Brookdale Senior Living Inc. 10-Q

Item 1. Financial Statements BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except stock amounts) June 30, 2024 December 31, 2023 Assets (Unaudited) Current assets Cash and cash equivalents $ 290,018 $ 277,971 Marketable securities 19,727 29,755 Restricted cash 43,959 41,341 Accounts receivable, net 49,782 48,393 Prepaid expenses and other current assets, net 89,343 80,908 Total current assets 492,829 478,368 Property, plant and equipment and leasehold intangibles, net 4,256,490 4,330,629 Operating lease right-of-use assets 603,816 670,907 Restricted cash 28,527 30,356 Goodwill 27,321 27,321 Other assets, net 41,903 35,854 Total assets $ 5,450,886 $ 5,573,435 Liabilities and Equity Current liabilities Current portion of long-term debt $ 60,939 $ 41,463 Current portion of financing lease obligations 1,123 1,075 Current portion of operating lease obligations 199,226 192,631 Trade accounts payable 74,700 66,526 Accrued expenses 231,908 242,668 Refundable fees and deferred revenue 54,189 55,753 Total current liabilities 622,085 600,116 Long-term debt, less current portion 3,679,102 3,655,850 Financing lease obligations, less current portion 150,240 150,774 Operating lease obligations, less current portion 584,556 683,876 Deferred tax liability 5,627 5,987 Other liabilities 67,603 71,679 Total liabilities 5,109,213 5,168,282 Preferred stock, $ 0.01 par value, 50,000,000 shares authorized at June 30, 2024 and December 31, 2023; no shares issued and outstanding — — Common stock, $ 0.01 par value, 400,000,000 shares authorized at June 30, 2024 and December 31, 2023; 207,728,540 and 198,780,826 shares issued and 197,201,015 and 188,253,301 shares outstanding, respectively 2,077 1,988 Additional paid-in-capital 4,346,116 4,342,362 Treasury stock, at cost; 10,527,525 shares at June 30, 2024 and December 31, 2023 ( 102,774 ) ( 102,774 ) Accumulated deficit ( 3,905,205 ) ( 3,837,912 ) Total Brookdale Senior Living Inc. stockholders' equity 340,214 403,664 Noncontrolling interest 1,459 1,489 Total equity 341,673 405,153 Total liabilities and equity $ 5,450,886 $ 5,573,435 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Resident fees $ 739,709 $ 710,161 $ 1,483,950 $ 1,423,565 Management fees 2,616 2,510 5,234 5,087 Reimbursed costs incurred on behalf of managed communities 35,216 33,999 71,188 68,953 Other operating income — 4,122 — 6,450 Total revenue and other operating income 777,541 750,792 1,560,372 1,504,055 Facility operating expense (excluding facility depreciation and amortization of $ 81,706 , $ 77,846 , $ 161,610 , and $ 157,163 , respectively) 537,507 531,118 1,080,057 1,061,925 General and administrative expense (including non-cash stock-based compensation expense of $ 3,975 , $ 2,969 , $ 7,248 , and $ 6,073 , respectively) 46,664 45,326 92,396 93,945 Facility operating lease expense 50,964 50,512 102,460 96,639 Depreciation and amortization 88,028 84,448 174,155 169,382 Asset impairment — 520 1,708 520 Loss (gain) on sale of communities, net — ( 36,296 ) — ( 36,296 ) Costs incurred on behalf of managed communities 35,216 33,999 71,188 68,953 Income (loss) from operations 19,162 41,165 38,408 48,987 Interest income 4,714 6,115 9,492 11,441 Interest expense: Debt ( 53,778 ) ( 52,256 ) ( 107,234 ) ( 102,571 ) Financing lease obligations ( 5,110 ) ( 5,453 ) ( 10,171 ) ( 12,005 ) Amortization of deferred financing costs ( 2,334 ) ( 1,899 ) ( 4,591 ) ( 3,839 ) Change in fair value of derivatives ( 345 ) 5,173 2,742 4,269 Equity in earnings (loss) of unconsolidated ventures — ( 1,153 ) — ( 1,730 ) Non-operating gain (loss) on sale of assets, net 199 860 903 860 Other non-operating income (loss) 199 3,197 3,537 6,346 Income (loss) before income taxes ( 37,293 ) ( 4,251 ) ( 66,914 ) ( 48,242 ) Benefit (provision) for income taxes ( 449 ) ( 275 ) ( 409 ) ( 847 ) Net income (loss) ( 37,742 ) ( 4,526 ) ( 67,323 ) ( 49,089 ) Net (income) loss attributable to noncontrolling interest 15 16 30 30 Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders $ ( 37,727 ) $ ( 4,510 ) $ ( 67,293 ) $ ( 49,059 ) Basic and diluted net income (loss) per share attributable to Brookdale Senior Living Inc. common stockholders $ ( 0.17 ) $ ( 0.02 ) $ ( 0.30 ) $ ( 0.22 ) Weighted average shares used in computing basic and diluted net income (loss) per share 226,789 225,404 226,340 224,994 See accompanying notes to condensed consolidated financial statements. 5 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Total equity, balance at beginning of period $ 375,448 $ 540,854 $ 405,153 $ 584,153 Common stock: Balance at beginning of period $ 2,035 $ 1,988 $ 1,988 $ 1,978 Shares issued for settlement of prepaid stock purchase contracts 32 — 67 — Shares issued for warrant exercise 9 — 9 — Restricted stock and restricted stock units, net 1 — 19 16 Shares withheld for employee taxes — — ( 6 ) ( 6 ) Balance at end of period $ 2,077 $ 1,988 $ 2,077 $ 1,988 Additional paid-in-capital: Balance at beginning of period $ 4,342,191 $ 4,333,556 $ 4,342,362 $ 4,332,302 Compensation expense related to restricted stock grants 3,975 2,969 7,248 6,073 Shares issued for settlement of prepaid stock purchase contracts ( 32 ) — ( 67 ) — Shares issued for warrant exercise ( 9 ) — ( 9 ) — Restricted stock and restricted stock units, net ( 1 ) — ( 19 ) ( 16 ) Shares withheld for employee taxes ( 8 ) ( 21 ) ( 3,399 ) ( 1,855 ) Balance at end of period $ 4,346,116 $ 4,336,504 $ 4,346,116 $ 4,336,504 Treasury stock: Balance at beginning and end of period $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) $ ( 102,774 ) Accumulated deficit: Balance at beginning of period $ ( 3,867,478 ) $ ( 3,693,450 ) $ ( 3,837,912 ) $ ( 3,648,901 ) Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders ( 37,727 ) ( 4,510 ) ( 67,293 ) ( 49,059 ) Balance at end of period $ ( 3,905,205 ) $ ( 3,697,960 ) $ ( 3,905,205 ) $ ( 3,697,960 ) Noncontrolling interest: Balance at beginning of period $ 1,474 $ 1,534 $ 1,489 $ 1,548 Net income (loss) attributable to noncontrolling interest ( 15 ) ( 16 ) ( 30 ) ( 30 ) Balance at end of period $ 1,459 $ 1,518 $ 1,459 $ 1,518 Total equity, balance at end of period $ 341,673 $ 539,276 $ 341,673 $ 539,276 Common stock share activity Outstanding shares of common stock: Balance at beginning of period 193,013 188,235 188,253 187,249 Shares issued for settlement of prepaid stock purchase contracts 3,152 — 6,709 — Shares issued for warrant exercise 942 — 942 — Restricted stock and restricted stock units, net 95 6 1,873 1,551 Shares withheld for employee taxes ( 1 ) ( 6 ) ( 576 ) ( 565 ) Balance at end of period 197,201 188,235 197,201 188,235 See accompanying notes to condensed consolidated financial statements. 6 BROOKDALE SENIOR LIVING INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Six Months Ended June 30, 2024 2023 Cash Flows from Operating Activities Net income (loss) $ ( 67,323 ) $ ( 49,089 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization, net 178,746 173,221 Asset impairment 1,708 520 Equity in (earnings) loss of unconsolidated ventures — 1,730 Distributions from unconsolidated ventures from cumulative share of net earnings — 430 Amortization of entrance fees — ( 732 ) Proceeds from deferred entrance fee revenue — 477 Deferred income tax (benefit) provision ( 360 ) 188 Operating lease expense adjustment ( 26,572 ) ( 22,362 ) Change in fair value of derivatives ( 2,742 ) ( 4,269 ) Loss (gain) on sale of assets, net ( 903 ) ( 37,156 ) Non-cash stock-based compensation expense 7,248 6,073 Property and casualty insurance income ( 2,688 ) ( 3,927 ) Other non-operating (income) loss — ( 2,542 ) Changes in operating assets and liabilities: Accounts receivable, net ( 1,390 ) 7,550 Prepaid expenses and other assets, net ( 855 ) 11,711 Prepaid insurance premiums financed with notes payable ( 15,702 ) ( 13,004 ) Trade accounts payable and accrued expenses ( 14,380 ) 3,782 Refundable fees and deferred revenue ( 1,563 ) 13,021 Operating lease assets and liabilities for lessor capital expenditure reimbursements 1,300 2,244 Net cash provided by (used in) operating activities 54,524 87,866 Cash Flows from Investing Activities Purchase of marketable securities ( 19,591 ) ( 110,754 ) Sale and maturities of marketable securities 30,000 65,100 Capital expenditures, net of related payables ( 95,973 ) ( 109,825 ) Acquisition of assets, net of cash acquired — ( 574 ) Proceeds from sale of assets, net 7,017 43,059 Property and casualty insurance proceeds 2,704 8,789 Purchase of interest rate cap instruments ( 8,513 ) ( 3,019 ) Proceeds from interest rate cap instruments 9,129 3,423 Other ( 176 ) ( 109 ) Net cash provided by (used in) investing activities ( 75,403 ) ( 103,910 ) Cash Flows from Financing Activities Proceeds from debt 81,271 25,532 Repayment of debt and financing lease obligations ( 41,077 ) ( 72,917 ) Payment of financing costs, net of related payables ( 3,074 ) ( 676 ) Payments of employee taxes for withheld shares ( 3,405 ) ( 1,861 ) Net cash provided by (used in) financing activities 33,715 ( 49,922 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 12,836 ( 65,966 ) Cash, cash equivalents, and restricted cash at beginning of period 349,668 474,548 Cash, cash equivalents, and restricted cash at end of period $ 362,504 $ 408,582 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 649 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 June 30, 2024, the Company owned 342 communities, representing a majority of the Company's community portfolio, leased 277 communities, and managed 30 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, 2023 filed with the SEC on February 21, 2024. 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. 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, asset impairments, self-insurance reserves, performance-based compensation, 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. 3. Fair Value Measurements Marketable Securities As of June 30, 2024 and December 31, 2023, marketable securities of $ 19.7 million and $ 29.8 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. 8 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 June 30, 2024. ($ in millions) Current notional balance $ 1,257.5 Weighted average fixed cap rate 3.90 % Weighted average remaining term 0.7 years Estimated asset fair value (included in other assets, net) $ 15.5 As of December 31, 2023, the estimated fair value of the interest rate cap instruments was $ 13.3 million. The following table summarizes the Company's SOFR interest rate swap instrument as of June 30, 2024. ($ in millions) Current notional balance $ 220.0 Fixed interest rate 4.25 % Remaining term 1.3 years Estimated asset fair value (included in other assets, net) $ 1.6 As of December 31, 2023, the estimated fair value of the interest rate swap instrument was $ 1.6 million. 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 $ 3.7 billion as of both June 30, 2024 and December 31, 2023. Fair value of the long-term debt is approximately $ 3.5 billion and $ 3.4 billion as of June 30, 2024 and December 31, 2023, respectively. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy. 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Private pay 94.1 % 93.8 % 94.0 % 93.7 % Government reimbursement 4.6 % 4.8 % 4.6 % 4.9 % Other third-party payor programs 1.3 % 1.4 % 1.4 % 1.4 % Refer to Note 13 for disaggregation of revenue by reportable segment. 9 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, certain of the Company's revenue-generating contracts include non-refundable fees that 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 $ 48.8 million and $ 48.3 million, including $ 23.0 million and $ 24.1 million of monthly resident fees billed and received in advance, as of June 30, 2024 and December 31, 2023, respectively. For the six months ended June 30, 2024 and 2023, the Company recognized $ 42.8 million and $ 44.9 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2024 and 2023, respectively. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance obligations that have original expected durations of one year or less. 5. Property, Plant and Equipment and Leasehold Intangibles, Net As of June 30, 2024 and December 31, 2023, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following. (in thousands) June 30, 2024 December 31, 2023 Land $ 497,829 $ 500,649 Buildings and improvements 5,372,852 5,348,133 Furniture and equipment 1,143,172 1,111,408 Resident in-place lease intangibles 281,041 282,411 Construction in progress 35,412 33,905 Assets under financing leases and leasehold improvements 1,110,127 1,070,900 Property, plant and equipment and leasehold intangibles 8,440,433 8,347,406 Accumulated depreciation and amortization ( 4,183,943 ) ( 4,016,777 ) Property, plant and equipment and leasehold intangibles, net $ 4,256,490 $ 4,330,629 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 $ 88.0 million and $ 84.4 million for the three months ended June 30, 2024 and 2023, respectively, and $ 174.2 million and $ 169.4 million for the six months ended June 30, 2024 and 2023, respectively. The Company did not recognize any impairment charges for the three months ended June 30, 2024. The Company recognized $ 1.7 million for the six months ended June 30, 2024 and $ 0.5 million for both the three and six months ended June 30, 2023 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. 10 6. Debt Long-term debt consists of the following. (in thousands) June 30, 2024 December 31, 2023 Fixed rate mortgage notes payable due 2025 through 2047; weighted average interest rate of 4.26 % as of both June 30, 2024 and December 31, 2023 $ 1,941,759 $ 1,953,414 Variable rate mortgage notes payable due 2025 through 2030; weighted average interest rate of 7.76 % and 7.74 % as of June 30, 2024 and December 31, 2023, respectively 1,566,960 1,524,907 Convertible notes payable due October 2026; interest rate of 2.00 % as of both June 30, 2024 and December 31, 2023 230,000 230,000 Tangible equity units senior amortizing notes due November 2025; interest rate of 10.25 % as of both June 30, 2024 and December 31, 2023 13,827 17,990 Notes payable for insurance premium financing due 2024; interest rate of 7.40 % as of June 30, 2024 14,486 — Deferred financing costs, net ( 26,991 ) ( 28,998 ) Total long-term debt 3,740,041 3,697,313 Current portion 60,939 41,463 Total long-term debt, less current portion $ 3,679,102 $ 3,655,850 As of June 30, 2024, the long-term debt, less current portion within the Company's condensed consolidated balance sheet includes $ 100.0 million of mortgage notes payable scheduled to mature in January 2025 with two one-year extension options, exercisable by the Company subject to the satisfaction of certain conditions. As of June 30, 2024, 91.3 %, or $ 3.4 billion, of the Company's total debt obligations represented non-recourse property-level mortgage financings. As of June 30, 2024, $ 58.8 million of letters of credit and no cash borrowings were outstanding under the Company's $ 100.0 million secured credit facility. The Company also had a separate secured letter of credit facility providing up to $ 17.0 million of letters of credit as of June 30, 2024 under which $ 15.7 million had been issued as of that date. 2024 Mortgage Financing In February 2024, the Company obtained $ 50.0 million of debt secured by first priority mortgages on 11 communities. The loan bears interest at a variable rate equal to SOFR plus a margin of 350 basis points. The debt matures in February 2027 with two one-year extension options, exercisable subject to certain performance criteria. 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 mortgage debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of June 30, 2024, the Company is in compliance with the financial covenants of its debt agreements. 11 7. Leases As of June 30, 2024, the Company operated 277 communities under long-term leases ( 263 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 and maintenance, 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. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of June 30, 2024, the Company is in compliance with the financial covenants of its long-term lease agreements. 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 did not recognize any such impairment charges for the three and six months ended June 30, 2024 and 2023. 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 June 30, Six Months Ended June 30, Operating Leases (in thousands) 2024 2023 2024 2023 Facility operating expense $ 2,176 $ 1,732 $ 4,096 $ 3,358 Facility lease expense 50,964 50,512 102,460 96,639 Operating lease expense 53,140 52,244 106,556 99,997 Operating lease expense adjustment (1) 13,483 11,557 26,572 22,362 Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements ( 1,051 ) — ( 1,300 ) ( 2,244 ) Operating net cash outflows from operating leases $ 65,572 $ 63,801 $ 131,828 $ 120,115 (1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense. 12 Three Months Ended June 30, Six Months Ended June 30, Financing Leases (in thousands) 2024 2023 2024 2023 Depreciation and amortization $ 2,898 $ 4,091 $ 5,770 $ 10,476 Interest expense: financing lease obligations 5,110 5,453 10,171 12,005 Financing lease expense $ 8,008 $ 9,544 $ 15,941 $ 22,481 Operating cash outflows from financing leases $ 5,110 $ 5,453 $ 10,171 $ 12,005 Financing cash outflows from financing leases 265 2,126 527 7,978 Total net cash outflows from financing leases $ 5,375 $ 7,579 $ 10,698 $ 19,983 The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the condensed consolidated balance sheet as of June 30, 2024 are as follows (in thousands). Year Ending December 31, Operating Leases Financing Leases 2024 (six months) $ 129,816 $ 10,209 2025 261,680 7,004 2026 147,137 6,988 2027 148,971 6,237 2028 85,882 6,071 Thereafter 252,096 21,146 Total lease payments 1,025,582 57,655 Purchase option liability and non-cash gain on future sale of property — 145,136 Imputed interest and variable lease payments ( 241,800 ) ( 51,428 ) Total lease obligations $ 783,782 $ 151,363 Subsequent to the three months ended June 30, 2024, the Company and Omega Healthcare Investors, Inc. ("Omega") amended the existing master lease pursuant to which the Company continues to lease 24 communities from Omega. The Company's amended master lease has an initial term to expire on December 31, 2037. As part of the amendment, Omega agreed to make available up to $ 80.0 million to fund costs associated with capital expenditures for the communities through December 31, 2037. The annual rent under the lease will not be adjusted upon reimbursements for capital expenditures in the aggregate amount of up to $ 30.0 million of the $ 80.0 million pool, which is available in certain tranches through June 30, 2028. With respect to the remaining $ 50.0 million of the $ 80.0 million pool, the annual rent under the lease will prospectively increase by the amount of each reimbursement multiplied by 9.5 %. The $ 50.0 million will be available in certain tranches beginning January 1, 2025, subject to certain annual reimbursement caps specified in the lease. Under the terms of the amendment, rent will escalate annually per the terms of the existing lease escalator, with a potential minor contingent rent adjustment beginning in 2028 depending on lease performance. The Company preliminarily estimates that the lease modification will increase the right-of-use assets and lease obligations recognized on its condensed consolidated balance sheet each by approximately $ 220.0 million. 8. 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 13 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 ("CMS") 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 and consolidated into two lawsuits. In January 2024, the court dismissed one of the two derivative lawsuits. Plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. The other derivative lawsuit remains pending with the Middle District of Tennessee and asserts claims on behalf of the Company against certain current and former officers and directors for alleged breaches of duties owed to the Company. The complaint incorporates substantively similar allegations to the securities lawsuit previously described. 9. 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 for 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, 2024 2,224 $ 6.36 $ 14,148 Three months ended June 30, 2024 17 $ 6.86 $ 115 10. 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 June 30, 2024, 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 June 30, 2024, the Company issued 942,424 shares of common stock upon the partial exercise of the Warrant by Ventas for 1.7 million shares, net of shares withheld to satisfy the aggregate exercise price. As of June 30, 2024, the Warrant remains outstanding for the right to purchase 14.6 million shares of the Company's common stock. 14 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. During the three and six months ended June 30, 2024, 243,662 and 518,662 , respectively, of the Units were separated at the election of the holders into the two components, prepaid stock purchase contracts and senior amortizing notes, and the Company delivered 3,151,548 and 6,708,425 shares of the Company’s common stock upon settlement of such prepaid stock purchase contracts for the three and six months ended June 30, 2024, respectively. As of June 30, 2024, 2,356,338 prepaid stock purchase contracts remain outstanding, and the maximum number of shares issuable upon settlement of the Units' prepaid stock purchase contracts is 35.8 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. The following table summarizes the computation of basic weighted average shares presented in the condensed consolidated statements of operations. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Weighted average common shares outstanding 194,788 188,218 192,425 187,808 Weighted average minimum shares issuable under purchase contracts 32,001 37,186 33,915 37,186 Weighted average shares outstanding - basic 226,789 225,404 226,340 224,994 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 June 30, (in millions) 2024 2023 Convertible senior notes 38.3 38.3 Warrants 14.6 16.3 Restricted stock and restricted stock units 6.5 6.5 Incremental shares issuable under purchase contracts 5.3 6.5 Total 64.7 67.6 11. Income Taxes The difference between the Company's effective tax rate for the three months ended June 30, 2024 and 2023 was primarily due to an increase in the valuation allowance recorded on operating losses during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The difference between the Company's effective tax rate for the six months ended June 30, 2024 and 2023 was primarily due to an increase in the tax benefit on the vesting of restricted stock units for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 9.1 million for the three months ended June 30, 2024, which was offset by an increase to the valuation allowance of $ 9.2 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 16.7 million for the six months ended June 30, 2024, which was partially offset by an increase to the valuation allowance of $ 16.3 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 1.4 million for the three months ended June 30, 2023, which was partially offset by an increase to the 15 valuation allowance of $ 1.3 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $ 10.8 million for the six months ended June 30, 2023, which was offset by an increase to the valuation allowance of $ 11.0 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 June 30, 2024 and December 31, 2023 was $ 490.5 million and $ 474.2 million, respectively. The increase in the valuation allowance for both the six months ended June 30, 2024 and 2023 is the result of current operating losses during the periods and 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 six months ended June 30, 2024 and 2023 which are included in income tax expense or benefit for the period. As of June 30, 2024, 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. 16 12. Supplemental Disclosure of Cash Flow Information Six Months Ended June 30, (in thousands) 2024 2023 Supplemental Disclosure of Cash Flow Information: Interest paid $ 117,143 $ 114,194 Income taxes paid, net of (refunds) $ 1,213 $ ( 946 ) Capital expenditures, net of related payables: Capital expenditures - non-development, net $ 102,916 $ 127,727 Capital expenditures - development, net 433 904 Capital expenditures - non-development - reimbursable from lessor 1,300 2,244 Trade accounts payable ( 8,676 ) ( 21,050 ) Net cash paid $ 95,973 $ 109,825 Acquisition of assets, net of cash acquired: Prepaid expenses and other assets, net $ — $ 23 Property, plant and equipment and leasehold intangibles, net — 6,872 Investment in unconsolidated ventures — ( 3,395 ) Other liabilities — ( 384 ) Other non-operating loss (income) — ( 2,542 ) Net cash paid $ — $ 574 Proceeds from sale of assets, net: Prepaid expenses and other assets, net $ ( 362 ) $ ( 1,538 ) Property, plant and equipment and leasehold intangibles, net ( 6,311 ) ( 23,733 ) Refundable fees and deferred revenue — 9,347 Other liabilities 559 10,021 Non-operating loss (gain) on sale of assets, net ( 903 ) ( 860 ) Loss (gain) on sale of communities, net — ( 36,296 ) Net cash received $ ( 7,017 ) $ ( 43,059 ) Supplemental Schedule of Non-cash Operating, Investing, and Financing Activities: Non-cash lease transactions, net: Property, plant and equipment and leasehold intangibles, net $ 38 $ ( 51,584 ) Operating lease right-of-use assets 3,420 178,409 Financing lease obligations ( 38 ) 88,886 Operating lease obligations ( 3,420 ) ( 215,711 ) Net $ — $ — 17 Restricted cash consists principally of escrow deposits for interest rate caps, real estate taxes, property insurance, capital expenditures, and debt service reserves required by certain lenders under mortgage debt agreements, deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs, and regulatory reserves for certain CCRCs. 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) June 30, 2024 December 31, 2023 Reconciliation of cash, cash equivalents, and restricted cash: Cash and cash equivalents $ 290,018 $ 277,971 Restricted cash - current 43,959 41,341 Restricted cash - non-current 28,527 30,356 Total cash, cash equivalents, and restricted cash $ 362,504 $ 349,668 13. 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. 18 The following tables set forth selected segment financial data. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Revenue and other operating income: Independent Living (1) $ 149,542 $ 140,888 $ 298,490 $ 281,544 Assisted Living and Memory Care (1) 507,191 490,286 1,018,063 979,090 CCRCs (1) 82,976 83,109 167,397 169,381 All Other 37,832 36,509 76,422 74,040 Total revenue and other operating income $ 777,541 $ 750,792 $ 1,560,372 $ 1,504,055 Segment operating income: (2) Independent Living $ 50,334 $ 46,361 $ 98,977 $ 93,194 Assisted Living and Memory Care 136,155 124,616 273,613 249,209 CCRCs 15,713 12,188 31,303 25,687 All Other 2,616 2,510 5,234 5,087 Total segment operating income 204,818 185,675 409,127 373,177 General and administrative expense (including non-cash stock-based compensation expense) 46,664 45,326 92,396 93,945 Facility operating lease expense 50,964 50,512 102,460 96,639 Depreciation and amortization 88,028 84,448 174,155 169,382 Asset impairment — 520 1,708 520 Loss (gain) on sale of communities, net — ( 36,296 ) — ( 36,296 ) Income (loss) from operations $ 19,162 $ 41,165 $ 38,408 $ 48,987 As of (in thousands) June 30, 2024 December 31, 2023 Total assets: Independent Living (3) $ 1,174,509 $ 1,206,021 Assisted Living and Memory Care 3,227,652 3,315,921 CCRCs 598,719 612,521 Corporate and All Other 450,006 438,972 Total assets $ 5,450,886 $ 5,573,435 (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 total carrying amount of goodwill is included within the Independent Living segment and was $ 27.3 million as of both June 30, 2024 and December 31, 2023. 19