Brookdale Senior Living Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "believe," "project," "predict," "continue," "plan," "target," or other similar words or expressions. These forward-looking statements are based on certain assumptions and expectations, and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our assumptions or expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the impacts of the COVID-19 pandemic, including the response efforts of federal, state, and local government authorities, businesses, individuals, and us on our business, results of operations, cash flow, revenue, expenses, liquidity, and our strategic initiatives, including plans for future growth, which 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 our 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 our 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 our ability to adapt our sales and marketing efforts to meet that demand, the impact of COVID-19 on our residents’ and their families’ ability to afford our 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 our new residents, the disproportionate impact of COVID-19 on seniors generally and those residing in our communities, the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, health plan, and other expenses, greater use of contract labor and overtime due to COVID-19 and general labor market conditions, the impact of COVID-19 on our 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 our debt and lease documents, increased regulatory requirements, including the costs of unfunded, mandatory testing of residents and associates and provision of test kits to our health plan participants, increased enforcement actions resulting from COVID-19, government action that may limit our 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 our response efforts; events which adversely affect the ability of seniors to afford resident fees, including downturns in the economy, housing market, consumer confidence, or the equity markets and unemployment among resident family members; changes in reimbursement rates, methods, or timing under governmental reimbursement programs including the Medicare and Medicaid programs; the effects of senior housing construction and development, lower industry occupancy (including due to the pandemic), and increased competition; conditions of housing markets, regulatory changes, acts of nature, and the effects of climate change in geographic areas where we are concentrated; terminations of our resident agreements and vacancies in the living spaces we lease, including due to the pandemic; failure to maintain the security and functionality of our information systems, to prevent a cybersecurity attack or breach, or to comply with applicable privacy and consumer protection laws, including HIPAA; our ability to complete our capital expenditures in accordance with our plans; our ability to identify and pursue development, investment, and acquisition opportunities and our ability to successfully integrate acquisitions; competition for the acquisition of assets; our ability to complete pending or expected disposition, acquisition, or other transactions on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing, and our ability to identify and pursue any such opportunities in the future; risks related to the implementation of our strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; limits on our ability to use net operating loss carryovers to reduce future tax payments; delays in obtaining regulatory approvals; disruptions in the financial markets or decreases in the appraised values or performance of our communities that affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; our ability to generate sufficient cash flow to cover required interest, principal, and long-term lease payments and to fund our planned capital projects; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained therein), including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements and the risk of loss of our property securing leases and indebtedness due to any resulting lease terminations and foreclosure actions; the effect of our indebtedness and long-term leases on our liquidity and our ability to operate our business; increases in market interest rates that increase the costs of our debt obligations; our ability to obtain 22 additional capital on terms acceptable to us; departures of key officers and potential disruption caused by changes in management; increased competition for, or a shortage of, associates (including due to the pandemic or general labor market conditions), wage pressures resulting from increased competition, low unemployment levels, minimum wage increases and changes in overtime laws, and union activity; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us, including putative class action complaints; the cost and difficulty of complying with increasing and evolving regulation; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations; changes in, or our failure to comply with, employment-related laws and regulations; unanticipated costs to comply with legislative or regulatory developments; the risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, competition in the labor market, costs of salaries, wages, benefits, and insurance, interest rates, and tax rates; the impact of seasonal contagious illness or an outbreak of COVID-19 or other contagious disease in the markets in which we operate; actions of activist stockholders, including a proxy contest; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021 and Part II, "Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management's views as of the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements, and, except as required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or change in events, conditions, or circumstances on which any statement is based. 23 Unless otherwise specified, references to "Brookdale," "we," "us," "our," or "the Company" in this Quarterly Report on Form 10-Q mean Brookdale Senior Living Inc. together with its consolidated subsidiaries. Overview We are the nation's premier operator of senior living communities, operating and managing 672 communities in 41 states as of September 30, 2022, with the ability to serve more than 60,000 residents. We offer our residents access to a broad continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). Our goal is to be the first choice in senior living by being the nation's most trusted and effective senior living provider and employer. Our senior living communities and our comprehensive network help to provide seniors with care and services in an environment that feels like home. Our expertise in healthcare, hospitality, and real estate provides residents with opportunities to improve wellness, pursue passions, and stay connected with friends and loved ones. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to age-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents' families who are concerned with care decisions for their elderly relatives. COVID-19 Pandemic Update The COVID-19 pandemic significantly disrupted the senior living industry and our business beginning in March 2020. We expect the impact of this disruption to continue into 2023 as we continue to make progress to rebuild occupancy lost due to the pandemic. The health and wellbeing of our residents and associates has been and continues to be our highest priority. Rebuilding Occupancy. We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic while maintaining rate discipline. From March 2020 through February 2021, we lost 1,330 basis points of weighted average consolidated senior housing occupancy. From February 2021 through October 2022, we increased our weighted average consolidated senior housing occupancy by 780 basis points to 77.2%. Sequentially from the second quarter of 2022, our weighted average consolidated senior housing occupancy increased by 180 basis points to 76.4% for the third quarter of 2022. The table below sets forth our recent consolidated occupancy trend. Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Weighted average 69.6 % 70.5 % 72.5 % 73.5 % 73.4 % 74.6 % 76.4 % Quarter end 70.6 % 72.6 % 74.2 % 74.5 % 75.0 % 76.6 % 78.4 % Jan 2022 Feb 2022 Mar 2022 Apr 2022 May 2022 Jun 2022 Jul 2022 Aug 2022 Sep 2022 Oct 2022 Weighted average 73.4 % 73.3 % 73.6 % 73.9 % 74.6 % 75.2 % 75.9 % 76.4 % 76.9 % 77.2 % Month end 74.2 % 74.4 % 75.0 % 75.3 % 76.2 % 76.6 % 77.1 % 77.9 % 78.4 % 78.2 % During the three and nine months ended September 30, 2022, various communities experienced restrictions on new resident move-ins due to the pandemic, and as of October 31, 2022, all of our communities were open for new resident move-ins. We may revert to more restrictive measures at our communities, including restrictions on visitors and move-ins, if the pandemic worsens, as a result of infections at a community, as necessary to comply with regulatory requirements, or at the direction of authorities having jurisdiction. We cannot predict with reasonable certainty when our occupancy will return to pre-COVID-19 pandemic levels. Pandemic Expenses. For the three and nine months ended September 30, 2022, we recognized $3.6 million and $15.9 million, respectively, of facility operating expense for incremental direct costs to respond to the pandemic. For the three and nine months ended September 30, 2021, we recognized $7.2 million and $44.3 million, respectively, of facility operating expense for incremental direct costs to respond to the pandemic. The direct costs include those for: acquisition of additional personal protective equipment, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers' compensation, and health plan expense; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. On a cumulative basis since the beginning of fiscal 2020 through September 30, 2022, we have incurred $189.2 million 24 of pandemic related facility operating expense. Refer to "Results of Operations" below for information on non-cash impairment charges recognized as a result of the impacts of the COVID-19 pandemic. Phase 4 Provider Relief Fund Grants . During the three months ended September 30, 2022, we accepted and recognized as other operating income $61.1 million from the Phase 4 general distribution of the Public Health and Social Services Emergency Fund ("Provider Relief Fund") administered by the U.S. Department of Health and Human Services. The grant has been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. Employee Retention Credit. We were eligible to claim the employee retention credit for certain of our associates under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"). We recognized $9.9 million for the nine months ended September 30, 2021 of employee retention credits on wages paid from March 12, 2020 to December 31, 2020 within other operating income, for which we have received $4.6 million in cash as of September 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 nine months ended September 30, 2022, we recognized $4.7 million and $9.4 million, respectively, of employee retention credits on wages paid in 2021 within other operating income. We have a receivable for the remaining $14.7 million included within prepaid expenses and other current assets, net on the condensed consolidated balance sheet as of September 30, 2022. We cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on our business, results of operations, cash flow, and liquidity, and our response efforts may continue to delay or negatively impact our 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 our 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 our 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 our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents' and their families' ability to afford our 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 our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, health plan, and other expenses; greater use of contract labor and overtime due to COVID-19 and general labor market conditions; the impact of COVID-19 on our 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 our debt and lease documents; increased regulatory requirements, including the costs of unfunded, mandatory testing of residents and associates and provision of test kits to our health plan participants; increased enforcement actions resulting from COVID-19; government action that may limit our 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 our response efforts. Community Labor We continue to experience pressures associated with the intensely competitive labor environment. During 2021 and the nine months ended September 30, 2022, the pressures included increased associate turnover, difficulty in timely filling open positions, and increasing wages. Continued increased competition for, or a shortage of, nurses or other associates, including due to the COVID-19 pandemic, general labor market conditions, low levels of unemployment, or general inflationary pressures, have required and may require that we enhance our pay and benefits package to compete effectively for such associates. We have increased our recruiting efforts to fill open positions and have increased our workforce since December 31, 2021. We have reviewed wage rates in all of our markets and made adjustments, and we will monitor to remain competitive. We seek to ensure that our communities are staffed with full and part-time associates. To cover open positions, we have increased our use of more expensive contract labor and overtime. Third-party staffing agencies from which we source contract labor have increased the rates they charge which has resulted in increases in the cost of contract labor. We expect to continue to experience labor cost pressure as a result of an anticipated increase in hours worked as our occupancy levels grow and the labor conditions described above. We are working to reduce the use of premium labor. Our labor expense in our same community portfolio for the three and nine months ended September 30, 2022 increased 11.0% and 12.7% from the three and nine months ended September 30, 2021, respectively. The year-over-year increase in our same community labor expense for the nine months ended September 30, 2022 primarily resulted from our increased use of contract labor and overtime as well as merit and market wage rate adjustments. The year-over-year increase in our same community labor expense for the three months ended September 30, 2022 primarily resulted from our merit and market wage rate 25 adjustments, an increase in hours worked due to increased occupancy during the period, and an increase in the use of overtime, partially offset by a decrease in the use of contract labor. Our labor expense in our same community portfolio for the three months ended September 30, 2022 increased 1.1% sequentially from the three months ended June 30, 2022 primarily due to an increase in hours worked by associates and an additional day, which was a holiday, partially offset by decreased use of contract labor. Resident Fee Rates The rates charged at communities are highly dependent on local market conditions and the competitive environment in which the communities operate. Substantially all of our private pay senior housing residency agreements allow for adjustments to the monthly rate on 90 or fewer days' notice which enables us to seek increases in monthly rates due to inflation or other factors. Increases for level of care changes or additional services are typically allowed immediately upon notice of the change. Generally, we have increased our monthly rates, including rates for care and other services, for private pay residents on an annual basis beginning January 1 each year. We made the annual rate adjustment effective January 1, 2022 for our in-place private pay residents, which was higher than our typical annual rate adjustment and resulted in a 4.5% net increase in same community RevPOR for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The rate adjustment was higher due to increased costs associated with additional efforts to serve and care for our residents during the pandemic, the current inflationary environment, and the intensely competitive labor environment. We expect our pricing actions in 2023 to incorporate labor and inflationary cost increases resulting in an annual rate increase effective January 1, 2023 that will be higher than our typical annual rate adjustment and the adjustment effective January 1, 2022. Impacts of Hurricane Ian On September 28, 2022, Hurricane Ian made landfall in Florida. We operate 77 communities that were within the path of the storm. Under our emergency evacuation plans, we evacuated nine communities prior to landfall. All of the impacted communities returned to operation. Several communities will experience some continuing disruption as storm damage is remediated. During the three months ended September 30, 2022, we incurred $0.3 million of facility operating expenses related to hurricane response and evacuation. In addition, during the three months ended September 30, 2022, we recognized $3.8 million of impairment expense for property, plant, and equipment casualty losses sustained at communities as a result of Hurricane Ian. Based on our preliminary assessments, we expect additional facility operating expense related to the hurricane response and remediation of storm damage of approximately $8.0 million, net of expected reimbursement from our property and casualty and business interruption insurance policies, for the three months ended December 31, 2022. We estimate that we will incur an additional approximately $10.0 million of capital expenditures for property remediation, primarily during the three months ended December 31, 2022, for which we expect approximately $3.0 million of reimbursement from our property and casualty insurance policies subsequent to 2022. The foregoing estimates are preliminary estimates derived by management from the information available at this time. The actual amounts and timing of amounts may differ. Lease Amendment In October 2022, we and a lessor entered into an amendment to our existing master lease pursuant to which we continue to lease 24 communities. The amendment removed certain asset repurchase clauses and adjusted the extension option provisions. The amendment did not change the amount of required lease payments or the initial term of the lease. The leases for certain communities are accounted for as failed sale-leaseback transactions as of September 30, 2022 and we expect the amended leases to result in sale accounting for such communities and a non-cash gain on sale of assets recognized in the three months ended December 31, 2022. In addition, we expect the amended leases for such communities to be prospectively classified as operating leases subsequent to December 31, 2022, the effective date of the amendment. We expect the reclassification of such lease costs to operating lease expense will result in an approximately $22.0 million increase in cash paid for operating leases for the full year 2023 and an offsetting decrease in cash paid for financing leases. Sale of Health Care Services On July 1, 2021, we completed the sale of 80% of our equity in our Health Care Services segment to affiliates of HCA Healthcare, Inc. ("HCA Healthcare") for a purchase price of $400.0 million in cash, subject to certain adjustments set forth in the Securities Purchase Agreement (the "Purchase Agreement") dated February 24, 2021, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment (the "HCS Sale"). We received net cash proceeds of $312.6 million, including $305.8 million at closing on July 1, 2021 and $6.8 million upon completion of the post-closing net working capital adjustment in October 2021. 26 The Purchase Agreement also contained certain agreed upon indemnities for the benefit of the purchaser. The results and financial position of the Health Care Services segment were deconsolidated from our consolidated financial statements as of July 1, 2021 and our retained 20% equity interest in the venture with HCA Healthcare ("HCS Venture") is accounted for under the equity method of accounting subsequent to that date. As of July 1, 2021, we recognized a $100.0 million asset within investment in unconsolidated ventures on our consolidated balance sheet for the estimated fair value of our retained 20% noncontrolling interest in the HCS Venture. We recognized a $286.5 million gain on sale, net of transaction costs, within our consolidated statement of operations for the year ended December 31, 2021 for the HCS Sale. Refer to Note 15 to the condensed consolidated financial statements contained in "Item 1. Financial Statements” for selected financial data for the Health Care Services segment through June 30, 2021. On November 1, 2021, the HCS Venture sold certain home health, hospice, and outpatient therapy agencies in areas not served by HCA Healthcare to LHC Group Inc. Upon the completion of the sale, we received $35.0 million of cash distributions from the HCS Venture from the net sale proceeds, which decreased our investment in unconsolidated ventures. We continue to own a 20% equity interest in the remaining HCS Venture, which continues to operate home health and hospice agencies in areas served by HCA Healthcare. Results of Operations As of September 30, 2022, our total operations included 672 communities with a capacity to serve over 60,000 residents. As of that date, we owned 346 communities (31,588 units), leased 295 communities (20,570 units), and managed 31 communities (4,605 units). The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period of January 1, 2021 to September 30, 2022 affect the comparability of our results of operations. We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. • Senior housing operating results and data presented on a same community basis reflect results and data of a consistent population of communities by excluding the impact of changes in the composition of our portfolio of communities. The operating results exclude natural disaster expense and related insurance recoveries. We define our same community portfolio as communities consolidated and operational for the full period in both comparison years. Consolidated communities excluded from the same community portfolio include communities acquired or disposed of since the beginning of the prior year, communities classified as assets held for sale, certain communities planned for disposition, certain communities that have undergone or are undergoing expansion, redevelopment, and repositioning projects, and certain communities that have experienced a casualty event that significantly impacts their operations. Our management uses same community operating results and data for decision making, and we believe such results and data provide useful information to investors, because it enables comparisons of revenue, expense, and other operating measures for a consistent portfolio over time without giving effect to the impacts of communities that were not consolidated and operational for the comparison periods, communities acquired or disposed during the comparison periods (or planned for disposition), and communities with results that are or likely will be impacted by completed or in-process development-related capital expenditure projects. • RevPAR , or average monthly senior housing resident fee revenue per available unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding revenue from our former Health Care Services segment, revenue for private duty services provided to seniors living outside of our communities, and entrance fee amortization), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPAR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPAR for decision making, and we believe the measure provides useful information to investors, because the measure is an indicator of senior housing resident fee revenue performance that reflects the impact of both senior housing occupancy and rate. • RevPOR , or average monthly senior housing resident fee revenue per occupied unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding revenue from our former Health Care Services segment, revenue for private duty services provided to seniors living outside of our communities, and entrance fee amortization), divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPOR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPOR for decision making, and we believe the measure provides useful information to investors, because it reflects the average 27 amount of senior housing resident fee revenue we derive from an occupied unit per month without factoring occupancy rates. RevPOR is a significant driver of our senior housing revenue performance. • Weighted average occupancy rate reflects the percentage of units at our owned and leased communities being utilized by residents over a reporting period. We measure occupancy rates with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments, and also measure this metric both on a consolidated senior housing and a same community basis. Our management uses weighted average occupancy, and we believe the measure provides useful information to investors, because it is a significant driver of our senior housing revenue performance. This section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable measure in accordance with generally accepted accounting principles in the United States ("GAAP"). Comparison of Three Months Ended September 30, 2022 and 2021 Summary Operating Results The following table summarizes our overall operating results for the three months ended September 30, 2022 and 2021. Three Months Ended September 30, Increase (Decrease) (in thousands) 2022 2021 Amount Percent Total resident fees and management fees revenue $ 653,215 $ 603,716 $ 49,499 8.2 % Other operating income 66,759 89 66,670 NM Facility operating expense 525,510 480,423 45,087 9.4 % Net income (loss) (28,374) 174,263 (202,637) NM Adjusted EBITDA 106,851 34,582 72,269 NM The increase in total resident fees and management fees revenue was primarily attributable to a 9.9% increase in same community RevPAR, comprised of a 400 basis point increase in same community weighted average occupancy and a 4.2% increase in same community RevPOR. During the three months ended September 30, 2022 and 2021, we recognized $66.8 million and $0.1 million, respectively, of government grants and employee retention credits as other operating income based on our estimates of our satisfaction of the conditions of the grants and credits during the period, including for the three months ended September 30, 2022, $61.1 million of grants from the Phase 4 general distribution from the Provider Relief Fund. The increase in facility operating expense was primarily attributable to an 11.1% increase in same community facility operating expense, including a $33.2 million, or 11.0%, increase in our same community labor expense primarily resulting from merit and market wage rate adjustments, an increase in hours worked due to increased occupancy during the period, and an increase in the use of overtime, partially offset by a decrease in the use of contract labor. Additionally, broad inflationary pressure, higher repairs and maintenance volume, and an increase in food costs due to increased occupancy during the period contributed to the increase in our same community facility operating expense. Facility operating expense for the three months ended September 30, 2022 and 2021 includes $3.6 million and $7.2 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. The change in net income (loss) was primarily attributable to a net gain on sale of $288.2 million for the HCS Sale in the prior year period partially offset by an increase in other operating income compared to the prior year period and the net impact of the revenue and facility operating expense factors previously discussed. The increase in Adjusted EBITDA was primarily attributable to an increase in other operating income compared to the prior year period, as well as the net impact of the revenue and facility operating expense factors previously discussed. 28 Operating Results - Senior Housing Segments The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the three months ended September 30, 2022 and 2021, including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. Three Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 650,248 $ 600,095 $ 50,153 8.4 % Other operating income $ 66,759 $ 89 $ 66,670 NM Facility operating expense $ 525,510 $ 480,423 $ 45,087 9.4 % Number of communities (period end) 641 648 (7) (1.1) % Total average units 52,158 52,811 (653) (1.2) % RevPAR $ 4,150 $ 3,784 $ 366 9.7 % Occupancy rate (weighted average) 76.4 % 72.5 % 390 bps n/a RevPOR $ 5,432 $ 5,219 $ 213 4.1 % Same Community Operating Results and Data Resident fees $ 629,491 $ 573,015 $ 56,476 9.9 % Other operating income $ 64,522 $ 88 $ 64,434 NM Facility operating expense $ 505,143 $ 454,813 $ 50,330 11.1 % Number of communities 632 632 — — % Total average units 50,547 50,554 (7) — % RevPAR $ 4,151 $ 3,778 $ 373 9.9 % Occupancy rate (weighted average) 76.5 % 72.5 % 400 bps n/a RevPOR $ 5,429 $ 5,211 $ 218 4.2 % 29 Independent Living Segment The following table summarizes the operating results and data for our Independent Living segment for the three months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Three Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 128,106 $ 119,584 $ 8,522 7.1 % Other operating income $ 9,520 $ 9 $ 9,511 NM Facility operating expense $ 91,231 $ 82,860 $ 8,371 10.1 % Number of communities (period end) 68 68 — — % Total average units 12,569 12,567 2 — % RevPAR $ 3,397 $ 3,172 $ 225 7.1 % Occupancy rate (weighted average) 78.3 % 74.7 % 360 bps n/a RevPOR $ 4,337 $ 4,244 $ 93 2.2 % Same Community Operating Results and Data Resident fees $ 126,389 $ 118,100 $ 8,289 7.0 % Other operating income $ 9,276 $ 8 $ 9,268 NM Facility operating expense $ 89,948 $ 81,676 $ 8,272 10.1 % Number of communities 67 67 — — % Total average units 12,379 12,377 2 — % RevPAR $ 3,403 $ 3,181 $ 222 7.0 % Occupancy rate (weighted average) 78.2 % 74.7 % 350 bps n/a RevPOR $ 4,352 $ 4,259 $ 93 2.2 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 350 basis point increase in same community weighted average occupancy and a 2.2% increase in same community RevPOR. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's same community RevPOR was primarily the result of in-place rate increases. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $4.7 million, or 9.8%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments and an increase in the use of overtime. Additionally, broad inflationary pressure, higher repairs and maintenance volume, an increase in food costs due to increased occupancy during the period, and an increase in utilities costs due to higher usage contributed to the increase in the segment's same community facility operating expense. The segment's facility operating expense for the three months ended September 30, 2022 and 2021 includes $0.4 million and $0.9 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 30 Assisted Living and Memory Care Segment The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the three months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Three Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 442,097 $ 402,621 $ 39,476 9.8 % Other operating income $ 49,721 $ 75 $ 49,646 NM Facility operating expense $ 361,779 $ 327,372 $ 34,407 10.5 % Number of communities (period end) 554 560 (6) (1.1) % Total average units 34,398 34,893 (495) (1.4) % RevPAR $ 4,281 $ 3,845 $ 436 11.3 % Occupancy rate (weighted average) 76.2 % 71.9 % 430 bps n/a RevPOR $ 5,621 $ 5,347 $ 274 5.1 % Same Community Operating Results and Data Resident fees $ 439,395 $ 395,339 $ 44,056 11.1 % Other operating income $ 49,465 $ 76 $ 49,389 NM Facility operating expense $ 358,576 $ 320,988 $ 37,588 11.7 % Number of communities 550 550 — — % Total average units 34,203 34,202 1 — % RevPAR $ 4,282 $ 3,853 $ 429 11.1 % Occupancy rate (weighted average) 76.1 % 71.9 % 420 bps n/a RevPOR $ 5,624 $ 5,362 $ 262 4.9 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 420 basis point increase in same community weighted average occupancy and a 4.9% increase in same community RevPOR. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's same community RevPOR was primarily the result of in-place rate increases, partially offset by lower care revenue as new resident acuity returned to pre-pandemic levels. The increase in the segment's resident fees was partially offset by the disposition of six communities (478 units) since the beginning of the prior year period, which resulted in $4.9 million less in resident fees during the three months ended September 30, 2022 compared to the prior year period. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $25.0 million, or 11.5%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments, an increase in hours worked due to increased occupancy during the period, and an increase in the use of overtime, partially offset by a decrease in the use of contract labor. Additionally, broad inflationary pressure, higher repairs and maintenance volume, and an increase in food costs due to increased occupancy during the period contributed to the increase in the segment's same community facility operating expense. The increase in the segment's facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $4.1 million less in facility operating expense during the three months ended September 30, 2022 compared to the prior year period. The segment's facility operating expense for the three months ended September 30, 2022 and 2021 includes $2.5 million and $4.8 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 31 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the three months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Three Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 80,045 $ 77,890 $ 2,155 2.8 % Other operating income $ 7,518 $ 5 $ 7,513 NM Facility operating expense $ 72,500 $ 70,191 $ 2,309 3.3 % Number of communities (period end) 19 20 (1) (5.0) % Total average units 5,191 5,351 (160) (3.0) % RevPAR $ 5,105 $ 4,824 $ 281 5.8 % Occupancy rate (weighted average) 73.3 % 71.2 % 210 bps n/a RevPOR $ 6,966 $ 6,777 $ 189 2.8 % Same Community Operating Results and Data Resident fees $ 63,707 $ 59,576 $ 4,131 6.9 % Other operating income $ 5,781 $ 4 $ 5,777 NM Facility operating expense $ 56,619 $ 52,149 $ 4,470 8.6 % Number of communities 15 15 — — % Total average units 3,965 3,975 (10) (0.3) % RevPAR $ 5,356 $ 4,996 $ 360 7.2 % Occupancy rate (weighted average) 73.9 % 71.3 % 260 bps n/a RevPOR $ 7,252 $ 7,005 $ 247 3.5 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 3.5% increase in same community RevPOR and a 260 basis point increase in same community weighted average occupancy. The increase in the segment's same community RevPOR was primarily the result of in-place rate increases. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's resident fees was partially offset by the disposition of one community (120 units) since the beginning of the prior year period, which resulted in $2.3 million less in resident fees during the three months ended September 30, 2022 compared to the prior year period. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $3.5 million, or 9.7%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments, an increase in hours worked due to increased occupancy during the period, and an increase in the use of overtime, partially offset by a decrease in the use of contract labor. The increase in the segment's facility operating expense was partially offset by the disposition of one community since the beginning of the prior year period, which resulted in $2.5 million less in facility operating expense during the three months ended September 30, 2022 compared to the prior year period. The segment's facility operating expense for the three months ended September 30, 2022 and 2021 includes $0.7 million and $1.5 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 32 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the three months ended September 30, 2022 and 2021. Three Months Ended September 30, Increase (Decrease) (in thousands) 2022 2021 Amount Percent Management fees $ 2,967 $ 3,621 $ (654) (18.1) % Reimbursed costs incurred on behalf of managed communities 37,484 37,849 (365) (1.0) % Costs incurred on behalf of managed communities 37,484 37,849 (365) (1.0) % General and administrative expense 41,331 43,812 (2,481) (5.7) % Facility operating lease expense 41,317 43,226 (1,909) (4.4) % Depreciation and amortization 86,922 84,560 2,362 2.8 % Asset impairment 5,688 639 5,049 NM Interest income 2,192 286 1,906 NM Interest expense 49,873 49,361 512 1.0 % Equity in earnings (loss) of unconsolidated ventures (2,020) (1,474) (546) (37.0) % Gain (loss) on sale of assets, net (56) 288,375 (288,431) NM Other non-operating income (loss) 1,877 571 1,306 NM Benefit (provision) for income taxes 300 (15,279) 15,579 NM Management Fees. The decrease in management fees was primarily attributable to the transition of management arrangements on six net communities since the beginning of the prior year period, generally for management arrangements on interim management arrangements on formerly leased communities and certain former unconsolidated ventures in which we sold our interest. Reimbursed Costs Incurred on Behalf of Managed Communities and Costs Incurred on Behalf of Managed Communities. The decrease in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period, partially offset by an increase in reimbursed community labor costs for communities managed in both periods. General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to decreases in estimated incentive compensation costs and transaction and organizational restructuring costs. General and administrative expense includes transaction and organizational restructuring costs of $0.3 million and $0.9 million for the three months ended September 30, 2022 and 2021, respectively. Transaction costs include those directly related to acquisition, disposition, financing and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance costs. Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to expense reductions for lease incentives received for capital expenditures since the beginning of the prior year period, expense reductions subsequent to the recognition of impairment of operating lease right-of-use assets since the beginning of the prior year period, and lease termination activity since the beginning of the prior year period. Depreciation and Amortization . The increase in depreciation and amortization expense was primarily due to the completion of community renovations, apartment upgrades, and other major building infrastructure projects for leased communities since the beginning of the prior year period. Asset Impairment. During the three months ended September 30, 2022, we recorded $5.7 million of non-cash impairment charges, primarily for property damage sustained at certain communities, including property damage sustained from Hurricane Ian in September 2022. 33 Interest Expense . The increase in interest expense was primarily due to an increase in interest expense on long-term debt as a result of increases in variable interest rates, partially offset by increases in the fair value of interest rate derivatives, reflecting the impact of increases in forward interest rates. Based upon our estimates of variable interest rates we expect debt interest expense to increase approximately $17.0 million for the full year 2022 compared to 2021, which we expect will be partially offset by an approximately $4.0 million increase in interest income earned on our cash, cash equivalents, and marketable securities. Gain (Loss) on Sale of Assets, net . The decrease in gain on sale of assets is due to the $288.2 million gain recognized for the HCS Sale in the prior year period. Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the three months ended September 30, 2022 and 2021 was primarily due to the HCS Sale in the three months ended September 30, 2021. We recorded an aggregate deferred federal, state, and local tax benefit of $7.3 million, which was partially offset by an increase in the valuation allowance of $6.7 million in the three months ended September 30, 2022. We recorded an aggregate deferred federal, state, and local tax expense of $81.0 million for the three months ended September 30, 2021, which was partially offset by a reduction to the valuation allowance of $71.8 million. We evaluate our 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. Our valuation allowance as of September 30, 2022 and December 31, 2021 was $418.7 million and $368.0 million, respectively. Comparison of Nine Months Ended September 30, 2022 and 2021 Summary Operating Results The following table summarizes our overall operating results for the nine months ended September 30, 2022 and 2021. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2022 2021 Amount Percent Total resident fees and management fees revenue $ 1,937,235 $ 1,955,608 $ (18,373) (0.9) % Other operating income 75,546 12,132 63,414 NM Facility operating expense 1,551,938 1,587,581 (35,643) (2.2) % Net income (loss) (212,689) (17,644) (195,045) NM Adjusted EBITDA 194,741 102,627 92,114 89.8 % The decrease in total resident fees and management fees revenue was primarily attributable to deconsolidation of results of the Health Care Services segment effective July 1, 2021, which resulted in a decrease of $174.2 million of resident fees compared to the prior year period. The decrease in resident fees was partially offset by a 10.4% increase in same community RevPAR, comprised of a 400 basis point increase in same community weighted average occupancy and a 4.5% increase in same community RevPOR. Management fee revenue decreased $7.6 million primarily due to the transition of management agreements on 44 net communities since the beginning of the prior year period. During the nine months ended September 30, 2022 and 2021, we recognized $75.5 million and $12.1 million, respectively, of government grants and employee retention credits as other operating income based on our estimates of our satisfaction of the conditions of the grants and credits during the period, including for the nine months ended September 30, 2022, $61.1 million of grants from the Phase 4 general distribution from the Provider Relief Fund. The decrease in facility operating expense was primarily attributable to deconsolidation of results of the Health Care Services segment effective July 1, 2021, which resulted in a $171.5 million decrease in facility operating expenses. The decrease in facility operating expense was partially offset by an 11.2% increase in same community facility operating expense, including a $112.4 million, or 12.7%, increase in our same community labor expense primarily resulting from an increase in the use of contract labor and overtime as well as merit and market wage rate adjustments, partially offset by a decrease in incremental direct labor costs to respond to the COVID-19 pandemic. Additionally, broad inflationary pressure, higher repairs and maintenance volume, and an increase in food costs due to increased occupancy during the period contributed to the increase in 34 our same community facility operating expense. Facility operating expense for the nine months ended September 30, 2022 and 2021 includes $15.9 million and $44.3 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. The increase in net loss was primarily attributable to the a net gain on sale of $288.2 million for the HCS Sale in the prior year period and a decrease in equity in earnings of unconsolidated ventures compared to the prior year period. These changes were partially offset by an increase in other operating income compared to the prior year period, the net impact of the revenue and facility operating expense factors previously discussed, and a decrease in general and administrative expense compared to the prior year period. The increase in Adjusted EBITDA was primarily attributable to an increase in other operating income compared to the prior year period, the net impact of the revenue and facility operating expense factors previously discussed, and a decrease in general and administrative expense compared to the prior year period as a result of the HCS Sale and a decrease in estimated incentive compensation costs. Operating Results - Senior Housing Segments The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the nine months ended September 30, 2022 and 2021 including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 1,927,610 $ 1,764,259 $ 163,351 9.3 % Other operating income $ 75,546 $ 9,027 $ 66,519 NM Facility operating expense $ 1,551,938 $ 1,416,128 $ 135,810 9.6 % Number of communities (period end) 641 648 (7) (1.1) % Total average units 52,371 52,898 (527) (1.0) % RevPAR $ 4,084 $ 3,702 $ 382 10.3 % Occupancy rate (weighted average) 74.8 % 70.9 % 390 bps n/a RevPOR $ 5,461 $ 5,225 $ 236 4.5 % Same Community Operating Results and Data Resident fees $ 1,858,440 $ 1,683,690 $ 174,750 10.4 % Other operating income $ 72,892 $ 8,187 $ 64,705 NM Facility operating expense $ 1,488,359 $ 1,338,448 $ 149,911 11.2 % Number of communities 632 632 — — % Total average units 50,555 50,554 1 — % RevPAR $ 4,085 $ 3,701 $ 384 10.4 % Occupancy rate (weighted average) 74.8 % 70.8 % 400 bps n/a RevPOR $ 5,458 $ 5,224 $ 234 4.5 % 35 Independent Living Segment The following table summarizes the operating results and data for our Independent Living segment for the nine months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 378,088 $ 356,371 $ 21,717 6.1 % Other operating income $ 10,681 $ 1,484 $ 9,197 NM Facility operating expense $ 265,981 $ 248,501 $ 17,480 7.0 % Number of communities (period end) 68 68 — — % Total average units 12,569 12,553 16 0.1 % RevPAR $ 3,342 $ 3,154 $ 188 6.0 % Occupancy rate (weighted average) 76.3 % 73.9 % 240 bps n/a RevPOR $ 4,379 $ 4,266 $ 113 2.6 % Same Community Operating Results and Data Resident fees $ 373,125 $ 352,387 $ 20,738 5.9 % Other operating income $ 10,424 $ 1,464 $ 8,960 NM Facility operating expense $ 262,512 $ 245,316 $ 17,196 7.0 % Number of communities 67 67 — — % Total average units 12,379 12,375 4 — % RevPAR $ 3,349 $ 3,164 $ 185 5.8 % Occupancy rate (weighted average) 76.3 % 73.8 % 250 bps n/a RevPOR $ 4,392 $ 4,285 $ 107 2.5 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 250 basis point increase in same community weighted average occupancy and a 2.5% increase in same community RevPOR. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $9.6 million, or 6.5%, increase in the segment's same community labor expense primarily resulting from an increase in the use of contract labor and overtime as well as merit and market wage rate adjustments, partially offset by a decrease in incremental direct labor costs to respond to the COVID-19 pandemic. Additionally, broad inflationary pressure, higher repairs and maintenance volume, an increase in food costs due to increased occupancy during the period, and an increase in utilities costs due to higher usage contributed to the increase in the segment's same community facility operating expense. The segment's facility operating expense for the nine months ended September 30, 2022 and 2021 includes $2.0 million and $5.4 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 36 Assisted Living and Memory Care Segment The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the nine months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 1,308,683 $ 1,181,277 $ 127,406 10.8 % Other operating income $ 56,489 $ 5,808 $ 50,681 NM Facility operating expense $ 1,070,682 $ 963,266 $ 107,416 11.2 % Number of communities (period end) 554 560 (6) (1.1) % Total average units 34,604 35,007 (403) (1.2) % RevPAR $ 4,200 $ 3,748 $ 452 12.1 % Occupancy rate (weighted average) 74.5 % 69.9 % 460 bps n/a RevPOR $ 5,640 $ 5,363 $ 277 5.2 % Same Community Operating Results and Data Resident fees $ 1,293,876 $ 1,157,606 $ 136,270 11.8 % Other operating income $ 56,109 $ 5,596 $ 50,513 NM Facility operating expense $ 1,057,330 $ 939,911 $ 117,419 12.5 % Number of communities 550 550 — — % Total average units 34,204 34,204 — — % RevPAR $ 4,203 $ 3,760 $ 443 11.8 % Occupancy rate (weighted average) 74.4 % 69.9 % 450 bps n/a RevPOR $ 5,647 $ 5,382 $ 265 4.9 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 450 basis point increase in same community weighted average occupancy and a 4.9% increase in same community RevPOR. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases, partially offset by lower care revenue as new resident acuity returned to pre-pandemic levels. The increase in the segment's resident fees was partially offset by the disposition of nine communities (695 units) since the beginning of the prior year period, which resulted in $10.3 million less in resident fees during the nine months ended September 30, 2022 compared to the prior year period. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $90.4 million, or 14.3%, increase in the segment's same community labor expense primarily resulting from an increase in the use of contract labor and overtime as well as merit and market wage rate adjustments, partially offset by a decrease in incremental direct labor costs to respond to the COVID-19 pandemic. Additionally, broad inflationary pressure, higher repairs and maintenance volume, and an increase in food costs due to increased occupancy during the period contributed to the increase in the segment's same community facility operating expense. The increase in the segment's facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $9.7 million less in facility operating expense during the nine months ended September 30, 2022 compared to the prior year period. The segment's facility operating expense for the nine months ended September 30, 2022 and 2021 includes $11.4 million and $29.8 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 37 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the nine months ended September 30, 2022 and 2021, including operating results and data on a same community basis. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2022 2021 Amount Percent Resident fees $ 240,839 $ 226,611 $ 14,228 6.3 % Other operating income $ 8,376 $ 1,735 $ 6,641 NM Facility operating expense $ 215,275 $ 204,361 $ 10,914 5.3 % Number of communities (period end) 19 20 (1) (5.0) % Total average units 5,198 5,338 (140) (2.6) % RevPAR $ 5,109 $ 4,689 $ 420 9.0 % Occupancy rate (weighted average) 73.3 % 70.0 % 330 bps n/a RevPOR $ 6,971 $ 6,702 $ 269 4.0 % Same Community Operating Results and Data Resident fees $ 191,439 $ 173,697 $ 17,742 10.2 % Other operating income $ 6,359 $ 1,127 $ 5,232 NM Facility operating expense $ 168,517 $ 153,221 $ 15,296 10.0 % Number of communities 15 15 — — % Total average units 3,972 3,975 (3) (0.1) % RevPAR $ 5,356 $ 4,855 $ 501 10.3 % Occupancy rate (weighted average) 73.8 % 69.8 % 400 bps n/a RevPOR $ 7,255 $ 6,955 $ 300 4.3 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 400 basis point increase in same community weighted average occupancy and a 4.3% increase in same community RevPOR. The increase in the segment's same community weighted average occupancy primarily reflects the impact of our execution on key initiatives to rebuild occupancy lost due to the pandemic. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases and an occupancy mix shift to more skilled nursing services within the segment. The increase in the segment's resident fees was partially offset by the disposition of one community (120 units) since the beginning of the prior year period, which resulted in $6.5 million less in resident fees during the nine months ended September 30, 2022 compared to the prior year period. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $12.4 million, or 11.9%, increase in the segment's same community labor expense primarily resulting from an increase in the use of contract labor and overtime as well as merit and market wage rate adjustments. The increase in the segment's facility operating expense was partially offset by the disposition of one community since the beginning of the prior year period, which resulted in $7.1 million less in facility operating expense during the nine months ended September 30, 2022 compared to the prior year period. The segment's facility operating expense for the nine months ended September 30, 2022 and 2021 includes $2.5 million and $6.9 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 38 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the nine months ended September 30, 2022 and 2021. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2022 2021 Amount Percent Management fees $ 9,625 $ 17,185 $ (7,560) (44.0) % Reimbursed costs incurred on behalf of managed communities 112,013 146,651 (34,638) (23.6) % Costs incurred on behalf of managed communities 112,013 146,651 (34,638) (23.6) % General and administrative expense 128,209 146,155 (17,946) (12.3) % Facility operating lease expense 124,419 131,508 (7,089) (5.4) % Depreciation and amortization 259,229 252,042 7,187 2.9 % Asset impairment 17,362 13,394 3,968 29.6 % Interest income 3,065 1,048 2,017 192.5 % Interest expense 141,461 147,025 (5,564) (3.8) % Equity in earnings (loss) of unconsolidated ventures (9,353) 11,941 (21,294) NM Gain (loss) on sale of assets, net 611 289,408 (288,797) (99.8) % Other non-operating income (loss) 1,739 5,163 (3,424) (66.3) % Benefit (provision) for income taxes 1,086 (15,239) 16,325 NM Management Fees. The decrease in management fees was primarily attributable to the transition of management arrangements on 44 net communities since the beginning of the prior year period, generally for management arrangements on certain former unconsolidated ventures in which we sold our interest and interim management arrangements on formerly leased communities. Reimbursed Costs Incurred on Behalf of Managed Communities and Costs Incurred on Behalf of Managed Communities. The decrease in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period, partially offset by an increase in reimbursed community labor costs for communities managed in both periods. General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to decreases in compensation costs as a result of reductions in our corporate headcount related to the HCS Sale, estimated incentive compensation costs, transaction and organizational restructuring costs, and non-cash stock-based compensation expense. General and administrative expense includes transaction and organizational restructuring costs of $0.9 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively. Transaction costs include those directly related to acquisition, disposition, financing and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance costs. Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to expense reductions for lease incentives received for capital expenditures since the beginning of the prior year period, expense reductions subsequent to the recognition of impairment of operating lease right-of-use assets since the beginning of the prior year period, and lease termination activity since the beginning of the prior year period. Depreciation and Amortization . The increase in depreciation and amortization expense was primarily due to the completion of community renovations, apartment upgrades, and other major building infrastructure projects for leased communities since the beginning of the prior year period. Asset Impairment. During the nine months ended September 30, 2022 and 2021, we recorded $17.4 million and $13.4 million, respectively, of non-cash impairment charges, primarily for certain leased communities with decreased occupancy and future cash flow estimates as a result of the continuing impacts of the COVID-19 pandemic. 39 Interest Expense. The decrease in interest expense was primarily due to increases in the fair value of interest rate derivatives, reflecting the impact of increases in forward interest rates, partially offset by an increase in interest expense on long-term debt as a result of increases in variable interest rates. Based upon our estimates of variable interest rates we expect debt interest expense to increase approximately $17.0 million for the full year 2022 compared to 2021, which we expect will be partially offset by an approximately $4.0 million increase in interest income earned on our cash, cash equivalents, and marketable securities. Equity in Earnings (Loss) of Unconsolidated Ventures. The change in equity in earnings (loss) of unconsolidated ventures was primarily due to the gain on sale of assets recognized by our unconsolidated entrance fee venture for the sale of the two remaining entry fee CCRCs during the prior year period. The equity in loss of unconsolidated ventures for the current year period was primarily for our share of the operating results of the new HCS Venture, including the impact of organizational restructuring costs for adjustments to its operational structure. Gain (Loss) on Sale of Assets, net . The decrease in gain on sale of assets is due to the $288.2 million gain recognized for the HCS Sale in the prior year period. Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the nine months ended September 30, 2022 and 2021 was due to the HCS Sale in the nine months ended September 30, 2021. We recorded an aggregate deferred federal, state, and local tax benefit of $52.8 million, which was partially offset by an increase in the valuation allowance of $50.7 million in the nine months ended September 30, 2022. We recorded an aggregate deferred federal, state, and local tax expense of $35.0 million for the nine months ended September 30, 2021, which was partially offset by a reduction to the valuation allowance of $26.5 million. The deferred income tax expense for the nine months ended September 30, 2021 included $104.3 million as a result of the gain on the HCS Sale, offset by a benefit of $69.3 million as a result of operating losses (exclusive of the HCS Sale). Liquidity and Capital Resources This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measure. Liquidity The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the condensed consolidated statements of cash flows, and our Adjusted Free Cash Flow. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2022 2021 Amount Percent Net cash provided by (used in) operating activities $ 51,843 $ (13,247) $ 65,090 NM Net cash provided by (used in) investing activities (57,493) 201,729 (259,222) NM Net cash provided by (used in) financing activities (37,847) (75,731) (37,884) (50.0) % Net increase (decrease) in cash, cash equivalents, and restricted cash (43,497) 112,751 (156,248) NM Cash, cash equivalents, and restricted cash at beginning of period 438,314 465,148 (26,834) (5.8) % Cash, cash equivalents, and restricted cash at end of period $ 394,817 $ 577,899 $ (183,082) (31.7) % Adjusted Free Cash Flow $ (97,827) $ (147,991) $ 50,164 33.9 % The change in net cash provided by (used in) operating activities was attributable primarily to a $64.8 million increase in government grants and credits received, an increase in same community revenue, and a decrease in general and administrative expense compared to the prior year period. These changes were partially offset by an increase in same community facility operating expense and a decrease in lessor reimbursements for capital expenditures for operating leases compared to the prior year period. 40 The change in net cash provided by (used in) investing activities was primarily attributable to $305.8 million of net proceeds from the HCS Sale received in the prior year period, a $24.8 million increase in cash paid for capital expenditures compared to the prior year period, and $6.0 million of cash paid for the acquisition of a previously leased community in the current year period. These changes were partially offset by a $60.8 million increase in proceeds from sales and maturities of marketable securities and a $17.7 million decrease in purchases of marketable securities compared to the prior year period. The decrease in net cash used in financing activities was primarily attributable to a $31.9 million decrease in repayment of debt and financing lease obligations and a $6.9 million increase in debt proceeds compared to the prior year period. The change in Adjusted Free Cash Flow was primarily attributable to a $64.8 million increase in government grants and credits received, an increase in same community revenue, and a decrease in general and administrative expense compared to the prior year period. These changes were partially offset by an increase in same community facility operating expense compared to the prior year period and a $37.4 million increase in non-development capital expenditures, net. Our principal sources of liquidity have historically been from: • cash balances on hand, cash equivalents, and marketable securities; • cash flows from operations; • proceeds from our credit facilities; • funds generated through unconsolidated venture arrangements; • proceeds from mortgage financing or refinancing of various assets; • funds raised in the debt or equity markets; and • proceeds from the disposition of assets. Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. We also have received pandemic-related government relief in the form of cash grants and employee retention credits, and we have elected to utilize the pandemic-related payroll tax deferral program. Our liquidity requirements have historically arisen from: • working capital; • operating costs such as labor costs, severance costs, general and administrative expense, and supply costs; • debt, interest, and lease payments; • acquisition consideration, lease termination and restructuring costs, and transaction and integration costs; • capital expenditures and improvements, including the expansion, repositioning, redeveloping, and major renovation of our communities and the development of new communities; • cash collateral required to be posted in connection with our financial instruments and insurance programs; • purchases of common stock under our share repurchase authorizations; • other corporate initiatives (including integration, information systems, branding, and other strategic projects); and • prior to 2009, dividend payments. Over the near-term, we expect that our liquidity requirements will primarily arise from: • working capital; • operating costs such as labor costs, general and administrative expense, and supply costs, including those related to Hurricane Ian; • debt, interest, and lease payments; • payment of deferred payroll taxes under the CARES Act; • acquisition consideration; • transaction costs and investment in our healthcare and wellness initiatives; • capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our existing communities, and the remediation or replacement of assets as a result of casualty losses; • cash collateral required to be posted in connection with our financial instruments and insurance programs; and • other corporate initiatives (including information systems and other strategic projects). We are highly leveraged and have significant debt and lease obligations. As of September 30, 2022, we have three principal corporate-level debt obligations and credit facilities: • $230.0 million principal amount of 2.00% convertible senior notes due 2026. 41 • $80.0 million secured credit facility maturing January 2024, under which $72.6 million of letters of credit and no cash borrowings have been issued as of September 30, 2022. • Separate secured letter of credit facility providing for up to $15.0 million of letters of credit as of September 30, 2022, under which $13.9 million had been issued as of that date. As of September 30, 2022, we had $3.8 billion of debt outstanding, at a weighted average interest rate of 4.49%. As of such date, 93.9%, or $3.6 billion, of our total debt obligations represented non-recourse property-level mortgage financings. As of September 30, 2022, 61.9%, or $2.4 billion, of our long-term debt had a weighted average fixed interest rate of 3.94%. We are subject to market risks from changes in interest rates charged on our credit facilities and other variable rate indebtedness. As of September 30, 2022, 91% of our $1.5 billion of outstanding variable rate debt is indexed to the one-month London Interbank Offer Rate ("LIBOR") plus a weighted average margin of 233 basis points and 9% of our outstanding variable rate debt is indexed to the one-month Secured Overnight Financing Rate ("SOFR") plus a weighted average margin of 223 basis points. As of September 30, 2022, $1.3 billion, or 91%, of our variable rate debt is subject to interest rate cap agreements, and $128.7 million of our variable rate debt is not subject to any interest rate cap agreements. For our LIBOR and SOFR interest rate cap agreements as of September 30, 2022, the weighted average fixed cap rate is 4.39%, and the weighted average remaining term is 1.4 years. Many of our variable rate debt instruments include provisions that obligate us to acquire additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The costs of acquiring additional interest rate cap agreements may offset the benefits of our existing interest rate cap agreements. As of September 30, 2022, we had $1.3 billion of operating and financing lease obligations. For the twelve months ending September 30, 2023, we will be required to make approximatel y $279.1 million of cash lease payments in connection with our existing operating and financing leases. Total liquidity of $395.6 million as of September 30, 2022 included $299.2 million of unrestricted cash and cash equivalents (excluding restricted cash of $95.6 million), $89.5 million of marketable securities, and $6.9 million of availability on our secured credit facility. Total liquidity as of September 30, 2022 decreased $141.3 million from total liquidity of $536.8 million as of December 31, 2021. The decrease was primarily attributable to negative $97.8 million of Adjusted Free Cash Flow and $28.3 million of payments of mortgage debt. On October 13, 2022, we obtained $220.0 million of debt secured by first priority mortgages on 24 communities. The loan bears interest at a variable rate equal to the one-month SOFR plus a margin of 245 basis points, and is interest only for the first three years. The debt matures in October 2025 with two one-year renewal options, exercisable subject to certain performance criteria. The debt documents contain a requirement for us to maintain liquidity of at least $130.0 million and 25% of the loan amount is subject to a guaranty by us. The proceeds from the financing were primarily utilized to repay $199.6 million of outstanding mortgage debt maturing in 2023 and to purchase a SOFR interest rate swap instrument for $6.1 million. The interest rate swap instrument has a $220.0 million notional amount, a fixed interest rate of 3.0%, and a term of eighteen months. As of September 30, 2022, our current liabilities exceeded current assets by $75.6 million. Included in our current liabilities is $182.3 million of the current portion of operating and financing lease obligations, for which the associated right-of-use assets are excluded from current assets on our condensed consolidated balance sheets. We currently estimate our historical principal sources of liquidity, primarily our cash flows from operations, together with cash balances on hand, cash equivalents, and marketable securities will be sufficient to fund our liquidity needs for at least the next 12 months. We continue to seek opportunities to preserve and enhance our liquidity, including through increasing our RevPAR, maintaining expense discipline, continuing to refinance maturing debt, continuing to evaluate our capital structure and the state of debt and equity markets, and monetizing non-strategic or underperforming owned assets. There is no assurance that financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in monetizing certain assets. Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level of capital expenditures, general economic conditions, and the cost of capital, as well as other factors described in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 15, 2022. The amount of mortgage financing available for our communities is generally dependent on their appraised values and performance. In addition, our inability to satisfy underwriting criteria for individual communities may limit our access to our historical lending sources for such communities, including Fannie Mae and Freddie Mac. Due to lower operating performance of our communities, generally, resulting from the COVID-19 pandemic, during 2021 and 2022 we sought and obtained non-agency mortgage financings to partially refinance maturing Freddie Mac and Fannie Mae indebtedness. We have completed the refinancing of substantially all of our debt maturities due in 2022 and 2023. Our inability to obtain refinancing proceeds sufficient to cover 2024 and later maturing indebtedness could adversely impact our liquidity, and may cause us to seek additional alternative sources of financing, which may be less attractive or unavailable. Shortfalls in cash flows from estimated operating results or other principal sources of liquidity may have an adverse impact on our ability to fund our planned 42 capital expenditures, or to pursue any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or to fund investments to support our strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us. Capital Expenditures Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence and for unit turnovers over $500 per unit) and community renovations, apartment upgrades, and other major building infrastructure projects. Corporate capital expenditures include those for information technology systems and equipment, the expansion of our support platform and the remediation or replacement of assets as a result of casualty losses. Development capital expenditures include community expansions, major community redevelopment and repositioning projects, and the development of new communities. With our development capital expenditures program, we intend to expand, renovate, redevelop, and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These development projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications. The following table summarizes our capital expenditures for the nine months ended September 30, 2022 for our consolidated business. (in millions) Community-level capital expenditures, net (1) $ 109.6 Corporate capital expenditures, net 19.2 Non-development capital expenditures, net (2) 128.8 Development capital expenditures, net 4.4 Total capital expenditures, net $ 133.2 (1) Reflects the amount invested, net of lessor reimbursements of $18.9 million. (2) Amount is included in Adjusted Free Cash Flow. In the aggregate, we expect our full-year 2022 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $170.0 million, including approximately $10.0 million of capital expenditures for property remediation resulting from the impact of Hurricane Ian based on our preliminary assessments. The foregoing amounts exclude expected reimbursement subsequent to 2022 from our property and casualty insurance policies of capital expenditures resulting from the impact of Hurricane Ian. In addition, we expect our full-year 2022 development capital expenditures to be approximately $10.0 million, net of anticipated lessor reimbursements, and such projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities. We anticipate that our 2022 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, and reimbursements from lessors. Funding our planned capital expenditures, pursuing any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or funding investments to support our strategy may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences, or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon our plans. 43 Credit Facilities On December 11, 2020, we entered into a revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of up to $80.0 million which can be drawn in cash or as letters of credit. The agreement matures on January 15, 2024. Amounts drawn under the facility will bear interest at 30-day LIBOR plus an applicable margin which was 2.75% as of September 30, 2022. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of September 30, 2022. The revolving credit facility is currently secured by first priority mortgages and negative pledges on certain of our communities. Available capacity under the facility will vary from time to time based upon borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and the variable interest rate of the credit facility. As of September 30, 2022, $72.6 million of letters of credit and no cash borrowings were outstanding under our $80.0 million secured credit facility and the facility had $6.9 million of availability. We also had a separate secured letter of credit facility providing up to $15.0 million of letters of credit as of September 30, 2022 under which $13.9 million had been issued as of that date. Long-Term Leases As of September 30, 2022, we operated 295 communities under long-term leases (230 operating leases and 65 financing leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. We typically guarantee the performance and lease payment obligations of our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, 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 leased property revenue. Approximatel y 89% of our community lease payments are subject to a weighted average maximum annual increase of 2.7% for community leases subject to fixed annual escalators or variable annual escalators based on the consumer price index subject to a cap. The remaining community lease payments are subject to variable annual escalators primarily based upon the change in the consumer price index. An additional 1% increase in the consumer price index would have resulted in additional cash lease payments of approximately $0.2 million for the twelve months ended September 30, 2022. We are responsible for all operating costs, including repairs, property taxes, and insurance. The lease terms 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 us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios. Our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met. Certain of our master leases contain radius restrictions, which limit our ability to own, develop, or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand, develop, or acquire senior housing communities and operating companies. For the three and nine months ended September 30, 2022, our cash lease payments for our operating leases were $51.7 million and $154.5 million, respectively, and for our financing leases were $17.4 million and $52.6 million, respectively. For the twelve months ending September 30, 2023, we will be required to make $279.1 million of cash lease payments in connection with our existing operating and financing leases. Debt and Lease Covenants Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service and lease coverage ratios, and requiring us not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. Net worth is generally calculated as stockholders' equity as calculated in accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale- 44 leaseback transactions and deferred entrance fee revenue. The debt service and lease coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or lease payment. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our 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). Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities, and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default. As of September 30, 2022, we are in compliance with the financial covenants of our debt agreements and long-term leases. Non-GAAP Financial Measures This Quarterly Report on Form 10-Q contains the financial measures Adjusted EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with GAAP. Presentations of these non-GAAP financial measures are intended to aid investors in better understanding the factors and trends affecting our performance and liquidity. However, investors should not consider these non-GAAP financial measures as a substitute for financial measures determined in accordance with GAAP, including net income (loss), income (loss) from operations, or net cash provided by (used in) operating activities. We caution investors that amounts presented in accordance with our definitions of these non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies calculate non-GAAP measures in the same manner. We urge investors to review the following reconciliations of these non-GAAP financial measures from the most comparable financial measures determined in accordance with GAAP. Adjusted EBITDA Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) excluding: benefit/provision for income taxes, non-operating income/expense items, and depreciation and amortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction, or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges, gain/loss on facility operating lease termination, operating lease expense adjustment, non-cash stock-based compensation expense, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance. We believe that presentation of Adjusted EBITDA as a performance measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day operating decisions; (ii) it provides an assessment of operational factors that management can impact in the short-term, namely revenues and the controllable cost structure of the organization, by eliminating items related to our financing and capital structure and other items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods; and (iii) we believe that this measure is used by research analysts and investors to evaluate our operating results and to value companies in our industry. Adjusted EBITDA has material limitations as a performance measure, including: (i) excluded interest and income tax are necessary to operate our business under our current financing and capital structure; (ii) excluded depreciation, amortization, and impairment charges may represent the wear and tear and/or reduction in value of our communities, goodwill, and other assets 45 and may be indicative of future needs for capital expenditures; and (iii) we may incur income/expense similar to those for which adjustments are made, such as gain/loss on sale of assets, facility operating lease termination, or debt modification and extinguishment, non-cash stock-based compensation expense, and transaction and other costs, and such income/expense may significantly affect our operating results. The table below reconciles Adjusted EBITDA from net income (loss). Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net income (loss) $ (28,374) $ 174,263 $ (212,689) $ (17,644) Provision (benefit) for income taxes (300) 15,279 (1,086) 15,239 Equity in (earnings) loss of unconsolidated ventures 2,020 1,474 9,353 (11,941) Loss (gain) on sale of assets, net 56 (288,375) (611) (289,408) Other non-operating (income) loss (1,877) (571) (1,739) (5,163) Interest expense 49,873 49,361 141,461 147,025 Interest income (2,192) (286) (3,065) (1,048) Income (loss) from operations 19,206 (48,855) (68,376) (162,940) Depreciation and amortization 86,922 84,560 259,229 252,042 Asset impairment 5,688 639 17,362 13,394 Operating lease expense adjustment (8,714) (6,273) (25,329) (16,263) Non-cash stock-based compensation expense 3,403 3,568 10,907 12,878 Transaction and organizational restructuring costs 346 943 948 3,516 Adjusted EBITDA (1) $ 106,851 $ 34,582 $ 194,741 $ 102,627 (1) Adjusted EBITDA includes a $66.8 million and $75.5 million benefit for the three and nine months ended September 30, 2022, respectively, and a $0.1 million and $12.1 million benefit for the three and nine months ended September 30, 2021, respectively, of government grants and credits recognized in other operating income. Adjusted Free Cash Flow Adjusted Free Cash Flow is a non-GAAP liquidity measure that we define as net cash provided by (used in) operating activities before: distributions from unconsolidated ventures from cumulative share of net earnings, changes in prepaid insurance premiums financed with notes payable, changes in operating lease assets and liabilities for lease termination, cash paid/received for gain/loss on facility operating lease termination, and lessor capital expenditure reimbursements under operating leases; plus: property insurance proceeds and proceeds from refundable entrance fees, net of refunds; less: non-development capital expenditures and payment of financing lease obligations. Non-development capital expenditures are comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades, and other major building infrastructure projects for our communities and is presented net of lessor reimbursements. Non-development capital expenditures do not include capital expenditures for: community expansions, major community redevelopment and repositioning projects, and the development of new communities. We believe that presentation of Adjusted Free Cash Flow as a liquidity measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective sources of operating liquidity, and to review our ability to service our outstanding indebtedness, pay dividends to stockholders, engage in share repurchases, and make capital expenditures, including development capital expenditures; and (ii) it provides an indicator to management to determine if adjustments to current spending decisions are needed. Adjusted Free Cash Flow has material limitations as a liquidity measure, including: (i) it does not represent cash available for dividends, share repurchases, or discretionary expenditures since certain non-discretionary expenditures, including mandatory debt principal payments, are not reflected in this measure; (ii) the cash portion of non-recurring charges related to gain/loss on facility lease termination generally represent charges/gains that may significantly affect our liquidity; and (iii) the impact of timing of cash expenditures, including the timing of non-development capital expenditures, limits the usefulness of the measure 46 for short-term comparisons. Additionally, Adjusted Free Cash Flow excludes cash used to purchase interest rate cap instruments, as well as any cash provided by settlements of interest rate cap instruments. The table below reconciles Adjusted Free Cash Flow from net cash provided by (used in) operating activities. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net cash provided by (used in) operating activities $ 63,521 $ 7,200 $ 51,843 $ (13,247) Net cash provided by (used in) investing activities 22,508 203,974 (57,493) 201,729 Net cash provided by (used in) financing activities (19,754) (19,177) (37,847) (75,731) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 66,275 $ 191,997 $ (43,497) $ 112,751 Net cash provided by (used in) operating activities $ 63,521 $ 7,200 $ 51,843 $ (13,247) Distributions from unconsolidated ventures from cumulative share of net earnings — (836) (561) (6,191) Changes in prepaid insurance premiums financed with notes payable (5,700) (4,151) 5,552 4,634 Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases (4,367) (11,551) (9,224) (27,057) Non-development capital expenditures, net (43,819) (28,193) (128,831) (91,438) Payment of financing lease obligations (5,506) (5,039) (16,606) (14,692) Adjusted Free Cash Flow (1) $ 4,129 $ (42,570) $ (97,827) $ (147,991) (1) Adjusted Free Cash Flow includes: • $62.8 million and $68.1 million benefit for the three and nine months ended September 30, 2022, respectively, and $1.1 million and $3.3 million benefit for the three and nine months ended September 30, 2021, respectively, from government grants and credits received. • $3.1 million recoupment for the nine months ended September 30, 2022, of accelerated/advanced Medicare payments, of which none were recouped during the three months ended September 30, 2022, and $3.5 million and $17.8 million recoupment for the three and nine months ended September 30, 2021, respectively, of accelerated/advanced Medicare payments. • $0.3 million and $0.9 million for the three and nine months ended September 30, 2022, respectively, and $0.9 million and $3.5 million for the three and nine months ended September 30, 2021, respectively, for transaction and organizational costs.