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, 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; 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; 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 inability to renew, restructure, or extend leases, or exercise purchase options at or prior to the end of any existing lease term; 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, 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, and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts; negative publicity with respect to any lawsuits, claims, or other legal or regulatory proceedings; costs to respond to, and adverse determinations resulting from, government inquiries, reviews, audits, and investigations; the cost and difficulty of complying with increasing and evolving regulation, including new disclosure obligations; changes in, or our failure to comply with, employment-related laws and regulations; the risks associated with current global economic conditions and general economic factors on us and our business partners such as inflation, commodity costs, fuel and other energy costs, competition in the labor market, costs of salaries, wages, benefits, and insurance, interest rates, tax rates, geopolitical tensions or conflicts, and uncertainty surrounding federal elections; 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 ("SEC"), including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended 22 December 31, 2023. 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-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 648 communities in 41 states as of September 30, 2024, with the ability to serve approximately 58,000 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"). As of September 30, 2024, we owned 342 communities (30,977 units), leased 277 communities (19,860 units), and managed 29 communities (4,362 units). 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. Community Transactions Agreements to Acquire Currently Leased Assets In September 2024, we entered into three definitive agreements to acquire 41 communities (2,789 units) that are currently leased by us for a combined purchase price of $610.0 million. These three transactions are expected to close by year-end, subject to the satisfaction of customary closing conditions for real estate transactions. We expect to fund these acquisitions through the assumption of existing mortgage debt, the net cash proceeds from the sale of the 3.50% convertible senior notes due 2029 (the “2029 New Notes”), proceeds from non-recourse mortgage financing on certain of the assets, and cash on hand. We expect these three transactions will result in an approximately $46.6 million decrease in cash paid for operating and financing leases for the twelve months ending December 31, 2025 compared to the previously required estimated 2025 lease payments and assuming the renewal of the lease for five of the communities at the end of its current term on December 31, 2024. We expect the amendment of the leasing arrangements will result in an approximately $8.1 million and $32.8 million decrease in cash paid for operating leases for the three months ending December 31, 2024 and the twelve months ending December 31, 2025, respectively, as a result of the reclassification of lease costs due to financing lease classification and the expected acquisition transactions. We expect to recognize an approximately $33.0 million loss on extinguishment of the financing obligation upon close of the reacquisition transaction for the amount by which the repurchase price exceeds the previously recognized financing obligation for three communities for which the lease arrangements are accounted for as failed sale-leaseback transactions. Refer to Notes 6 and 7 to the condensed consolidated financial statements contained in Item 1. Financial Statements for additional information on the 2029 New Notes and the acquisition transactions, respectively. Omega Lease Amendment In August 2024, we amended the existing master lease with Omega Healthcare Investors, Inc. ("Omega") pursuant to which we continue to lease 24 communities (2,555 units) from Omega. The 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. 23 Results of Operations 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 components of executive compensation, 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 components of executive compensation, and we believe the measure provides useful information to investors, because the measure is an indicator of senior housing resident fee revenue performance that reflects the impact of both senior housing occupancy and rate. • RevPOR , or average monthly senior housing resident fee revenue per occupied unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding revenue for private duty services provided to seniors living outside of our communities and entrance fee amortization), divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPOR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPOR for decision making, and we believe the measure provides useful information to investors, because it reflects the average amount of senior housing resident fee revenue we derive from an occupied unit per month without factoring occupancy rates. RevPOR is a significant driver of our senior housing revenue performance. • Weighted average occupancy 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"). 24 Comparison of Three Months Ended September 30, 2024 and 2023 Summary Operating Results The following table summarizes our overall operating results for the three months ended September 30, 2024 and 2023. Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 Amount Percent Resident fees $ 743,729 $ 717,123 $ 26,606 3.7 % Facility operating expense 548,282 537,411 10,871 2.0 % Net income (loss) (50,734) (48,811) 1,923 3.9 % Adjusted EBITDA 92,237 80,220 12,017 15.0 % The increase in resident fees was primarily attributable to a 5.6% increase in same community RevPAR, comprised of a 4.2% increase in same community RevPOR and a 100 basis point increase in same community weighted average occupancy. The increase was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $14.6 million less in resident fees during the three months ended September 30, 2024 compared to the prior year period. The increase in facility operating expense was primarily attributable to a 4.1% increase in same community facility operating expense primarily resulting from broad inflationary pressure and an increase in marketing expense, partially offset by a decrease in the use of premium labor, primarily contract labor. The increase was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $12.8 million less in facility operating expense during the three months ended September 30, 2024 compared to the prior year period. The increase in net loss was primarily attributable to the increase in facility operating expense, a decrease in property insurance recoveries, a decrease in the fair value of interest rate derivatives in the current period, and an increase in depreciation and amortization expense, partially offset by the increase in resident fees and a decrease in asset impairment expense. The increase in Adjusted EBITDA was primarily attributable to the increase in resident fees, partially offset by the increase in facility operating expense and a $2.6 million decrease in other operating income for state government grants recognized in the three months ended September 30, 2023. 25 Operating Results - Senior Housing Segments The following table summarizes the consolidated operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) for the three months ended September 30, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 743,729 $ 717,123 $ 26,606 3.7 % Other operating income $ — $ 2,623 $ (2,623) (100.0)% Facility operating expense $ 548,282 $ 537,411 $ 10,871 2.0 % Number of communities (period end) 619 641 (22) (3.4) % Total average units 50,836 51,960 (1,124) (2.2) % RevPAR $ 4,869 $ 4,596 $ 273 5.9 % Weighted average occupancy 78.9 % 77.6 % 130 bps n/a RevPOR $ 6,171 $ 5,919 $ 252 4.3 % Same Community Operating Results and Data Resident fees $ 730,861 $ 691,884 $ 38,977 5.6 % Other operating income $ — $ 2,445 $ (2,445) (100.0) % Facility operating expense $ 536,875 $ 515,738 $ 21,137 4.1 % Number of communities 611 611 — — % Total average units 50,137 50,121 16 — % RevPAR $ 4,859 $ 4,601 $ 258 5.6 % Weighted average occupancy 78.9 % 77.9 % 100 bps n/a RevPOR $ 6,155 $ 5,909 $ 246 4.2 % 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, 2024 and 2023. 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) 2024 2023 Amount Percent Resident fees $ 150,380 $ 141,234 $ 9,146 6.5 % Other operating income $ — $ 215 $ (215) (100.0)% Facility operating expense $ 101,633 $ 96,747 $ 4,886 5.1 % Number of communities (period end) 68 68 — — % Total average units 12,579 12,569 10 0.1 % RevPAR $ 3,985 $ 3,746 $ 239 6.4 % Weighted average occupancy 80.8 % 79.6 % 120 bps n/a RevPOR $ 4,930 $ 4,705 $ 225 4.8 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of a 4.8% increase in RevPOR and a 120 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, an increase in insurance expense, and an increase in marketing expense. 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, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 510,084 $ 494,014 $ 16,070 3.3 % Other operating income $ — $ 2,218 $ (2,218) (100.0)% Facility operating expense $ 378,316 $ 369,501 $ 8,815 2.4 % Number of communities (period end) 534 555 (21) (3.8) % Total average units 33,523 34,480 (957) (2.8) % RevPAR $ 5,060 $ 4,769 $ 291 6.1 % Weighted average occupancy 78.5 % 77.6 % 90 bps n/a RevPOR $ 6,448 $ 6,148 $ 300 4.9 % Same Community Operating Results and Data Resident fees $ 503,977 $ 477,252 $ 26,725 5.6 % Other operating income $ — $ 2,192 $ (2,192) (100.0)% Facility operating expense $ 372,586 $ 356,290 $ 16,296 4.6 % Number of communities 527 527 — — % Total average units 33,240 33,238 2 — % RevPAR $ 5,054 $ 4,786 $ 268 5.6 % Weighted average occupancy 78.5 % 77.6 % 90 bps n/a RevPOR $ 6,439 $ 6,166 $ 273 4.4 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 4.4% increase in same community RevPOR and a 90 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 communities since the beginning of the prior year period, which resulted in $11.9 million less in resident fees during the three months ended September 30, 2024 compared to 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 attributable to broad inflationary pressure and an increase in marketing expense, 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, which resulted in $9.6 million less in facility operating expense during the three months ended September 30, 2024 compared to the prior year period. 28 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the three months ended September 30, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 83,265 $ 81,875 $ 1,390 1.7 % Other operating income $ — $ 190 $ (190) (100.0)% Facility operating expense $ 68,333 $ 71,163 $ (2,830) (4.0) % Number of communities (period end) 17 18 (1) (5.6) % Total average units 4,734 4,911 (177) (3.6) % RevPAR $ 5,863 $ 5,557 $ 306 5.5 % Weighted average occupancy 76.7 % 73.2 % 350 bps n/a RevPOR $ 7,644 $ 7,594 $ 50 0.7 % Same Community Operating Results and Data Resident fees $ 76,504 $ 73,398 $ 3,106 4.2 % Other operating income $ — $ 38 $ (38) (100.0)% Facility operating expense $ 62,779 $ 62,540 $ 239 0.4 % Number of communities 16 16 — — % Total average units 4,318 4,314 4 0.1 % RevPAR $ 5,906 $ 5,671 $ 235 4.1 % Weighted average occupancy 77.0 % 74.8 % 220 bps n/a RevPOR $ 7,672 $ 7,584 $ 88 1.2 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 220 basis point increase in same community weighted average occupancy and a 1.2% increase in the segment's same community RevPOR. 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 same community RevPOR was primarily the result of the current year rate increase, partially offset by an occupancy mix shift to more independent living residents. The increase in the segment's resident fees was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $2.7 million less in resident fees during the three months ended September 30, 2024 compared to the prior year period. The decrease in the segment's facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $3.2 million less in facility operating expense during the three months ended September 30, 2024 compared to 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 primarily attributable to broad inflationary pressure, partially offset by a decrease in the use of premium labor, primarily contract labor. 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, 2024 and 2023. Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 Amount Percent Management fees $ 2,676 $ 2,566 $ 110 4.3 % Reimbursed costs incurred on behalf of managed communities 37,762 34,979 2,783 8.0 % Costs incurred on behalf of managed communities 37,762 34,979 2,783 8.0 % General and administrative expense 44,929 43,076 1,853 4.3 % Facility operating lease expense 51,937 53,145 (1,208) (2.3) % Depreciation and amortization 90,064 85,932 4,132 4.8 % Asset impairment 934 9,086 (8,152) (89.7) % Interest income 4,663 6,323 (1,660) (26.3) % Interest expense 66,316 59,412 6,904 11.6 % Gain (loss) on debt modification and extinguishment, net (2,267) — 2,267 NM Equity in earnings (loss) of unconsolidated ventures — (1,426) (1,426) (100.0)% Other non-operating income (loss) 3,584 10,166 (6,582) (64.7) % Benefit (provision) for income taxes (677) 1,876 (2,553) NM Reimbursed Costs Incurred on Behalf of Managed Communities. The increase in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to an increase in community costs incurred as a result of natural disasters and broad inflationary pressure for communities managed in both periods. General and Administrative Expense. The increase in general and administrative expense was primarily attributable to increases in legal expenses and non-cash stock-based compensation expense compared to the prior year period. Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to community lease termination activity since the prior year period. Depreciation and Amortization . The increase in depreciation and amortization expense was primarily due to the completion of community renovations, apartment upgrades, and other major building infrastructure projects since the beginning of the prior year period. Asset Impairment. During the three months ended September 30, 2024, we recorded $0.9 million of non-cash impairment charges due to property damage sustained at certain communities. During the three months ended September 30, 2023, we recorded $9.1 million of non-cash impairment charges, primarily due to the planned disposition of certain underperforming communities that have since been sold. Interest Expense . The increase in interest expense was primarily due to a decrease in the fair value of interest rate derivatives in the current period and an increase in interest expense on long-term debt. Gain (Loss) on Debt Modification and Extinguishment, Net. The increase in loss on debt modification and extinguishment, net was primarily due to debt modification costs recognized during the three months ended September 30, 2024 for the refinancing of mortgage debt previously scheduled to mature in September 2025. Other Non-operating Income (Loss). The decrease in other non-operating income is due to decreased income recognized for insurance recoveries from our property and casualty insurance policies. 30 Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the three months ended September 30, 2024 and 2023 was primarily due to an increase in the valuation allowance recorded on operating losses during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. We recorded an aggregate deferred federal, state, and local tax benefit of $12.2 million for the three months ended September 30, 2024, which was offset by an increase in the valuation allowance of $12.5 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, 2024 and December 31, 2023 was $503.0 million and $474.2 million, respectively. 31 Comparison of Nine Months Ended September 30, 2024 and 2023 Summary Operating Results The following table summarizes our overall operating results for the nine months ended September 30, 2024 and 2023. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 Amount Percent Resident fees $ 2,227,679 $ 2,140,688 $ 86,991 4.1 % Facility operating expense 1,628,339 1,599,336 29,003 1.8 % Net income (loss) (118,057) (97,900) 20,157 20.6 % Adjusted EBITDA 287,669 250,215 37,454 15.0 % The increase in resident fees was primarily attributable to a 5.9% increase in same community RevPAR, comprised of a 4.2% increase in same community RevPOR and a 130 basis point increase in same community weighted average occupancy. The increase was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $44.7 million less in resident fees during the nine months ended September 30, 2024 compared to the prior year period. The increase in facility operating expense was primarily attributable to a 4.0% increase in same community facility operating expense, primarily resulting from broad inflationary pressure, an additional day of expense due to the leap year, an increase in estimated insurance expense, and an increase in property repair expense primarily as a result of severe weather events, partially offset by a decrease in the use of premium labor, primarily contract labor. The increase was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $39.2 million less in facility operating expense during the nine months ended September 30, 2024 compared to the prior year period. The increase in net loss was primarily attributable to 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, the increase in facility operating expense, a $12.0 million increase in interest expense primarily due to the change in the fair value of derivatives, a decrease in other operating income, and an increase in depreciation and amortization expense compared to the prior year period. These changes were partially offset by the increase in resident fees. The increase in Adjusted EBITDA was primarily attributable to the increase in resident fees, partially offset by the increase in facility operating expense, the change in classification of $9.9 million of lease payments for 35 communities as cash facility operating lease payments as a result of lease amendments in the prior year period, and a decrease in other operating income. 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, 2024 and 2023 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) 2024 2023 Amount Percent Resident fees $ 2,227,679 $ 2,140,688 $ 86,991 4.1 % Other operating income $ — $ 9,073 $ (9,073) (100.0)% Facility operating expense $ 1,628,339 $ 1,599,336 $ 29,003 1.8 % Number of communities (period end) 619 641 (22) (3.4) % Total average units 50,934 52,056 (1,122) (2.2) % RevPAR $ 4,852 $ 4,564 $ 288 6.3 % Weighted average occupancy 78.3 % 76.8 % 150 bps n/a RevPOR $ 6,197 $ 5,940 $ 257 4.3 % Same Community Operating Results and Data Resident fees $ 2,185,853 $ 2,062,923 $ 122,930 6.0 % Other operating income $ — $ 8,710 $ (8,710) (100.0)% Facility operating expense $ 1,591,651 $ 1,530,398 $ 61,253 4.0 % Number of communities 611 611 — — % Total average units 50,129 50,124 5 — % RevPAR $ 4,845 $ 4,573 $ 272 5.9 % Weighted average occupancy 78.4 % 77.1 % 130 bps n/a RevPOR $ 6,183 $ 5,933 $ 250 4.2 % 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, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 448,870 $ 422,506 $ 26,364 6.2 % Other operating income $ — $ 487 $ (487) (100.0)% Facility operating expense $ 301,146 $ 285,097 $ 16,049 5.6 % Number of communities (period end) 68 68 — — % Total average units 12,572 12,571 1 — % RevPAR $ 3,967 $ 3,734 $ 233 6.2 % Weighted average occupancy 80.1 % 79.0 % 110 bps n/a RevPOR $ 4,950 $ 4,724 $ 226 4.8 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's RevPAR, comprised of a 4.8% increase in RevPOR and a 110 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, an additional day of expense due to the leap year, an increase in property repair expense primarily as a result of severe weather events, increased wireless internet access provided for residents, and an increase in estimated insurance expense. The segment's same community facility operating expense for the nine months ended September 30, 2024 excludes $0.5 million of natural disaster expense. 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, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 1,528,147 $ 1,467,314 $ 60,833 4.1 % Other operating income $ — $ 8,008 $ (8,008) (100.0)% Facility operating expense $ 1,122,766 $ 1,099,382 $ 23,384 2.1 % Number of communities (period end) 534 555 (21) (3.8) % Total average units 33,630 34,446 (816) (2.4) % RevPAR $ 5,038 $ 4,727 $ 311 6.6 % Weighted average occupancy 77.9 % 76.6 % 130 bps n/a RevPOR $ 6,468 $ 6,172 $ 296 4.8 % Same Community Operating Results and Data Resident fees $ 1,506,801 $ 1,419,449 $ 87,352 6.2 % Other operating income $ — $ 7,843 $ (7,843) (100.0)% Facility operating expense $ 1,102,302 $ 1,059,631 $ 42,671 4.0 % Number of communities 527 527 — — % Total average units 33,241 33,239 2 — % RevPAR $ 5,037 $ 4,745 $ 292 6.2 % Weighted average occupancy 77.9 % 76.7 % 120 bps n/a RevPOR $ 6,465 $ 6,190 $ 275 4.4 % The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 4.4% increase in same community RevPOR and a 120 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 communities since the beginning of the prior year period, which resulted in $31.3 million less in resident fees during the nine months ended September 30, 2024 compared to 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 attributable to broad inflationary pressure, an additional day of expense due to the leap year, an increase in estimated insurance expense, and an increase in property repair expense primarily as a result of severe weather events, 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, which resulted in $25.3 million less in facility operating expense during the nine months ended September 30, 2024 compared to the prior year period. The segment's same community facility operating expense for the nine months ended September 30, 2024 excludes $3.1 million of natural disaster expense. 35 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the nine months ended September 30, 2024 and 2023, 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) 2024 2023 Amount Percent Resident fees $ 250,662 $ 250,868 $ (206) (0.1) % Other operating income $ — $ 578 $ (578) (100.0)% Facility operating expense $ 204,427 $ 214,857 $ (10,430) (4.9) % Number of communities (period end) 17 18 (1) (5.6) % Total average units 4,732 5,039 (307) (6.1) % RevPAR $ 5,886 $ 5,516 $ 370 6.7 % Weighted average occupancy 76.3 % 72.9 % 340 bps n/a RevPOR $ 7,715 $ 7,569 $ 146 1.9 % Same Community Operating Results and Data Resident fees $ 230,182 $ 220,968 $ 9,214 4.2 % Other operating income $ — $ 380 $ (380) (100.0)% Facility operating expense $ 188,674 $ 185,530 $ 3,144 1.7 % Number of communities 16 16 — — % Total average units 4,316 4,314 2 — % RevPAR $ 5,925 $ 5,691 $ 234 4.1 % Weighted average occupancy 76.7 % 74.5 % 220 bps n/a RevPOR $ 7,729 $ 7,644 $ 85 1.1 % The decrease in the segment's resident fees was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $13.4 million less in resident fees during the nine months ended September 30, 2024 compared to the prior year period. The decrease was partially offset by an increase in the segment's same community RevPAR, comprised of a 220 basis point increase in same community weighted average occupancy and a 1.1% increase in same community RevPOR. 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 same community RevPOR was primarily the result of the current year rate increase, partially offset by an occupancy mix shift to more independent living residents. The decrease in the segment's facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $13.9 million less in facility operating expense during the nine months ended September 30, 2024 compared to 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 primarily attributable to broad inflationary pressure, an additional day of expense due to the leap year, and an increase in estimated insurance expense, partially offset by a decrease in the use of premium labor, primarily contract labor. 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, 2024 and 2023. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 Amount Percent Management fees $ 7,910 $ 7,653 $ 257 3.4 % Reimbursed costs incurred on behalf of managed communities 108,950 103,932 5,018 4.8 % Costs incurred on behalf of managed communities 108,950 103,932 5,018 4.8 % General and administrative expense 137,325 137,021 304 0.2 % Facility operating lease expense 154,397 149,784 4,613 3.1 % Depreciation and amortization 264,219 255,314 8,905 3.5 % Asset impairment 2,642 9,606 (6,964) (72.5) % Loss (gain) on sale of communities, net — (36,296) (36,296) (100.0)% Interest income 14,155 17,764 (3,609) (20.3) % Interest expense 185,570 173,558 12,012 6.9 % Gain (loss) on debt modification and extinguishment, net (2,267) — 2,267 NM Equity in earnings (loss) of unconsolidated ventures — (3,156) (3,156) (100.0)% Non-operating gain (loss) on sale of assets, net 923 860 63 7.3 % Other non-operating income (loss) 7,121 16,512 (9,391) (56.9) % Benefit (provision) for income taxes (1,086) 1,029 (2,115) NM Reimbursed Costs Incurred on Behalf of Managed Communities and Costs Incurred on Behalf of Managed Communities. The increase in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to an increase in community costs incurred as a result of broad inflationary pressure for communities managed in both periods. General and Administrative Expense. General and administrative expense includes transaction and organizational restructuring costs of $0.6 million and $3.8 million for the nine months ended September 30, 2024 and 2023, 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 in the prior year period. Depreciation and Amortization. The increase in depreciation and amortization expense was primarily due to the completion of community renovations, apartment upgrades, and other major building infrastructure projects since the beginning of the prior year period, partially offset by the change in classification of lease costs from financing leases to operating leases as a result of lease amendments in the prior year period. Asset Impairment. During the nine months ended September 30, 2024, we recorded $2.6 million of non-cash impairment charges primarily due to non-cash impairment charges for property damage sustained at certain communities. During the nine months ended September 30, 2023, we recorded $9.6 million of non-cash impairment charges, primarily related to the planned disposition of certain underperforming communities that have since been sold. Loss (Gain) on Sale of Communities, net . The decrease in gain on sale of communities, net was due to the sale of our one remaining entrance fee community during the nine months ended September 30, 2023. Interest Expense. The increase in interest expense was primarily due to an increase in the fair value of interest rate derivatives in the prior year and an increase in interest expense on long-term debt primarily as a result of increases in variable interest rate indices. 37 Gain (Loss) on Debt Modification and Extinguishment, Net. The increase in loss on debt modification and extinguishment, net was primarily due to debt modification costs recognized during the nine months ended September 30, 2024 for the refinancing of mortgage debt previously scheduled to mature in September 2025. Equity in Earnings (Loss) of Unconsolidated Ventures. The decrease in equity in loss of unconsolidated ventures was due to the sale of our equity interest in the Health Care Services venture in December 2023. Other Non-operating Income (Loss). The decrease in other non-operating income is due to decreased 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, 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. We recorded an aggregate deferred federal, state, and local tax benefit of $28.9 million for the nine months ended September 30, 2024, which was partially offset by an increase in the valuation allowance of $28.8 million. 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 to the valuation allowance of $21.0 million. Liquidity and Capital Resources This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measure. Liquidity The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the condensed consolidated statements of cash flows, and our Adjusted Free Cash Flow. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 Amount Percent Net cash provided by (used in) operating activities $ 120,979 $ 133,629 $ (12,650) (9.5) % Net cash provided by (used in) investing activities (133,516) (135,747) (2,231) (1.6) % Net cash provided by (used in) financing activities (5,086) (69,154) (64,068) (92.6) % Net increase (decrease) in cash, cash equivalents, and restricted cash (17,623) (71,272) (53,649) (75.3) % Cash, cash equivalents, and restricted cash at beginning of period 349,668 474,548 (124,880) (26.3) % Cash, cash equivalents, and restricted cash at end of period $ 332,045 $ 403,276 $ (71,231) (17.7) % Adjusted Free Cash Flow $ (17,960) $ (26,176) $ 8,216 31.4 % The decrease in net cash provided by operating activities was primarily attributable to $28.0 million in cash received in the prior year period associated with government grants and credits, an increase in incentive compensation payments, and an increase in facility operating expense compared to the prior year period, partially offset by an increase in resident fees compared to the prior year period. The decrease in net cash used in investing activities was primarily attributable to a $120.6 million decrease in purchases of marketable securities and a $23.8 million decrease in cash paid for capital expenditures compared to the prior year period. These changes were partially offset by a reduction in the sale and maturities of marketable securities of $105.1 million and net proceeds from sale of assets of $36.2 million. The decrease in net cash used in financing activities was primarily attributable to $50.0 million of debt secured by first priority mortgages on 11 communities in February 2024. 38 The change in Adjusted Free Cash Flow was primarily attributable to a $30.3 million decrease in non-development capital expenditures, net compared to the prior year period, partially offset by the decrease in net cash provided by operating activities and a decrease in property and casualty insurance proceeds. 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. Over the near-term, we expect that our liquidity requirements will primarily arise from: • working capital; • operating costs such as labor costs, general and administrative expense, and supply costs; • debt, interest, and lease payments; • investment in our healthcare and wellness initiatives; • transaction consideration and related expenses, including consideration for the acquisition of 41 communities pursuant to agreements with certain of our lessors; • capital expenditures and improvements; • 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). In addition, we may use liquidity to the extent that we identify potential lease restructuring opportunities. We are highly leveraged and have significant debt and lease obligations. As of September 30, 2024, we had $3.7 billion of debt outstanding at a weighted average interest rate of 5.45%. As of such date, 91.5%, or $3.4 billion, of our total debt obligations represented non-recourse property-level mortgage financings. As of September 30, 2024, we had $1.5 billion of operating and financing lease obligations, and for the twelve months ending September 30, 2025, we will be required to make approximately $249.5 million of cash lease payments in connection with our existing operating and financing leases (after giving effect to our planned acquisition transactions for 41 communities). In September 2024, we entered into privately negotiated agreements with certain of the holders of our outstanding 2.00% convertible senior notes due 2026 (the “2026 Notes”) to exchange a portion of our existing 2026 Notes for a newly issued series of 2029 New Notes. On October 3, 2024, pursuant to the agreements, we issued $369.4 million principal amount of a newly issued series of 2029 New Notes. Approximately $219.4 million principal amount of the 2029 New Notes was issued in exchange for $206.7 million principal amount of the 2026 Notes and $150.0 million principal amount of the 2029 New Notes was issued for cash. Our net cash proceeds were approximately $135.0 million after subtracting fees, discounts, and estimated expenses in connection with the financings. Refer to Note 6 to the condensed consolidated financial statements contained in Item 1. Financial Statements for additional information on the convertible senior notes transactions. In September 2024, we entered into three definitive agreements to acquire 41 communities that are currently leased by us for a combined purchase price of $610.0 million. These three transactions are expected to close by year-end, subject to the satisfaction of customary closing conditions for real estate transactions. We expect to fund these acquisitions through the assumption of approximately $194.5 million existing mortgage debt, the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on certain of the assets, and cash on hand. 39 Total liquidity of $324.1 million as of September 30, 2024 included $254.7 million of unrestricted cash and cash equivalents (excluding restricted cash of $77.3 million), $29.7 million of marketable securities, and $39.7 million of availability on our secured credit facility. Total liquidity as of September 30, 2024 decreased $16.6 million from total liquidity of $340.7 million as of December 31, 2023. The decrease was primarily attributable to negative $18.0 million of Adjusted Free Cash Flow. As described above, we received net cash proceeds of approximately $135.0 million for the exchange and issuance of convertible senior notes, net of fees, discounts, and estimated expenses in October 2024, which subsequently increased our current liquidity. The Company intends to use the proceeds to fund the planned acquisitions and for general corporate purposes. 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, 2023 filed with the Securities and Exchange Commission ("SEC") on February 21, 2024. 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. As of September 30, 2024, 10% of our owned communities were unencumbered by mortgage debt. As of September 30, 2024, our current liabilities exceeded current assets by $110.3 million. Included in our current liabilities is $152.0 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 and cash equivalents, 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 appropriate expense discipline, continuing to refinance or exercise available extension options for 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 or exercising extension options. We have $100.0 million and $220.0 million of mortgage notes payable scheduled to mature in January 2025 and October 2025, respectively, with two one-year extension options, exercisable by us subject to the satisfaction of certain conditions. We expect to satisfy the conditions to exercise the options to extend the mortgage notes payable for the first additional one-year term. We have completed the refinancing of all of our other mortgage debt maturities due in 2024 and 2025. Our inability to exercise available extension options or obtain refinancing proceeds sufficient to cover 2026 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 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. Funding our planned capital expenditures 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. 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. 40 The following table summarizes our capital expenditures for the nine months ended September 30, 2024 for our consolidated business. (in thousands) Community-level capital expenditures, net (1) $ 120,715 Corporate capital expenditures, net 23,919 Non-development capital expenditures, net (2) 144,634 Development capital expenditures, net 624 Total capital expenditures, net $ 145,258 (1) Reflects the amount invested, net of lessor reimbursements of $8.0 million. (2) Amount is included in Adjusted Free Cash Flow. In the aggregate, we expect our full-year 2024 non-development capital expenditures, net of anticipated lessor reimbursements and property and casualty insurance proceeds, to be approximately $180.0 million. We anticipate that our 2024 capital expenditures will be funded from cash on hand, cash equivalents, cash flows from operations, reimbursements from lessors, and reimbursement from our property and casualty insurance policies. We received $6.3 million of such insurance reimbursements in the nine months ended September 30, 2024. Credit Facilities In December 2023, we amended our revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The amended agreement provides an expanded commitment amount of up to $100.0 million which can be drawn in cash or as letters of credit. The credit facility matures in January 2027, and we have the option to extend the facility for two additional terms of approximately one year each subject to the satisfaction of certain conditions. Amounts drawn under the facility will bear interest at the Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging from 2.5% to 3.0% based upon the percentage of the total commitment drawn. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of September 30, 2024. 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 certain 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, 2024, $58.5 million of letters of credit and no cash borrowings were outstanding under our $100.0 million secured credit facility and the facility had $39.7 million of availability. We also had a separate secured letter of credit facility providing up to $17.0 million of letters of credit as of September 30, 2024 under which $15.7 million had been issued as of that date. Long-Term Leases As of September 30, 2024, we operated 277 communities under long-term leases (227 operating leases and 50 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 88% of our community lease payments for the nine months ended September 30, 2024 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. We are responsible for all operating costs, including repairs and maintenance, 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 existing lease maturities of our senior housing community leases as of September 30, 2024 are as follows 41 (without giving effect to future renewals or extension options and assuming the closing of the pending lease acquisition transactions involving 41 communities described above). Years Ending December 31, Community Count Total Units 2024 1 172 2025 122 10,347 2026 2 153 2027 — — 2028 1 116 Thereafter 110 6,283 Subtotal 236 17,071 Communities subject to acquisition agreements 41 2,789 Total 277 19,860 In the aggregate, our cash flow from our leased portfolio is negative after giving effect to capital expenditures and allocated general and administrative expense. We expect to renew, extend, or restructure leases with respect to certain leases where economically advantageous. One master lease reflected in the table above covers 120 communities and is scheduled to mature on December 31, 2025. Pursuant to the terms of the master lease, our renewal notice deadline expires at the end of November 2024. To the extent we do not renew the lease and otherwise do not reach agreement on a restructured arrangement with the landlord prior to the lease maturity, the lease would expire in accordance with its terms. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios. Our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met. Certain of our master leases contain radius restrictions, which limit our ability to own, develop, or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand, develop, or acquire senior housing communities and operating companies. For the nine months ended September 30, 2024 and 2023, our cash lease payments for our operating leases were $199.6 million and $188.8 million, respectively, and for our financing leases were $16.0 million and $25.2 million, respectively. For the twelve months ending September 30, 2025, we will be required to make $249.5 million of cash lease payments in connection with our existing operating and financing leases (after giving effect to our planned acquisition transactions for 41 communities). 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, 2024, our liquidity was $324.1 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). 42 Furthermore, our 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, 2024, we are in compliance with the financial covenants of our debt agreements and long-term lease agreements. Non-GAAP Financial Measures This Quarterly Report on Form 10-Q contains the financial measures Adjusted EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with GAAP. Presentations of these non-GAAP financial measures are intended to aid investors in better understanding the factors and trends affecting our performance and liquidity. However, investors should not consider these non-GAAP financial measures as a substitute for financial measures determined in accordance with GAAP, including net income (loss), income (loss) from operations, or net cash provided by (used in) operating activities. We caution investors that amounts presented in accordance with our definitions of these non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies calculate non-GAAP measures in the same manner. We urge investors to review the following reconciliations of these non-GAAP financial measures from the most comparable financial measures determined in accordance with GAAP. Adjusted EBITDA Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) excluding: benefit/provision for income taxes, non-operating income/expense items, and depreciation and amortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction, or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges, operating lease expense adjustment, non-cash stock-based compensation expense, 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) 2024 2023 2024 2023 Net income (loss) $ (50,734) $ (48,811) $ (118,057) $ (97,900) Provision (benefit) for income taxes 677 (1,876) 1,086 (1,029) Equity in (earnings) loss of unconsolidated ventures — 1,426 — 3,156 Loss (gain) on debt modification and extinguishment, net 2,267 — 2,267 — Non-operating loss (gain) on sale of assets, net (20) — (923) (860) Other non-operating (income) loss (3,584) (10,166) (7,121) (16,512) Interest expense 66,316 59,412 185,570 173,558 Interest income (4,663) (6,323) (14,155) (17,764) Income (loss) from operations 10,259 (6,338) 48,667 42,649 Depreciation and amortization 90,064 85,932 264,219 255,314 Asset impairment 934 9,086 2,642 9,606 Loss (gain) on sale of communities, net — — — (36,296) Operating lease expense adjustment (12,489) (11,458) (39,061) (33,820) Non-cash stock-based compensation expense 3,403 2,893 10,651 8,966 Transaction and organizational restructuring costs 66 105 551 3,796 Adjusted EBITDA $ 92,237 $ 80,220 $ 287,669 $ 250,215 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. 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) 2024 2023 2024 2023 Net cash provided by (used in) operating activities $ 66,455 $ 45,763 $ 120,979 $ 133,629 Net cash provided by (used in) investing activities (58,113) (31,837) (133,516) (135,747) Net cash provided by (used in) financing activities (38,801) (19,232) (5,086) (69,154) Net increase (decrease) in cash, cash equivalents, and restricted cash $ (30,459) $ (5,306) $ (17,623) $ (71,272) Net cash provided by (used in) operating activities $ 66,455 $ 45,763 $ 120,979 $ 133,629 Distributions from unconsolidated ventures from cumulative share of net earnings — — — (430) Changes in prepaid insurance premiums financed with notes payable (7,772) (6,474) 7,930 6,530 Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases (6,432) — (7,732) (2,244) Non-development capital expenditures, net (41,718) (47,248) (144,634) (174,975) Property and casualty insurance proceeds 3,593 10,747 6,297 19,536 Payment of financing lease obligations (273) (244) (800) (8,222) Adjusted Free Cash Flow $ 13,853 $ 2,544 $ (17,960) $ (26,176)