Brookdale Senior Living Inc. 10-Q

Item 1. Financial Statements BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except stock amounts) June 30, 2022 December 31, 2021 Assets (Unaudited) Current assets Cash and cash equivalents $ 238,757 $ 347,031 Marketable securities 165,481 182,393 Restricted cash 29,946 26,845 Accounts receivable, net 49,544 51,137 Assets held for sale — 3,642 Prepaid expenses and other current assets, net 103,738 87,946 Total current assets 587,466 698,994 Property, plant and equipment and leasehold intangibles, net 4,839,643 4,904,292 Operating lease right-of-use assets 572,191 630,423 Restricted cash 59,839 64,438 Investment in unconsolidated ventures 59,697 67,424 Goodwill 27,321 27,321 Deferred tax asset 1,717 279 Other assets, net 20,422 17,296 Total assets $ 6,168,296 $ 6,410,467 Liabilities and Equity Current liabilities Current portion of long-term debt $ 268,341 $ 63,125 Current portion of financing lease obligations 22,996 22,151 Current portion of operating lease obligations 154,455 148,642 Trade accounts payable 76,651 76,125 Accrued expenses 260,150 254,831 Refundable fees and deferred revenue 71,420 67,080 Total current liabilities 854,013 631,954 Long-term debt, less current portion 3,565,819 3,778,087 Financing lease obligations, less current portion 526,601 532,136 Operating lease obligations, less current portion 620,035 681,876 Other liabilities 83,261 86,791 Total liabilities 5,649,729 5,710,844 Preferred stock, $ 0.01 par value, 50,000,000 shares authorized at June 30, 2022 and December 31, 2021; no shares issued and outstanding — — Common stock, $ 0.01 par value, 400,000,000 shares authorized at June 30, 2022 and December 31, 2021; 197,783,147 and 197,485,318 shares issued and 187,255,622 and 186,957,793 shares outstanding (including 483,299 and 1,549,059 unvested restricted shares), respectively 1,978 1,975 Additional paid-in-capital 4,211,931 4,208,675 Treasury stock, at cost; 10,527,525 shares at June 30, 2022 and December 31, 2021 ( 102,774 ) ( 102,774 ) Accumulated deficit ( 3,594,905 ) ( 3,410,474 ) Total Brookdale Senior Living Inc. stockholders' equity 516,230 697,402 Noncontrolling interest 2,337 2,221 Total equity 518,567 699,623 Total liabilities and equity $ 6,168,296 $ 6,410,467 See accompanying notes to condensed consolidated financial statements. 4 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue Resident fees $ 640,388 $ 673,978 $ 1,277,362 $ 1,338,328 Management fees 3,329 4,998 6,658 13,564 Reimbursed costs incurred on behalf of managed communities 37,388 43,008 74,529 108,802 Other operating income 8,411 1,308 8,787 12,043 Total revenue and other operating income 689,516 723,292 1,367,336 1,472,737 Expense Facility operating expense (excluding facility depreciation and amortization of $ 80,944 , $ 77,921 , $ 160,876 , and $ 155,195 , respectively) 513,664 550,846 1,026,428 1,107,158 General and administrative expense (including non-cash stock-based compensation expense of $ 3,619 , $ 4,527 , $ 7,504 , and $ 9,310 , respectively) 41,752 52,400 86,878 102,343 Facility operating lease expense 41,538 43,864 83,102 88,282 Depreciation and amortization 86,623 83,591 172,307 167,482 Asset impairment 2,599 2,078 11,674 12,755 Costs incurred on behalf of managed communities 37,388 43,008 74,529 108,802 Total operating expense 723,564 775,787 1,454,918 1,586,822 Income (loss) from operations ( 34,048 ) ( 52,495 ) ( 87,582 ) ( 114,085 ) Interest income 778 341 873 762 Interest expense: Debt ( 35,693 ) ( 35,425 ) ( 68,850 ) ( 70,776 ) Financing lease obligations ( 11,994 ) ( 11,492 ) ( 24,052 ) ( 22,875 ) Amortization of deferred financing costs ( 1,520 ) ( 1,907 ) ( 3,062 ) ( 3,822 ) Change in fair value of derivatives 973 ( 233 ) 4,376 ( 191 ) Equity in earnings (loss) of unconsolidated ventures ( 2,439 ) 13,946 ( 7,333 ) 13,415 Gain (loss) on sale of assets, net 961 ( 79 ) 667 1,033 Other non-operating income (loss) ( 111 ) 2,948 ( 138 ) 4,592 Income (loss) before income taxes ( 83,093 ) ( 84,396 ) ( 185,101 ) ( 191,947 ) Benefit (provision) for income taxes ( 1,190 ) 792 786 40 Net income (loss) ( 84,283 ) ( 83,604 ) ( 184,315 ) ( 191,907 ) Net (income) loss attributable to noncontrolling interest ( 135 ) 19 ( 116 ) 37 Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders $ ( 84,418 ) $ ( 83,585 ) $ ( 184,431 ) $ ( 191,870 ) Basic and diluted net income (loss) per share attributable to Brookdale Senior Living Inc. common stockholders $ ( 0.45 ) $ ( 0.45 ) $ ( 0.99 ) $ ( 1.04 ) Weighted average shares used in computing basic and diluted net income (loss) per share 186,761 185,182 186,341 184,600 See accompanying notes to condensed consolidated financial statements. 5 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Total equity, balance at beginning of period $ 599,279 $ 695,107 $ 699,623 $ 802,729 Common stock: Balance at beginning of period $ 1,978 $ 1,978 $ 1,975 $ 1,983 Restricted stock and restricted stock units, net — ( 1 ) 9 1 Shares withheld for employee taxes — — ( 6 ) ( 7 ) Balance at end of period $ 1,978 $ 1,977 $ 1,978 $ 1,977 Additional paid-in-capital: Balance at beginning of period $ 4,208,360 $ 4,213,095 $ 4,208,675 $ 4,212,409 Non-cash stock-based compensation expense 3,619 4,527 7,504 9,310 Issuance of common stock under Associate Stock Purchase Plan — 213 — 437 Restricted stock and restricted stock units, net — 1 ( 9 ) ( 1 ) Shares withheld for employee taxes ( 48 ) ( 115 ) ( 4,239 ) ( 4,437 ) Other, net — 7 — 10 Balance at end of period $ 4,211,931 $ 4,217,728 $ 4,211,931 $ 4,217,728 Treasury stock: Balance at beginning and end of period $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) Accumulated deficit: Balance at beginning of period $ ( 3,510,487 ) $ ( 3,419,469 ) $ ( 3,410,474 ) $ ( 3,311,184 ) Net income (loss) ( 84,418 ) ( 83,585 ) ( 184,431 ) ( 191,870 ) Balance at end of period $ ( 3,594,905 ) $ ( 3,503,054 ) $ ( 3,594,905 ) $ ( 3,503,054 ) Noncontrolling interest: Balance at beginning of period $ 2,202 $ 2,277 $ 2,221 $ 2,295 Net income (loss) attributable to noncontrolling interest 135 ( 19 ) 116 ( 37 ) Balance at end of period $ 2,337 $ 2,258 $ 2,337 $ 2,258 Total equity, balance at end of period $ 518,567 $ 616,135 $ 518,567 $ 616,135 Common stock share activity Outstanding shares of common stock: Balance at beginning of period 187,283 187,230 186,958 187,804 Issuance of common stock under Associate Stock Purchase Plan — 30 — 73 Restricted stock and restricted stock units, net ( 18 ) ( 104 ) 907 23 Shares withheld for employee taxes ( 9 ) ( 17 ) ( 609 ) ( 761 ) Balance at end of period 187,256 187,139 187,256 187,139 See accompanying notes to condensed consolidated financial statements. 6 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Six Months Ended June 30, 2022 2021 Cash Flows from Operating Activities Net income (loss) $ ( 184,315 ) $ ( 191,907 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization, net 175,369 171,304 Asset impairment 11,674 12,755 Equity in (earnings) loss of unconsolidated ventures 7,333 ( 13,415 ) Distributions from unconsolidated ventures from cumulative share of net earnings 561 5,355 Amortization of entrance fees ( 1,267 ) ( 876 ) Proceeds from deferred entrance fee revenue 1,959 2,298 Deferred income tax (benefit) provision ( 1,438 ) ( 704 ) Operating lease expense adjustment ( 16,615 ) ( 9,990 ) Change in fair value of derivatives ( 4,376 ) 191 Loss (gain) on sale of assets, net ( 667 ) ( 1,033 ) Non-cash stock-based compensation expense 7,504 9,310 Other ( 181 ) ( 4,007 ) Changes in operating assets and liabilities: Accounts receivable, net 1,592 ( 1,267 ) Prepaid expenses and other assets, net ( 5,550 ) 1,605 Prepaid insurance premiums financed with notes payable ( 11,252 ) ( 8,785 ) Trade accounts payable and accrued expenses ( 822 ) 2,131 Refundable fees and deferred revenue 3,956 ( 8,918 ) Operating lease assets and liabilities for lessor capital expenditure reimbursements 4,857 15,506 Net cash provided by (used in) operating activities ( 11,678 ) ( 20,447 ) Cash Flows from Investing Activities Change in lease security deposits and lease acquisition deposits, net 155 ( 75 ) Purchase of marketable securities ( 205,373 ) ( 119,914 ) Sale and maturities of marketable securities 222,500 192,995 Capital expenditures, net of related payables ( 96,851 ) ( 79,538 ) Acquisition of assets ( 6,004 ) — Investment in unconsolidated ventures ( 167 ) ( 5,359 ) Proceeds from sale of assets, net 5,739 9,646 Net cash provided by (used in) investing activities ( 80,001 ) ( 2,245 ) Cash Flows from Financing Activities Proceeds from debt 29,302 21,022 Repayment of debt and financing lease obligations ( 43,084 ) ( 72,970 ) Payment of financing costs, net of related payables ( 116 ) ( 172 ) Payments of employee taxes for withheld shares ( 4,195 ) ( 4,444 ) Other — 10 Net cash provided by (used in) financing activities ( 18,093 ) ( 56,554 ) Net increase (decrease) in cash, cash equivalents, and restricted cash ( 109,772 ) ( 79,246 ) Cash, cash equivalents, and restricted cash at beginning of period 438,314 465,148 Cash, cash equivalents, and restricted cash at end of period $ 328,542 $ 385,902 See accompanying notes to condensed consolidated financial statements. 7 BROOKDALE SENIOR LIVING INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Description of Business Brookdale Senior Living Inc. together with its consolidated subsidiaries ("Brookdale" or the "Company") is an operator of 674 senior living communities throughout the United States. The Company is committed to its mission of enriching the lives of the people it serves with compassion, respect, excellence, and integrity. The Company operates and manages independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). The Company's senior living communities and its comprehensive network help to provide seniors with care and services in an environment that feels like home. As of June 30, 2022, the Company owned 346 communities, representing a majority of the Company's consolidated community portfolio, leased 295 communities, and managed 33 communities. On July 1, 2021, the Company sold 80 % of its equity in its Health Care Services segment. The accompanying unaudited condensed consolidated financial statements include the results of operations and cash flows of the Health Care Services segment for the six months ended June 30, 2021. For periods beginning July 1, 2021, the results and financial position of the Health Care Services segment were deconsolidated from the Company's consolidated financial statements and its 20 % equity interest in the Health Care Services venture (the "HCS Venture") is accounted for under the equity method of accounting. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position, results of operations, and cash flows of the Company for all periods presented. Certain information and footnote disclosures included in annual financial statements have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. These interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 15, 2022. Principles of Consolidation The condensed consolidated financial statements include the accounts of Brookdale and its consolidated subsidiaries. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying unaudited condensed consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation, and net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. The Company reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting. The Company continually evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation ("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this analysis on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. 8 Use of Estimates The preparation of the condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, other operating income, asset impairments, self-insurance reserves, performance-based compensation, the allowance for credit losses, depreciation and amortization, leasing transactions, income taxes, and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the original estimates. Reclassifications Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations. 3. COVID-19 Pandemic The COVID-19 pandemic has adversely impacted the Company's occupancy and resident fee revenue beginning in March 2020 and resulted in incremental direct costs to respond to the pandemic and net cash used in operating activities. The Company cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on its business, results of operations, cash flow, and liquidity, and its response efforts may continue to delay or negatively impact its strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth of the pandemic and any resurgence or variants of the disease; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in the Company's markets; the development, availability, utilization, and efficacy of COVID-19 testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals, including the Company's ability to qualify for and satisfy the terms and conditions of financial relief; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and the Company's ability to adapt its sales and marketing efforts to meet that demand; the impact of COVID-19 on the Company's residents’ and their families’ ability to afford its resident fees, including due to changes in unemployment rates, consumer confidence, housing markets, and equity markets caused by COVID-19; changes in the acuity levels of the Company's new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in the Company's communities; the duration and costs of the Company's response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, health plan, and other expenses; potentially greater use of contract labor and overtime due to COVID-19 and general labor market conditions; the impact of COVID-19 on the Company's ability to complete financings and refinancings of various assets or other transactions or to generate sufficient cash flow to cover required debt, interest, and lease payments and to satisfy financial and other covenants in its debt and lease documents; increased regulatory requirements, including the costs of unfunded, mandatory testing of residents and associates and provision of test kits to the Company's health plan participants; increased enforcement actions resulting from COVID-19; government action that may limit the Company's collection or discharge efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or the Company's response efforts. Employee Retention Credit. The Company was eligible to claim the employee retention credit for certain of its associates under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"). The Company recognized $ 0.9 million and $ 9.9 million for the three and six months ended June 30, 2021, respectively, of employee retention credits on wages paid from March 12, 2020 to December 31, 2020 within other operating income, for which the Company has received $ 4.6 million in cash as of June 30, 2022. The credit was modified and extended by subsequent legislation for wages paid from January 1, 2021 through December 31, 2021. During the three and six months ended June 30, 2022, the Company recognized $ 4.7 million of employee retention credits on wages paid in 2021 within other operating income based upon its current estimates. The Company has a receivable for the remaining $ 10.1 million included within prepaid expenses and other current assets, net on the condensed consolidated balance sheet as of June 30, 2022. Phase 4 Provider Relief Fund Grants . During the three months ended December 31, 2021, the Company applied for the Phase 4 general distribution from the Public Health and Social Services Emergency Fund ("Provider Relief Fund") administered by the U.S. Department of Health and Human Services ("HHS"), under which grants have been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The Company accepted approximately 9 $ 60.0 million of Phase 4 grants on August 5, 2022. The Company has not recognized any Phase 4 grant amounts in income for the three or six months ended June 30, 2022. 4. Fair Value Measurements Marketable Securities As of June 30, 2022 and December 31, 2021, marketable securities of $ 165.5 million and $ 182.4 million, respectively, are stated at fair value based on valuations provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy. Debt The Company estimates the fair value of its debt using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company had outstanding long-term debt with a carrying amount of approximately $ 3.8 billion as of both June 30, 2022 and December 31, 2021. Fair value of the long-term debt is approximately $ 3.4 billion as of June 30, 2022 and approximates the carrying amount as of December 31, 2021. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy. 5. Revenue The Company disaggregates its revenue from contracts with customers by payor source as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Resident fee revenue by payor source is as follows. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Private pay 93.6 % 81.0 % 93.5 % 81.2 % Government reimbursement 5.1 % 14.6 % 5.1 % 14.6 % Other third-party payor programs 1.3 % 4.4 % 1.4 % 4.2 % The sale of 80 % of the Company's equity in its Health Care Services segment on July 1, 2021 reduced its revenue from government reimbursement programs. Refer to Note 15 for disaggregation of revenue by reportable segment. The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source, although terms generally include payment to be made within 30 days. Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain healthcare services is generally billed monthly in arrears. Additionally, non-refundable community fees are generally billed and collected in advance or upon move-in of a resident under the Company's independent living, assisted living, and memory care residency agreements. Amounts of revenue that are collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had total deferred revenue (included within refundable fees and deferred revenue and other liabilities within the condensed consolidated balance sheets) of $ 71.8 million and $ 67.5 million, including $ 30.9 million and $ 27.5 million of monthly resident fees billed and received in advance, as of June 30, 2022 and December 31, 2021, respectively. For the six months ended June 30, 2022 and 2021, the Company recognized $ 48.6 million and $ 46.2 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2022 and 2021, respectively. 10 6. Property, Plant and Equipment and Leasehold Intangibles, Net As of June 30, 2022 and December 31, 2021, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following. (in thousands) June 30, 2022 December 31, 2021 Land $ 508,210 $ 502,610 Buildings and improvements 5,293,975 5,262,136 Furniture and equipment 1,019,609 990,006 Resident and leasehold operating intangibles 301,732 303,737 Construction in progress 58,387 51,037 Assets under financing leases and leasehold improvements 1,633,303 1,609,217 Property, plant and equipment and leasehold intangibles 8,815,216 8,718,743 Accumulated depreciation and amortization ( 3,975,573 ) ( 3,814,451 ) Property, plant and equipment and leasehold intangibles, net $ 4,839,643 $ 4,904,292 Assets under financing leases and leasehold improvements includes $ 315.4 million and $ 332.3 million of financing lease right-of-use assets, net of accumulated amortization, as of June 30, 2022 and December 31, 2021, respectively. Refer to Note 8 for further information on the Company's financing leases. Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $ 86.6 million and $ 83.6 million for the three months ended June 30, 2022 and 2021, respectively, and $ 172.3 million and $ 167.5 million for the six months ended June 30, 2022 and 2021, respectively. The Company recognized $ 1.6 million and $ 0.6 million for the three months ended June 30, 2022 and 2021, respectively, and $ 2.1 million and $ 2.3 million for the six months ended June 30, 2022 and 2021, respectively, of non-cash impairment charges in its operating results for its property, plant and equipment and leasehold intangibles assets, primarily due to property damage at certain communities and decreased occupancy and future cash flow estimates at certain communities as a result of the continuing impacts of the COVID-19 pandemic. 7. Debt Long-term debt consists of the following. (in thousands) June 30, 2022 December 31, 2021 Fixed rate mortgage notes payable due 2023 through 2047; weighted average interest rate of 4.14 % as of both June 30, 2022 and December 31, 2021 $ 2,153,956 $ 2,164,115 Variable rate mortgage notes payable due 2023 through 2030; weighted average interest rate of 4.04 % and 2.44 % as of June 30, 2022 and December 31, 2021, respectively 1,467,840 1,476,943 Convertible notes payable due October 2026; interest rate of 2.00 % as of both June 30, 2022 and December 31, 2021 230,000 230,000 Other notes payable due 2022, interest rate of 2.10 % as of June 30, 2022 9,605 — Deferred financing costs, net ( 27,241 ) ( 29,846 ) Total long-term debt 3,834,160 3,841,212 Current portion 268,341 63,125 Total long-term debt, less current portion $ 3,565,819 $ 3,778,087 11 As of June 30, 2022, 93.8 %, or $ 3.6 billion, of the Company's total debt obligations represented non-recourse property-level mortgage financings. As of June 30, 2022, $ 72.6 million of letters of credit and no cash borrowings were outstanding under the Company's $ 80.0 million secured credit facility. The Company also had a separate secured letter of credit facility providing up to $ 15.0 million of letters of credit as of June 30, 2022 under which $ 13.9 million had been issued as of that date. Financial Covenants Certain of the Company's debt documents contain restrictions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. In addition, the Company's debt documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable debt documents. Many of the Company's debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, the Company's debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of June 30, 2022, the Company is in compliance with the financial covenants of its debt agreements. 8. Leases As of June 30, 2022, the Company operated 295 communities under long-term leases ( 230 operating leases and 65 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of June 30, 2022, the Company is in compliance with the financial covenants of its long-term leases. 12 Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $ 1.0 million and $ 1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $ 9.6 million and $ 10.5 million for the six months ended June 30, 2022 and 2021, respectively, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continuing impacts of the COVID-19 pandemic. A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows. Three Months Ended June 30, Six Months Ended June 30, Operating Leases (in thousands) 2022 2021 2022 2021 Facility operating expense $ 1,561 $ 4,520 $ 3,084 $ 9,362 Facility lease expense 41,538 43,864 83,102 88,282 Operating lease expense 43,099 48,384 86,186 97,644 Operating lease expense adjustment (1) 8,308 5,326 16,615 9,990 Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements ( 3,367 ) ( 7,943 ) ( 4,857 ) ( 15,506 ) Operating net cash outflows from operating leases $ 48,040 $ 45,767 $ 97,944 $ 92,128 (1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense. Three Months Ended June 30, Six Months Ended June 30, Financing Leases (in thousands) 2022 2021 2022 2021 Depreciation and amortization $ 7,607 $ 7,594 $ 15,273 $ 15,224 Interest expense: financing lease obligations 11,994 11,492 24,052 22,875 Financing lease expense $ 19,601 $ 19,086 $ 39,325 $ 38,099 Operating cash outflows from financing leases $ 11,994 $ 11,492 $ 24,052 $ 22,875 Financing cash outflows from financing leases 5,610 4,864 11,100 9,653 Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement ( 3,770 ) ( 2,057 ) ( 6,977 ) ( 3,446 ) Total net cash outflows from financing leases $ 13,834 $ 14,299 $ 28,175 $ 29,082 The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of June 30, 2022 are as follows (in thousands). Year Ending December 31, Operating Leases Financing Leases 2022 (six months) $ 102,321 $ 34,171 2023 209,006 69,401 2024 194,536 70,615 2025 192,255 59,994 2026 76,955 61,250 Thereafter 206,716 53,382 Total lease payments 981,789 348,813 Purchase option liability and non-cash gain on future sale of property — 424,316 Imputed interest and variable lease payments ( 207,299 ) ( 223,532 ) Total lease obligations $ 774,490 $ 549,597 13 9. Investment in Unconsolidated Ventures As of June 30, 2022, the Company holds a 20 % equity interest, and affiliates of HCA Healthcare Inc. own an 80 % interest, in the HCS Venture, and the Company has determined the HCS Venture is a VIE. The HCS Venture operates home health and hospice agencies in the United States. The Company does not consolidate this VIE because it does not have the ability to control the activities that most significantly impact this VIE's economic performance. The Company's interest in the HCS Venture is accounted for under the equity method of accounting. The carrying amount of the Company's investment in the unconsolidated venture and maximum exposure to loss as a result of the Company's ownership interest in the HCS Venture was $ 54.3 million, which is included in investment in unconsolidated ventures on the accompanying unaudited condensed consolidated balance sheet as of June 30, 2022. As of June 30, 2022, the Company is not required to provide financial support, through a liquidity arrangement or otherwise, to the HCS Venture. 10. Litigation The Company has been and is currently involved in litigation and claims incidental to the conduct of its business, which it believes are generally comparable to other companies in the senior living and healthcare industries, including, but not limited to, putative class action claims from time to time regarding staffing at the Company's communities and compliance with consumer protection laws and the Americans with Disabilities Act. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, the Company maintains general liability, professional liability, and other insurance policies in amounts and with coverage and deductibles the Company believes are appropriate, based on the nature and risks of its business, historical experience, availability, and industry standards. The Company's current policies provide for deductibles for each claim and contain various exclusions from coverage. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts and for claims or portions of claims that are not covered by such policies and/or exceed the policy limits. The senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement actions, or litigation related to regulatory compliance matters. In addition, the Company is subject to various government reviews, audits, and investigations to verify compliance with Medicare and Medicaid programs and other applicable laws and regulations. The Centers for Medicare & Medicaid Services ("CMS") has engaged third-party firms to review claims data to evaluate appropriateness of billings. In addition to identifying overpayments, audit contractors can refer suspected violations to government authorities. An adverse outcome of government scrutiny may result in citations, sanctions, other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and damage to the Company’s business reputation. The Company’s costs to respond to and defend any such audits, reviews, and investigations may be significant. In June 2020, the Company and several current and former executive officers were named as defendants in a putative class action lawsuit alleging violations of the federal securities laws filed in the federal court for the Middle District of Tennessee. The lawsuit asserted that the defendants made material misstatements and omissions concerning the Company's business, operational and compliance policies, compliance with applicable regulations and statutes, and staffing practices that caused the Company's stock price to be artificially inflated between August 2016 and April 2020. The district court dismissed the lawsuit and entered judgment in favor of the defendants in September 2021, and the plaintiffs did not file an appeal. Between October 2020 and June 2021, alleged stockholders of the Company filed several stockholder derivative lawsuits in the federal courts for the Middle District of Tennessee and the District of Delaware, which was subsequently transferred to the Middle District of Tennessee. The derivative lawsuits are currently pending and assert claims on behalf of the Company against certain current and former officers and directors for alleged breaches of duties owed to the Company. The complaints incorporate substantively similar allegations to the securities lawsuit described above. 11. Stock-Based Compensation Grants of restricted stock units and stock awards under the Company's 2014 Omnibus Incentive Plan were as follows. (in thousands, except weighted average amounts) Restricted Stock Unit and Stock Award Grants Weighted Average Grant Date Fair Value Total Grant Date Fair Value Three months ended March 31, 2022 2,862 $ 5.50 $ 15,743 Three months ended June 30, 2022 26 $ 6.40 $ 166 14 12. Earnings Per Share During the three and six months ended June 30, 2022 and 2021, the Company reported consolidated net losses. As a result of the net losses reported for the periods, all unvested restricted stock, restricted stock units, and potential shares issuable under warrants and convertible senior notes were antidilutive for the periods and as such were not included in the computation of diluted weighted average shares outstanding. The following potentially outstanding shares of common stock were excluded from the computation of diluted net income (loss) per share attributable to common stockholders because including the shares would have been antidilutive. As of June 30, (in millions) 2022 2021 Restricted stock and restricted stock units 5.5 6.1 Warrants 16.3 16.3 Convertible senior notes 38.3 — Total 60.1 22.4 On July 26, 2020, the Company issued to Ventas, Inc. ("Ventas") a warrant (the "Warrant") to purchase 16.3 million shares of the Company’s common stock, $ 0.01 par value per share, at a price per share of $ 3.00 . The Warrant is exercisable at Ventas' option at any time and from time to time, in whole or in part, until December 31, 2025. The exercise price and the number of shares issuable on exercise of the Warrant are subject to certain anti-dilution adjustments, including for cash dividends, stock dividends, stock splits, reclassifications, non-cash distributions, certain repurchases of common stock, and business combination transactions. As of June 30, 2022, the maximum number of shares issuable upon conversion of convertible senior notes is 38.3 million (after giving effect to additional shares that would be issuable upon conversion in connection with the occurrence of certain corporate or other events). 13. Income Taxes The difference between the Company's effective tax rate for the three months ended June 30, 2022 and 2021 was due to the increase in the net deferred tax expense resulting from a valuation allowance recorded in excess of the benefit recorded on operational losses for the three months ended June 30, 2022. The difference between the Company's effective tax rate for the six months ended June 30, 2022 and 2021 was due to the increase in the net deferred tax benefit recognized on operational losses and an increase in the tax benefit recognized on the vesting of restricted stock units and restricted stock awards. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 20.6 million for the three months ended June 30, 2022, which was offset by an increase to the valuation allowance of $ 21.4 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 45.5 million for the six months ended June 30, 2022, which was offset by an increase to the valuation allowance of $ 44.0 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 20.8 million for the three months ended June 30, 2021, which was offset by an increase to the valuation allowance of $ 19.8 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 46.0 million for the six months ended June 30, 2021, which was offset by an increase to the valuation allowance of $ 45.3 million. The Company evaluates its deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company's valuation allowance as of June 30, 2022 and December 31, 2021 was $ 412.0 million and $ 368.0 million, respectively. The increase in the valuation allowance for the six months ended June 30, 2022 is the result of current operating losses during the six months ended June 30, 2022 and by the anticipated reversal of future tax liabilities offset by future tax deductions. The increase in the valuation allowance for the six months ended June 30, 2021 is the result of current operating losses during the six months ended June 30, 2021. The Company recorded interest charges related to its tax contingency reserve for cash tax positions for the three and six months ended June 30, 2022 and 2021 which are included in income tax expense or benefit for the period. As of June 30, 2022, tax returns for years 2018 through 2020 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination. 15 14. Supplemental Disclosure of Cash Flow Information During the period from January 1, 2021 through June 30, 2022, the Company disposed of five owned communities and the Company's triple-net lease obligations on six communities were terminated (including through the acquisition of one formerly leased community). During the six months ended June 30, 2022, the Company completed the sale of two owned communities for cash proceeds of $ 4.4 million, net of transaction costs, and recognized a net gain on sale of assets of $ 0.7 million for these sales. During the six months ended June 30, 2021, the Company completed the sale of two owned communities for cash proceeds of $ 8.5 million, net of transaction costs, and recognized a net gain on sale of assets of $ 0.5 million for these sales. Six Months Ended June 30, (in thousands) 2022 2021 Supplemental Disclosure of Cash Flow Information: Interest paid $ 92,673 $ 94,683 Income taxes paid, net of refunds $ 598 $ 2,963 Capital expenditures, net of related payables: Capital expenditures - non-development, net $ 85,012 $ 63,245 Capital expenditures - development, net 2,690 2,118 Capital expenditures - non-development - reimbursable 11,833 18,952 Trade accounts payable ( 2,684 ) ( 4,777 ) Net cash paid $ 96,851 $ 79,538 Proceeds from sale of assets, net: Prepaid expenses and other assets, net $ ( 1,264 ) $ — Assets held for sale ( 3,668 ) ( 8,040 ) Property, plant and equipment and leasehold intangibles, net — ( 568 ) Other liabilities ( 140 ) ( 5 ) Loss (gain) on sale of assets, net ( 667 ) ( 1,033 ) Net cash received $ ( 5,739 ) $ ( 9,646 ) Supplemental Schedule of Non-cash Operating, Investing, and Financing Activities: Non-cash lease transactions, net: Property, plant and equipment and leasehold intangibles, net $ 11,056 $ 2,534 Operating lease right-of-use assets 10,780 16,733 Financing lease obligations ( 6,296 ) ( 2,534 ) Operating lease obligations ( 15,540 ) ( 16,733 ) Net $ — $ — Restricted cash consists principally of deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs, escrow deposits for real estate taxes, property insurance, and capital expenditures, and debt service reserve accounts required by certain lenders under mortgage debt agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sums to the total of the same such amounts shown in the condensed consolidated statements of cash flows. (in thousands) June 30, 2022 December 31, 2021 Reconciliation of cash, cash equivalents, and restricted cash: Cash and cash equivalents $ 238,757 $ 347,031 Restricted cash 29,946 26,845 Long-term restricted cash 59,839 64,438 Total cash, cash equivalents, and restricted cash $ 328,542 $ 438,314 16 15. Segment Information As of June 30, 2022, the Company has three reportable segments: Independent Living; Assisted Living and Memory Care; and CCRCs. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment. Prior to July 1, 2021, the Company had an additional reportable segment, Health Care Services. On July 1, 2021, the Company sold 80 % of its equity in its Health Care Services segment. For periods beginning July 1, 2021, the results and financial position of its Health Care Services segment were deconsolidated from the Company's consolidated financial statements and its 20 % equity interest in the HCS Venture is accounted for under the equity method of accounting as of that date. Independent Living . The Company's Independent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors who desire to live in a residential setting that feels like home, without the efforts of ownership. The majority of the Company's independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services to accommodate their changing needs. Assisted Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily living for the Company's residents. The Company's assisted living and memory care communities include both freestanding, multi-story communities, as well as smaller, freestanding, single story communities. The Company also provides memory care services at freestanding memory care communities that are specially designed for residents with Alzheimer's disease and other dementias. CCRCs. The Company's CCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate a broad spectrum of physical ability and healthcare needs. Most of the Company's CCRCs have independent living, assisted living, memory care, and skilled nursing available on one campus. All Other. All Other includes communities operated by the Company pursuant to management agreements. Under the management agreements for these communities, the Company receives management fees as well as reimbursement of expenses it incurs on behalf of the owners. Health Care Services . The Company's former Health Care Services segment included the home health, hospice, and outpatient therapy services provided to residents of many of its communities and to seniors living outside its communities. The Health Care Services segment did not include the skilled nursing and inpatient healthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs segment. The following tables set forth selected segment financial data. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Revenue and other operating income: Independent Living (1)(2) $ 126,737 $ 118,116 $ 251,143 $ 238,262 Assisted Living and Memory Care (1)(2) 440,866 392,347 873,354 784,389 CCRCs (1)(2) 81,196 76,988 161,652 150,451 All Other 40,717 48,006 81,187 122,366 Health Care Services (1)(2) — 87,835 — 177,269 Total revenue and other operating income $ 689,516 $ 723,292 $ 1,367,336 $ 1,472,737 17 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Segment operating income: (3) Independent Living $ 38,709 $ 35,292 $ 76,393 $ 72,621 Assisted Living and Memory Care 87,588 77,062 164,451 148,495 CCRCs 8,838 8,673 18,877 16,281 All Other 3,329 4,998 6,658 13,564 Health Care Services — 3,413 — 5,816 Total segment operating income 138,464 129,438 266,379 256,777 General and administrative expense (including non-cash stock-based compensation expense) 41,752 52,400 86,878 102,343 Facility operating lease expense 41,538 43,864 83,102 88,282 Depreciation and amortization 86,623 83,591 172,307 167,482 Asset impairment 2,599 2,078 11,674 12,755 Income (loss) from operations $ ( 34,048 ) $ ( 52,495 ) $ ( 87,582 ) $ ( 114,085 ) As of (in thousands) June 30, 2022 December 31, 2021 Total assets: Independent Living (4) $ 1,310,044 $ 1,349,341 Assisted Living and Memory Care 3,551,394 3,601,144 CCRCs 681,846 693,386 Corporate and All Other 625,012 766,596 Total assets $ 6,168,296 $ 6,410,467 (1) All revenue and other operating income is earned from external third parties in the United States. (2) Includes other operating income recognized for the credits or grants pursuant to the employee retention credit and other government sources. Allocations to the applicable segment generally reflect the credits earned by the segment, the segment's receipt and acceptance of the grant, or the segment's proportional utilization of the grant. Other operating income by segment is as follows. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Other operating income: Independent Living $ 1,159 $ 111 $ 1,161 $ 1,475 Assisted Living and Memory Care 6,412 629 6,768 5,733 CCRCs 840 46 858 1,730 Health Care Services — 522 — 3,105 Total other operating income $ 8,411 $ 1,308 $ 8,787 $ 12,043 (3) Segment operating income is defined as segment revenues and other operating income less segment facility operating expenses (excluding facility depreciation and amortization) and costs incurred on behalf of managed communities. (4) The Company's Independent Living segment had a carrying amount of goodwill of $ 27.3 million as of both June 30, 2022 and December 31, 2021. 18