Brookdale Senior Living Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "believe," "project," "predict," "continue," "plan," "target," or other similar words or expressions, and include statements regarding our expected financial and operational results. These forward-looking statements are based on certain assumptions and expectations, and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our assumptions or expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the impacts of the COVID-19 pandemic, including on the nation's economy and debt and equity markets and the local economies in our markets, and on us and our business, results of operations, cash flow, revenue, expenses, liquidity, and our strategic initiatives, including plans for future growth, which will depend on many factors, some of which cannot be foreseen, including the pace and consistency of recovery from the pandemic and any resurgence or variants of the disease; the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts; events which adversely affect the ability of seniors to afford resident fees, including downturns in the economy, housing market, consumer confidence, or the equity markets and unemployment among resident family members; changes in reimbursement rates, methods, or timing under governmental reimbursement programs including the Medicare and Medicaid programs; the effects of senior housing construction and development, lower industry occupancy, and increased competition; conditions of housing markets, regulatory changes, acts of nature, and the effects of climate change in geographic areas where we are concentrated; terminations of our resident agreements and vacancies in the living spaces we lease; failure to maintain the security and functionality of our information systems, to prevent a cybersecurity attack or breach, or to comply with applicable privacy and consumer protection laws, including HIPAA; our ability to complete our capital expenditures in accordance with our plans; our ability to identify and pursue development, investment, and acquisition opportunities and our ability to successfully integrate acquisitions; competition for the acquisition of assets; our ability to complete pending or expected disposition, acquisition, or other transactions on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing, and our ability to identify and pursue any such opportunities in the future; risks related to the implementation of our strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; limits on our ability to use net operating loss carryovers to reduce future tax payments; delays in obtaining regulatory approvals; disruptions in the financial markets or decreases in the appraised values or performance of our communities that affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; our ability to generate sufficient cash flow to cover required interest, principal, and long-term lease payments and to fund our planned capital projects; the effect of any non-compliance with any of our debt or lease agreements (including the financial or other covenants contained therein), including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements and the risk of loss of our property securing leases and indebtedness due to any resulting lease terminations and foreclosure actions; the effect of our indebtedness and long-term leases on our liquidity and our ability to operate our business; increases in market interest rates that increase the costs of our debt obligations; our ability to obtain additional capital on terms acceptable to us; departures of key officers and potential disruption caused by changes in management; increased competition for, or a shortage of, associates (including due to general labor market conditions), wage pressures resulting from increased competition, low unemployment levels, minimum wage increases and changes in overtime laws, and union activity; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us, including putative class action complaints; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations; the cost and difficulty of complying with increasing and evolving regulation; changes in, or our failure to comply with, employment-related laws and regulations; unanticipated costs to comply with legislative or regulatory developments; the risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, competition in the labor market, costs of salaries, wages, benefits, and insurance, interest rates, and tax rates; the impact of seasonal contagious illness or an outbreak of COVID-19 or other contagious disease in the markets in which we operate; actions of activist stockholders, including a proxy contest; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2022. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward- 21 looking statements, which reflect management's views as of the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements, and, except as required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or change in events, conditions, or circumstances on which any statement is based. Unless otherwise specified, references to "Brookdale," "we," "us," "our," or "the Company" in this Quarterly Report on Form 10-Q mean Brookdale Senior Living Inc. together with its consolidated subsidiaries. Overview We are the nation's premier operator of senior living communities, operating and managing 672 communities in 41 states as of 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, 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. The ability of residents to age-in-place is also beneficial to our residents' families who are concerned with care decisions for their elderly relatives. Resident Fee Increases The rates we charge our residents are highly dependent on local market conditions and the competitive environment in which the communities operate. As the senior living industry rebuilds occupancy lost due to the pandemic, we continue to experience a highly competitive environment for new residents. Generally, we have increased our monthly rates, including rates for care and other services, for private pay residents on an annual basis beginning January 1 each year. We made the annual rate adjustment effective January 1, 2023 for our in-place private pay residents. The increase was again higher than our typical annual rate adjustment in order to help offset our recent increased costs as a result of labor pressures, high inflation, and increased interest rates, as described below. As a result of rate and occupancy increases, consolidated RevPAR (as defined below) for the 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, 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 A confluence of macroeconomic conditions, including an intensely competitive labor environment and higher inflation and interest rates, has continued to affect our operations during 2023. Labor Pressures Labor costs comprise approximately two-thirds of our total facility operating expense. We began to experience pressures associated with the intensely competitive labor environment during 2021, which have continued into 2023. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. We have increased our recruiting efforts to fill existing open positions, resulting in increasing the size of our workforce 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 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 1.3% during both the three and nine months ended September 30, 2023 compared to the prior year periods. The increases primarily resulted from wage rate 22 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. Inflation Our non-labor facility operating expense comprises approximately one-third of our total facility operating expense and is subject to inflationary pressures. The United States consumer price index increased more than 10% since December 2021. We mitigated a portion of an increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. We mitigated a portion of rising utility costs through sustainability investments we made in recent years, such as lighting retrofits and water consumption projects. Despite our mitigation efforts and with higher occupancy, for the three and 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 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. 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 September 30, 2023. Many of our long-term variable rate debt instruments include provisions that obligate us to obtain additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The costs of obtaining additional interest rate cap agreements may offset the benefits of our existing interest rate cap agreements. For the three and 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. Community Transactions On May 1, 2023, we completed the sale of our one remaining entrance fee community. 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, 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. 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. Welltower Lease Amendments During the three months ended June 30, 2023, we entered into amendments to our existing lease arrangements with Welltower Inc. ("Welltower") pursuant to which we continue to lease 74 communities. In connection with the amendments, we extended the maturity of one lease involving 39 communities from December 31, 2026 until June 30, 2032. As a result, our amended lease arrangements provide that the current term for 69 of the communities will expire on June 30, 2032 and the current term for five of the communities will expire on December 31, 2024. The amendments did not change the amount of required lease payments over the previous term of the leases or the annual lease escalators. In addition, Welltower agreed to make available a pool in the aggregate amount of up to $17.0 million to fund costs associated with certain capital expenditure projects for 69 of 23 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 amendments replaced the net worth covenant provisions requiring us to maintain at least $400.0 million of stockholders' equity with a consolidated tangible net worth covenant requiring us to maintain at least $2.0 billion of tangible net worth, generally calculated as stockholders' equity plus accumulated depreciation and amortization less intangible assets and further adjusted for certain other items. Such calculation is generally similar to the tangible net worth covenants within certain of our long-term debt documents. So long as we maintain tangible net worth as defined in the leases of at least $1.5 billion, we will also be able to cure any breach by posting collateral with Welltower. Results of Operations As of 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). The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q. The results of operations for any particular period are not necessarily indicative of results for any future period. We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. • Senior housing operating results and data presented on a same community basis reflect results and data of a consistent population of communities by excluding the impact of changes in the composition of our portfolio of communities. The operating results exclude natural disaster expense and related insurance recoveries. We define our same community portfolio as communities consolidated and operational for the full period in both comparison years. Consolidated communities excluded from the same community portfolio include communities acquired or disposed of since the beginning of the prior year, communities classified as assets held for sale, certain communities planned for disposition, certain communities that have undergone or are undergoing expansion, redevelopment, and repositioning projects, and certain communities that have experienced a casualty event that significantly impacts their operations. Our management uses same community operating results and data for decision making, and we believe such results and data provide useful information to investors, because it enables comparisons of revenue, expense, and other operating measures for a consistent portfolio over time without giving effect to the impacts of communities that were not consolidated and operational for the comparison periods, communities acquired or disposed during the comparison periods (or planned for disposition), and communities with results that are or likely will be impacted by completed or in-process development-related capital expenditure projects. • RevPAR , or average monthly senior housing resident fee revenue per available unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding revenue for private duty services provided to seniors living outside of our communities and entrance fee amortization), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPAR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory 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 24 Care, and CCRCs segments. Our management uses RevPOR for decision making, and we believe the measure provides useful information to investors, because it reflects the average amount of senior housing resident fee revenue we derive from an occupied unit per month without factoring occupancy rates. RevPOR is a significant driver of our senior housing revenue performance. • Weighted average occupancy rate reflects the percentage of units at our owned and leased communities being utilized by residents over a reporting period. We measure occupancy rates with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments, and also measure this metric both on a consolidated senior housing and a same community basis. Our management uses weighted average occupancy, and we believe the measure provides useful information to investors, because it is a significant driver of our senior housing revenue performance. This section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable measure in accordance with generally accepted accounting principles in the United States ("GAAP"). Comparison of Three Months Ended September 30, 2023 and 2022 Summary Operating Results The following table summarizes our overall operating results for the three months ended September 30, 2023 and 2022. Three Months Ended September 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Total resident fees and management fees revenue $ 719,689 $ 653,215 $ 66,474 10.2 % Other operating income 2,623 66,759 (64,136) (96.1) % Facility operating expense 537,411 525,510 11,901 2.3 % Net income (loss) (48,811) (28,374) 20,437 72.0 % Adjusted EBITDA 80,220 106,851 (26,631) (24.9) % 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. 25 Operating Results - Senior Housing Segments The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the three months ended September 30, 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 September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 717,123 $ 650,248 $ 66,875 10.3 % Other operating income $ 2,623 $ 66,759 $ (64,136) (96.1) % Facility operating expense $ 537,411 $ 525,510 $ 11,901 2.3 % Number of communities (period end) 641 641 — — % Total average units 51,960 52,158 (198) (0.4) % RevPAR $ 4,596 $ 4,150 $ 446 10.7 % Occupancy rate (weighted average) 77.6 % 76.4 % 120 bps n/a RevPOR $ 5,919 $ 5,432 $ 487 9.0 % Same Community Operating Results and Data Resident fees $ 702,703 $ 634,205 $ 68,498 10.8 % Other operating income $ 2,405 $ 64,997 $ (62,592) (96.3) % Facility operating expense $ 524,283 $ 509,969 $ 14,314 2.8 % Number of communities 632 632 — — % Total average units 51,051 51,052 (1) — % RevPAR $ 4,588 $ 4,141 $ 447 10.8 % Occupancy rate (weighted average) 77.9 % 76.5 % 140 bps n/a RevPOR $ 5,892 $ 5,410 $ 482 8.9 % 26 Independent Living Segment 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 September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 141,234 $ 128,106 $ 13,128 10.2 % Other operating income $ 215 $ 9,520 $ (9,305) (97.7) % Facility operating expense $ 96,747 $ 91,231 $ 5,516 6.0 % Number of communities (period end) 68 68 — — % Total average units 12,569 12,569 — — % RevPAR $ 3,746 $ 3,397 $ 349 10.3 % Occupancy rate (weighted average) 79.6 % 78.3 % 130 bps n/a 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 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 and increased wireless internet access provided for residents, partially offset by a decrease in the use of premium labor. 27 Assisted Living and Memory Care Segment The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the three months ended September 30, 2023 and 2022, including operating results and data on a same community basis. Three Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 494,014 $ 442,097 $ 51,917 11.7 % Other operating income $ 2,218 $ 49,721 $ (47,503) (95.5) % Facility operating expense $ 369,501 $ 361,779 $ 7,722 2.1 % Number of communities (period end) 555 554 1 0.2 % Total average units 34,480 34,398 82 0.2 % RevPAR $ 4,769 $ 4,281 $ 488 11.4 % Occupancy rate (weighted average) 77.6 % 76.2 % 140 bps n/a RevPOR $ 6,148 $ 5,621 $ 527 9.4 % Same Community Operating Results and Data Resident fees $ 488,071 $ 438,277 $ 49,794 11.4 % Other operating income $ 2,152 $ 49,187 $ (47,035) (95.6) % Facility operating expense $ 364,835 $ 357,924 $ 6,911 1.9 % Number of communities 548 548 — — % Total average units 34,168 34,169 (1) — % RevPAR $ 4,761 $ 4,276 $ 485 11.3 % Occupancy rate (weighted average) 77.6 % 76.2 % 140 bps n/a RevPOR $ 6,134 $ 5,613 $ 521 9.3 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 9.3% increase in same community RevPOR and a 140 basis point increase in same community weighted average occupancy. 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 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. 28 CCRCs Segment 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 September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 81,875 $ 80,045 $ 1,830 2.3 % Other operating income $ 190 $ 7,518 $ (7,328) (97.5) % Facility operating expense $ 71,163 $ 72,500 $ (1,337) (1.8) % Number of communities (period end) 18 19 (1) (5.3) % Total average units 4,911 5,191 (280) (5.4) % RevPAR $ 5,557 $ 5,105 $ 452 8.9 % Occupancy rate (weighted average) 73.2 % 73.3 % (10) bps n/a RevPOR $ 7,594 $ 6,966 $ 628 9.0 % Same Community Operating Results and Data Resident fees $ 73,398 $ 67,822 $ 5,576 8.2 % Other operating income $ 38 $ 6,290 $ (6,252) (99.4) % Facility operating expense $ 62,540 $ 60,880 $ 1,660 2.7 % Number of communities 16 16 — — % Total average units 4,314 4,314 — — % RevPAR $ 5,671 $ 5,240 $ 431 8.2 % Occupancy rate (weighted average) 74.8 % 74.2 % 60 bps n/a RevPOR $ 7,584 $ 7,067 $ 517 7.3 % 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. The decrease in the segment's facility operating expense was primarily attributable to the disposition of one community since the beginning of the prior year period. The decrease in the segment's facility operating expense was partially offset by an increase in the segment's same community facility operating expense, including a $0.9 million, or 2.1%, increase in the segment's same community labor expense. 29 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the three months ended September 30, 2023 and 2022. Three Months Ended September 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Management fees $ 2,566 $ 2,967 $ (401) (13.5) % Reimbursed costs incurred on behalf of managed communities 34,979 37,484 (2,505) (6.7) % Costs incurred on behalf of managed communities 34,979 37,484 (2,505) (6.7) % General and administrative expense 43,076 41,331 1,745 4.2 % Facility operating lease expense 53,145 41,317 11,828 28.6 % Depreciation and amortization 85,932 86,922 (990) (1.1) % Asset impairment 9,086 5,688 3,398 59.7 % 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) % 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 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 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 $0.3 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. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance costs. Facility Operating Lease Expense. The increase in facility operating lease expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Depreciation and Amortization . The decrease in depreciation and amortization expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period, partially offset by the completion of community renovations, apartment upgrades, and other major building infrastructure projects for leased communities since the beginning of the prior year period. Asset Impairment. During the three months ended 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 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 30 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 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 September 30, 2023 and December 31, 2022 was $446.0 million and $425.0 million, respectively. 31 Comparison of Nine Months Ended September 30, 2023 and 2022 Summary Operating Results 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 Total resident fees and management fees revenue $ 2,148,341 $ 1,937,235 $ 211,106 10.9 % Other operating income 9,073 75,546 (66,473) (88.0) % Facility operating expense 1,599,336 1,551,938 47,398 3.1 % Net income (loss) (97,900) (212,689) (114,789) (54.0) % Adjusted EBITDA 250,215 194,741 55,474 28.5 % The increase in total resident fees and management fees revenue was primarily attributable to an 11.9% increase in same community RevPAR, comprised of an 8.8% 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. 32 Operating Results - Senior Housing Segments The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the nine months ended September 30, 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. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 2,140,688 $ 1,927,610 $ 213,078 11.1 % Other operating income $ 9,073 $ 75,546 $ (66,473) (88.0) % Facility operating expense $ 1,599,336 $ 1,551,938 $ 47,398 3.1 % Number of communities (period end) 641 641 — — % Total average units 52,056 52,371 (315) (0.6) % RevPAR $ 4,564 $ 4,084 $ 480 11.8 % Occupancy rate (weighted average) 76.8 % 74.8 % 200 bps n/a RevPOR $ 5,940 $ 5,461 $ 479 8.8 % Same Community Operating Results and Data Resident fees $ 2,094,649 $ 1,871,693 $ 222,956 11.9 % Other operating income $ 8,799 $ 73,476 $ (64,677) (88.0) % Facility operating expense $ 1,555,932 $ 1,502,298 $ 53,634 3.6 % Number of communities 632 632 — — % Total average units 51,054 51,060 (6) — % RevPAR $ 4,559 $ 4,073 $ 486 11.9 % Occupancy rate (weighted average) 77.0 % 74.9 % 210 bps n/a RevPOR $ 5,918 $ 5,439 $ 479 8.8 % 33 Independent Living Segment 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. Nine Months Ended September 30, Increase (Decrease) (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) 2023 2022 Amount Percent Resident fees $ 422,506 $ 378,088 $ 44,418 11.7 % Other operating income $ 487 $ 10,681 $ (10,194) (95.4) % Facility operating expense $ 285,097 $ 265,981 $ 19,116 7.2 % Number of communities (period end) 68 68 — — % Total average units 12,571 12,569 2 — % RevPAR $ 3,734 $ 3,342 $ 392 11.7 % Occupancy rate (weighted average) 79.0 % 76.3 % 270 bps n/a RevPOR $ 4,724 $ 4,379 $ 345 7.9 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of a 7.9% increase in RevPOR and a 270 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 and increased wireless internet access provided for residents, partially offset by a decrease in the use of premium labor, primarily contract labor. 34 Assisted Living and Memory Care Segment The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the nine months ended September 30, 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 Resident fees $ 1,467,314 $ 1,308,683 $ 158,631 12.1 % Other operating income $ 8,008 $ 56,489 $ (48,481) (85.8) % Facility operating expense $ 1,099,382 $ 1,070,682 $ 28,700 2.7 % Number of communities (period end) 555 554 1 0.2 % Total average units 34,446 34,604 (158) (0.5) % RevPAR $ 4,727 $ 4,200 $ 527 12.5 % Occupancy rate (weighted average) 76.6 % 74.5 % 210 bps n/a RevPOR $ 6,172 $ 5,640 $ 532 9.4 % Same Community Operating Results and Data Resident fees $ 1,451,175 $ 1,290,392 $ 160,783 12.5 % Other operating income $ 7,932 $ 55,821 $ (47,889) (85.8) % Facility operating expense $ 1,085,165 $ 1,055,349 $ 29,816 2.8 % Number of communities 548 548 — — % Total average units 34,169 34,170 (1) — % RevPAR $ 4,719 $ 4,196 $ 523 12.5 % Occupancy rate (weighted average) 76.6 % 74.5 % 210 bps n/a RevPOR $ 6,159 $ 5,636 $ 523 9.3 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 9.3% increase in same community RevPOR and a 210 basis point increase in same community weighted average occupancy. The increase in the segment's same community RevPOR was primarily the result of 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. 35 CCRCs Segment 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 Resident fees $ 250,868 $ 240,839 $ 10,029 4.2 % Other operating income $ 578 $ 8,376 $ (7,798) (93.1) % Facility operating expense $ 214,857 $ 215,275 $ (418) (0.2) % Number of communities (period end) 18 19 (1) (5.3) % Total average units 5,039 5,198 (159) (3.1) % RevPAR $ 5,516 $ 5,109 $ 407 8.0 % Occupancy rate (weighted average) 72.9 % 73.3 % (40) bps n/a RevPOR $ 7,569 $ 6,971 $ 598 8.6 % Same Community Operating Results and Data Resident fees $ 220,968 $ 203,213 $ 17,755 8.7 % Other operating income $ 380 $ 6,974 $ (6,594) (94.6) % Facility operating expense $ 185,530 $ 180,936 $ 4,594 2.5 % Number of communities 16 16 — — % Total average units 4,314 4,321 (7) (0.2) % RevPAR $ 5,691 $ 5,226 $ 465 8.9 % Occupancy rate (weighted average) 74.5 % 74.0 % 50 bps n/a RevPOR $ 7,644 $ 7,063 $ 581 8.2 % 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 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 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. 36 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the nine months ended September 30, 2023 and 2022. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent Management fees $ 7,653 $ 9,625 $ (1,972) (20.5) % Reimbursed costs incurred on behalf of managed communities 103,932 112,013 (8,081) (7.2) % Costs incurred on behalf of managed communities 103,932 112,013 (8,081) (7.2) % General and administrative expense 137,021 128,209 8,812 6.9 % Facility operating lease expense 149,784 124,419 25,365 20.4 % Depreciation and amortization 255,314 259,229 (3,915) (1.5) % Asset impairment 9,606 17,362 (7,756) (44.7) % Loss (gain) on sale of communities, net (36,296) — 36,296 NM Interest income 17,764 3,065 14,699 NM Interest expense 173,558 141,461 32,097 22.7 % Equity in earnings (loss) of unconsolidated ventures (3,156) (9,353) (6,197) (66.3) % Non-operating gain (loss) on sale of assets, net 860 611 249 40.8 % Other non-operating income (loss) 16,512 1,739 14,773 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. The decrease in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period, partially offset by an increase in community costs incurred as a result of broad inflationary pressure for communities managed in both periods. General and Administrative Expense. The increase in general and administrative expense was primarily attributable to an increase in estimated incentive compensation costs 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. Transaction costs include those directly related to acquisition, disposition, financing and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance costs. Facility Operating Lease Expense. The increase in facility operating lease expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Depreciation and Amortization . The decrease in depreciation and amortization expense was primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period, partially offset by the completion of community renovations, apartment upgrades, and other major building infrastructure projects for leased communities since the beginning of the prior year period. Asset Impairment. During the 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 nine months ended September 30, 2023. 37 Interest Expense. The increase in interest expense was primarily due to an increase in interest expense on long-term debt primarily as a result of increases in variable interest rates, partially offset by a decrease in interest expense on financing lease obligations primarily due to the change in classification of lease costs from financing leases to operating leases as a result of lease amendments subsequent to the prior year period. Equity in Earnings (Loss) of Unconsolidated Ventures. The decrease in equity in loss of unconsolidated ventures was primarily due to improved operating results for our health care services venture. 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 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 This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measure. Liquidity The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the condensed consolidated statements of cash flows, and our Adjusted Free Cash Flow. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2023 2022 Amount Percent 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 % Net cash provided by (used in) financing activities (69,154) (37,847) 31,307 82.7 % Net increase (decrease) in cash, cash equivalents, and restricted cash (71,272) (43,497) 27,775 63.9 % Cash, cash equivalents, and restricted cash at beginning of period 474,548 438,314 36,234 8.3 % Cash, cash equivalents, and restricted cash at end of period $ 403,276 $ 394,817 $ 8,459 2.1 % Adjusted Free Cash Flow $ (26,176) $ (97,827) $ 71,651 73.2 % 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. 38 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 nine months ended September 30, 2023. 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: • cash balances on hand, cash equivalents, and marketable securities; • cash flows from operations; • proceeds from our credit facilities; • funds generated through unconsolidated venture arrangements; • proceeds from mortgage financing or refinancing of various assets; • funds raised in the debt or equity markets; and • proceeds from the disposition of assets. Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. We also have received pandemic-related government relief, including cash grants. Over the near-term, we expect that our liquidity requirements will primarily arise from: • working capital; • operating costs such as labor costs, severance costs, general and administrative expense, and supply costs; • debt, interest, and lease payments; • transaction costs and investment in our healthcare and wellness initiatives; • capital expenditures and improvements, including the renovation of our current communities and remediation or replacement of assets as a result of casualty losses; • cash collateral required to be posted in connection with our financial instruments and insurance programs; and • other corporate initiatives (including information systems and other strategic projects). We are highly leveraged and have significant debt and lease obligations. As of 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 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. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission ("SEC") on February 22, 2023. Since the amount of mortgage financing available for our communities is generally dependent on their appraised values and performance, decreases in their appraised values, including due to adverse changes in real estate market conditions, or their performance, could result in available mortgage refinancing amounts that are less than the communities’ maturing indebtedness. In addition, our inability to satisfy underwriting criteria for individual communities may limit our access to our historical lending sources for such communities, including Fannie Mae and Freddie Mac. Due to lower operating performance of our communities, generally, resulting from the COVID-19 pandemic, during 2021 and 2022 we sought and obtained non-agency mortgage financings to partially refinance maturing Freddie Mac and Fannie Mae indebtedness. 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 expect to utilize a portion of our current 39 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. We continue to seek opportunities to preserve and enhance our liquidity, including through increasing our RevPAR, maintaining expense discipline, continuing to refinance maturing debt, continuing to evaluate our capital structure and the state of debt and equity markets, and monetizing non-strategic or underperforming owned assets. There is no assurance that financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in monetizing certain assets. Our inability to obtain refinancing proceeds sufficient to cover 2024 and later maturing indebtedness could adversely impact our liquidity, and may cause us to seek additional alternative sources of financing, which may be less attractive or unavailable. Shortfalls in cash flows from estimated operating results or other principal sources of liquidity may have an adverse impact on our ability to fund our planned capital expenditures, to pursue any potential lease restructuring opportunities that we identify, or to fund investments to support our strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us. Capital Expenditures Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include maintenance expenditures (including routine maintenance of communities over $1,500 per occurrence), community renovations, unit upgrades (including unit turnovers over $500 per unit), and other major building infrastructure projects (including replacements of major building systems). Corporate capital expenditures include those for information technology systems and equipment 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 nine months ended September 30, 2023 for our consolidated business. (in thousands) Community-level capital expenditures, net (1) $ 129,542 Corporate capital expenditures, net (2) 45,433 Non-development capital expenditures, net (3) 174,975 Development capital expenditures, net 1,309 Total capital expenditures, net $ 176,284 (1) Reflects the amount invested, net of lessor reimbursements of $2.2 million. (2) Includes $29.2 million of remediation costs at our communities resulting from natural disasters, including $25.5 million of capital expenditures resulting from the impact of Winter Storm Elliott. A portion of such costs are reimbursable under our property and casualty insurance policies. (3) Amount is included in Adjusted Free Cash Flow. In the aggregate, we expect our full-year 2023 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $223.0 million, including remediation costs at our communities resulting from Winter Storm Elliott and Hurricane Ian. We anticipate that our 2023 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, reimbursements from lessors, and approximately $28.0 million of reimbursement from our property and casualty insurance policies. We received $19.5 million of such insurance reimbursements in the nine months ended September 30, 2023. 40 Funding our planned capital expenditures, any potential lease restructuring opportunities that we identify, or investments to support our strategy may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences, or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon our plans. Credit Facilities On December 11, 2020, we entered into a revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of up to $80.0 million which can be drawn in cash or as letters of credit. The credit facility matures on January 15, 2024 and we have the option to extend the facility for two additional terms of one year each subject to the satisfaction of certain conditions. 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 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 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. Under a master lease, numerous communities are leased through an indivisible lease. In certain cases, we guarantee the performance and lease payment obligations of our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or leased property revenue. Approximately 89% of our community lease payments are subject to a weighted average maximum annual increase of 2.7% for community leases subject to fixed annual escalators or variable annual escalators based on the consumer price index subject to a cap. The remaining community lease payments are subject to variable annual escalators primarily based upon the change in the consumer price index. An additional 1% increase in the consumer price index would have resulted in additional cash lease payments of approximately $0.2 million for the twelve months ended September 30, 2023. We are responsible for all operating costs, including repairs, property taxes, and insurance. The lease terms generally provide for renewal or extension options from 5 to 20 years, and, in some instances, purchase options. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios. Our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met. Certain of our master leases contain radius restrictions, which limit our ability to own, develop, or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand, develop, or acquire senior housing communities and operating companies. 41 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, 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 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. Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, our long-term mortgage debt is secured by our communities and, in certain cases, our long-term debt and leases are secured by a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities, and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default. As of September 30, 2023, we are in compliance with the financial covenants of our debt agreements and long-term leases. Non-GAAP Financial Measures This Quarterly Report on Form 10-Q contains the financial measures Adjusted EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with GAAP. Presentations of these non-GAAP financial measures are intended to aid investors in better understanding the factors and trends affecting our performance and liquidity. However, investors should not consider these non-GAAP financial measures as a substitute for financial measures determined in accordance with GAAP, including net income (loss), income (loss) from operations, or net cash provided by (used in) operating activities. We caution investors that amounts presented in accordance with our definitions of these non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies calculate non-GAAP measures in the same manner. We urge investors to review the following reconciliations of these non-GAAP financial measures from the most comparable financial measures determined in accordance with GAAP. 42 Adjusted EBITDA Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) excluding: benefit/provision for income taxes, non-operating income/expense items, and depreciation and amortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction, or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges, gain/loss on facility operating lease termination, operating lease expense adjustment, non-cash stock-based compensation expense, gain/loss on sale of communities, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance. We believe that presentation of Adjusted EBITDA as a performance measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day operating decisions; (ii) it provides an assessment of operational factors that 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: (i) excluded interest and income tax are necessary to operate our business under our current financing and capital structure; (ii) excluded depreciation, amortization, and impairment charges may represent the wear and tear and/or reduction in value of our communities, goodwill, and other assets and may be indicative of future needs for capital expenditures; and (iii) we may incur income/expense similar to those for which adjustments are made, such as gain/loss on sale of assets, facility operating lease termination, or debt modification and extinguishment, non-cash stock-based compensation expense, and transaction and other costs, and such income/expense may significantly affect our operating results. 43 The table below reconciles Adjusted EBITDA from net income (loss). Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Net income (loss) $ (48,811) $ (28,374) $ (97,900) $ (212,689) Provision (benefit) for income taxes (1,876) (300) (1,029) (1,086) Equity in (earnings) loss of unconsolidated ventures 1,426 2,020 3,156 9,353 Non-operating loss (gain) on sale of assets, net — 56 (860) (611) Other non-operating (income) loss (10,166) (1,877) (16,512) (1,739) Interest expense 59,412 49,873 173,558 141,461 Interest income (6,323) (2,192) (17,764) (3,065) Income (loss) from operations (6,338) 19,206 42,649 (68,376) 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) — Operating lease expense adjustment (11,458) (8,714) (33,820) (25,329) Non-cash stock-based compensation expense 2,893 3,403 8,966 10,907 Transaction and organizational restructuring costs 105 346 3,796 948 Adjusted EBITDA (1) $ 80,220 $ 106,851 $ 250,215 $ 194,741 (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 Adjusted Free Cash Flow is a non-GAAP liquidity measure that we define as net cash provided by (used in) operating activities before: distributions from unconsolidated ventures from cumulative share of net earnings, changes in prepaid insurance premiums financed with notes payable, changes in operating lease assets and liabilities for lease termination, cash paid/received for gain/loss on facility operating lease termination, and lessor capital expenditure reimbursements under operating leases; plus: property and casualty insurance proceeds and proceeds from refundable entrance fees, net of refunds; less: non-development capital expenditures and payment of financing lease obligations. Non-development capital expenditures are comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades, and other major building infrastructure projects for our communities and is presented net of lessor reimbursements. Non-development capital expenditures do not include capital expenditures for: community expansions, major community redevelopment and repositioning projects, and the development of new communities. We believe that presentation of Adjusted Free Cash Flow as a liquidity measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective sources of operating liquidity, and to review our ability to service our outstanding indebtedness, pay dividends to stockholders, engage in share repurchases, and make capital expenditures, including development capital expenditures; and (ii) it provides an indicator to management to determine if adjustments to current spending decisions are needed. Adjusted Free Cash Flow has material limitations as a liquidity measure, including: (i) it does not represent cash available for dividends, share repurchases, or discretionary expenditures since certain non-discretionary expenditures, including mandatory debt principal payments, are not reflected in this measure; (ii) the cash portion of non-recurring charges related to gain/loss on facility lease termination generally represent charges/gains that may significantly affect our liquidity; and (iii) the impact of timing of cash expenditures, including the timing of non-development capital expenditures, limits the usefulness of the measure for short-term comparisons. Additionally, Adjusted Free Cash Flow excludes cash used to purchase interest rate cap instruments, as well as any cash provided by settlements of interest rate cap instruments. 44 The table below reconciles Adjusted Free Cash Flow from net cash provided by (used in) operating activities. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Net cash provided by (used in) operating activities $ 45,763 $ 63,521 $ 133,629 $ 51,843 Net cash provided by (used in) investing activities (31,837) 22,508 (135,747) (57,493) Net cash provided by (used in) financing activities (19,232) (19,754) (69,154) (37,847) Net increase (decrease) in cash, cash equivalents, and restricted cash $ (5,306) $ 66,275 $ (71,272) $ (43,497) Net cash provided by (used in) operating activities $ 45,763 $ 63,521 $ 133,629 $ 51,843 Distributions from unconsolidated ventures from cumulative share of net earnings — — (430) (561) Changes in prepaid insurance premiums financed with notes payable (6,474) (5,700) 6,530 5,552 Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases — (4,367) (2,244) (9,224) Non-development capital expenditures, net (47,248) (43,819) (174,975) (128,831) Property and casualty insurance proceeds 10,747 — 19,536 — Payment of financing lease obligations (244) (5,506) (8,222) (16,606) Adjusted Free Cash Flow (1) $ 2,544 $ 4,129 $ (26,176) $ (97,827) (1) Adjusted Free Cash Flow includes: • $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.