended June 30, 2024, compared to the same period in the prior year.

Previous wording

Cost of services increased by $197.2 million to $736.0 million, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The 36.6% increase was primarily driven by an increase of $119.4 million in salaries and wages. Of the salaries and wages increase, those attributable to New facilities purchased after March 31, 2023 accounted for $76.0 million or 63.7% of the increase. Our total number of post-acute care facilities, inclusive of skilled nursing facilities and assisted living facilities, increased from 177 as of March 31, 2023 to 218 as of March 31, 2024, an increase of 23.2%. This increase in operations and employees led to the increase in labor cost for New facilities as they were acquired throughout the year. Headcount and operational changes attributable to other facilities accounted for the remaining change in salaries and wages. Aside from labor costs, the increase in cost of services was due to increases of $36.8 million in administrative expenses for facilities made up of $19.5 million from New facilities and $17.3 million from Ramping and Mature facilities, $19.5 million in contracted services, and $11.8 million in nursing and dietary expenses with the remainder spread out across various expense types.

Current wording

Cost of services increased by $171.3 million to $762.1 million, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The 29.0% increase was primarily driven by an increase of $100.6 million in salaries and wages. Of the salaries and wages increase, those attributable to New facilities purchased after June 30, 2023 accounted for $61.7 million or 61.3% of the increase. Our total number of post-acute care facilities, inclusive of skilled nursing facilities and assisted living facilities, increased from 188 as of June 30, 2023 to 220 as of June 30, 2024, an increase of 17.0%. This increase in operations and employees led to the increase in labor cost for New facilities as they were acquired throughout the year. Headcount and operational changes attributable to Ramping and Mature facilities accounted for the remaining change in salaries and wages. Aside from labor costs, the increase in cost of services was due to increases of $37.8 million in administrative expenses for facilities driven by a $23.7 million increase in professional and general liability insurance; $19.0 million in contracted services made up of $9.8 million from New facilities, or 51.4%, and the remaining $9.2 million from Ramping and Mature facilities; and $11.3 million in nursing and dietary expenses, $7.8 million from New facilities, with the remainder spread out across various expense types.

Previous wording

Rent - cost of services increasedto $64.0 million for the three months ended March 31, 2024, compared to $45.1 million for the three months ended March 31, 2023. The increase was primarily attributable to the addition of 41 new facilities, which accounted for approximately 63% of the increase, with the remaining $7.0 million attributable to annual escalators on Mature and Ramping facilities' rent.

Current wording

Rent - cost of services increased to $65.8 million for the three months ended June 30, 2024, compared to $51.5 million for the three months ended June 30, 2023. The increase was primarily attributable to the addition of new facilities throughout the year, as well as to annual escalators on existing facilities' rent.

Previous wording

Depreciation and amortization increased by $2.1 million to $7.9 million, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This increase is directly attributable to new facilities acquired.

Current wording

Depreciation and amortization increased by $2.6 million to $8.8 million, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This increase is directly attributable to new real estate obtained through acquisitions.

Previous wording

Other expense, net was $6.9 million for the three months ended March 31, 2024, a decrease of $3.3 million compared to the three months ended March 31, 2023. Other expense, net consists of interest expense related to our debt, which increased by $4.8 million, to $15.4 million for the three months ended March 31, 2024, driven by an increase in lines of credit and long-term debt of $246.7 million from March 31, 2023 to March 31, 2024. Additionally, in the three months ended March 31, 2024, other expense, net also included a gain of $8.0 million recognized upon the termination of a lease.

Current wording

Other expense, net was $13.1 million for the three months ended June 30, 2024, a decrease of $4.9 million compared to the three months ended June 30, 2023. Other expense, net consists of interest expense related to our debt, which decreased by $6.1 million, to $9.2 million for the three months ended June 30, 2024, driven by a decrease in lines of credit and long term debt of $55.1 million from June 30, 2023 to June 30, 2024. This was offset by an increase in other expense of $1.3 million compared to the three months ended June 30, 2023, driven by a loss on a joint venture disposal.

Previous wording

Additional funding - Additional funding revenue was$0 for the three months ended March 31, 2024, compared to $0.4 million for the three months ended March 31, 2023. The decrease was due to the termination of additional funding from the HHS under the Pandemic PHE after March 31, 2023.

Current wording

Additional funding - Additional funding revenue was$0 for the six months ended June 30, 2024, compared to $0.4 million for the six months ended June 30, 2023. The decrease was due to the termination of additional funding from the HHS under the Pandemic PHE in 2023.

Previous wording

Provision for income taxes totaled $23.9 million for the three months ended March 31, 2024, representing an effective tax rate of 32.7%, compared to a provision for income tax of $11.5 million and an effective tax rate of 23.4% for the three months ended March 31, 2023. The change in effective tax rate in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to an increase in non-deductible expenses, including non-deductible compensation in 2024. See Note 8 “Provision for Income Taxes” in our condensed combined/consolidated financial statements for more information.

Current wording

Provision for income taxes totaled $22.4 million for the six months ended June 30, 2024, representing an effective tax rate of 37.0%, compared to a provision for income tax of $21.9 million and an effective tax rate of 27.1% for the six months ended June 30, 2023. The change in effective tax rate in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to an increase in non-deductible expenses, including non-deductible compensation in 2024. See Note 8, “Income Taxes” in our condensed combined/consolidated financial statements for more information.

Previous wording

Our primary sources of liquidity have historically been derived from our cash flows from operations, mortgage loans (including both Housing and Urban Development (HUD)-insured and non-HUD mortgage loans), and credit facilities maintained with commercial banks. Our liquidity as of March 31, 2024 is impacted by cash generated from strong operational performance that improved through a combination of long-term leases and real estate purchases and increased acquisitions. As of March 31, 2024, we had cash and cash equivalents of $81.2 million, total assets of $3.9 billion, total liabilities of $3.7 billion, and total equity of $133.6 million, compared to cash and cash equivalents of $94.3 million, total assets of $2.8 billion, total liabilities of $2.7 billion, and total equity of $87.7 million as of March 31, 2023.

Current wording

Our primary sources of liquidity have historically been derived from our cash flows from operations, mortgage loans (including both Housing and Urban Development (HUD)-insured and non-HUD mortgage loans), and credit facilities maintained with commercial banks. Our liquidity as of June 30, 2024 is impacted by cash generated from strong operational performance that improved through a combination of long-term leases and real estate purchases and increased acquisitions. As of June 30, 2024, we had cash and cash equivalents of $73.4 million, total assets of $3.9 billion, total liabilities of $3.3 billion, and total equity of $578.2 million, compared to cash and cash equivalents of $38.2, total assets of $3.1 billion, total liabilities of $3.0 billion, and total equity of $83.7 million as of June 30, 2023.

Previous wording

On April 15, 2024, we completed our IPO of 21,428,572 shares of common stock at a public offering price of $21.00 per share, for total net proceeds of approximately $423.0 million, after deducting underwriting discounts and commissions and offering expenses. For additional information, see Note 15 – Subsequent Events to our condensed combined/consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

On April 15, 2024, we completed our IPO obtaining total net proceeds of $414.2 million, after deducting underwriting discounts and commissions and offering expenses. For additional information, see Note 13, “Capital Stock”, to our condensed combined/consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Previous wording

We currently maintain our Amended and Restated 2023 Credit Facility, which has a total commitment limit of $600 million, as our single line-of-credit. As of March 31, 2024, the total principal amount outstanding under our Amended and Restated 2023 Credit Facility was $537.0 million. The terms of the Amended and Restated 2023 Credit Facility permit optional prepayments from time to time without premium or penalty. We expect to continue to use the Amended and Restated 2023 Credit Facility as our single line-of-credit and to fund the potential acquisition of additional property and operation acquisitions, as well as for working capital and for general corporate purposes. Cash paid to fund acquisitions was $78.5 million for the three months ended March 31, 2024, compared to $52.1 million, for the three months ended March 31, 2023. We used approximately $371.4 million of the net proceeds from the IPO to repay amounts outstanding under our Amended and Restated 2023 Credit Facility.

Current wording

We currently maintain our Amended and Restated 2023 Credit Facility, which has a total commitment limit of $600.0 million, as our single line-of-credit. As of June 30, 2024, the total principal amount outstanding under our Amended and Restated 2023 Credit Facility was $248.0 million. The terms of the Amended and Restated 2023 Credit Facility permit optional prepayments from time to time without premium or penalty. We expect to continue to use the Amended and Restated 2023 Credit Facility as our single line-of-credit and to fund the potential acquisition of additional property and operation acquisitions, as well as for working capital and for general corporate purposes. Cash paid to fund real estate acquisitions was $174.7 million for the six months ended June 30, 2024, compared to $52.4 million, for the six months ended June 30, 2023. We used approximately $370.0 million of the net proceeds from the IPO to repay amounts outstanding under our Amended and Restated 2023 Credit Facility.

Previous wording

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.

Current wording

Cash provided by operating activities is net (loss) income adjusted for certain non-cash items and changes in operating assets and liabilities.

Previous wording

Net cash provided by operating activities for the three months ended March 31, 2024 of $58.8 million decreased by $20.5 million as compared with the same period in 2023. The decrease to net cash provided by operating activities was primarily driven by changes in working capital including increases in accounts receivable, net and other receivables, and decreases in other liabilities. These impacts were offset by an $11.5 million increase to net income and a $15.4 million increase to noncash reconciling items, as well as increases in the working capital balances of accounts payable, accrued payroll and benefits, and other accrued expenses. Changes in working capital were driven by growth in operating facilities period-over-period and an increase in days sales outstanding of 4.5, from 52.7 for the three months ended March 31, 2023 to 57.3 for the three months ended March 31, 2024. This growth in days sales outstanding is primarily due to the increase of newly acquired facilities during the year which typically have a longer collection period during the facility ownership transition.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2024 of $93.6 million increased by $35.4 million as compared with the same period in 2023. The increase to net cash provided by operating activities was driven by an increase in operational performance offset by an increase in non-cash expenses, primarily due to the stock-based compensation expense. This increase was further offset by a decrease in cash flows from the change in operating assets and liabilities of $37.9 million due primarily to the timing of accounts receivable collections as well as the timing of payables and other accrued liabilities. The timing of collections and impacts to net income are driven by growth in operating facilities period-over-period and an increase in days sales outstanding of 3.4, from 54.0 as of June 30, 2023 to 57.4 as of June 30, 2024. This growth in days sales outstanding is primarily due to the increase of newly acquired facilities during the year which typically have a longer collection period during the facility ownership transition.

Previous wording

Net cash used in investing activities for the three months ended March 31, 2024 of $118.7 million increased by $61.1 million as compared with the same period in 2023. The increase in cash used was attributable to an increase of $26.4 million in cash used to acquire real estate facilities and an increase of $10.8 million in cash used to purchase property and equipment, in excess of cash used for these purposes in the three months ended March 31, 2023. In the three months ended March, 31, 2024 we also purchased investments of $25.0 million through our captive insurance subsidiary using funds held as long-term restricted cash previously held in other assets (see Note 5 “Fair Value Measurement”) and we made an additional $5.1 million investment in partnerships during the period, as opposed to no cash used for these purposes in the same period in 2023.

Current wording

Net cash used in investing activities for the six months ended June 30, 2024 of $239.6 million increased by $172.4 million as compared with the same period in 2023. The increase in cash used was attributable to an increase of $122.3 million used to acquire real estate facilities and an increase of $9.5 million used to purchase property and equipment, in excess of cash used for these purposes in the six months ended June 30, 2023. In the six months ended June 30, 2024 we also purchased investments of $35.0 million through our captive insurance subsidiary using funds held as long-term restricted cash previously held in other assets (see Note 5, “Fair Value Measurement”) and we made an additional $5.1 million investment in partnerships during the period, as opposed to no cash used for these purposes in the same period in 2023.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2024 of $34.5 million increased by $19.5 million as compared with the same period in 2023. The increase was primarily driven by a year-over-year increase of $18.9 million in net cash flow on lines of credit. There was also a year-over-year decrease of $(0.4) million in net cash flow on long-term debt. The total long-term debt additions of $39.8 million during the three months ended March 31, 2024 had more favorable terms, as compared to our existing debt, including the additions to the HUD-insured mortgage loans of $34.7 million with interest rates ranging from 2.9% to 3.6% and remaining and remaining terms of 24 to 26 years.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 of $105.2 million increased by $113.8 million as compared with the same period in 2023. The increase was primarily driven by a year-over-year increase of $414.2 million from net IPO proceeds. Offsetting this inflow were $228.9 million and $48.4 million decreases in net cash flows from lines of credit and long-term debt, respectively. The total long-term debt additions of $39.8 million during the six months ended June 30, 2024 had more favorable terms, as compared to our existing debt, including the additions to the HUD-insured mortgage loans of $34.7 million with interest rates ranging from 2.9% to 3.6% and remaining terms of 24 to 26 years.

Previous wording

We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of March 31, 2024, there were no material off-balance sheet arrangements and transactions, however, we may enter into such contractual arrangements in the future in order to support our business plans. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources.

Current wording

We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of June 30, 2024, we had $11.7 million of borrowing capacity under the Amended and Restated 2023 Credit Facility pledged as collateral to secure outstanding letters of credit. We may enter into further contractual arrangements in the future in order to support our business plans. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources.

Previous wording

For the three months ended March 31, 2024, Medicare and Medicaid represented our largest sources of revenue and accounted for 35.7% and 38.8% of our routine revenue for the three months ended March 31, 2024, respectively. The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. The Medicare program and state Medicaid programs and their reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare and state Medicaid programs reimburse us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare and Medicaid. We cannot predict the extent to which such proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and legislation will have on us. Historically, adjustments to reimbursement under Medicare and Medicaid programs have had a significant effect on our revenue.

Current wording

Medicare and Medicaid represent our largest sources of revenue and accounted for 37.5% and 38.1% of our routine revenue for the three months ended June 30, 2024, respectively, and 36.6% and 38.4% of our routine revenue for the six months ended June 30, 2024, respectively. The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. The Medicare program and state Medicaid programs and their reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare and state Medicaid programs reimburse us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare and Medicaid. We cannot predict the extent to which such proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and legislation will have on us. Historically, adjustments to reimbursement under Medicare and Medicaid programs have had a significant effect on our revenue.

Previous wording

Patient Protection and Affordable Care Act - In recent years, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the U.S. healthcare system, many of which are intended to contain or reduce healthcare costs. For example, the Affordable Care Act (ACA) affects how healthcare services are covered, delivered and reimbursed, and it expanded health insurance coverage through a combination of public program expansion and private sector health insurance reforms. Several of the reforms are very significant and could ultimately change the nature of our services, the methods of payment for our services and the underlying regulatory environment. These reforms include modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA and, on June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA.

Current wording

Patient Protection and Affordable Care Act - In recent years, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the U.S. healthcare system, many of which are intended to contain or reduce healthcare costs. For example, the ACA affects how healthcare services are covered, delivered and reimbursed, and it expanded health insurance coverage through a combination of public program expansion and private sector health insurance reforms. Several of the reforms are very significant and could ultimately change the nature of our services, the methods of payment for our services and the underlying regulatory environment. These reforms include modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA and, on June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA.

Previous wording

Proposed and Enacted Federal and State Legislation - The U.S. Congress has introduced various bills intended to improve quality of care and oversight in nursing homes. For example, on August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 was introduced in the U.S. Senate and proposed to reduce SNF payments for inaccurate submission of certain data, provide federal funding to carry out SNF data validation and ensure accuracy of cost report information, and mandate staffing requirements for SNFs. Although this bill was not approved by Congress, similar proposed legislation may be introduced in the future.t

Current wording

Proposed and Enacted Federal and State Legislation - The U.S. Congress has introduced various bills intended to improve quality of care and oversight in nursing homes. For example, on August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 was introduced in the U.S. Senate and proposed to reduce SNF payments for inaccurate submission of certain data, provide federal funding to carry out SNF data validation and ensure accuracy of cost report information, and mandate staffing requirements for SNFs. Although this bill was not approved by Congress, similar proposed legislation may be introduced in the future.

Previous wording

In addition to proposed legislation at the federal level, state legislatures have introduced and enacted legislation to address quality of care and oversight in nursing homes. For example, California enacted the Skilled Nursing Facility Ownership and Management Reform Act of 2022, which took effect on July 1, 2023, increases the oversight authority of the California Department of Public Health and changes several provisions regarding SNF licensing. We expect for states to continue to introduce and pass legislation that increases the regulation of SNFs. Quality of Care initiatives - The Biden Administration has published several fact sheets related to the quality of care in nursing homes. On October 21, 2022, the Biden Administration published a fact sheet calling for improvements to the quality of care in nursing homes, and on September 1, 2023, the Biden Administration published another fact sheet regarding initiatives to improve resident safety in nursing homes, such as minimum staffing requirements. Additionally, on September 1, 2023, CMS issued a proposed rule that would create minimum staffing standards for skilled nursing facilities and nursing facilities and requirements for states to report the percent of Medicaid payments spent on compensation to direct care workers and support staff at each nursing facility and each intermediate care facility for individuals with intellectual disabilities. We anticipate there will be continued administrative, regulatory, and legislative efforts at the federal and state level to monitor and regulate LTC facilities.

Current wording

In addition to proposed legislation at the federal level, state legislatures have introduced and enacted legislation to address quality of care and oversight in nursing homes. For example, California enacted the Skilled Nursing Facility Ownership and Management Reform Act of 2022, which took effect on July 1, 2023, increases the oversight authority of the California Department of Public Health and changes several provisions regarding SNF licensing. We expect for states to continue to introduce and pass legislation that increases the regulation of SNFs. Quality of Care initiatives - The Biden Administration has published several fact sheets related to the quality of care in nursing homes. On October 21, 2022, the Biden Administration published a fact sheet calling for improvements to the quality of care in nursing homes, and on September 1, 2023, the Biden Administration published another fact sheet regarding initiatives to improve resident safety in nursing homes, such as minimum staffing requirements. Additionally, on April 22, 2024, CMS issued a final rule that creates minimum staffing standards for skilled nursing facilities and nursing facilities and requirements for states to report the percent of Medicaid payments spent on compensation to direct care workers and support staff at each nursing facility and each intermediate care facility for individuals with intellectual disabilities. For further discussion, see the section titled “CMS Minimum Staffing Standards Final Rule.” We anticipate there will be continued administrative, regulatory, and legislative efforts at the federal and state level to monitor and regulate LTC facilities.

Previous wording

Additionally, the Stark Law prohibits a physician from referring a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies. Designated health services include inpatient and outpatient hospital services, physical therapy, occupational therapy, speech language pathology services, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, and enteral and parenteral feeding and supplies and home health services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor.

Current wording

Additionally, the federal physician self-referral law (Stark Law) prohibits a physician from referring a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies. Designated health services include inpatient and outpatient hospital services, physical therapy, occupational therapy, speech language pathology services, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, and enteral and parenteral feeding and supplies and home health services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor.

Previous wording

In recent years, there has been increased regulatory scrutiny into post-hospital SNF care. For example, in November 2019, the OIG released a report of its investigation into overpayments to hospitals that did not comply with Medicare’s post-acute-care transfer policy. Hospitals violating this policy transferred patients to certain post-acute-care settings, such as SNFs, but claimed the higher reimbursements associated with discharges to homes. A similar OIG audit report, released in February 2019, focused on improper payments for SNF services when the Medicare three-day inpatient hospital stay requirement was not met. In 2021, the OIG released the result of an audit finding that Medicare overpaid millions of dollars of chronic care management (CCM) services. The OIG's 2021 report found that in calendar years 2017 and 2018, Medicare overpaid millions of dollars in CCM claims. In 2022, the OIG released an audit revealing that CMS had not collected $226 million, or 45%, of identified overpayments within that period, potentially affecting SNFs. These investigatory actions by OIG demonstrate its increased scrutiny into post-hospital SNF care provided to beneficiaries and may encourage additional oversight or stricter compliance standards.

Current wording

In recent years, there has been increased regulatory scrutiny into post-hospital SNF care. For example, in November 2019, the OIG released a report of its investigation into overpayments to hospitals that did not comply with Medicare’s post-acute-care transfer policy. Hospitals violating this policy transferred patients to certain post-acute-care settings, such as SNFs, but claimed the higher reimbursements associated with discharges to homes. A similar OIG audit report, released in February 2019, focused on improper payments for SNF services when the Medicare three-day inpatient hospital stay requirement was not met. In 2021, the OIG released the result of an audit finding that Medicare overpaid millions of dollars of chronic care management (CCM) services. The OIG's 2021 report found that in calendar years 2017 and 2018, Medicare overpaid millions of dollars in CCM claims. In 2022, the OIG released an audit revealing that CMS had not collected $226.0 million, or 45%, of identified overpayments within that period, potentially affecting SNFs. These investigatory actions by OIG demonstrate its increased scrutiny into post-hospital SNF care provided to beneficiaries and may encourage additional oversight or stricter compliance standards.