American Healthcare REIT, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The use of the words “we,” “us” or “our” refers to American Healthcare REIT, Inc. and its subsidiaries, including American Healthcare REIT Holdings, LP, except where otherwise noted. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to promote understanding of our results of operations and financial condition. Such discussion is provided as a supplement to, and should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our 2023 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or SEC, on March 22, 2024. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of September 30, 2024 and December 31, 2023, together with our results of operations for the three and nine months ended September 30, 2024 and 2023 and cash flows for the nine months ended September 30, 2024 and 2023. Our results of operations and financial condition, as reflected in the accompanying condensed consolidated financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions, and other factors that could affect the ongoing viability of our tenants and residents. During the quarter ended December 31, 2023, we modified how we evaluate our business and make resource allocations, and therefore determined that we operate through four reportable business segments: integrated senior health campuses, outpatient medical, or OM, (which was formerly known as medical office buildings, or MOBs), triple-net leased properties and senior housing operating properties, or SHOP. All segment information included in this Quarterly Report on Form 10-Q has been recast for all periods presented to reflect four reportable business segments and the change in segment name from MOBs to OM. The segment name change from MOBs to OM did not result in any changes to the composition of such segment or information reviewed by management, and therefore, had no impact on the historical results of operations. Forward-Looking Statements Certain statements contained in this report, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995 (collectively with the “Securities Act and Exchange Act, or the Acts”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Acts. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “can,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “possible,” “initiatives,” “focus,” “seek,” “objective,” “goal,” “strategy,” “plan,” “potential,” “potentially,” “preparing,” “projected,” “future,” “long-term,” “once,” “should,” “could,” “would,” “might,” “uncertainty,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the SEC. Any such forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate, and beliefs of, and assumptions made by, our management and involve uncertainties that could significantly affect our financial results. Such statements include, but are not limited to: (i) statements about our plans, strategies, initiatives and prospects, including any future capital-raising initiatives and planned or future acquisitions or dispositions of properties and other assets; and (ii) statements about our future results of operations, capital expenditures and liquidity. Such statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated, including, without limitation: changes in economic conditions generally and the real estate market specifically; legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs, and regulations or proposed regulations governing the operations and sales of health care properties; the availability of capital; our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; changes in interest rates, and foreign currency risk; competition in the real estate industry; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to REITs; the success of our investment strategy; cybersecurity incidents and information technology failures, including unauthorized access to our computer systems and/or our vendors’ computer systems and our third-party management companies’ computer systems and/or their vendors’ computer systems; our ability to retain our executive officers and key employees; unexpected labor costs and inflationary pressures; and those risks identified in Item 1A, Risk Factors in our 2023 Annual Report on Form 10-K, as filed with the SEC on March 22, 2024, this Quarterly Report on Form 10-Q, and any future filings we make with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and undue reliance should not be placed on such statements. We undertake no obligation to update any such statements that may become untrue because of subsequent events. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. 43 Table of Contents Overview and Background American Healthcare REIT, Inc., a Maryland corporation, is a self-managed REIT that acquires, owns and operates a diversified portfolio of clinical healthcare real estate properties, focusing primarily on outpatient medical buildings, senior housing, skilled nursing facilities, or SNFs, and other healthcare-related facilities. We have built a fully-integrated management platform, with approximately 114 employees, that operates clinical healthcare properties throughout the United States, the United Kingdom and the Isle of Man. We operate our integrated senior health campuses and SHOP utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a “RIDEA” structure. We have also originated and acquired secured loans and may originate or acquire other real estate-related investments in the future on an infrequent and opportunistic basis. We generally seek investments that produce current income; however, we have selectively developed, and may continue to selectively develop, healthcare real estate properties. We have elected to be taxed as a REIT for U.S. federal income tax purposes. We believe that we have been organized and operated, and we intend to continue to operate, in conformity with the requirements for qualification and taxation as a REIT under the Code. Operating Partnership We conduct substantially all of our operations through American Healthcare REIT Holdings, LP, or our operating partnership, and we are the sole general partner of our operating partnership. As of December 31, 2023 , we owned 95.0% of the operating partnership units, or OP units, in our operating partnership, and the remaining 5.0% OP units were owned by the following limited partners: AHI Group Holdings, LLC, which is owned and controlled by Jeffrey T. Hanson, the non-executive Chairman of our board of directors, or our board, Danny Prosky, our Chief Executive Officer, President and director, and Mathieu B. Streiff, one of our directors; Platform Healthcare Investor T-II, LLC; Flaherty Trust; and a wholly-owned subsidiary of Griffin Capital Company, LLC. On August 19, 2024, Platform Healthcare Investor T-II, LLC redeemed all of its OP units in exchange for 1,216,571 shares of our Common Stock on a one-for-one basis, and as a result, is no longer a limited partner of our operating partnership. As of September 30, 2024, we owned 98.5% of the OP units in our operating partnership, and the remaining 1.5% of the OP units were owned by the remaining limited partners. See Note 12, Redeemable Noncontrolling Interests, and Note 13, Equity — Noncontrolling Interests in Total Equity, to our accompanying condensed consolidated financial statements for a further discussion of the ownership in our operating partnership. Public Offerings and Listing We issued an aggregate 65,445,557 shares of Class T common stock and Class I common stock, for a total of $2,737,716,000 in gross offering proceeds, since February 26, 2014 in our initial public offerings and our distribution reinvestment plan, or DRIP, offerings. Our initial public offerings were terminated as of April 2019. On February 9, 2024, pursuant to a Registration Statement filed with the SEC on Form S-11 (File No. 333-267464), as amended, we closed our underwritten public offering, or the February 2024 Offering, through which we issued 64,400,000 shares of Common Stock, for a total of $772,800,000 in gross offering proceeds. Such amounts include the exercise in full of the underwriters’ overallotment option to purchase up to an additional 8,400,000 shares of Common Stock. These shares are listed on the New York Stock Exchange, or NYSE, under the trading symbol “AHR” and began trading on February 7, 2024. Following the closing of the February 2024 Offering and until August 5, 2024, we presented Common Stock, Class T common stock and Class I common stock, or collectively, common stock, as separate classes within our condensed consolidated balance sheets and condensed consolidated statements of equity. Any references to “Common Stock” in this Quarterly Report on Form 10-Q refer to our NYSE-listed shares sold through the February 2024 Offering or the September 2024 Offering, as defined below, whereas Class T common stock and Class I common stock refer to classes of common stock that were not listed. This applies to all historical periods presented herein. On August 5, 2024, 180 days after the listing of our Common Stock on the NYSE, each share of our Class T common stock and Class I common stock automatically converted into one share of our listed Common Stock. On September 20, 2024, we closed our additional underwritten public offering, or the September 2024 Offering, under a prospectus supplement and related prospectus filed with the SEC pursuant to our effective shelf Registration Statement on Form S-3 (File No. 333-281488). Through the September 2024 Offering, we issued 20,010,000 shares of Common Stock, for a total of $471,236,000 in gross offering proceeds. Such amounts include the exercise in full of the underwriters’ overallotment option to purchase up to an additional 2,610,000 shares of Common Stock. These shares are listed on NYSE under the trading symbol “AHR” and began trading on September 19, 2024. See Note 13, Equity, to our accompanying condensed consolidated financial statements, for a further discussion of our public offerings. 44 Table of Contents Our Real Estate Investments Portfolio We currently operate through four reportable business segments: integrated senior health campuses, OM, SHOP and triple-net leased properties. As of September 30, 2024, we owned and/or operated 324 buildings and integrated senior health campuses, representing approximately 19,676,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $4,666,399,000. In addition, as of September 30, 2024, we also owned a real estate-related debt investment purchased for $60,429,000. Critical Accounting Estimates Our accompanying condensed consolidated financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying footnotes. These estimates are made and evaluated on an ongoing basis using information that is currently available, as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions. The complete listing of our Critical Accounting Estimates was previously disclosed in our 2023 Annual Report on Form 10-K, as filed with the SEC on March 22, 2024, and there have been no material changes to our Critical Accounting Estimates as disclosed therein, except as included within Note 2, Summary of Significant Accounting Policies, to our accompanying condensed consolidated financial statements. Interim Unaudited Financial Data For a discussion of interim unaudited financial data, see Note 2, Summary of Significant Accounting Policies — Interim Unaudited Financial Data, to our accompanying condensed consolidated financial statements. Our accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2023 Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. Acquisitions and Dispositions in 2024 For a discussion of our acquisitions and dispositions of investments in 2024, see Note 2, Summary of Significant Accounting Policies — Properties Held for Sale, Note 3, Real Estate Investments, Net, and Note 4, Business Combinations, to our accompanying condensed consolidated financial statements. Factors Which May Influence Results of Operations Other than the effects of inflation discussed below, as well as other national economic conditions affecting real estate generally, and as otherwise disclosed in our risk factors, we are not aware of any material trends or uncertainties that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, disposition, management and operation of our properties. For a further discussion of these and other factors that could impact our future results or performance, see “Forward-Looking Statements” above and Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2023 Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. Inflation During the nine months ended September 30, 2024 and 2023, inflation has affected our operations. The annual rate of inflation in the United States was 2.4% in September 2024 and 3.7% in September 2023, as measured by the Consumer Price Index. We believe inflation has impacted our operations such that we have experienced, and continue to experience, increases in the cost of labor, services, energy and supplies, and therefore continued inflationary pressures on our integrated senior health campuses and SHOP could continue to impact our profitability in future periods. To offset the impact of inflation on the cost of labor and services, we had our RIDEA managers bill higher than average annual rent and care fee increases for existing residents in 2023 and 2024, as compared to prior years, while adjusting market rates as frequently as needed based on competitor pricing and market conditions. We believe this practice will improve operating performance in our integrated senior health campuses and SHOP, as well as increase rent coverage and the stability of our real estate revenue in our triple-net leased properties over time. For properties that are not operated under a RIDEA structure, there are provisions in the majority of our tenant leases that help us mitigate the impact of inflation. These provisions include negotiated rental increases, which historically range from 2% to 3% per year, reimbursement billings for operating expense pass-through charges and real estate tax and insurance reimbursements. However, due to the long-term nature of existing leases, among other factors, the leases may not reset frequently enough to cover inflation. 45 Table of Contents In addition, inflation has also caused an increase in the cost of our variable-rate debt due to historically rising interest rates. See Item 3, Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk, of this Quarterly Report on Form 10-Q for further discussion. Scheduled Lease Expirations Excluding our SHOP and integrated senior health campuses, as of September 30, 2024, our properties were 91.0% leased, and, during the remainder of 2024, 2.8% of the leased GLA is scheduled to expire. Our leasing strategy focuses on negotiating renewals for leases scheduled to expire during the next twelve months. In the future, if we are unable to negotiate renewals, we will try to identify new tenants or collaborate with existing tenants who are seeking additional space to occupy. As of September 30, 2024, our remaining weighted average lease term was 6.5 years, excluding our SHOP and integrated senior health campuses. Our combined SHOP and integrated senior health campuses were 87.8% leased as of September 30, 2024. Substantially all of our leases with residents at such properties are for a term of one year or less. Results of Operations Comparison of Three and Nine Months Ended September 30, 2024 and 2023 Our operating results are primarily comprised of income derived from our portfolio of properties and expenses in connection with the acquisition and operation of such properties. Our primary sources of revenue include rent generated by our leased, non-RIDEA properties and resident fees and services revenue from our RIDEA properties. Our primary expenses include property operating expenses and rental expenses. In general, we expect such revenues and expenses related to our portfolio of RIDEA properties to increase in the future due to an overall increase in occupancies, resident fees and pricing of care services provided. We segregate our operations into reporting segments in order to assess the performance of our business in the same way that management reviews our performance and makes operating decisions. As of September 30, 2024, we operated through four reportable business segments: integrated senior health campuses, OM, SHOP and triple-net leased properties. The most significant drivers behind changes in our consolidated results of operations for the three and nine months ended September 30, 2024 compared to the corresponding periods in 2023 were primarily due to: the increase in resident occupancies and billing rates, partially offset by the adverse effect of inflation, which resulted in increases in the cost of labor, services, energy and supplies; our acquisitions and dispositions of investments subsequent to September 30, 2023; and the transition of the operations of certain leased senior housing and skilled nursing facilities from triple-net leased properties to a managed portfolio utilizing a RIDEA structure. Additional information behind the changes in our consolidated results of operations is discussed in more detail below. See Note 2, Summary of Significant Accounting Policies — Properties Held for Sale, Note 3, Real Estate Investments, Net, and Note 4, Business Combinations, to our accompanying condensed consolidated financial statements for a further discussion of our acquisitions and dispositions during 2024. As of September 30, 2024 and 2023, we owned and/or operated the following types of properties (dollars in thousands): September 30, 2024 2023 Number of Buildings/ Campuses Aggregate Contract Purchase Price Leased % (1) Number of Buildings/ Campuses Aggregate Contract Purchase Price Leased % (1) Integrated senior health campuses 127 $ 2,030,482 88.2 % 125 $ 1,943,134 85.5 % OM 86 1,239,845 88.1 % 90 1,270,474 89.7 % SHOP 83 926,107 86.7 % 46 729,767 80.7 % Triple-net leased properties 28 469,965 100 % 37 542,565 100 % Total/weighted average(2) 324 $ 4,666,399 91.0 % 298 $ 4,485,940 92.6 % ___________ (1) Leased percentage includes all third-party leased space at our non-RIDEA properties (including master leases), except for our SHOP and integrated senior health campuses where leased percentage represents resident occupancy of the available units/beds therein. (2) Weighted average leased percentage excludes our SHOP and integrated senior health campuses. 46 Table of Contents Revenues and Grant Income Our primary sources of revenue include resident fees and services revenue generated by our RIDEA properties and rent from our leased, non-RIDEA properties. For the three and nine months ended September 30, 2024 and 2023, resident fees and services revenue primarily consisted of rental fees related to resident leases, extended health care fees and other ancillary services, and real estate revenue primarily consisted of base rent and expense recoveries. The amount of revenues generated by our RIDEA properties depends principally on our ability to maintain resident occupancy rates. The amount of revenues generated by our non-RIDEA properties is dependent on our ability to maintain tenant occupancy rates of currently leased space and to lease available space at the then existing rental rates. We also received grant income during the three and nine months ended September 30, 2023. Revenues and grant income by reportable segment consisted of the following for the periods then ended (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Resident Fees and Services Revenue Integrated senior health campuses $ 409,626 $ 372,291 $ 1,196,522 $ 1,096,917 SHOP 67,208 43,915 190,443 138,541 Total resident fees and services revenue 476,834 416,206 1,386,965 1,235,458 Real Estate Revenue OM 33,715 35,688 101,464 109,811 Triple-net leased properties 13,265 11,282 39,499 31,323 Total real estate revenue 46,980 46,970 140,963 141,134 Grant Income Integrated senior health campuses — 1,064 — 7,445 Total grant income — 1,064 — 7,445 Total revenues and grant income $ 523,814 $ 464,240 $ 1,527,928 $ 1,384,037 Resident Fees and Services Revenue For our integrated senior health campuses segment, we increased resident fees and services revenue by $37,335,000 and $99,605,000, respectively, for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to: (i) increased resident occupancy and higher resident fees as a result of an increase in billing rates and levels of service; and (ii) an increase of $8,320,000 and $18,357,000, respectively, due to the expansion of our customer base, expansion of services offered and increases in billing rates for such services at ancillary business units within Trilogy Investors, LLC, or Trilogy. For our SHOP segment, resident fees and services revenue increased $23,293,000 and $51,902,000, respectively, for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to: (i) an increase of $11,893,000 and $31,418,000, respectively, due to the acquisition of 14 senior housing properties in February 2024; (ii) an increase of $4,028,000 and $12,367,000, respectively, due to the transitioning of leased senior housing facilities in our Michigan ALF Portfolio to a managed portfolio utilizing a RIDEA structure in November 2023; and (iii) an increase of $1,581,000 due to the acquisition of five senior housing properties in Washington in September 2024. Additionally, $5,102,000 of the increase in resident fees and services revenue for our SHOP segment for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to transitioning SNFs in our Central Wisconsin Senior Care Portfolio from triple-net leased properties to a managed portfolio utilizing a RIDEA structure in March 2023. The remaining increase in resident fees and services revenue for our SHOP segment was primarily attributable to increased resident occupancy and higher resident fees as a result of an increase in billing rates and levels of service. Such increases were partially offset by real estate dispositions within our SHOP segment in 2023 and 2024. 47 Table of Contents Real Estate Revenue For the three months ended September 30, 2024, real estate revenue within our triple-net leased properties segment increased $1,983,000, as compared to the three months ended September 30, 2023, primarily due to the transitioning of the senior housing facilities in our Michigan ALF Portfolio to a managed portfolio utilizing a RIDEA structure in 2023 that resulted in the full amortization of $2,756,000 of above-market leases recorded against real estate revenue in the prior year. For the nine months ended September 30, 2024, real estate revenue within our triple-net leased properties segment increased $8,176,000, as compared to the nine months ended September 30, 2023, primarily due to transitioning each of the leased SNFs in our Central Wisconsin Senior Care Portfolio and the leased senior housing facilities in our Michigan ALF Portfolio to a managed portfolio utilizing a RIDEA structure in 2023 that resulted in the full amortization of an aggregate $10,829,000 of above-market leases recorded against real estate revenue in the prior year. Such increase was partially offset by a decrease in real estate revenue generated from our Michigan ALF Portfolio prior to such transition to a managed portfolio utilizing a RIDEA structure. Real estate revenue for our OM segment decreased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to dispositions of OM buildings during 2023 and 2024 and a slight decrease in occupancy. Grant Income For both the three and nine months ended September 30, 2024, we did not recognize any grant income. For the three months and nine months ended September 30, 2023, we recognized $1,064,000 and $7,445,000, respectively, of grant income at our integrated senior health campuses related to government grants received through certain federal and state pandemic-related relief measures, such as reimbursement programs. Property Operating Expenses and Rental Expenses Integrated senior health campuses and SHOP typically have a higher percentage of direct operating expenses to revenue and grant income than OM buildings and triple-net leased properties due to the nature of RIDEA-type facilities where we conduct day-to-day operations. Property operating expenses and property operating expenses as a percentage of resident fees and services revenue and grant income, as well as rental expenses and rental expenses as a percentage of real estate revenue, by reportable segment consisted of the following for the periods then ended (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Property Operating Expenses Integrated senior health campuses $ 361,227 88.2 % $ 335,563 89.9 % $ 1,060,835 88.7 % $ 992,620 89.9 % SHOP 55,901 83.2 % 39,040 88.9 % 162,486 85.3 % 124,678 90.0 % Total property operating expenses $ 417,128 87.5 % $ 374,603 89.8 % $ 1,223,321 88.2 % $ 1,117,298 89.9 % Rental Expenses OM $ 12,649 37.5 % $ 13,690 38.4 % $ 38,409 37.9 % $ 42,025 38.3 % Triple-net leased properties 501 3.8 % 884 7.8 % 1,791 4.5 % 2,397 7.7 % Total rental expenses $ 13,150 28.0 % $ 14,574 31.0 % $ 40,200 28.5 % $ 44,422 31.5 % For the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, the increase in total property operating expenses for our integrated senior health campuses segment was predominately due to: (i) increased resident occupancy at the facilities within such segment; and (ii) an increase of $6,574,000 and $22,789,000, respectively, within Trilogy’s ancillary business unit due to higher labor costs associated with the expansion of services offered and inflation’s impact on labor costs and other operating expenses. 48 Table of Contents For the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, total property operating expenses for our SHOP segment increased primarily due to: (i) an increase of $10,666,000 and $27,588,000, respectively, due to the acquisition of 14 senior housing properties in February 2024; (ii) an increase of $4,442,000 and $13,350,000, respectively, due to the transitioning of the senior housing facilities in our Michigan ALF Portfolio from triple-net leased properties to a managed portfolio utilizing a RIDEA structure in November 2023; (iii) an increase of $975,000 due to the acquisition of five senior housing properties in Washington in September 2024; and (iv) increased resident occupancy at the facilities within such segment. Additionally, $3,900,000 of the increase in total property operating expenses for our SHOP segment for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to transitioning the SNFs in our Central Wisconsin Senior Care Portfolio from triple-net leased properties to a managed portfolio utilizing a RIDEA structure in March 2023. Such increases in total property operating expenses for our SHOP segment were partially offset by a decrease of $1,134,000 and $14,155,000, respectively, in total property operating expenses for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, due to real estate dispositions within our SHOP segment in 2023 and 2024. Rental expenses for our OM segment decreased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to the dispositions of OM buildings since September 30, 2023. Business Acquisition Expenses For the three and nine months ended September 30, 2024, we recorded business acquisition expenses of $3,537,000 and $6,334,000, respectively, primarily related to $2,691,000 and $4,926,000, respectively, in aggregate acquisition costs incurred for properties operated under a RIDEA structure and included in our SHOP segment. For the three and nine months ended September 30, 2023, we recorded business acquisition expenses of $1,024,000 and $2,244,000, respectively, primarily incurred in pursuit of real estate-investment opportunities. See Note 4, Business Combinations, to our accompanying condensed consolidated financial statements for a further discussion of our senior housing properties acquired in February 2024 and September 2024. Depreciation and Amortization For the three months ended September 30, 2024 and 2023, depreciation and amortization was $44,246,000 and $49,273,000, respectively, which primarily consisted of depreciation on our operating properties of $37,610,000 and $36,929,000, respectively, and amortization of our identified intangible assets of $5,958,000 and $11,778,000, respectively. For nine months ended September 30, 2024 and 2023, depreciation and amortization was $132,277,000 and $138,644,000, respectively, which primarily consisted of depreciation on our operating properties of $111,611,000 and $109,967,000, respectively, and amortization of our identified intangible assets of $18,692,000 and $26,618,000, respectively. For the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, the decrease in depreciation and amortization of $5,027,000 was primarily due to the full amortization of $5,750,000 of in-place leases related to the transition of the senior housing — leased facilities within our Michigan ALF Portfolio to a managed portfolio utilizing a RIDEA structure in 2023. For the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, the decrease in depreciation and amortization of $6,367,000 was primarily due to the full amortization of an aggregate $6,635,000 of in-place leases related to the transition of the SNFs within our Central Wisconsin Senior Care Portfolio to a managed portfolio utilizing a RIDEA structure in March 2023 and the transition of the senior housing — leased facilities in our Michigan ALF Portfolio to a managed portfolio utilizing a RIDEA structure in November 2023. 49 Table of Contents Interest Expense Interest expense, including gain or loss in fair value of derivative financial instruments, consisted of the following for the periods then ended (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest expense: Lines of credit and term loan and derivative financial instruments $ 13,552 $ 24,966 $ 44,476 $ 72,655 Mortgage loans payable 13,348 14,215 40,838 41,310 Amortization of deferred financing costs: Lines of credit and term loan 785 686 2,149 2,491 Mortgage loans payable 389 554 1,955 1,690 Amortization of debt discount/premium, net 923 887 3,699 2,662 Loss (gain) in fair value of derivative financial instruments 8,967 (3,402) 2,162 (8,200) Loss on debt and derivative extinguishments 572 345 1,852 345 Interest on finance lease liabilities 156 82 464 239 Interest expense on financing obligations and other liabilities 670 270 1,996 614 Total $ 39,362 $ 38,603 $ 99,591 $ 113,806 The decrease in total interest expense for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a decrease in debt balances predominately related to: (i) the payoff of $176,145,000 of variable-rate mortgage loans payable and paydown of $545,010,000 on our variable-rate lines of credit in February 2024 from the net proceeds received from the February 2024 Offering; and (ii) the paydown of $194,000,000 on our variable-rate lines of credit in September 2024 from the net proceeds received from the September 2024 Offering. Such decrease in total interest expense for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was partially offset by the $10,362,000 change from gain to loss in fair value of derivative financial instruments. See Note 7, Other Assets, Net, Note 8, Mortgage Loans Payable, Net, and Note 10, Derivative Financial Instruments, to our accompanying condensed consolidated financial statements for a further discussion of debt and derivative extinguishments. Gain or Loss on Dispositions of Real Estate Investments For the three months ended September 30, 2024, we disposed of a land easement on one of our OM properties and recognized a net loss on sale of $(4,000). For the nine months ended September 30, 2024, we recognized an aggregate net gain on dispositions of our real estate investments of $2,257,000 primarily related to the sale of two OM buildings and one SHOP in 2024. See Note 2, Summary of Significant Accounting Policies — Properties Held for Sale and Note 3, Real Estate Investments, Net — Dispositions of Real Estate Investments, to our accompanying condensed consolidated financial statements for further discussion. For the three months ended September 30, 2023, we recognized an aggregate net gain on dispositions of our real estate investments of $31,981,000 primarily related to the sale of one SHOP within our Central Florida Senior Housing Portfolio and three OM buildings. For the nine months ended September 30, 2023, we recognized an aggregate net gain on dispositions of our real estate investments of $29,777,000 primarily related to the sale of six SHOP within our Central Florida Senior Housing Portfolio and 14 OM buildings. Impairment of Real Estate Investments For both the three and nine months ended September 30, 2024, we did not recognize impairment charges on real estate investments. For both the three and nine months ended September 30, 2023, we recognized an aggregate impairment charge of $12,510,000 for two of the SHOP within our Northern CA Senior Housing Portfolio. See Note 3, Real Estate Investments, Net— Impairment of Real Estate Investments, to our accompanying condensed consolidated financial statements for further discussion. 50 Table of Contents Gain on Re-measurement of Previously Held Equity Interest For both the three and nine months ended September 30, 2024, we did not recognize any gain on re-measurement of any previously held equity interest. For the nine months ended September 30, 2023, we recognized a $726,000 gain on re-measurement of the fair value of our previously held equity interest in Memory Care Partners, LLC. See Note 4, Business Combinations, to our accompanying condensed consolidated financial statements for further discussion. Liquidity and Capital Resources Our principal sources of liquidity are cash flows from operations, borrowings under our lines of credit and proceeds from dispositions of real estate investments. For the next 12 months, our principal liquidity needs are to: (i) fund property operating expenses and general and administrative expenses; (ii) meet our debt service requirements (including principal and interest); (iii) fund development activities and capital expenditures; and (iv) make distributions to our stockholders, as required for us to continue to qualify as a REIT. We believe that the sources of liquidity described above will be sufficient to satisfy our cash requirements for the next 12 months and thereafter. We do not have any material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources. Material Cash Requirements Capital Improvement Expenditures A capital plan for each investment is established upon acquisition that contemplates the estimated capital needs of that investment, including costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include operating cash generated by the investment, capital reserves, a line of credit or other loan established with respect to the investment, other borrowings or additional equity investments from us and joint venture partners. The capital plan for each investment is adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs. As of September 30, 2024, we had $16,297,000 of restricted cash in loan impounds and reserve accounts to fund a portion of such capital expenditures. Based on the budget for the properties we owned as of September 30, 2024, we estimated that unspent discretionary expenditures for capital and tenant improvements as of such date are to be approximately $14,686,000 for the remaining three months of 2024, although actual expenditures are dependent on many factors which are not presently known. Contractual Obligations The following table provides information with respect to: (i) the maturity and scheduled principal repayment of our secured mortgage loans payable and lines of credit and term loan; (ii) interest payments on our mortgage loans payable and lines of credit and term loan, excluding the effect of our interest rate swaps; (iii) ground and other lease obligations; and (iv) financing and other obligations as of September 30, 2024 (in thousands): Payments Due by Period 2024 2025-2026 2027-2028 Thereafter Total Principal payments — fixed-rate debt $ 33,036 $ 298,228 $ 196,677 $ 615,207 $ 1,143,148 Interest payments — fixed-rate debt 10,525 70,572 53,024 346,809 480,930 Principal payments — variable-rate debt — 164,586 596,500 — 761,086 Interest payments — variable-rate debt (based on rates in effect as of September 30, 2024) 13,084 82,588 5,051 — 100,723 Ground and other lease obligations 8,055 62,314 63,895 136,396 270,660 Financing obligations and other obligations 1,494 10,984 9,856 31,833 54,167 Total $ 66,194 $ 689,272 $ 925,003 $ 1,130,245 $ 2,810,714 Distributions For information on distributions, see the “Distributions” section below. 51 Table of Contents Credit Facilities We are party to a credit agreement, as amended, with an aggregate maximum principal amount up to $1,150,000,000, or the 2024 Credit Facility. In addition, we are party to an agreement, as amended, regarding a senior secured revolving credit facility with an aggregate maximum principal amount of $400,000,000, or the Trilogy Credit Facility. See Note 9, Lines of Credit and Term Loan, to our accompanying condensed consolidated financial statements for a further discussion. As of September 30, 2024, our aggregate borrowing capacity under the 2024 Credit Facility and the Trilogy Credit Facility was $1,550,000,000. As of September 30, 2024, our aggregate borrowings outstanding under our credit facilities was $596,532,000, and we had an aggregate of $953,468,000 available on such facilities. We believe that the resources described above will be sufficient to satisfy our cash requirements for the next 12 months and thereafter. Cash Flows The following table sets forth changes in cash flows (in thousands): Nine Months Ended September 30, 2024 2023 Cash, cash equivalents and restricted cash — beginning of period $ 90,782 $ 111,906 Net cash provided by operating activities 116,578 72,766 Net cash (used in) provided by investing activities (95,941) 20,701 Net cash provided by (used in) financing activities 5,239 (123,177) Effect of foreign currency translation on cash, cash equivalents and restricted cash 14 (40) Cash, cash equivalents and restricted cash — end of period $ 116,672 $ 82,156 The following summary discussion of our changes in our cash flows is based on our accompanying condensed consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. Operating Activities For the nine months ended September 30, 2024 and 2023, cash flows from operating activities were primarily related to property operations, offset by payments of general and administrative expenses and interest payments on our outstanding indebtedness. In general, cash flows from operating activities are affected by the timing of cash receipts and payments. In addition, the increase in net cash provided by operating activities for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily driven by the increase in operating performance of our real estate investments in our integrated senior health campuses and SHOP segments, as well as a decrease in interest paid on our outstanding indebtedness as a result of mortgage payoffs and paydowns on our lines of credit using net proceeds from the February 2024 Offering and September 2024 Offering. See the “Results of Operations” section above for further discussion. Investing Activities For the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, the change from net cash provided by investing activities to net cash used in investing activities was primarily due to a $153,332,000 decrease in proceeds from dispositions of real estate investments, partially offset by a $12,000,000 decrease in investments in unconsolidated entities, a $12,130,000 decrease in developments and capital expenditures and a $17,508,000 change from issuance of real estate notes receivable to net principal repayments on real estate notes receivable. Financing Activities For the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, the change from net cash used in financing activities to net cash provided by financing activities was primarily due to the closing of the February 2024 Offering and September 2024 Offering that resulted in an aggregate $1,244,036,000 in gross offering proceeds from the issuance of Common Stock as well as a decrease of $15,042,000 in net payments on financing and other obligations. Such amounts were partially offset by a $761,587,000 increase in net payments on our lines of credit and mortgage loans payable, primarily using the net proceeds from the February 2024 Offering and September 2024 Offering for such paydowns, $258,001,000 in cash paid to purchase the noncontrolling interest in Trilogy REIT Holdings LLC held by a joint venture partner, a $69,023,000 increase in payment of offering costs, a $22,906,000 increase in distributions paid to common stockholders and a $20,129,000 increase in cash paid to redeem certain equity interests owned in Trilogy Investors, LLC. 52 Table of Contents Distributions Our board shall authorize distributions, if any, on a quarterly basis, in such amounts as our board shall determine, and each quarterly record date for the purposes of such distributions shall be determined and authorized by our board in the last month of each calendar quarter until such time as our board changes our distribution policy. On November 14, 2022, our board suspended our DRIP offering beginning with distributions declared, if any, for the quarter ending December 31, 2022. As a result of the suspension of our DRIP, unless and until our board reinstates our DRIP offering, stockholders who are current participants in our DRIP were or will be paid distributions in cash. Since the first quarter of 2023, our board has authorized a quarterly distribution equal to $0.25 per share to holders of our common stock, which we expect will continue to be paid in the future, though we cannot guarantee that our distributions will continue at the current value. Such quarterly distributions were equal to an annualized distribution rate of $1.00 per share and paid in cash, only from legally available funds. The amount of the quarterly distributions paid to our common stockholders was determined by our board and was dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT under the Code. The following tables reflect distributions we paid for the nine months ended September 30, 2024 and 2023, and the sources of distributions as compared to cash flows from operations or funds from operations attributable to controlling interest, or FFO, a non-GAAP financial measure (dollars in thousands): Nine Months Ended September 30, 2024 2023 Distributions paid in cash $ 82,591 $ 59,685 Sources of distributions: Cash flows from operations $ 82,591 100 % $ 59,685 100 % Proceeds from borrowings — — — — $ 82,591 100 % $ 59,685 100 % Nine Months Ended September 30, 2024 2023 Distributions paid in cash $ 82,591 $ 59,685 Sources of distributions: NAREIT FFO attributable to controlling interest $ 82,591 100 % $ 57,075 95.6 % Proceeds from borrowings — — 2,610 4.4 $ 82,591 100 % $ 59,685 100 % As of September 30, 2024, any distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and some portion of a distribution to our stockholders may have been paid from borrowings. For a further discussion of FFO, including a reconciliation of our GAAP net loss to FFO, see “Funds from Operations and Normalized Funds from Operations” below. Mortgage Loans Payable, Net For a discussion of our mortgage loans payable, see Note 8, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial statements. Lines of Credit and Term Loan For a discussion of our lines of credit and term loan, see Note 9, Lines of Credit and Term Loan, to our accompanying condensed consolidated financial statements. 53 Table of Contents REIT Requirements In order to maintain our qualification as a REIT for U.S. federal income tax purposes, we are required to distribute to our stockholders a minimum of 90.0% of our REIT taxable income. Existin g Internal Revenue Service, or IRS, guidance includes a safe harbor pursuant to which publicly offered REITs ca n satisfy the distribution requirement by distributing a combination of cash and stock to stockholders. In general, to qualify under the safe harbor, each stockholder must elect to receive either cash or stock, and the aggregate cash component of the distribution to stockholders must represent at least 20.0% of the total distribution . In the event that there is a shortfall in net cash available due to factors including, without limitation, the timing of such distributions or the timing of the collection of receivables, we may seek to obtain capital to make distributions by means of secured and unsecured debt financing through one or more unaffiliated third parties. We may also make distributions with cash from capital transactions including, without limitation, the sale of one or more of our properties. Commitments and Contingencies For a discussion of our commitments and contingencies, see Note 11, Commitments and Contingencies, to our accompanying condensed consolidated financial statements. Debt Service Requirements A significant liquidity need is the payment of principal and interest on our outstanding indebtedness. As of September 30, 2024, we had $1,307,702,000 of fixed-rate and variable-rate mortgage loans payable outstanding secured by our properties. As of September 30, 2024, we had $596,532,000 outstanding, and $953,468,000 remained available under our lines of credit. The weighted average effective interest rate on our outstanding debt, factoring in our interest rate swaps, was 4.72% per annum as of September 30, 2024. See Note 8, Mortgage Loans Payable, Net, and Note 9, Lines of Credit and Term Loan, to our accompanying condensed consolidated financial statements. We are required by the terms of certain loan documents to meet various financial and non-financial covenants, such as leverage ratios, net worth ratios, debt service coverage ratios and fixed charge coverage ratios. As of September 30, 2024, we were in compliance with all such covenants and requirements on our mortgage loans payable and our lines of credit and term loan. If any future covenants are violated, we anticipate seeking a waiver or amending the debt covenants with the lenders when and if such event should occur. However, there can be no assurances that management will be able to effectively achieve such plans. Funds from Operations and Normalized Funds from Operations Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, a non-GAAP financial measure, which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. The use of funds from operations is recommended by the REIT industry as a supplemental performance measure, and our management uses FFO to evaluate our performance over time. FFO is not equivalent to our net income (loss) as determined under GAAP. We define FFO, a non-GAAP financial measure, consistent with the standards established by the White Paper on funds from operations approved by the Board of Governors of NAREIT, or the White Paper. The White Paper defines funds from operations as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of certain real estate assets, gains or losses upon consolidation of a previously held equity interest, and impairment writedowns of certain real estate assets and investments, plus depreciation and amortization related to real estate, and after adjustments for unconsolidated partnerships and joint ventures. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that impairments are based on estimated future undiscounted cash flows. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations. Our FFO calculation complies with NAREIT’s policy described above. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization and impairments, provides a further understanding of our operating performance to investors, industry analysts and our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, which may not be immediately apparent from net income (loss). We define normalized FFO attributable to controlling interest, or Normalized FFO, as FFO further adjusted for the following items included in the determination of GAAP net income (loss): expensed acquisition fees and costs, which we refer 54 Table of Contents to as business acquisition expenses; amounts relating to changes in deferred rent and amortization of above- and below-market leases; the non-cash impact of changes to our equity instruments; non-cash or non-recurring income or expense; the non-cash effect of income tax benefits or expenses; capitalized interest; impairment of intangible assets and goodwill; amortization of closing costs on debt security investments; mark-to-market adjustments included in net income (loss); gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect Normalized FFO on the same basis. However, FFO and Normalized FFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) as an indicator of our operating performance, GAAP cash flows from operations as an indicator of our liquidity or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and Normalized FFO measures and the adjustments to GAAP in calculating FFO and Normalized FFO. Presentation of this information is intended to provide useful information to investors, industry analysts and management as they compare the operating performance used by the REIT industry, although it should be noted that not all REITs calculate funds from operations and normalized funds from operations the same way, so comparisons with other REITs may not be meaningful. FFO and Normalized FFO should be reviewed in conjunction with other measurements as an indication of our performance. None of the SEC, NAREIT, or any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or Normalized FFO. In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and we would have to adjust our calculation and characterization of FFO or Normalized FFO. The following is a reconciliation of net income or loss, which is the most directly comparable GAAP financial measure, to FFO and Normalized FFO for the periods presented below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ (3,093) $ (6,446) $ (3,171) $ (45,928) Depreciation and amortization related to real estate — consolidated properties 44,208 49,235 132,163 138,530 Depreciation and amortization related to real estate — unconsolidated entities 310 96 682 254 Impairment of real estate investments — consolidated properties — 12,510 — 12,510 Loss (gain) on dispositions of real estate investments, net — consolidated properties 4 (31,981) (2,257) (29,777) Gain on re-measurement of previously held equity interest — — — (726) Net (income) loss attributable to noncontrolling interests (1,033) 457 (2,868) 1,884 Depreciation, amortization, impairments, net gain/loss on dispositions and gain on re-measurement — noncontrolling interests (4,756) (6,061) (15,865) (19,672) NAREIT FFO attributable to controlling interest $ 35,640 $ 17,810 $ 108,684 $ 57,075 Business acquisition expenses $ 3,537 $ 1,024 $ 6,334 $ 2,244 Amortization of above- and below-market leases 432 3,103 1,277 12,233 Amortization of closing costs — debt security investments 82 71 238 204 Change in deferred rent (598) 1,478 (1,743) 1,238 Non-cash impact of changes to equity instruments 2,630 1,579 7,330 4,244 Capitalized interest (56) (47) (261) (127) Loss on debt and derivative extinguishments 572 345 1,852 345 Loss (gain) in fair value of derivative financial instruments 8,967 (3,402) 2,162 (8,200) Foreign currency (gain) loss (2,689) 1,704 (2,345) (372) Adjustments for unconsolidated entities (71) (106) (319) (359) Adjustments for noncontrolling interests (758) (386) (683) (976) Normalized FFO attributable to controlling interest $ 47,688 $ 23,173 $ 122,526 $ 67,549 55 Table of Contents Net Operating Income Net operating income, or NOI, is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, business acquisition expenses, depreciation and amortization, interest expense, gain or loss in fair value of derivative financial instruments, gain or loss on dispositions of real estate investments, impairment of real estate investments, impairment of intangible assets and goodwill, income or loss from unconsolidated entities, gain on re-measurement of previously held equity interests, foreign currency gain or loss, other income or expense and income tax benefit or expense. NOI is not equivalent to our net income (loss) as determined under GAAP and may not be a useful measure in measuring operational income or cash flows. Furthermore, NOI should not be considered as an alternative to net income (loss) as an indication of our operating performance or as an alternative to cash flows from operations as an indication of our liquidity. NOI should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss). NOI should be reviewed in conjunction with other measurements as an indication of our performance. We believe that NOI is an appropriate supplemental performance measure to reflect the performance of our operating assets because NOI excludes certain items that are not associated with the operations of the properties. We believe that NOI is a widely accepted measure of comparative operating performance in the real estate community and is useful to investors in understanding the profitability and operating performance of our property portfolio. However, our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. To facilitate understanding of this financial measure, the following is a reconciliation of net income or loss, which is the most directly comparable GAAP financial measure, to NOI for the periods presented below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ (3,093) $ (6,446) $ (3,171) $ (45,928) General and administrative 11,921 11,342 35,495 36,169 Business acquisition expenses 3,537 1,024 6,334 2,244 Depreciation and amortization 44,246 49,273 132,277 138,644 Interest expense 30,395 42,005 97,429 122,006 Loss (gain) in fair value of derivative financial instruments 8,967 (3,402) 2,162 (8,200) Loss (gain) on dispositions of real estate investments, net 4 (31,981) (2,257) (29,777) Impairment of real estate investments — 12,510 — 12,510 Loss from unconsolidated entities 2,123 505 4,363 924 Gain on re-measurement of previously held equity interest — — — (726) Foreign currency (gain) loss (2,689) 1,704 (2,345) (372) Other income, net (2,138) (1,755) (7,107) (5,952) Income tax expense 263 284 1,227 775 Net operating income $ 93,536 $ 75,063 $ 264,407 $ 222,317