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, and include statements regarding our expected financial and operational results. 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 on the nation's economy and debt and equity markets and the local economies in our markets, and on us and 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 pace and consistency of recovery from the pandemic and any resurgence or variants of the disease; 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, 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; 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 any non-compliance with any of our debt or lease agreements (including the financial or other 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 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 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; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations; the cost and difficulty of complying with increasing and evolving regulation; 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, 2022. 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- 20 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. 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 June 30, 2023, 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 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. Resident Fee Increases The rates we charge our residents are highly dependent on local market conditions and the competitive environment in which the communities operate. As the senior living industry rebuilds occupancy lost due to the pandemic, we continue to experience a highly competitive environment for new residents. 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, 2023 for our in-place private pay residents. The increase was again higher than our typical annual rate adjustment in order to help offset our recent increased costs as a result of labor pressures, high inflation, and increased interest rates, as described below. As a result of rate and occupancy increases, consolidated RevPAR (as defined below) for the six months ended June 30, 2023 increased 12.2% compared to the prior year period. Due to the competitive environment for new residents in our recovering industry, the higher rate adjustment could slow our occupancy recovery progress or result in a decrease in occupancy in our communities. Any use of promotional or other discounting would offset a portion of such rate adjustments in our RevPAR and RevPOR (as defined below) results. In addition, the rate adjustment may not be sufficient to offset our increased costs in the event that labor expenses, inflation, or interest rates grow at rates higher than we anticipated. Macroeconomic Conditions A confluence of macroeconomic conditions, including an intensely competitive labor environment and higher inflation and interest rates, has continued to affect our operations during 2023. Labor Pressures Labor costs comprise approximately two-thirds of our total facility operating expense. We began to experience pressures associated with the intensely competitive labor environment during 2021, which have continued into 2023. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. We have increased our recruiting efforts to fill existing open positions, resulting in increasing the size of our workforce during 2022. We continue to review wage rates in our markets and make competitive adjustments. Beginning in 2021, to cover existing open positions, we needed to rely on more expensive premium labor, primarily contract labor and overtime. From its peak in December 2021 to June 2023, we have decreased our monthly contract labor expense by approximately 90%, while maintaining focus on resident satisfaction and high-quality care. We continue to work to reduce our reliance on premium labor. The labor component of our facility operating expense in our same community portfolio increased 1.5% and 1.3% during the three and six months ended June 30, 2023, respectively, compared to the prior year period. The increases primarily resulted 21 from wage rate adjustments and increased incentive compensation costs, partially offset by a decrease in the use of premium labor, primarily contract labor. We expect to continue to experience labor cost pressure as a result of the labor environment conditions described above. Continued increased competition for, or a shortage of, nurses or other associates and general inflationary pressures have required and may require that we enhance our pay and benefits package to compete effectively for such associates. Inflation Our non-labor facility operating expense comprises approximately one-third of our total facility operating expense and is subject to inflationary pressures. The United States consumer price index increased more than 9% since December 2021. We mitigated a portion of an increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. We mitigated a portion of rising utility costs through sustainability investments we made in recent years, such as lighting retrofits and water consumption projects. Despite our mitigation efforts and with higher occupancy, for the three and six months ended June 30, 2023 our non-labor facility operating expense in our same community portfolio increased 9.2% and 9.5%, respectively, compared to the prior year period. For the remainder of 2023, we expect to continue to experience inflationary pressures. Interest Rates As of June 30, 2023, we had approximately $1.5 billion of long-term variable rate debt outstanding which is indexed to the London Interbank Offer Rate ("LIBOR") plus a weighted average margin of approximately 228 basis points or Secured Overnight Financing Rate ("SOFR") plus a weighted average margin of approximately 237 basis points. Our remaining variable rate mortgage notes payable arrangements indexed to LIBOR were modified to reference SOFR plus an 11 basis point spread adjustment to reflect historical spreads between LIBOR and SOFR rather than LIBOR prospectively after the discontinuance of LIBOR in July 2023. Accordingly, our annual interest expense related to long-term variable rate debt was directly affected by movements in LIBOR and SOFR prior to the transition and will be directly affected by movements in SOFR going forward. The SOFR and LIBOR steadily increased since the beginning of 2022, ending the period more than 500 basis points higher than year-end 2021. Approximately 93% of our long-term variable rate debt is subject to interest rate cap or swap agreements, which had a weighted average fixed interest rate of 4.14% and a weighted average remaining term of one year as of June 30, 2023. Many of our long-term variable rate debt instruments include provisions that obligate us to obtain additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The costs of obtaining additional interest rate cap agreements may offset the benefits of our existing interest rate cap agreements. For the three and six months ended June 30, 2023, our debt interest expense increased 46.4% and 49.0%, respectively, compared to the prior year period, substantially all due to an increase in our interest expense associated with our long-term variable rate debt. Interest earned on our cash, cash equivalents, and marketable securities partially offset such increased interest expense. COVID-19 Pandemic Update The COVID-19 pandemic has adversely impacted our occupancy and resident fee revenue beginning in March 2020. The health and wellbeing of our residents and associates has been and continues to be our highest priority. While the Federal COVID-19 Public Health Emergency Declaration expired on May 11, 2023, we cannot predict with reasonable certainty the impacts that COVID-19 and the continued recovery ultimately will have on our business, results of operations, cash flow, and liquidity. Community Transactions On May 1, 2023, we completed the sale of our one remaining entrance fee community. We received cash proceeds of $12.5 million, net of $29.6 million in mortgage debt repaid and transaction costs, and recognized a net gain on sale of communities of $36.3 million. We elected not to exercise our lease renewal option under the current terms for a master lease which expires on December 31, 2023. Pursuant to the master lease, we currently continue to lease 35 communities (1,468 units) and we will be required to make approximately $7.7 million of cash lease payments for the six months ending December 31, 2023. In August 2023, we entered into a new master lease agreement pursuant to which we will continue to lease 10 of such communities (458 units) following the expiration of the existing lease. The new lease contains a purchase option on the 10 communities which becomes exercisable at the beginning of the final lease year. The term of the new lease will expire on December 31, 2029, subject to earlier termination if we exercise the purchase option. The landlord has also agreed to make available a pool to fund costs associated with certain capital expenditure projects in connection with the new lease. 22 Welltower Lease Amendments During the three months ended June 30, 2023, we entered into amendments to our existing lease arrangements with Welltower Inc. ("Welltower") pursuant to which we continue to lease 74 communities. In connection with the amendments, we extended the maturity of one lease involving 39 communities from December 31, 2026 until June 30, 2032. As a result, our amended lease arrangements provide that the current term for 69 of the communities will expire on June 30, 2032 and the current term for five of the communities will expire on December 31, 2024. The amendments did not change the amount of required lease payments over the previous term of the leases or the annual lease escalators. In addition, Welltower agreed to make available a pool in the aggregate amount of up to $17.0 million to fund costs associated with certain capital expenditure projects for 69 of the communities. Upon reimbursement of such expenditures, the annual minimum rent under the lease will prospectively increase by the amount of the reimbursement multiplied by the sum of the then current SOFR (subject to a floor of 3.0%) and a margin of 4.0%, and such amount will escalate annually consistent with the minimum rent escalation provisions of the 39 community lease. The amended leases for 35 of such communities were prospectively classified as operating leases subsequent to the amendment. The prospective change in classification of such lease costs to operating lease expense will result in a $19.3 million increase in cash lease payments for operating leases for 2023 and an offsetting decrease in cash lease payments for financing leases. For the three and six months ended June 30, 2023, the classification of such lease costs as operating lease expense resulted in a $4.8 million increase in cash lease payments for operating leases and an offsetting decrease in cash lease payments for financing leases. The amendments replaced the net worth covenant provisions requiring us to maintain at least $400.0 million of stockholders' equity with a consolidated tangible net worth covenant requiring us to maintain at least $2.0 billion of tangible net worth, generally calculated as stockholders' equity plus accumulated depreciation and amortization less intangible assets and further adjusted for certain other items. Such calculation is generally similar to the tangible net worth covenants within certain of our long-term debt documents. So long as we maintain tangible net worth as defined in the leases of at least $1.5 billion, we will also be able to cure any breach by posting collateral with Welltower. Results of Operations As of June 30, 2023, our total operations included 672 communities with a capacity to serve over 60,000 residents. As of that date, we owned 346 communities (31,356 units), leased 295 communities (20,584 units), and managed 31 communities (4,685 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. 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 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 23 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 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 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 June 30, 2023 and 2022 Summary Operating Results The following table summarizes our overall operating results for the three months ended June 30, 2023 and 2022. Three Months Ended June 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Total resident fees and management fees revenue $ 712,671 $ 643,717 $ 68,954 10.7 % Other operating income 4,122 8,411 (4,289) (51.0) % Facility operating expense 531,118 513,664 17,454 3.4 % Net income (loss) (4,526) (84,283) (79,757) (94.6) % Adjusted EBITDA 81,372 50,714 30,658 60.5 % The increase in total resident fees and management fees revenue was primarily attributable to an 11.9% increase in same community RevPAR, comprised of an 8.9% increase in same community RevPOR and a 210 basis point increase in same community weighted average occupancy. The increase in facility operating expense was primarily attributable to a 4.0% increase in same community facility operating expense primarily resulting from broad inflationary pressure, increased estimated incentive compensation costs, and increased referral source costs, partially offset by a decrease in the use of premium labor, primarily contract labor. The decrease in net loss was primarily attributable to the increase in resident fee revenue and a $36.3 million gain on sale of communities, net recognized during the three months ended June 30, 2023 for the sale of our one remaining entrance fee community. These changes were partially offset by increases in facility operating expense and debt interest expense compared to the prior year period. The increase in Adjusted EBITDA was primarily attributable to the increase in resident fee revenue, partially offset by the increase in facility operating expense and the change in classification of $10.4 million of lease payments for 51 communities as cash facility operating lease payments as a result of lease amendments subsequent to the prior year period. 24 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 June 30, 2023 and 2022, 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 June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 710,161 $ 640,388 $ 69,773 10.9 % Other operating income $ 4,122 $ 8,411 $ (4,289) (51.0) % Facility operating expense $ 531,118 $ 513,664 $ 17,454 3.4 % Number of communities (period end) 641 641 — — % Total average units 52,030 52,368 (338) (0.6) % RevPAR $ 4,544 $ 4,071 $ 473 11.6 % Occupancy rate (weighted average) 76.5 % 74.6 % 190 bps n/a RevPOR $ 5,939 $ 5,459 $ 480 8.8 % Same Community Operating Results and Data Resident fees $ 697,345 $ 623,053 $ 74,292 11.9 % Other operating income $ 4,107 $ 8,130 $ (4,023) (49.5) % Facility operating expense $ 518,113 $ 498,017 $ 20,096 4.0 % Number of communities 634 634 — — % Total average units 51,134 51,142 (8) — % RevPAR $ 4,546 $ 4,061 $ 485 11.9 % Occupancy rate (weighted average) 76.7 % 74.6 % 210 bps n/a RevPOR $ 5,923 $ 5,440 $ 483 8.9 % 25 Independent Living Segment The following table summarizes the operating results and data for our Independent Living segment for the three months ended June 30, 2023 and 2022. All 68 of the communities in our Independent Living segment are included within our same community portfolio. Three Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 140,670 $ 125,578 $ 15,092 12.0 % Other operating income $ 218 $ 1,159 $ (941) (81.2) % Facility operating expense $ 94,527 $ 88,028 $ 6,499 7.4 % Number of communities (period end) 68 68 — — % Total average units 12,573 12,569 4 — % RevPAR $ 3,729 $ 3,330 $ 399 12.0 % Occupancy rate (weighted average) 78.9 % 76.0 % 290 bps n/a RevPOR $ 4,727 $ 4,380 $ 347 7.9 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of a 7.9% increase in RevPOR and a 290 basis point increase in weighted average occupancy. The increase in the segment's RevPOR was primarily the result of in-place rate increases. The increase in the segment's 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 facility operating expense was primarily attributable to broad inflationary pressure, increased wireless internet access provided for residents, and increased estimated incentive compensation costs, partially offset by a decrease in the use of premium labor, primarily contract labor. 26 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 June 30, 2023 and 2022, including operating results and data on a same community basis. Three Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 486,523 $ 434,454 $ 52,069 12.0 % Other operating income $ 3,763 $ 6,412 $ (2,649) (41.3) % Facility operating expense $ 365,670 $ 353,278 $ 12,392 3.5 % Number of communities (period end) 555 554 1 0.2 % Total average units 34,442 34,598 (156) (0.5) % RevPAR $ 4,703 $ 4,183 $ 520 12.4 % Occupancy rate (weighted average) 76.3 % 74.2 % 210 bps n/a RevPOR $ 6,164 $ 5,636 $ 528 9.4 % Same Community Operating Results and Data Resident fees $ 482,788 $ 429,625 $ 53,163 12.4 % Other operating income $ 3,756 $ 6,287 $ (2,531) (40.3) % Facility operating expense $ 361,537 $ 349,145 $ 12,392 3.5 % Number of communities 550 550 — — % Total average units 34,247 34,249 (2) — % RevPAR $ 4,699 $ 4,181 $ 518 12.4 % Occupancy rate (weighted average) 76.3 % 74.2 % 210 bps n/a RevPOR $ 6,159 $ 5,635 $ 524 9.3 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 9.3% increase in same community RevPOR and a 210 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 four communities since the beginning of 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 primarily resulting from broad inflationary pressure, increased estimated incentive compensation costs, and increased referral source costs, partially offset by a decrease in the use of premium labor, primarily contract labor. 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. 27 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the three months ended June 30, 2023 and 2022, including operating results and data on a same community basis. Three Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 82,968 $ 80,356 $ 2,612 3.3 % Other operating income $ 141 $ 840 $ (699) (83.2) % Facility operating expense $ 70,921 $ 72,358 $ (1,437) (2.0) % Number of communities (period end) 18 19 (1) (5.3) % Total average units 5,015 5,201 (186) (3.6) % RevPAR $ 5,500 $ 5,115 $ 385 7.5 % Occupancy rate (weighted average) 72.0 % 73.4 % (140) bps n/a RevPOR $ 7,636 $ 6,970 $ 666 9.6 % Same Community Operating Results and Data Resident fees $ 73,887 $ 67,850 $ 6,037 8.9 % Other operating income $ 133 $ 684 $ (551) (80.6) % Facility operating expense $ 61,871 $ 60,826 $ 1,045 1.7 % Number of communities 16 16 — — % Total average units 4,314 4,324 (10) (0.2) % RevPAR $ 5,709 $ 5,231 $ 478 9.1 % Occupancy rate (weighted average) 74.0 % 74.1 % (10) bps n/a RevPOR $ 7,712 $ 7,059 $ 653 9.3 % The increase in the segment's resident fees was primarily attributable to a 9.3% increase in the segment's same community RevPOR, which was primarily the result of in-place rate increases. The increase in the segment's resident fees was partially offset by the disposition of one community since the beginning of the prior year period. The decrease in the segment's facility operating expense was primarily attributable to the disposition of one community since the beginning of the prior year period. The decrease in the segment's facility operating expense was partially offset by an increase in the segment's same community facility operating expense, including a $0.8 million, or 1.9%, increase in the segment's same community labor expense. 28 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 June 30, 2023 and 2022. Three Months Ended June 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Management fees $ 2,510 $ 3,329 $ (819) (24.6) % Reimbursed costs incurred on behalf of managed communities 33,999 37,388 (3,389) (9.1) % Costs incurred on behalf of managed communities 33,999 37,388 (3,389) (9.1) % General and administrative expense 45,326 41,752 3,574 8.6 % Facility operating lease expense 50,512 41,538 8,974 21.6 % Depreciation and amortization 84,448 86,623 (2,175) (2.5) % Asset impairment 520 2,599 (2,079) (80.0) % Loss (gain) on sale of communities, net (36,296) — 36,296 NM Interest income 6,115 778 5,337 NM Interest expense 54,435 48,234 6,201 12.9 % Equity in earnings (loss) of unconsolidated ventures (1,153) (2,439) (1,286) (52.7) % Gain (loss) on sale of assets, net 860 961 (101) (10.5) % Other non-operating income (loss) 3,197 (111) 3,308 NM Benefit (provision) for income taxes (275) (1,190) (915) (76.9) % 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 community costs incurred as a result of broad inflationary pressure for communities managed in both periods. General and Administrative Expense. The increase in general and administrative expense was primarily attributable to an increase in estimated incentive compensation costs. General and administrative expense includes transaction and organizational restructuring costs of $0.1 million and $0.2 million for the three months ended June 30, 2023 and 2022, 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 increase in facility operating lease expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Depreciation and Amortization . The decrease in depreciation and amortization expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period, partially offset by 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 June 30, 2023, we recorded $0.5 million of non-cash impairment charges, primarily for property damage sustained at certain communities. During the three months ended June 30, 2022, we recorded $2.6 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased occupancy and future cash flow estimates as a result of the continued impacts of the COVID-19 pandemic. Loss (Gain) on Sale of Communities, net . The increase in gain on sale of communities, net was due to the sale of our one remaining entrance fee community during the three months ended June 30, 2023. 29 Interest Expense . The increase in interest expense was primarily due to an increase in interest expense on long-term debt primarily as a result of increases in variable interest rates, partially offset by a decrease in interest expense on financing lease obligations primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period and increases in the fair value of interest rate derivatives. Equity in Earnings (Loss) of Unconsolidated Ventures . The decrease in equity in loss of unconsolidated ventures was primarily due to improved operating results for our health care services venture. Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the three months ended June 30, 2023 and 2022 was primarily due to an increase in the valuation allowance recorded on operating losses during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. We recorded an aggregate deferred federal, state, and local tax benefit of $1.4 million for the three months ended June 30, 2023, which was partially offset by an increase in the valuation allowance of $1.3 million. We recorded an aggregate deferred federal, state, and local tax expense of $20.6 million for the three months ended June 30, 2022, which was offset by a reduction to the valuation allowance of $21.4 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 June 30, 2023 and December 31, 2022 was $436.0 million and $425.0 million, respectively. Comparison of Six Months Ended June 30, 2023 and 2022 Summary Operating Results The following table summarizes our overall operating results for the six months ended June 30, 2023 and 2022. Six Months Ended June 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Total resident fees and management fees revenue $ 1,428,652 $ 1,284,020 $ 144,632 11.3 % Other operating income 6,450 8,787 (2,337) (26.6) % Facility operating expense 1,061,925 1,026,428 35,497 3.5 % Net income (loss) (49,089) (184,315) (135,226) (73.4) % Adjusted EBITDA 169,995 87,890 82,105 93.4 % The increase in total resident fees and management fees revenue was primarily attributable to a 12.5% increase in same community RevPAR, comprised of an 8.7% increase in same community RevPOR and a 260 basis point increase in same community weighted average occupancy. The increase in facility operating expense was primarily attributable to a 4.0% increase in same community facility operating expense, primarily resulting from broad inflationary pressure, increased estimated incentive compensation costs, and increased referral source costs, partially offset by a decrease in the use of premium labor, primarily contract labor. The decrease in net loss was primarily attributable to the increase in resident fee revenue and a $36.3 million gain on sale of communities, net recognized during the six months ended June 30, 2023 for the sale of our one remaining entrance fee community. These changes were partially offset by increases in facility operating expense and debt interest expense compared to the prior year period. The increase in Adjusted EBITDA was primarily attributable to the increase in resident fee revenue, partially offset by the increase in facility operating expense and the change in classification of $15.9 million of lease payments for 51 communities as cash facility operating lease payments as a result of lease amendments subsequent to the prior year period. 30 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 six months ended June 30, 2023 and 2022 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. Six Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 1,423,565 $ 1,277,362 $ 146,203 11.4 % Other operating income $ 6,450 $ 8,787 $ (2,337) (26.6) % Facility operating expense $ 1,061,925 $ 1,026,428 $ 35,497 3.5 % Number of communities (period end) 641 641 — — % Total average units 52,104 52,478 (374) (0.7) % RevPAR $ 4,548 $ 4,052 $ 496 12.2 % Occupancy rate (weighted average) 76.4 % 74.0 % 240 bps n/a RevPOR $ 5,951 $ 5,476 $ 475 8.7 % Same Community Operating Results and Data Resident fees $ 1,395,405 $ 1,240,455 $ 154,950 12.5 % Other operating income $ 6,396 $ 8,488 $ (2,092) (24.6) % Facility operating expense $ 1,033,824 $ 994,093 $ 39,731 4.0 % Number of communities 634 634 — — % Total average units 51,133 51,141 (8) — % RevPAR $ 4,548 $ 4,043 $ 505 12.5 % Occupancy rate (weighted average) 76.6 % 74.0 % 260 bps n/a RevPOR $ 5,936 $ 5,460 $ 476 8.7 % 31 Independent Living Segment The following table summarizes the operating results and data for our Independent Living segment for the six months ended June 30, 2023 and 2022, including operating results and data on a same community basis. All 68 of the communities in our Independent Living segment are included within our same community portfolio. Six Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 281,272 $ 249,982 $ 31,290 12.5 % Other operating income $ 272 $ 1,161 $ (889) (76.6) % Facility operating expense $ 188,350 $ 174,750 $ 13,600 7.8 % Number of communities (period end) 68 68 — — % Total average units 12,572 12,569 3 — % RevPAR $ 3,729 $ 3,315 $ 414 12.5 % Occupancy rate (weighted average) 78.8 % 75.3 % 350 bps n/a RevPOR $ 4,734 $ 4,401 $ 333 7.6 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of a 7.6% increase in RevPOR and a 350 basis point increase in weighted average occupancy. The increase in the segment's RevPOR was primarily the result of in-place rent increases. The increase in the segment's 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 facility operating expense was primarily attributable to broad inflationary pressure, increased wireless internet access provided for residents, and increased estimated incentive compensation costs, partially offset by a decrease in the use of premium labor, primarily contract labor. 32 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 six months ended June 30, 2023 and 2022, including operating results and data on a same community basis. Six Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 973,300 $ 866,586 $ 106,714 12.3 % Other operating income $ 5,790 $ 6,768 $ (978) (14.5) % Facility operating expense $ 729,881 $ 708,903 $ 20,978 3.0 % Number of communities (period end) 555 554 1 0.2 % Total average units 34,429 34,708 (279) (0.8) % RevPAR $ 4,706 $ 4,159 $ 547 13.2 % Occupancy rate (weighted average) 76.1 % 73.6 % 250 bps n/a RevPOR $ 6,184 $ 5,650 $ 534 9.5 % Same Community Operating Results and Data Resident fees $ 966,563 $ 855,082 $ 111,481 13.0 % Other operating income $ 5,782 $ 6,643 $ (861) (13.0) % Facility operating expense $ 722,505 $ 699,189 $ 23,316 3.3 % Number of communities 550 550 — — % Total average units 34,247 34,248 (1) — % RevPAR $ 4,704 $ 4,161 $ 543 13.0 % Occupancy rate (weighted average) 76.1 % 73.6 % 250 bps n/a RevPOR $ 6,180 $ 5,655 $ 525 9.3 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 9.3% increase in same community RevPOR and a 250 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 rent 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 five communities since the beginning of 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 primarily resulting from broad inflationary pressure, increased estimated incentive compensation costs, and increased referral source costs, partially offset by a decrease in the use of premium labor, primarily contract labor. 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. 33 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the six months ended June 30, 2023 and 2022, including operating results and data on a same community basis. Six Months Ended June 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 168,993 $ 160,794 $ 8,199 5.1 % Other operating income $ 388 $ 858 $ (470) (54.8) % Facility operating expense $ 143,694 $ 142,775 $ 919 0.6 % Number of communities (period end) 18 19 (1) (5.3) % Total average units 5,103 5,201 (98) (1.9) % RevPAR $ 5,495 $ 5,112 $ 383 7.5 % Occupancy rate (weighted average) 72.7 % 73.3 % (60) bps n/a RevPOR $ 7,557 $ 6,973 $ 584 8.4 % Same Community Operating Results and Data Resident fees $ 147,570 $ 135,391 $ 12,179 9.0 % Other operating income $ 342 $ 684 $ (342) (50.0) % Facility operating expense $ 122,990 $ 120,056 $ 2,934 2.4 % Number of communities 16 16 — — % Total average units 4,314 4,324 (10) (0.2) % RevPAR $ 5,701 $ 5,219 $ 482 9.2 % Occupancy rate (weighted average) 74.3 % 73.9 % 40 bps n/a RevPOR $ 7,675 $ 7,061 $ 614 8.7 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of an 8.7% increase in same community RevPOR and a 40 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 rent increases. The increase in the segment's resident fees was partially offset by the disposition of one community since the beginning of 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 $1.7 million, or 2.0%, increase in the segment's same community labor expense primarily resulting from wage rate adjustments. Additionally, broad inflationary pressure 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 one community since the beginning of the prior year period. 34 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the six months ended June 30, 2023 and 2022. Six Months Ended June 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Management fees $ 5,087 $ 6,658 $ (1,571) (23.6) % Reimbursed costs incurred on behalf of managed communities 68,953 74,529 (5,576) (7.5) % Costs incurred on behalf of managed communities 68,953 74,529 (5,576) (7.5) % General and administrative expense 93,945 86,878 7,067 8.1 % Facility operating lease expense 96,639 83,102 13,537 16.3 % Depreciation and amortization 169,382 172,307 (2,925) (1.7) % Asset impairment 520 11,674 (11,154) (95.5) % Loss (gain) on sale of communities, net (36,296) — 36,296 NM Interest income 11,441 873 10,568 NM Interest expense 114,146 91,588 22,558 24.6 % Equity in earnings (loss) of unconsolidated ventures (1,730) (7,333) (5,603) (76.4) % Non-operating gain (loss) on sale of assets, net 860 667 193 28.9 % Other non-operating income (loss) 6,346 (138) 6,484 NM Benefit (provision) for income taxes (847) 786 (1,633) NM 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 community costs incurred as a result of broad inflationary pressure for communities managed in both periods. General and Administrative Expense. The increase in general and administrative expense was primarily attributable to an increase in organizational restructuring costs compared to the prior year period, primarily for severance costs for our senior leadership changes, and an increase in estimated incentive compensation costs. General and administrative expense includes transaction and organizational restructuring costs of $3.7 million and $0.6 million for the six months ended June 30, 2023 and 2022, 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 increase in facility operating lease expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Depreciation and Amortization . The decrease in depreciation and amortization expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period, partially offset by 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 six months ended June 30, 2023, we recorded $0.5 million of non-cash impairment charges, primarily for property damage sustained at certain communities. During the six months ended June 30, 2022, we recorded $11.7 million of non-cash impairment charges, primarily for certain leased communities with decreased occupancy and future cash flow estimates as a result of the continued impacts of the COVID-19 pandemic. Loss (Gain) on Sale of Communities, net . The increase in gain on sale of communities, net was due to the sale of our one remaining entrance fee community during the six months ended June 30, 2023. 35 Interest Expense. The increase in interest expense was primarily due to an increase in interest expense on long-term debt primarily as a result of increases in variable interest rates, partially offset by a decrease in interest expense on financing lease obligations primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Equity in Earnings (Loss) of Unconsolidated Ventures. The decrease in equity in loss of unconsolidated ventures was primarily due to improved operating results for our health care services venture. Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the six months ended June 30, 2023 and 2022 was primarily due to a decrease in the tax benefit on the vesting of restricted stock units and restricted stock awards due to a lower market price for our stock for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. We recorded an aggregate deferred federal, state, and local tax benefit of $10.8 million for the six months ended June 30, 2023, which was offset by an increase in the valuation allowance of $11.0 million. We recorded an aggregate deferred federal, state, and local tax expense of $45.5 million for the six months ended June 30, 2022, which was partially offset by a reduction to the valuation allowance of $44.0 million. 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. Six Months Ended June 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Net cash provided by (used in) operating activities $ 87,866 $ (11,678) $ 99,544 NM Net cash provided by (used in) investing activities (103,910) (80,001) 23,909 29.9 % Net cash provided by (used in) financing activities (49,922) (18,093) 31,829 175.9 % Net increase (decrease) in cash, cash equivalents, and restricted cash (65,966) (109,772) (43,806) (39.9) % Cash, cash equivalents, and restricted cash at beginning of period 474,548 438,314 36,234 8.3 % Cash, cash equivalents, and restricted cash at end of period $ 408,582 $ 328,542 $ 80,040 24.4 % Adjusted Free Cash Flow $ (28,720) $ (101,956) $ 73,236 71.8 % The change in net cash provided by (used in) operating activities was primarily attributable to an increase in resident fee revenue compared to the prior year period, partially offset by an increase in facility operating expense and an increase in debt interest expense compared to the prior year period. The increase in net cash used in investing activities was primarily attributable to a $157.4 million decrease in proceeds from sales and maturities of marketable securities. These changes were partially offset by a $94.6 million decrease in purchases of marketable securities and a $37.3 million increase in net proceeds from the sale of assets compared to the prior year period. The increase in net cash used in financing activities was primarily attributable to the repayment of $29.6 million of mortgage debt upon the sale of our one remaining entrance fee community during the six months ended June 30, 2023. The change in Adjusted Free Cash Flow was primarily attributable to the change in net cash provided by (used in) operating activities, partially offset by a $42.7 million increase in non-development capital expenditures, net. 36 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, including cash grants. Over the near-term, we expect that our liquidity requirements will primarily arise from: • working capital; • operating costs such as labor costs, severance costs, general and administrative expense, and supply costs; • debt, interest, and lease payments; • transaction costs and investment in our healthcare and wellness initiatives; • capital expenditures and improvements, including the renovation of our current communities and 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 June 30, 2023, we had $3.8 billion of debt outstanding at a weighted average interest rate of 5.39%. As of such date, 91.8%, or $3.5 billion, of our total debt obligations represented non-recourse property-level mortgage financings, of which $257.1 million matures in September 2024. As of June 30, 2023, we had $1.1 billion of operating and financing lease obligations, and for the twelve months ending June 30, 2024, we will be required to make approximately $277.9 million of cash lease payments in connection with our existing operating and financing leases. Total liquidity of $440.2 million as of June 30, 2023 included $336.6 million of unrestricted cash and cash equivalents (excluding restricted cash of $72.0 million), $96.2 million of marketable securities, and $7.4 million of availability on our secured credit facility. Total liquidity as of June 30, 2023 decreased $12.4 million from total liquidity of $452.6 million as of December 31, 2022. The decrease was primarily attributable to negative $28.7 million of Adjusted Free Cash Flow, partially offset by the net proceeds from the sale of our one remaining entrance fee community. As of June 30, 2023, our current liabilities exceeded current assets by $32.1 million. Included in our current liabilities is $189.4 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, 2022 filed with the Securities and Exchange Commission ("SEC") on February 22, 2023. Since the amount of mortgage financing available for our communities is generally dependent on their appraised values and performance, decreases in their appraised values, including due to adverse changes in real estate market conditions, or their performance, could result in available mortgage refinancing amounts that are less than the communities’ maturing indebtedness. 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 37 indebtedness. We have completed the refinancing of all of our mortgage debt maturities due in the next twelve months. Additionally, 13% of our owned communities were unencumbered by mortgage debt as of June 30, 2023. The $257.1 million principal amount of debt maturing in September 2024 is secured by non-recourse first mortgages on 47 communities that are part of a common pool that also secures additional outstanding mortgage debt with a later maturity. We expect to refinance the $257.1 million mortgage debt before the date it matures. We may need to utilize a portion of our current liquidity to repay a portion of the principal amount in connection with such transaction. The terms and amount of such refinancing will depend on various factors, including the appraised values and performance of the communities securing the indebtedness and macroeconomic factors. 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 capital expenditures, to pursue any 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 maintenance expenditures (including routine maintenance of communities over $1,500 per occurrence), community renovations, unit upgrades (including unit turnovers over $500 per unit), and other major building infrastructure projects (including replacements of major building systems). 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. The following table summarizes our capital expenditures for the six months ended June 30, 2023 for our consolidated business. (in thousands) Community-level capital expenditures, net (1) $ 91,761 Corporate capital expenditures, net (2) 35,966 Non-development capital expenditures, net (3) 127,727 Development capital expenditures, net 904 Total capital expenditures, net $ 128,631 (1) Reflects the amount invested, net of lessor reimbursements of $2.2 million. (2) Includes $26.4 million of remediation costs at our communities resulting from natural disasters, including $24.0 million of capital expenditures resulting from the impact of Winter Storm Elliott. A portion of such costs are reimbursable under our property and casualty insurance policies. (3) Amount is included in Adjusted Free Cash Flow. In the aggregate, we expect our full-year 2023 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $225.0 million, including remediation costs at our communities resulting from Winter Storm Elliott and Hurricane Ian. We anticipate that our 2023 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, reimbursements from lessors, and approximately $25.0 million of reimbursement from our property and casualty insurance policies. We received $8.8 million of such insurance reimbursements in the six months ended June 30, 2023. Funding our planned capital expenditures, any potential lease restructuring opportunities that we identify, or 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 38 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. 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 credit facility matures on January 15, 2024 and we have the option to extend the facility for two additional terms of one year each subject to the satisfaction of certain conditions. Amounts drawn under the facility will bear interest at SOFR plus an applicable margin which was 2.75% as of June 30, 2023. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of June 30, 2023. 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 June 30, 2023, $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 $7.4 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 June 30, 2023 under which $14.5 million had been issued as of that date. Long-Term Leases As of June 30, 2023, we operated 295 communities under long-term leases (281 operating leases and 14 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. In certain cases, we 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. Approximately 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 June 30, 2023. 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 six months ended June 30, 2023, our cash lease payments for our operating leases were $63.8 million and $122.4 million, respectively, and for our financing leases were $7.6 million and $20.0 million, respectively. As of June 30, 2023, for the twelve months ending June 30, 2024, we will be required to make $277.9 million of cash lease payments in connection with our existing operating and financing leases. 39 Debt and Lease Covenants Certain of our long-term 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 and/or increased by accumulated depreciation and amortization, deferred gains from sale-leaseback transactions, and/or 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. These covenants include a requirement contained in certain of our long-term debt documents for us to maintain liquidity of at least $130.0 million at each quarter-end determination date. As of June 30, 2023, our liquidity was $440.2 million. 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 long-term mortgage debt is secured by our communities and, in certain cases, our long-term debt and leases are secured by 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 June 30, 2023, 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, gain/loss on sale of communities, 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 40 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 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 June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net income (loss) $ (4,526) $ (84,283) $ (49,089) $ (184,315) Provision (benefit) for income taxes 275 1,190 847 (786) Equity in (earnings) loss of unconsolidated ventures 1,153 2,439 1,730 7,333 Non-operating loss (gain) on sale of assets, net (860) (961) (860) (667) Other non-operating (income) loss (3,197) 111 (6,346) 138 Interest expense 54,435 48,234 114,146 91,588 Interest income (6,115) (778) (11,441) (873) Income (loss) from operations 41,165 (34,048) 48,987 (87,582) Depreciation and amortization 84,448 86,623 169,382 172,307 Asset impairment 520 2,599 520 11,674 Loss (gain) on sale of communities, net (36,296) — (36,296) — Operating lease expense adjustment (11,557) (8,308) (22,362) (16,615) Non-cash stock-based compensation expense 2,969 3,619 6,073 7,504 Transaction and organizational restructuring costs 123 229 3,691 602 Adjusted EBITDA (1) $ 81,372 $ 50,714 $ 169,995 $ 87,890 (1) Adjusted EBITDA includes $4.1 million and $6.5 million benefit for the three and six months ended June 30, 2023, respectively, and $8.4 million and $8.8 million benefit for the three and six months ended June 30, 2022, 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 and casualty 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 41 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 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 June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net cash provided by (used in) operating activities $ 63,824 $ 11,577 $ 87,866 $ (11,678) Net cash provided by (used in) investing activities (41,891) (43,838) (103,910) (80,001) Net cash provided by (used in) financing activities (50,093) (17,690) (49,922) (18,093) Net increase (decrease) in cash, cash equivalents, and restricted cash $ (28,160) $ (49,951) $ (65,966) $ (109,772) Net cash provided by (used in) operating activities $ 63,824 $ 11,577 $ 87,866 $ (11,678) Distributions from unconsolidated ventures from cumulative share of net earnings (430) — (430) (561) Changes in prepaid insurance premiums financed with notes payable (6,301) (5,377) 13,004 11,252 Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases — (3,367) (2,244) (4,857) Non-development capital expenditures, net (64,815) (45,686) (127,727) (85,012) Property and casualty insurance proceeds 2,367 — 8,789 — Payment of financing lease obligations (2,126) (5,610) (7,978) (11,100) Adjusted Free Cash Flow (1) $ (7,481) $ (48,463) $ (28,720) $ (101,956) (1) Adjusted Free Cash Flow includes: • $11.9 million and $25.3 million benefit for the three and six months ended June 30, 2023, respectively, and $4.6 million and $5.4 million benefit for the three and six months ended June 30, 2022, respectively, from government grants and credits received. • $1.2 million and $3.1 million recoupment for the three and six months ended June 30, 2022, respectively, of accelerated/advanced Medicare payments. • $0.1 million and $3.7 million for the three and six months ended June 30, 2023, respectively, and $0.2 million and $0.6 million for the three and six months ended June 30, 2022, respectively, for transaction and organizational restructuring costs.