What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 163 added, 166 removed, 509 unchanged (39% of the section changed)

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together with its consolidated subsidiaries.

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 are the nation's premier operator of senior living communities, operating and managing 672 communities in 41 states as of September 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.

Our senior living communities and our comprehensive network help to provide seniors with care, connection, 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, make new friends, and stay connected with 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.

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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.

As a result of rate and occupancy increases, consolidated RevPAR (as defined below) for the nine months ended September 30, 2023 increased 11.8% compared to the prior year period.

Due to the competitive environment for new residents in our recovering industry, our rate adjustments 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.

In addition, our rate adjustments 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

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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 have increased our recruiting efforts to fill existing open positions, resulting in increasing the size of our workforce since the beginning of 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.

From its peak in December 2021 to September 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

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.

The labor component of our facility operating expense in our same community portfolio increased 1.3% during both the three and nine months ended September 30, 2023 compared to the prior year periods.

The increases primarily resulted from wage rate

adjustments, partially offset by a decrease in the use of premium labor, primarily contract labor, as the Company's associate turnover has declined and the size of the Company's workforce has increased.

We may 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.

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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.

Despite our mitigation efforts and with higher occupancy, for the three and nine months ended September 30, 2023 our non-labor facility operating expense in our same community portfolio increased 5.7% and 8.2%, respectively, compared to the prior year period.

For the remainder of 2023, we may 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.

As of September 30, 2023, we had approximately $1.5 billion of long-term variable rate debt outstanding which is indexed to the Secured Overnight Financing Rate ("SOFR") plus a weighted average margin of 239 basis points.

Accordingly, our annual interest expense related to long-term variable rate debt is directly affected by movements in SOFR.

The SOFR steadily increased since the beginning of 2022, ending the period more than 500 basis points higher than year-end 2021.

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.

For the three and nine months ended September 30, 2023, our debt interest expense increased 29.2% and 41.6%, 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

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We received cash proceeds of $12.7 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.

On November 1, 2023, we completed the sale of a CCRC community, for which we received cash proceeds of $12.7 million, net of transaction costs, at closing.

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.

Pursuant to the master lease, as of September 30, 2023, we continued to lease 35 communities (1,468 units).

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.

In October 2023, the new master lease agreement was amended to include seven additional communities (277 units) from the existing lease arrangement.

The new lease contains purchase options on the 17 communities which become 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 options.

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.

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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.

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.

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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.

For the three and nine months ended September 30, 2023, the classification of such lease costs as operating lease expense resulted in a $7.2 million and $12.0 million, respectively, 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.

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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 September 30, 2023, our total operations included 672 communities with a capacity to serve more than 60,000 residents.

As of that date, we owned 346 communities (31,385 units), leased 295 communities (20,572 units), and managed 31 communities (4,685 units).

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• 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

Care, and CCRCs segments.

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 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.

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.

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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

Comparison of Three Months Ended September 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.

The following table summarizes our overall operating results for the three months ended September 30, 2023 and 2022.

Three Months Ended

June 30, Increase (Decrease)

September 30, Increase (Decrease)

(in thousands) 2023 2022 Amount Percent

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Adjusted EBITDA 80,220 106,851 (26,631) (24.9) %

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.

The increase in total resident fees and management fees revenue was primarily attributable to a 10.8% increase in same community RevPAR, comprised of an 8.9% increase in same community RevPOR and a 140 basis point increase in same community weighted average occupancy.

During the three months ended September 30, 2023 and 2022, we recognized $2.6 million and $66.8 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 of the Public Health and Social Services Emergency Fund ("Provider Relief Fund") administered by the U.S.

Department of Health and Human Services.

The increase in facility operating expense was primarily attributable to a 2.8% increase in same community facility operating expense primarily resulting from broad inflationary pressure and higher third-party referral source costs associated with resident move-ins, partially offset by a decrease in the use of premium labor, primarily contract labor.

The increase in net loss was primarily attributable to a decrease in other operating income of $64.1 million, an increase in debt interest expense, and an increase in facility operating expense compared to the prior year period, partially offset by the increase in resident fee revenue.

The decrease in Adjusted EBITDA was primarily attributable to the decrease in other operating income, the change in classification of $12.8 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, and the increase in facility operating expense, partially offset by the increase in resident fee revenue.

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.

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, 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)

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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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.

The following table summarizes the operating results and data for our Independent Living segment for the three months ended September 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)

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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RevPOR $ 4,705 $ 4,337 $ 368 8.5 %

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 resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of an 8.5% increase in RevPOR and a 130 basis point increase in weighted average occupancy.

The increase in the segment's RevPOR was primarily the result of the current year rate increase.

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.

The increase in the segment's facility operating expense was primarily attributable to broad inflationary pressure and increased wireless internet access provided for residents, partially offset by a decrease in the use of premium labor.

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.

The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the three months ended September 30, 2023 and 2022, including operating results and data on a same community basis.

Three Months Ended

June 30, Increase (Decrease)

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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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 140 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 RevPOR was primarily the result of the current year rate increase.

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.

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 and higher third-party referral source costs associated with resident move-ins, partially offset by a decrease in the use of premium labor, primarily contract labor.

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.

The following table summarizes the operating results and data for our CCRCs segment for the three months ended September 30, 2023 and 2022, including operating results and data on a same community basis.

Three Months Ended

June 30, Increase (Decrease)

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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RevPOR $ 7,584 $ 7,067 $ 517 7.3 %

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 primarily attributable to a 7.3% increase in the segment's same community RevPOR, which was primarily the result of the current year rate increase.

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.

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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.

The following table summarizes other income and expense items in our operating results for the three months ended September 30, 2023 and 2022.

Three Months Ended

June 30, Increase (Decrease)

September 30, Increase (Decrease)

(in thousands) 2023 2022 Amount Percent

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Asset impairment 9,086 5,688 3,398 59.7 %

Loss (gain) on sale of communities, net (36,296) — 36,296 NM

Interest income 6,115 778 5,337 NM

Interest income 6,323 2,192 4,131 188.5 %

Interest expense 59,412 49,873 9,539 19.1 %

Equity in earnings (loss) of unconsolidated ventures (1,426) (2,020) (594) (29.4) %

Gain (loss) on sale of assets, net 860 961 (101) (10.5) %

Non-operating gain (loss) on sale of assets, net — (56) (56) NM

Other non-operating income (loss) 10,166 1,877 8,289 NM

Benefit (provision) for income taxes (275) (1,190) (915) (76.9) %

Benefit (provision) for income taxes 1,876 300 1,576 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.

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 and a decrease in the use of premium labor, primarily contract labor.

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.

General and administrative expense includes transaction and organizational restructuring costs of $0.1 million and $0.3 million for the three months ended September 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.

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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.

During the three months ended September 30, 2023, we recorded $9.1 million of non-cash impairment charges, primarily due to the potential disposition of up to five underperforming communities and lower than expected occupancy and decreased future cash flow estimates at certain leased communities.

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.

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.

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 and a decrease in the change in the fair value of interest rate derivatives.

These changes were 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.

Other Non-operating Income (Loss) .

The increase in other non-operating income was primarily due to increased income recognized for insurance recoveries from our property and casualty insurance policies.

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.

The difference between our effective tax rate for the three months ended September 30, 2023 and 2022 was primarily due to an decrease in the valuation allowance recorded on operating losses during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

We recorded an aggregate deferred federal, state, and local tax benefit of $12.2 million for the three months ended September 30, 2023, which was partially offset by an increase in the valuation allowance of $10.0 million.

We recorded an aggregate deferred federal, state, and local tax expense of $7.3 million for the three months ended September 30, 2022, which was partially offset by a reduction to the valuation allowance of $6.7 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

Our valuation allowance as of September 30, 2023 and December 31, 2022 was $446.0 million and $425.0 million, respectively.

Comparison of Nine Months Ended September 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)

The following table summarizes our overall operating results for the nine months ended September 30, 2023 and 2022.

Nine Months Ended

September 30, Increase (Decrease)

(in thousands) 2023 2022 Amount Percent

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Adjusted EBITDA 250,215 194,741 55,474 28.5 %

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.

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 8.8% increase in same community RevPOR and a 210 basis point increase in same community weighted average occupancy.

During the nine months ended September 30, 2023 and 2022, we recognized $9.1 million and $75.5 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 of the Provider Relief Fund.

The increase in facility operating expense was primarily attributable to a 3.6% increase in same community facility operating expense, primarily resulting from broad inflationary pressure and higher third-party referral source costs associated with resident move-ins, 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 nine months ended September 30, 2023 for the sale of our one remaining entrance fee community.

These changes were partially offset by a decrease in other operating income recognized, an increase in facility operating expense, and an increase in 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 decrease in other operating income, the increase in facility operating expense, and the change in classification of $28.7 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.

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.

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, 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)

Nine Months Ended

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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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.

The following table summarizes the operating results and data for our Independent Living segment for the nine months ended September 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)

Nine Months Ended

September 30, Increase (Decrease)

(in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent

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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 270 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 RevPOR was primarily the result of the current year rate increase.

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.

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)

The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the nine months ended September 30, 2023 and 2022, 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) 2023 2022 Amount Percent

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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 rent increases.

The increase in the segment's same community RevPOR was primarily the result of the current year rate increase.

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 and higher third-party referral source costs associated with resident move ins, 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.

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)

The following table summarizes the operating results and data for our CCRCs segment for the nine months ended September 30, 2023 and 2022, 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) 2023 2022 Amount Percent

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The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of an 8.2% increase in same community RevPOR and a 50 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 RevPOR was primarily the result of the current year rate increase.

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.

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, offset by an increase in the segment's same community facility operating expense, including a $2.6 million, or 2.1%, 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.

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)

The following table summarizes other income and expense items in our operating results for the nine months ended September 30, 2023 and 2022.

Nine Months Ended

September 30, Increase (Decrease)

(in thousands) 2023 2022 Amount Percent

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Other non-operating income (loss) 16,512 1,739 14,773 NM

Benefit (provision) for income taxes (847) 786 (1,633) NM

Benefit (provision) for income taxes 1,029 1,086 (57) (5.2) %

Reimbursed Costs Incurred on Behalf of Managed Communities and Costs Incurred on Behalf of Managed Communities.

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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.

The increase in general and administrative expense was primarily attributable to an increase in estimated incentive compensation costs and an increase in organizational restructuring costs compared to the prior year period, primarily for severance costs for our senior leadership changes.

General and administrative expense includes transaction and organizational restructuring costs of $3.8 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.

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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.

During the nine months ended September 30, 2023, we recorded $9.6 million of non-cash impairment charges, primarily due to the potential disposition of up to five underperforming communities and lower than expected occupancy and decreased future cash flow estimates at certain leased communities.

During the nine months ended September 30, 2022, we recorded $17.4 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.

The increase in gain on sale of communities, net was due to the sale of our one remaining entrance fee community during the nine months ended September 30, 2023.

Interest Expense.

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The decrease in equity in loss of unconsolidated ventures was primarily due to improved operating results for our health care services venture.

Other Non-operating Income (Loss) .

The increase in other non-operating income was primarily due to increased income recognized for insurance recoveries from our property and casualty insurance policies.

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.

The difference between our effective tax rate for the nine months ended September 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 $23.0 million for the nine months ended September 30, 2023, which was partially offset by an increase in the valuation allowance of $21.0 million.

We recorded an aggregate deferred federal, state, and local tax expense of $52.8 million for the nine months ended September 30, 2022, which was partially offset by a reduction to the valuation allowance of $50.7 million.

Liquidity and Capital Resources

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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)

Nine Months Ended

September 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) operating activities $ 133,629 $ 51,843 $ 81,786 157.8 %

Net cash provided by (used in) investing activities (135,747) (57,493) 78,254 136.1 %

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Adjusted Free Cash Flow $ (26,176) $ (97,827) $ 71,651 73.2 %

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.

The increase in net cash provided by operating activities was primarily attributable to an increase in resident fee revenue compared to the prior year period, partially offset by a $40.1 million decrease in cash received associated with government grants and credits, 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 $178.7 million decrease in proceeds from sales and maturities of marketable securities compared to the prior year period, partially offset by a $70.3 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 change in Adjusted Free Cash Flow was primarily attributable to the increase in net cash provided by operating activities and an increase in property and casualty insurance proceeds compared to the prior year period, partially offset by a $46.1 million increase in non-development capital expenditures, net compared to the prior year period.

Our principal sources of liquidity have historically been from:

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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 September 30, 2023, we had $3.8 billion of debt outstanding at a weighted average interest rate of 5.47%.

As of such date, 92.0%, 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.

As of September 30, 2023, we had $1.1 billion of operating and financing lease obligations, and for the twelve months ending September 30, 2024, we will be required to make approximately $281.4 million of cash lease payments in connection with our existing operating and financing leases.

Total liquidity of $405.4 million as of September 30, 2023 included $331.7 million of unrestricted cash and cash equivalents (excluding restricted cash of $71.6 million), $66.2 million of marketable securities, and $7.5 million of availability on our secured credit facility.

Total liquidity as of September 30, 2023 decreased $47.2 million from total liquidity of $452.6 million as of December 31, 2022.

The decrease was primarily attributable to negative $26.2 million of Adjusted Free Cash Flow and repayments of mortgage debt, partially offset by the net proceeds from the sale of our one remaining entrance fee community.

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.

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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 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.

As of September 30, 2023, 13% of our owned communities were unencumbered by mortgage debt.

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.

We expect 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.

As of September 30, 2023, our current liabilities exceeded current assets by $304.3 million.

In addition to the $304.5 million current portion of long-term debt, included in our current liabilities is $191.7 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, marketable securities, and proceeds from financings and refinancings of various assets will be sufficient to fund our liquidity needs for at least the next 12 months.

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 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.

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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.

Corporate capital expenditures include those for information technology systems and equipment 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.

The following table summarizes our capital expenditures for the nine months ended September 30, 2023 for our consolidated business.

(in thousands)

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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 $28.0 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.

We received $19.5 million of such insurance reimbursements in the nine months ended September 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.

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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.

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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.

We expect to satisfy the conditions to exercise the option to extend the facility for the first additional one year term.

Amounts drawn under the facility will bear interest at SOFR plus an applicable margin which was 2.75% as of September 30, 2023.

Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of September 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.

As of September 30, 2023, $72.5 million of letters of credit and no cash borrowings were outstanding under our $80.0 million secured credit facility and the facility had $7.5 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, 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).

As of September 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.

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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.

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, 2023.

We are responsible for all operating costs, including repairs, property taxes, and insurance.

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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.

For the three and nine months ended September 30, 2023, our cash lease payments for our operating leases were $66.5 million and $188.8 million, respectively, and for our financing leases were $5.2 million and $25.2 million, respectively.

As of September 30, 2023, for the twelve months ending September 30, 2024, we will be required to make $281.4 million of cash lease payments in connection with our existing operating and financing leases.

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.

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, and/or further adjusted for certain other specified adjustments.

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.

As of September 30, 2023, our liquidity was $405.4 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.

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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.

As of September 30, 2023, we are in compliance with the financial covenants of our debt agreements and long-term leases.

Non-GAAP Financial Measures

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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.

(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;

(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;

and (iv) we use the measure for components of executive compensation.

Adjusted EBITDA has material limitations as a performance measure, including:

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022 2023 2022

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$ 80,220 $ 106,851 $ 250,215 $ 194,741

(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.

(1) Adjusted EBITDA includes a $2.6 million and $9.1 million benefit for the three and nine months ended September 30, 2023, respectively, and $66.8 million and $75.5 million benefit for the three and nine months ended September 30, 2022, respectively, of government grants and credits recognized in other operating income.

Adjusted Free Cash Flow

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community expansions, major community redevelopment and repositioning projects, and the development of new communities.

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;

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.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022 2023 2022

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(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.

• $2.7 million and $28.0 million benefit for the three and nine months ended September 30, 2023, respectively, and $62.8 million and $68.1 million benefit for the three and nine months ended September 30, 2022, 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.

• $0.1 million and $3.8 million for the three and nine months ended September 30, 2023, respectively, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2022, respectively, for transaction and organizational restructuring costs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis