Brookdale Senior Living Inc. 10-Q

Item 1. Financial Statements BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except stock amounts) September 30, 2023 December 31, 2022 Assets (Unaudited) Current assets Cash and cash equivalents $ 331,716 $ 398,850 Marketable securities 66,233 48,680 Restricted cash 41,265 27,735 Accounts receivable, net 47,522 55,761 Assets held for sale 12,675 — Prepaid expenses and other current assets, net 94,536 106,067 Total current assets 593,947 637,093 Property, plant and equipment and leasehold intangibles, net 4,372,072 4,535,702 Operating lease right-of-use assets 707,434 597,130 Restricted cash 30,295 47,963 Investment in unconsolidated ventures 55,973 55,333 Goodwill 27,321 27,321 Deferred tax asset 3,619 1,604 Other assets, net 38,408 34,916 Total assets $ 5,829,069 $ 5,937,062 Liabilities and Equity Current liabilities Current portion of long-term debt $ 304,504 $ 66,043 Current portion of financing lease obligations 1,031 24,059 Current portion of operating lease obligations 190,703 176,758 Trade accounts payable 76,784 71,000 Accrued expenses 260,349 237,148 Refundable fees and deferred revenue 64,924 66,197 Total current liabilities 898,295 641,205 Long-term debt, less current portion 3,492,860 3,784,099 Financing lease obligations, less current portion 150,763 224,801 Operating lease obligations, less current portion 722,293 616,973 Other liabilities 71,519 85,831 Total liabilities 5,335,730 5,352,909 Preferred stock, $ 0.01 par value, 50,000,000 shares authorized at September 30, 2023 and December 31, 2022; no shares issued and outstanding — — Common stock, $ 0.01 par value, 400,000,000 shares authorized at September 30, 2023 and December 31, 2022; 198,767,716 and 197,776,991 shares issued and 188,240,191 and 187,249,466 shares outstanding (including 2,061 and 422,542 unvested restricted shares), respectively 1,988 1,978 Additional paid-in-capital 4,339,378 4,332,302 Treasury stock, at cost; 10,527,525 shares at September 30, 2023 and December 31, 2022 ( 102,774 ) ( 102,774 ) Accumulated deficit ( 3,746,756 ) ( 3,648,901 ) Total Brookdale Senior Living Inc. stockholders' equity 491,836 582,605 Noncontrolling interest 1,503 1,548 Total equity 493,339 584,153 Total liabilities and equity $ 5,829,069 $ 5,937,062 See accompanying notes to condensed consolidated financial statements. 4 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Resident fees $ 717,123 $ 650,248 $ 2,140,688 $ 1,927,610 Management fees 2,566 2,967 7,653 9,625 Reimbursed costs incurred on behalf of managed communities 34,979 37,484 103,932 112,013 Other operating income 2,623 66,759 9,073 75,546 Total revenue and other operating income 757,291 757,458 2,261,346 2,124,794 Facility operating expense (excluding facility depreciation and amortization of $ 79,384 , $ 81,405 , $ 236,547 , and $ 242,281 , respectively) 537,411 525,510 1,599,336 1,551,938 General and administrative expense (including non-cash stock-based compensation expense of $ 2,893 , $ 3,403 , $ 8,966 , and $ 10,907 , respectively) 43,076 41,331 137,021 128,209 Facility operating lease expense 53,145 41,317 149,784 124,419 Depreciation and amortization 85,932 86,922 255,314 259,229 Asset impairment 9,086 5,688 9,606 17,362 Loss (gain) on sale of communities, net — — ( 36,296 ) — Costs incurred on behalf of managed communities 34,979 37,484 103,932 112,013 Income (loss) from operations ( 6,338 ) 19,206 42,649 ( 68,376 ) Interest income 6,323 2,192 17,764 3,065 Interest expense: Debt ( 53,413 ) ( 41,330 ) ( 155,984 ) ( 110,180 ) Financing lease obligations ( 4,950 ) ( 11,916 ) ( 16,955 ) ( 35,968 ) Amortization of deferred financing costs ( 1,910 ) ( 1,528 ) ( 5,749 ) ( 4,590 ) Change in fair value of derivatives 861 4,901 5,130 9,277 Equity in earnings (loss) of unconsolidated ventures ( 1,426 ) ( 2,020 ) ( 3,156 ) ( 9,353 ) Non-operating gain (loss) on sale of assets, net — ( 56 ) 860 611 Other non-operating income (loss) 10,166 1,877 16,512 1,739 Income (loss) before income taxes ( 50,687 ) ( 28,674 ) ( 98,929 ) ( 213,775 ) Benefit (provision) for income taxes 1,876 300 1,029 1,086 Net income (loss) ( 48,811 ) ( 28,374 ) ( 97,900 ) ( 212,689 ) Net (income) loss attributable to noncontrolling interest 15 15 45 ( 101 ) Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders $ ( 48,796 ) $ ( 28,359 ) $ ( 97,855 ) $ ( 212,790 ) Basic and diluted net income (loss) per share attributable to Brookdale Senior Living Inc. common stockholders $ ( 0.22 ) $ ( 0.15 ) $ ( 0.43 ) $ ( 1.14 ) Weighted average shares used in computing basic and diluted net income (loss) per share 225,416 186,790 225,136 186,493 See accompanying notes to condensed consolidated financial statements. 5 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total equity, balance at beginning of period $ 539,276 $ 518,567 $ 584,153 $ 699,623 Common stock: Balance at beginning of period $ 1,988 $ 1,978 $ 1,978 $ 1,975 Restricted stock and restricted stock units, net — — 16 9 Shares withheld for employee taxes — — ( 6 ) ( 6 ) Balance at end of period $ 1,988 $ 1,978 $ 1,988 $ 1,978 Additional paid-in-capital: Balance at beginning of period $ 4,336,504 $ 4,211,931 $ 4,332,302 $ 4,208,675 Compensation expense related to restricted stock grants 2,893 3,403 8,966 10,907 Restricted stock and restricted stock units, net — — ( 16 ) ( 9 ) Shares withheld for employee taxes ( 19 ) ( 37 ) ( 1,874 ) ( 4,276 ) Balance at end of period $ 4,339,378 $ 4,215,297 $ 4,339,378 $ 4,215,297 Treasury stock: Balance at beginning and end of period $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) Accumulated deficit: Balance at beginning of period $ ( 3,697,960 ) $ ( 3,594,905 ) $ ( 3,648,901 ) $ ( 3,410,474 ) Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders ( 48,796 ) ( 28,359 ) ( 97,855 ) ( 212,790 ) Balance at end of period $ ( 3,746,756 ) $ ( 3,623,264 ) $ ( 3,746,756 ) $ ( 3,623,264 ) Noncontrolling interest: Balance at beginning of period $ 1,518 $ 2,337 $ 1,548 $ 2,221 Net income (loss) attributable to noncontrolling interest ( 15 ) ( 15 ) ( 45 ) 101 Noncontrolling interest distribution — ( 760 ) — ( 760 ) Balance at end of period $ 1,503 $ 1,562 $ 1,503 $ 1,562 Total equity, balance at end of period $ 493,339 $ 492,799 $ 493,339 $ 492,799 Common stock share activity Outstanding shares of common stock: Balance at beginning of period 188,235 187,256 187,249 186,958 Restricted stock and restricted stock units, net 10 8 1,561 915 Shares withheld for employee taxes ( 5 ) ( 8 ) ( 570 ) ( 617 ) Balance at end of period 188,240 187,256 188,240 187,256 See accompanying notes to condensed consolidated financial statements. 6 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended September 30, 2023 2022 Cash Flows from Operating Activities Net income (loss) $ ( 97,900 ) $ ( 212,689 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization, net 261,063 263,819 Asset impairment 9,606 17,362 Equity in (earnings) loss of unconsolidated ventures 3,156 9,353 Distributions from unconsolidated ventures from cumulative share of net earnings 430 561 Amortization of entrance fees ( 732 ) ( 1,816 ) Proceeds from deferred entrance fee revenue 477 2,360 Deferred income tax (benefit) provision ( 2,015 ) ( 2,068 ) Operating lease expense adjustment ( 33,820 ) ( 25,329 ) Change in fair value of derivatives ( 5,130 ) ( 9,277 ) Loss (gain) on sale of assets, net ( 37,156 ) ( 611 ) Non-cash stock-based compensation expense 8,966 10,907 Property and casualty insurance income ( 14,047 ) ( 996 ) Other non-operating (income) loss ( 2,542 ) — Changes in operating assets and liabilities: Accounts receivable, net 8,250 ( 411 ) Prepaid expenses and other assets, net 9,347 ( 11,807 ) Prepaid insurance premiums financed with notes payable ( 6,530 ) ( 5,552 ) Trade accounts payable and accrued expenses 21,444 1,548 Refundable fees and deferred revenue 8,518 7,265 Operating lease assets and liabilities for lessor capital expenditure reimbursements 2,244 9,224 Net cash provided by (used in) operating activities 133,629 51,843 Cash Flows from Investing Activities Purchase of marketable securities ( 159,811 ) ( 230,106 ) Sale and maturities of marketable securities 145,100 323,765 Capital expenditures, net of related payables ( 174,700 ) ( 150,572 ) Acquisition of assets, net of cash acquired ( 574 ) ( 6,004 ) Investment in unconsolidated ventures ( 7,589 ) ( 192 ) Proceeds from sale of assets, net 43,181 5,844 Property and casualty insurance proceeds 19,536 — Other ( 890 ) ( 228 ) Net cash provided by (used in) investing activities ( 135,747 ) ( 57,493 ) Cash Flows from Financing Activities Proceeds from debt 25,532 32,031 Repayment of debt and financing lease obligations ( 91,866 ) ( 64,190 ) Payment of financing costs, net of related payables ( 940 ) ( 646 ) Payments of employee taxes for withheld shares ( 1,880 ) ( 4,282 ) Other — ( 760 ) Net cash provided by (used in) financing activities ( 69,154 ) ( 37,847 ) Net increase (decrease) in cash, cash equivalents, and restricted cash ( 71,272 ) ( 43,497 ) Cash, cash equivalents, and restricted cash at beginning of period 474,548 438,314 Cash, cash equivalents, and restricted cash at end of period $ 403,276 $ 394,817 See accompanying notes to condensed consolidated financial statements. 7 BROOKDALE SENIOR LIVING INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Description of Business Brookdale Senior Living Inc. together with its consolidated subsidiaries ("Brookdale" or the "Company") is an operator of 672 senior living communities throughout the United States. The Company is committed to its mission of enriching the lives of the people it serves with compassion, respect, excellence, and integrity. The Company operates and manages independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). The Company's senior living communities and its comprehensive network help to provide seniors with care, connection, and services in an environment that feels like home. As of September 30, 2023, the Company owned 346 communities, representing a majority of the Company's community portfolio, leased 295 communities, and managed 31 communities. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position, results of operations, and cash flows of the Company for all periods presented. Certain information and footnote disclosures included in annual financial statements have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. These interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 22, 2023. Principles of Consolidation The condensed consolidated financial statements include the accounts of Brookdale and its consolidated subsidiaries. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying unaudited condensed consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation, and net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. The Company reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting. Use of Estimates The preparation of the condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, other operating income, asset impairments, self-insurance reserves, performance-based compensation, the allowance for credit losses, depreciation and amortization, leasing transactions, income taxes, and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the original estimates. Reclassifications Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations. 8 3. Fair Value Measurements Marketable Securities As of September 30, 2023 and December 31, 2022, marketable securities of $ 66.2 million and $ 48.7 million, respectively, are stated at fair value based on valuations provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy. Interest Rate Derivatives The Company's derivative assets include interest rate cap and swap instruments that effectively manage the risk above certain interest rates for a portion of the Company's long-term variable rate debt. The Company has not designated the interest rate cap and swap instruments as hedging instruments and as such, changes in the fair value of the instruments are recognized in earnings in the period of the change. The interest rate derivative positions are valued using models developed by the respective counterparty that use as their basis readily available observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. The Company considers the credit risk of its counterparties when evaluating the fair value of its derivatives. The following table summarizes the Company's Secured Overnight Financing Rate ("SOFR") interest rate cap instruments as of September 30, 2023. ($ in thousands) Current notional balance $ 1,231,920 Weighted average fixed cap rate 4.34 % Weighted average remaining term 1.0 year Estimated asset fair value (included in other assets, net) at September 30, 2023 $ 14,826 Estimated asset fair value (included in other assets, net) at December 31, 2022 $ 10,599 The following table summarizes the Company's SOFR interest rate swap instrument as of September 30, 2023. ($ in thousands) Current notional balance $ 220,000 Fixed interest rate 3.00 % Remaining term 0.6 years Estimated asset fair value (included in other assets, net) at September 30, 2023 $ 3,488 Estimated asset fair value (included in other assets, net) at December 31, 2022 $ 4,834 Long-term debt The Company estimates the fair value of its debt primarily using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company estimates the fair value of its convertible senior notes based on valuations provided by third-party pricing services. The Company had outstanding long-term debt with a carrying amount of approximately $ 3.8 billion and $ 3.9 billion as of September 30, 2023 and December 31, 2022, respectively. Fair value of the long-term debt is approximately $ 3.4 billion as of both September 30, 2023 and December 31, 2022. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy. 9 4. Revenue The Company disaggregates its revenue from contracts with customers by payor source as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Resident fee revenue by payor source is as follows. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Private pay 93.7 % 93.6 % 93.7 % 93.5 % Government reimbursement 4.9 % 5.1 % 4.9 % 5.1 % Other third-party payor programs 1.4 % 1.3 % 1.4 % 1.4 % Refer to Note 14 for disaggregation of revenue by reportable segment. The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source, although terms generally include payment to be made within 30 days. Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain healthcare services is generally billed monthly in arrears. Additionally, non-refundable community fees are generally billed and collected in advance or upon move-in of a resident under the Company's independent living, assisted living, and memory care residency agreements. Amounts of revenue that are collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had total deferred revenue (included within refundable fees and deferred revenue and other liabilities within the condensed consolidated balance sheets) of $ 57.9 million and $ 67.3 million, including $ 31.6 million and $ 25.2 million of monthly resident fees billed and received in advance, as of September 30, 2023 and December 31, 2022, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized $ 49.1 million and $ 53.1 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2023 and 2022, respectively. 5. Property, Plant and Equipment and Leasehold Intangibles, Net As of September 30, 2023 and December 31, 2022, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following. (in thousands) September 30, 2023 December 31, 2022 Land $ 502,084 $ 506,968 Buildings and improvements 5,331,202 5,323,736 Furniture and equipment 1,098,183 1,055,304 Resident and leasehold operating intangibles 283,711 286,122 Construction in progress 40,812 41,778 Assets under financing leases and leasehold improvements 1,083,714 1,375,521 Property, plant and equipment and leasehold intangibles 8,339,706 8,589,429 Accumulated depreciation and amortization ( 3,967,634 ) ( 4,053,727 ) Property, plant and equipment and leasehold intangibles, net $ 4,372,072 $ 4,535,702 Assets under financing leases and leasehold improvements includes $ 29.9 million and $ 98.4 million of financing lease right-of-use assets, net of accumulated amortization, as of September 30, 2023 and December 31, 2022, respectively. Refer to Note 7 for further information on the Company's financing leases. Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $ 85.9 million and $ 86.9 million for the three months ended September 30, 2023 and 2022, respectively, and $ 255.3 million and $ 259.2 million for the nine months ended September 30, 2023 and 2022, 10 respectively. The Company recognized $ 5.3 million and $ 5.8 million for the three and nine months ended September 30, 2023, respectively of non-cash impairment charges in its operating results for its property, plant and equipment and leasehold intangibles assets, primarily due to the potential disposition of up to five underperforming communities. The Company recognized $ 3.8 million and $ 5.9 million for the three and nine months ended September 30, 2022, respectively, of non-cash impairment charges in its operating results for its property, plant and equipment and leasehold intangibles assets, primarily due to property damage sustained at certain communities and decreased occupancy and future cash flow estimates at certain communities as a result of the continued impacts of the COVID-19 pandemic. 6. Debt Long-term debt consists of the following. (in thousands) September 30, 2023 December 31, 2022 Fixed rate mortgage notes payable due 2024 through 2047; weighted average interest rate of 4.14 % as of both September 30, 2023 and December 31, 2022 $ 2,040,563 $ 2,055,867 Variable rate mortgage notes payable due 2025 through 2030; weighted average interest rate of 7.70 % and 6.68 % as of September 30, 2023 and December 31, 2022, respectively 1,528,667 1,568,555 Convertible notes payable due October 2026; interest rate of 2.00 % as of both September 30, 2023 and December 31, 2022 230,000 230,000 Tangible equity units senior amortizing notes due November 2025; interest rate of 10.25 % as of both September 30, 2023 and December 31, 2022 19,993 25,586 Other notes payable due 2023; interest rate of 5.90 % as of September 30, 2023 2,673 — Deferred financing costs, net ( 24,532 ) ( 29,866 ) Total long-term debt 3,797,364 3,850,142 Current portion 304,504 66,043 Total long-term debt, less current portion $ 3,492,860 $ 3,784,099 As of September 30, 2023, 92.0 %, or $ 3.5 billion, of the Company's total debt obligations represented non-recourse property-level mortgage financings. The Company's remaining variable rate mortgage notes payable arrangements indexed to London Interbank Offered Rate ("LIBOR") were modified to reference SOFR rather than LIBOR prospectively after the discontinuance of LIBOR in July 2023. As of September 30, 2023, the Company's variable rate mortgage notes payable were indexed to SOFR plus a weighted average margin of 239 basis points. The Company applied the optional expedient provided by Accounting Standards Codification 848, Reference Rate Reform , for debt contract modifications related to the discontinuation of reference rates to ease the potential burden in accounting for reference rate reform. As of September 30, 2023, $ 72.5 million of letters of credit and no cash borrowings were outstanding under the Company's $ 80.0 million secured credit facility. The credit facility matures on January 15, 2024 and the Company has the option to extend the facility for two additional terms of one year each subject to the satisfaction of certain conditions. The Company 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. Financial Covenants Certain of the Company's debt documents contain restrictions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. In addition, the Company's debt documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable debt documents. Many of the Company's debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, the Company's long-term mortgage debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. 11 As of September 30, 2023, the Company is in compliance with the financial covenants of its debt agreements. 7. Leases As of September 30, 2023, the Company operated 295 communities under long-term leases ( 281 operating leases and 14 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. In certain cases, the Company guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. As of September 30, 2023, the Company is in compliance with the financial covenants of its long-term leases. Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $ 3.8 million for both the three and nine months ended September 30, 2023, of non-cash impairment charges for its operating lease right-of-use assets, primarily due to lower than expected occupancy and decreased future cash flow estimates at certain communities. The Company recognized $ 1.9 million and $ 11.5 million for the three and nine months ended September 30, 2022, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continued impacts of the COVID-19 pandemic and property damage sustained at certain communities. A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows. Three Months Ended September 30, Nine Months Ended September 30, Operating Leases (in thousands) 2023 2022 2023 2022 Facility operating expense $ 1,853 $ 1,621 $ 5,211 $ 4,705 Facility lease expense 53,145 41,317 149,784 124,419 Operating lease expense 54,998 42,938 154,995 129,124 Operating lease expense adjustment (1) 11,458 8,714 33,820 25,329 Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements — ( 4,367 ) ( 2,244 ) ( 9,224 ) Operating net cash outflows from operating leases $ 66,456 $ 47,285 $ 186,571 $ 145,229 (1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense. 12 Three Months Ended September 30, Nine Months Ended September 30, Financing Leases (in thousands) 2023 2022 2023 2022 Depreciation and amortization $ 1,159 $ 7,405 $ 8,902 $ 22,678 Interest expense: financing lease obligations 4,950 11,916 16,955 35,968 Financing lease expense $ 6,109 $ 19,321 $ 25,857 $ 58,646 Operating cash outflows from financing leases $ 4,950 $ 11,916 $ 16,955 $ 35,968 Financing cash outflows from financing leases 244 5,506 8,222 16,606 Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement — ( 2,727 ) — ( 9,704 ) Total net cash outflows from financing leases $ 5,194 $ 14,695 $ 25,177 $ 42,870 The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the condensed consolidated balance sheet as of September 30, 2023 are as follows (in thousands). Year Ending December 31, Operating Leases Financing Leases 2023 (three months) $ 66,197 $ 5,026 2024 258,495 20,213 2025 258,356 6,798 2026 143,912 6,781 2027 145,751 6,029 Thereafter 330,095 26,302 Total 1,202,806 71,149 Purchase option liability and non-cash gain on future sale of property — 145,136 Imputed interest and variable lease payments ( 289,810 ) ( 64,491 ) Total lease obligations $ 912,996 $ 151,794 Welltower Lease Amendments During the three months ended June 30, 2023, the Company entered into amendments to its existing lease arrangements with Welltower Inc. ("Welltower") pursuant to which the Company continues to lease 74 communities. In connection with the amendments, the Company extended the maturity of one lease involving 39 communities from December 31, 2026 until June 30, 2032. As a result, the Company's 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 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 amendment to the lease arrangements increased the right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $ 122.3 million. The amendments replaced the net worth covenant provisions requiring the Company to maintain at least $ 400.0 million of stockholders' equity with a consolidated tangible net worth covenant requiring the Company to maintain at least $ 2.0 billion of 13 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 the Company’s long-term debt documents. So long as it maintains tangible net worth as defined in the leases of at least $ 1.5 billion, the Company will also be able to cure any breach by posting collateral with Welltower. 8. Investment in Unconsolidated Ventures As of September 30, 2023, the Company owns a 20 % equity interest, and affiliates of HCA Healthcare Inc. own an 80 % interest, in a health care services venture (the "HCS Venture"), which operates home health and hospice agencies in the United States. The Company's interest in the HCS Venture is accounted for under the equity method of accounting. The carrying amount of the Company's investment in the unconsolidated venture and maximum exposure to loss as a result of the Company's ownership interest in the HCS Venture is $ 54.1 million, which is included in investment in unconsolidated ventures on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2023. As of September 30, 2023, the Company is not required to provide financial support, through a liquidity arrangement or otherwise, to the HCS Venture. During the three months ended September 30, 2023, the Company contributed $ 7.5 million to the HCS Venture. 9. Litigation The Company has been and is currently involved in litigation and claims incidental to the conduct of its business, which it believes are generally comparable to other companies in the senior living and healthcare industries, including, but not limited to, putative class action claims from time to time regarding staffing at the Company's communities and compliance with consumer protection laws and the Americans with Disabilities Act. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, the Company maintains general liability, professional liability, and other insurance policies in amounts and with coverage and deductibles the Company believes are appropriate, based on the nature and risks of its business, historical experience, availability, and industry standards. The Company's current policies provide for deductibles for each claim and contain various exclusions from coverage. The Company uses its wholly-owned captive insurance company for the purpose of insuring certain portions of its risk retention under its general and professional liability insurance programs. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts, for claims that exceed the funding level of the Company's wholly-owned captive insurance company, and for claims or portions of claims that are not covered by such policies and/or exceed the policy limits. The senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement actions, or litigation related to regulatory compliance matters. In addition, the Company is subject to various government reviews, audits, and investigations to verify compliance with Medicare and Medicaid programs and other applicable laws and regulations. The Centers for Medicare & Medicaid Services has engaged third-party firms to review claims data to evaluate appropriateness of billings. In addition to identifying overpayments, audit contractors can refer suspected violations to government authorities. In addition, states' Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. An adverse outcome of government scrutiny may result in citations, sanctions, other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and damage to the Company's business reputation. The Company's costs to respond to and defend any such audits, reviews, and investigations may be significant. In June 2020, the Company and several current and former executive officers were named as defendants in a putative class action lawsuit alleging violations of the federal securities laws filed in the federal court for the Middle District of Tennessee. The lawsuit asserted that the defendants made material misstatements and omissions concerning the Company's business, operational and compliance policies, compliance with applicable regulations and statutes, and staffing practices that caused the Company's stock price to be artificially inflated between August 2016 and April 2020. The district court dismissed the lawsuit and entered judgment in favor of the defendants in September 2021, and the plaintiffs did not file an appeal. Between October 2020 and June 2021, alleged stockholders of the Company filed several stockholder derivative lawsuits in the federal courts for the Middle District of Tennessee and the District of Delaware, which were subsequently transferred to the Middle District of Tennessee. The derivative lawsuits are currently pending and assert claims on behalf of the Company against certain current and former officers and directors for alleged breaches of duties owed to the Company. The complaints incorporate substantively similar allegations to the securities lawsuit previously described. 14 10. Stock-Based Compensation Grants of restricted stock units and stock awards under the Company's 2014 Omnibus Incentive Plan were as follows. (in thousands, except weighted average amounts) Restricted Stock Unit and Stock Award Grants Weighted Average Grant Date Fair Value Total Grant Date Fair Value Three months ended March 31, 2023 3,959 $ 2.97 $ 11,778 Three months ended June 30, 2023 10 $ 2.95 $ 29 Three months ended September 30, 2023 16 $ 4.01 $ 65 11. Earnings Per Share Potentially dilutive common stock equivalents for the Company include convertible senior notes, warrants, unvested restricted stock, restricted stock units, and prepaid stock purchase contracts. On October 1, 2021, the Company issued $ 230.0 million principal amount of 2.00 % convertible senior notes due 2026 (the "Notes"). As of September 30, 2023, the maximum number of shares issuable upon settlement of the Notes is 38.3 million (after giving effect to additional shares that would be issuable upon conversion in connection with the occurrence of certain corporate or other events). On July 26, 2020, the Company issued to Ventas, Inc. ("Ventas") a warrant (the "Warrant") to purchase 16.3 million shares of the Company’s common stock, $ 0.01 par value per share, at a price per share of $ 3.00 . The Warrant is exercisable at Ventas' option at any time and from time to time, in whole or in part, until December 31, 2025. The exercise price and the number of shares issuable on exercise of the Warrant are subject to certain anti-dilution adjustments, including for cash dividends, stock dividends, stock splits, reclassifications, non-cash distributions, certain repurchases of common stock, and business combination transactions. During the three months ended December 31, 2022, the Company issued 2,875,000 of its 7.00 % tangible equity units (the "Units") at a public offering price of $ 50.00 per Unit for an aggregate offering of $ 143.8 million. Each Unit is comprised of a prepaid stock purchase contract and a senior amortizing note with an initial principal amount of $ 8.8996 . Unless settled early in accordance with the terms of the instruments, under each purchase contract, the Company is obligated to deliver to the holder on November 15, 2025 a minimum of 12.9341 , and a maximum of 15.1976 , shares of the Company's common stock depending on the daily volume-weighted average price of its common stock for the 20 trading days preceding the settlement date. As of September 30, 2023, the maximum number of shares issuable upon settlement of the Units' prepaid stock purchase contracts is 43.7 million. Basic earnings per share ("EPS") is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding, after giving effect to the minimum number of shares issuable upon settlement of the prepaid stock purchase contract component of the Units. For both the three and nine months ended September 30, 2023, 37.2 million shares are included in weighted average basic shares outstanding for the minimum number of shares issuable upon settlement of the Units' prepaid stock purchase contracts. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Weighted average common shares outstanding 188,230 186,790 187,950 186,493 Weighted average minimum shares issuable under purchase contracts 37,186 — 37,186 — Weighted average shares outstanding - basic 225,416 186,790 225,136 186,493 15 Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. Diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. For the purposes of computing diluted EPS, weighted average shares outstanding do not include potentially dilutive securities that are anti-dilutive under the treasury stock method or if-converted method, and performance-based equity awards are included based on the attainment of the applicable performance metrics as of the end of the reporting period. The Company has the following potentially outstanding shares of common stock, which were excluded from the computation of diluted net income (loss) per share attributable to common stockholders in both periods as a result of the net loss. As of September 30, (in millions) 2023 2022 Convertible senior notes 38.3 38.3 Warrants 16.3 16.3 Restricted stock and restricted stock units 6.5 5.4 Incremental shares issuable under purchase contracts 6.5 — Total 67.6 60.0 12. Income Taxes The difference between the Company's effective tax rate for the three months ended September 30, 2023 and 2022 was primarily due to a 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. The difference between the Company's 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 the Company's stock for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The Company 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 to the valuation allowance of $ 10.0 million. The Company 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 to the valuation allowance of $ 21.0 million. The Company 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. The Company 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. The Company evaluates its deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company's valuation allowance as of September 30, 2023 and December 31, 2022 was $ 446.0 million and $ 425.0 million, respectively. The increase in the valuation allowance for both the nine months ended September 30, 2023 and 2022 is the result of current operating losses during the periods and by the anticipated reversal of future tax liabilities offset by future tax deductions. The Company recorded interest charges related to its tax contingency reserve for cash tax positions for the three and nine months ended September 30, 2023 and 2022 which are included in income tax expense or benefit for the period. As of September 30, 2023, tax returns for years 2019 through 2022 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination. 13. Supplemental Disclosure of Cash Flow Information During the period from January 1, 2022 through September 30, 2023, the Company disposed of three owned communities, the Company's triple-net lease obligations on four communities were terminated (including through the acquisition of one formerly leased community), and the Company acquired the remaining 50 % equity interest in one community. On May 1, 2023, the Company completed the sale of its one remaining entrance fee community, which was included within the Company's CCRCs segment. The Company 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. 16 On November 1, 2023, the Company completed the sale of a CCRC, for which the Company received cash proceeds of $12.7 million, net of transaction costs, at closing. As of September 30, 2023, the community was classified as held for sale within the CCRCs segment, resulting in $ 12.7 million of property, plant and equipment and leasehold intangibles being presented as assets held for sale within the condensed consolidated balance sheets. The Company was eligible to claim the employee retention credit for certain of its associates under the Coronavirus Aid, Relief, and Economic Security Act of 2020 and subsequent legislation. During the years ended December 31, 2022 and 2021, the Company recognized $ 9.4 million and $ 9.9 million, respectively, of employee retention credits on wages paid from March 12, 2020 to December 31, 2021 within other operating income, for which the Company has received $ 19.3 million in cash through September 30, 2023. During the nine months ended September 30, 2023 and 2022, the Company received cash of $ 14.7 million and $ 1.2 million, respectively, for such employee retention credits. 17 Nine Months Ended September 30, (in thousands) 2023 2022 Supplemental Disclosure of Cash Flow Information: Interest paid $ 171,317 $ 142,242 Income taxes paid, net of refunds $ ( 1,233 ) $ 581 Capital expenditures, net of related payables: Capital expenditures - non-development, net $ 174,975 $ 128,831 Capital expenditures - development, net 1,309 4,357 Capital expenditures - non-development - reimbursable from lessor 2,244 18,927 Trade accounts payable ( 3,828 ) ( 1,543 ) Net cash paid $ 174,700 $ 150,572 Acquisition of assets, net of cash acquired: Prepaid expenses and other assets, net $ 23 $ — Property, plant and equipment and leasehold intangibles, net 6,872 4 Investment in unconsolidated ventures ( 3,395 ) — Financing lease obligations — 6,000 Other liabilities ( 384 ) — Other non-operating loss (income) ( 2,542 ) — Net cash paid $ 574 $ 6,004 Proceeds from sale of assets, net: Prepaid expenses and other assets, net $ ( 1,660 ) $ ( 1,301 ) Assets held for sale — ( 3,668 ) Property, plant and equipment and leasehold intangibles, net ( 23,733 ) ( 100 ) Refundable fees and deferred revenue 9,347 — Other liabilities 10,021 ( 164 ) Non-operating (gain) loss on sale of assets, net ( 860 ) ( 611 ) Loss (gain) on sale of communities, net ( 36,296 ) — Net cash received $ ( 43,181 ) $ ( 5,844 ) Supplemental Schedule of Non-cash Operating, Investing, and Financing Activities: Non-cash lease transactions, net: Property, plant and equipment and leasehold intangibles, net $ ( 51,542 ) $ 11,067 Operating lease right-of-use assets 216,492 11,219 Financing lease obligations 88,844 ( 6,307 ) Operating lease obligations ( 253,794 ) ( 15,979 ) Net $ — $ — 18 Restricted cash consists principally of deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs, escrow deposits for real estate taxes, property insurance, and capital expenditures, and debt service reserve accounts required by certain lenders under mortgage debt agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sums to the total of the same such amounts shown in the condensed consolidated statements of cash flows. (in thousands) September 30, 2023 December 31, 2022 Reconciliation of cash, cash equivalents, and restricted cash: Cash and cash equivalents $ 331,716 $ 398,850 Restricted cash 41,265 27,735 Long-term restricted cash 30,295 47,963 Total cash, cash equivalents, and restricted cash $ 403,276 $ 474,548 14. Segment Information The Company has three reportable segments: Independent Living; Assisted Living and Memory Care; and CCRCs. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment. Independent Living . The Company's Independent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors who desire to live in a residential setting that feels like home, without the efforts of ownership. The majority of the Company's independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services to accommodate their changing needs. Assisted Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily living for the Company's residents. The Company's assisted living and memory care communities include both freestanding, multi-story communities, as well as smaller, freestanding, single story communities. The Company also provides memory care services at freestanding memory care communities that are specially designed for residents with Alzheimer's disease and other dementias. CCRCs. The Company's CCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate a broad spectrum of physical ability and healthcare needs. Most of the Company's CCRCs have independent living, assisted living, memory care, and skilled nursing available on one campus. All Other. All Other includes communities operated by the Company pursuant to management agreements. Under the management agreements for these communities, the Company receives management fees as well as reimbursement of expenses it incurs on behalf of the owners. The following tables set forth selected segment financial data. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue and other operating income: Independent Living (1) $ 141,449 $ 137,626 $ 422,993 $ 388,769 Assisted Living and Memory Care (1) 496,232 491,818 1,475,322 1,365,172 CCRCs (1) 82,065 87,563 251,446 249,215 All Other 37,545 40,451 111,585 121,638 Total revenue and other operating income $ 757,291 $ 757,458 $ 2,261,346 $ 2,124,794 19 Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Segment operating income: (2) Independent Living $ 44,702 $ 46,395 $ 137,896 $ 122,788 Assisted Living and Memory Care 126,731 130,039 375,940 294,490 CCRCs 10,902 15,063 36,589 33,940 All Other 2,566 2,967 7,653 9,625 Total segment operating income 184,901 194,464 558,078 460,843 General and administrative expense (including non-cash stock-based compensation expense) 43,076 41,331 137,021 128,209 Facility operating lease expense 53,145 41,317 149,784 124,419 Depreciation and amortization 85,932 86,922 255,314 259,229 Asset impairment 9,086 5,688 9,606 17,362 Loss (gain) on sale of communities, net — — ( 36,296 ) — Income (loss) from operations $ ( 6,338 ) $ 19,206 $ 42,649 $ ( 68,376 ) As of (in thousands) September 30, 2023 December 31, 2022 Total assets: Independent Living (3) $ 1,223,941 $ 1,267,825 Assisted Living and Memory Care 3,366,695 3,329,516 CCRCs 631,255 664,502 Corporate and All Other 607,178 675,219 Total assets $ 5,829,069 $ 5,937,062 (1) All revenue and other operating income is earned from external third parties in the United States. (2) Segment operating income is defined as segment revenues and other operating income less segment facility operating expenses (excluding facility depreciation and amortization) and costs incurred on behalf of managed communities. (3) The Company's Independent Living segment had a carrying amount of goodwill of $ 27.3 million as of both September 30, 2023 and December 31, 2022. 20