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Item 2. Management’s Discussion and Analysis

2024-11-04 compared with 2024-08-01 · 149 added, 133 removed, 529 unchanged (35% of the section changed)

2 unchanged sentences

We are a REIT organized under Maryland law that primarily owns medical office and life science properties, senior living communities and other healthcare related properties throughout the United States.

As of June 30, 2024, we owned 370 properties located in 36 states and Washington, D.C., including five properties classified as held for sale and two closed senior living communities.

At June 30, 2024, the gross book value of our real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, was $7.2 billion.

As of June 30, 2024, we owned an equity interest in each of the Seaport JV and the LSMD JV that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet that were 98% leased with an average (by annualized rental income) remaining lease term of 5.1 years.

As of September 30, 2024, we owned 368 properties located in 36 states and Washington, D.C., including 25 properties classified as held for sale and three closed senior living communities.

At September 30, 2024, the gross book value of our real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, was $7.2 billion.

As of September 30, 2024, we owned an equity interest in each of the Seaport JV and the LSMD JV that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet that were 99% leased with an average (by annualized rental income) remaining lease term of 15.2 years.

We are closely monitoring the impacts of the current economic and market conditions on all aspects of our business, including, but not limited to, high interest rates, prolonged high inflation, labor market challenges, volatility in the public equity and debt markets, geopolitical risks, economic downturns or a possible recession and changes in real estate utilization.

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In response to significant and prolonged increases in inflation, the U.S.

Federal Reserve has raised interest rates multiple times since the beginning of 2022.

Federal Reserve raised interest rates multiple times since the beginning of 2022.

Although the U.S.

Federal Reserve has indicated that it may lower interest rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current high levels or continue to increase.

Federal Reserve has lowered interest rates in 2024, we cannot be sure that it will continue to do so, or that any future interest rate decreases will be significant, and interest rates may remain at the current high levels or increase.

These inflationary pressures in the United States, as well as global geopolitical instability and tensions, have given rise to uncertainty regarding economic downturns or a possible recession and potential disruptions in the financial markets.

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While certain costs, primarily labor, insurance and food costs, have increased, we expect these cost increases to moderate, which will provide our managers the opportunity to increase rates in excess of increases in costs, resulting in improving returns to us.

In an effort to optimize performance, our asset management team reviews the results of each of our senior living communities and our operators, taking into account various factors such as performance metric benchmarks, location and other relevant data points.

This comprehensive review process ensures that our decisions are data-driven and strategically aligned with our overall objectives.

As a result of these reviews, our strategy to drive positive performance includes analyzing non-performing communities for potential disposition or transition to different operators.

For further information and risks relating to these economic uncertainties, including changes related to the COVID-19 pandemic, and their impact on our business and financial condition, see Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors" in our Annual Report.

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The following tables present an overview of our portfolio (dollars in thousands, except investment per square foot or unit data):

As of June 30, 2024 Number

As of September 30, 2024 Number

of Properties Square Feet or Number of Units Gross Book Value of Real Estate Assets (1)

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Total 368 $ 7,173,900 100.0 % $ 373,640 100.0 % $ 63,943 100.0 %

As of and For the Three Months Ended June 30,

As of and For the Three Months Ended September 30,

Medical Office and Life Science Portfolio (5)

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(5) Medical office and life science property occupancy data includes (i) out of service assets undergoing redevelopment, (ii) space which is leased but is not occupied or is being offered for sublease by tenants and (iii) space being fitted out for occupancy.

During the three and six months ended June 30, 2024, we entered into new and renewal leases in our Medical Office and Life Science Portfolio segment as summarized in the following table (dollars and square feet in thousands, except per square foot amounts):

Three Months Ended June 30, 2024

During the three and nine months ended September 30, 2024, we entered into new and renewal leases in our Medical Office and Life Science Portfolio segment as summarized in the following tables (dollars and square feet in thousands, except per square foot amounts):

Three Months Ended September 30, 2024

New Leases Renewals Total

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$ 8.58 $ 4.44 $ 6.21

Six Months Ended June 30, 2024

Nine Months Ended September 30, 2024

New Leases Renewals Total

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(1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

During the six months ended June 30, 2024, we entered into renewal leases at three of our wellness centers totaling 129,600 square feet at rates that were 7.5% higher than prior rents for the same space at a weighted average lease term of five years.

During the nine months ended September 30, 2024, we entered into renewal leases at three of our wellness centers totaling 129,600 square feet at rates that were 7.5% higher than prior rents for the same space at a weighted average lease term of five years.

We did not incur any leasing costs or concessions commitments for these renewals.

Lease Expiration Schedules

As of June 30, 2024, lease expirations in our Medical Office and Life Science Portfolio segment were as follows (dollars in thousands):

As of September 30, 2024, lease expirations in our Medical Office and Life Science Portfolio segment were as follows (dollars in thousands):

Year Number of Tenants Square Feet Leased Percent of Total Cumulative Percent of Total Annualized Rental Income (1)

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Weighted average remaining lease term (in years) 4.9 5.3

(1) Annualized rental income is based on rents pursuant to existing leases as of June 30, 2024, including straight line rent adjustments and estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our medical office and life science properties.

As of June 30, 2024, lease expirations at our triple net leased senior living communities leased to third party operators and wellness centers were as follows (dollars in thousands):

(1) Annualized rental income is based on rents pursuant to existing leases as of September 30, 2024, including straight line rent adjustments and estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our medical office and life science properties.

As of September 30, 2024, lease expirations at our triple net leased senior living communities leased to third party operators and wellness centers were as follows (dollars in thousands):

Year Number of Properties Number of Units or Square Feet Annualized Rental Income (1)

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19,210 48.9 % 100.0 %

Total 37 $ 39,267 100.0 %

36 $ 39,267 100.0 %

Weighted average remaining lease term (in years) (4)

(1) Annualized rental income is based on rents pursuant to existing leases as of June 30, 2024.

(1) Annualized rental income is based on rents pursuant to existing leases as of September 30, 2024.

Annualized rental income includes estimated percentage rents and straight line rent adjustments and excludes lease value amortization.

(2) We have entered into an agreement to sell these 18 communities for $135,000.

We expect this sale to close during the fourth quarter of 2024.

(3) Excludes one closed senior living community.

(4) Weighted average lease term is calculated based on square feet and annualized rental income.

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We also report “non-segment” operations, which consists of triple net leased senior living communities and wellness centers that are leased to third party operators from which we receive rents, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment.

The following table summarizes the results of operations of each of our segments for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30, Six Months Ended June 30,

The following table summarizes the results of operations of each of our segments for the three and nine months ended September 30, 2024 and 2023:

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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The following section analyzes and discusses the results of operations of each of our segments for the periods presented.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 (dollars and square feet in thousands, except average monthly rate):

Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the three months ended June 30, 2024 to the three months ended June 30, 2023.

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 (dollars and square feet in thousands, except average monthly rate):

Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the three months ended September 30, 2024 to the three months ended September 30, 2023.

Our definition of net operating income, or NOI, and our reconciliation of net income (loss) to NOI and a description of why we believe NOI is an appropriate supplemental measure are included below under the heading “Non-GAAP Financial Measures.”

Three Months Ended June 30,

Three Months Ended September 30,

2024 2023 $ Change % Change

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Acquisition and certain other transaction related costs 331 3,676 (3,345) (91.0) %

Impairment of assets 6,545 11,299 (4,754) (42.1) %

Loss on sale of properties (13,213) — (13,213) (100.0) %

Gains and losses on equity securities, net — — — nm

Impairment of assets 23,031 1,156 21,875 nm

Gain on sale of properties 111 — 111 nm

Interest and other income 2,575 3,243 (668) (20.6) %

1 unchanged sentence

(59,443) (47,758) (11,685) 24.5 %

Loss on modification or early extinguishment of debt (209) — (209) (100.0) %

Loss before income tax expense and equity in net (losses) earnings of investees (85,384) (75,279) (10,105) 13.4 %

Loss before income tax expense and equity in net earnings (losses) of investees (99,068) (65,445) (33,623) 51.4 %

Income tax expense (148) (189) 41 (21.7) %

Equity in net (losses) earnings of investees (12,307) 2,929 (15,236) nm

Equity in net earnings (losses) of investees 527 (145) 672 nm

Net loss $ (98,689) $ (65,779) $ (32,910) 50.0 %

3 unchanged sentences

All Properties

As of June 30, As of June 30,

As of September 30, As of September 30,

2024 2023 2024 2023

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Occupancy 87.8 % 93.7 % 80.8 % 85.8 %

Three Months Ended June 30,

Three Months Ended September 30,

Comparable (1)

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NOI $ 29,481 $ 29,666 $ (185) (0.6) % $ (1,654) $ (392) $ 27,827 $ 29,274 $ (1,447) (4.9) %

(1) Consists of medical office and life science properties that we have owned and which have been in service continuously since April 1, 2023;

(1) Consists of medical office and life science properties that we have owned and which have been in service continuously since July 1, 2023;

excludes properties classified as held for sale or out of service undergoing redevelopment, if any, and properties owned by unconsolidated joint ventures in each of which we own an equity interest.

Rental income.

Rental income decreased at our comparable properties primarily due to vacancies at certain of our properties, partially offset by increased parking revenue at one of our properties.

Rental income increased at our non-comparable properties

primarily due to a tenant default at one of our properties in the 2023 period and an increase in rental income at one of our recently redeveloped properties, partially offset by dispositions since April 1, 2023.

Rental income decreased at our comparable properties primarily due to vacancies at certain of our properties, partially offset by increases in property operating expense reimbursements at certain of our properties.

Rental income decreased at our non-comparable properties primarily due to a vacancy at one of our properties classified as held for sale and dispositions since July 1, 2023, partially offset by a tenant default at one of our properties during the 2023 period.

Property operating expenses.

Property operating expenses consist of real estate taxes, utility expenses, insurance, management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties.

The increase in property operating expenses at our comparable properties is primarily due to increased insurance costs recorded in the 2024 period, partially offset by a decrease in real estate taxes due to refunds realized and a reduction in assessed values as a result of successful appeals in the 2024 period.

Property operating expenses decreased at our non-comparable properties primarily due to dispositions since April 1, 2023.

The decrease in property operating expenses at our comparable properties is primarily due to a decrease in real estate taxes due to refunds realized and a reduction in assessed values as a result of successful appeals during the 2024 period as well as decreases in repairs and maintenance and utility expenses, partially offset by increases in other direct costs.

Property operating expenses decreased at our non-comparable properties primarily due to dispositions since July 1, 2023.

Net operating income.

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As of and For the Three Months As of and For the Three Months

Ended June 30, Ended June 30,

Ended September 30, Ended September 30,

2024 2023 2024 2023

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$ 5,179 $ 4,914 $ 5,199 $ 4,933

Three Months Ended June 30,

Three Months Ended September 30,

Comparable (1)

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NOI $ 30,414 $ 21,970 $ 8,444 38.4 % $ (2,981) $ (1,281) $ 27,433 $ 20,689 $ 6,744 32.6 %

(1) Consists of senior living communities that we have owned and which have been in service, reported in the same segment and operated by the same operator continuously since April 1, 2023;

(1) Consists of senior living communities that we have owned and which have been in service, reported in the same segment and operated by the same operator continuously since July 1, 2023;

excludes communities classified as held for sale, closed or out of service, if any.

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We recognize these revenues as services are provided and related fees are accrued.

Residents fees and services increased at our comparable properties primarily due to increases in occupancy and average monthly rate at our communities.

The activity for our non-comparable properties reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Residents fees and services increased at our comparable properties primarily due to increases in occupancy and average monthly rate at our communities as shown in the table above.

The activity for our non-comparable properties primarily reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Property operating expenses.

Property operating expenses consist of real estate taxes, utility expenses, insurance, wages and benefit costs of community level personnel, repairs and maintenance expense, management fees, cleaning expense and other direct costs of operating these communities.

Property operating expenses increased at our comparable properties primarily due to increases in labor costs, insurance costs, repairs and maintenance, dietary expenses and other direct costs, partially offset by reduced contract labor.

The activity for our non-comparable properties reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Property operating expenses increased at our comparable properties primarily due to increases in labor costs, repairs and maintenance, dietary expenses and other direct costs, partially offset by reduced contract labor, real estate taxes and insurance costs due to a reduction in premiums.

The activity for our non-comparable properties primarily reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Net operating income.

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All Properties

As of and For the Three Months Ended June 30, As of and For the Three Months Ended June 30,

As of and For the Three Months Ended September 30, As of and For the Three Months Ended September 30,

2024 2023 2024 2023

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2.50 x 2.69 x 2.50 x 2.69 x

Three Months Ended June 30,

Three Months Ended September 30,

Comparable (2)

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(1) Non-segment operations consists of all of our other operations, including certain senior living communities and wellness centers that are leased to third party operators, which segment we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment.

(2) Consists of properties that we have owned and which have been reported in the same segment and leased to the same operator continuously since April 1, 2023;

(2) Consists of properties that we have owned and which have been reported in the same segment and leased to the same operator continuously since July 1, 2023;

excludes properties classified as held for sale, if any.

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We have not independently verified tenant operating data.

Excludes data for historical periods prior to our ownership of certain properties, as well as data for properties sold or classified as held for sale, if any, or for which there was a transfer of operations during the periods presented.

Excludes rent coverage for one of our closed senior living communities, the tenant of which was in default under the applicable lease with us as of June 30, 2024.

Excludes data for historical periods prior to our ownership of certain properties, as well as data for properties sold, closed or classified as held for sale, if any, or for which there was a transfer of operations during the periods presented.

Rental income.

Rental income increased at our comparable properties primarily due to a new lease at one of our wellness centers.

The activity for our non-comparable properties primarily reflects the 18 triple net leased senior living communities classified as held for sale as of September 30, 2024.

Property operating expenses.

Property operating expenses consist of real estate taxes, insurance and other expenses that are not paid directly by our tenants.

The decrease in property operating expenses for our comparable properties primarily reflects real estate taxes and other expenses we paid during the 2023 period on behalf of a tenant previously in default under leases for six of our wellness centers.

We also continue to pay real estate taxes and other expenses for one wellness center until the lease commences, which we expect to occur during the first quarter of 2025.

Net operating income.

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Consolidated :

Depreciation and amortization expense.

Depreciation and amortization expense increased primarily due to the purchase of capital improvements at certain of our properties, partially offset by certain depreciable assets becoming fully depreciated and dispositions since July 1, 2023.

General and administrative expense .

General and administrative expense consists of fees paid to RMR under our business management agreement, legal and accounting fees, fees and expenses of our Trustees, equity compensation expense and other costs relating to our status as a publicly traded company.

General and administrative expense decreased primarily due to the reversal of $849 of estimated business management incentive fees as of June 30, 2024 as a result of our total shareholder return no longer exceeding the returns for the MSCI U.S.

REIT/Health Care REIT Index over the applicable measurement period and a decrease in legal and other professional fees, partially offset by an increase in our business management fees of $656.

General and administrative expense increased primarily due to $6,934 of estimated business management incentive fees that we recognized for the three months ended September 30, 2024 as a result of our total shareholder return exceeding the returns for the MSCI U.S.

REIT/Health Care REIT Index over the applicable measurement period and an increase in our business management fees of $622, as a result of an increase in average share price and weighted average debt, partially offset by a decrease in legal and other professional fees.

Acquisition and certain other transaction related costs.

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For information about our asset impairment charges, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 3 to our consolidated financial statements included in Part IV, Item 15 of our Annual Report.

Loss on sale of properties.

For information regarding loss on sale of properties, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 3 to our consolidated financial statements included in Part IV, Item 15 of our Annual Report.

Gain on sale of properties.

For information regarding gain on sale of properties, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Interest and other income.

The decrease in interest and other income is primarily due to $1,466 of funds we received from certain programs under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the American Rescue Plan Act, or ARPA, and various state programs in the 2023 period and lower average invested cash balances during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The decrease in interest and other income is primarily due to lower average invested cash balances during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Interest expense.

Interest expense increased primarily due to the issuance of $940,534 of our senior secured notes due 2026 in December 2023, resulting in discount accretion of $21,440 in the 2024 period.

Interest expense increased primarily due to the issuance of $940,534 of our senior secured notes due 2026 in December 2023, resulting in discount accretion of $22,034 during the 2024 period.

Additionally, we executed a $120,000 mortgage loan in May 2024 at a fixed interest rate of 6.864% per annum.

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The net proceeds from our $940,534 senior secured notes due 2026 were used to make these repayments aggregating $700,000 in December 2023.

Loss on modification or early extinguishment of debt .

During the three months ended June 30, 2024, we recorded a loss on early extinguishment of debt in connection with the redemption of $60,000 of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120,000 mortgage loan executed in May 2024.

Additionally, in June 2024, we redeemed $60,000 of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120,000 mortgage loan executed in May 2024.

Income tax expense .

Income tax expense is the result of operating income we earned in certain jurisdictions where we are subject to state income taxes.

Equity in net (losses) earnings of investees.

Equity in net (losses) earnings of investees is the change in the fair value of our investments in our joint ventures and also represents our proportionate share of the earnings of our equity method investment in AlerisLife.

Equity in net earnings (losses) of investees.

Equity in net earnings (losses) of investees is the change in the fair value of our investments in our joint ventures and also represents our proportionate share of the earnings of our equity method investment in AlerisLife.

For further information regarding our investment in AlerisLife, see Notes 3 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 (dollars and square feet in thousands, except average monthly rate):

Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the six months ended June 30, 2024 to the six months ended June 30, 2023.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 (dollars and square feet in thousands, except average monthly rate):

Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the nine months ended September 30, 2024 to the nine months ended September 30, 2023.

Our definition of NOI and our reconciliation of net income (loss) to NOI and a description of why we believe NOI is an appropriate supplemental measure are included below under the heading “Non-GAAP Financial Measures.”

Six Months Ended June 30,

Nine Months Ended September 30,

2024 2023 $ Change % Change

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Loss (gain) on sale of properties (18,976) 1,233 (20,209) nm

Gains and losses on equity securities, net — 8,126 (8,126) (100.0) %

Gains on equity securities, net — 8,126 (8,126) (100.0) %

Interest and other income 7,215 12,572 (5,357) (42.6) %

10 unchanged sentences

All Properties

As of June 30, As of June 30,

As of September 30, As of September 30,

2024 2023 2024 2023

Total properties

92 92 101 105

Total square feet 7,287 7,277 8,192 8,809

Occupancy 87.8 % 93.7 % 80.8 % 85.8 %

Six Months Ended June 30,

Nine Months Ended September 30,

Comparable (1)

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Rental income.

Rental income decreased at our comparable properties primarily due to vacancies at certain of our properties, partially offset by increased parking revenue at one of our properties.

Rental income increased at our non-comparable properties

Rental income increased at our comparable properties primarily due to increased parking revenue at one of our properties and leasing activity, partially offset by vacancies at certain of our properties.

Rental income decreased at our non-comparable properties primarily due to a vacancy at one of our properties classified as held for sale and dispositions since January 1, 2023, partially offset by a tenant default at one of our properties during the 2023 period and an increase in rental income at one of our recently redeveloped properties.

Property operating expenses.

The increase in property operating expenses at our comparable properties is primarily due to increased insurance costs recorded in the 2024 period and increases in utility expenses and cleaning costs, partially offset by a decrease in real estate taxes due to refunds realized and a reduction in assessed values as a result of successful appeals in the 2024 period.

Property operating expenses decreased at our non-comparable properties primarily due to dispositions since January 1, 2023.

3 unchanged sentences

All Properties

As of and For the Six Months Ended June 30, As of and For the Six Months Ended June 30,

As of and For the Nine Months Ended September 30, As of and For the Nine Months Ended September 30,

2024 2023 2024 2023

4 unchanged sentences

$ 5,155 $ 4,865 $ 5,175 $ 4,877

Six Months Ended June 30,

Nine Months Ended September 30,

Comparable (1)

10 unchanged sentences

Residents fees and services.

Residents fees and services increased at our comparable properties primarily due to increases in occupancy and average monthly rate at our communities.

The activity for our non-comparable properties reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Residents fees and services increased at our comparable properties primarily due to increases in occupancy and average monthly rate at our communities as shown in the table above.

The activity for our non-comparable properties primarily reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Property operating expenses.

Property operating expenses increased at our comparable properties primarily due to increases in labor costs, insurance costs, dietary expenses and other direct costs, partially offset by reduced contract labor.

The activity for our non-comparable properties reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Property operating expenses increased at our comparable properties primarily due to increases in labor costs, dietary expenses, maintenance and repairs, insurance costs and other direct costs, partially offset by reduced contract labor.

The activity for our non-comparable properties primarily reflects the 13 communities transitioned to an existing third party manager during the 2024 period.

Net operating income.

3 unchanged sentences

All Properties

As of and For the Six Months Ended June 30, As of and For the Six Months Ended June 30,

As of and For the Nine Months Ended September 30, As of and For the Nine Months Ended September 30,

2024 2023 2024 2023

7 unchanged sentences

2.50 x 2.69 x 2.50 x 2.69 x

Six Months Ended June 30,

Nine Months Ended September 30,

Comparable (2)

11 unchanged sentences

We have not independently verified tenant operating data.

Excludes rent coverage for one of our closed senior living communities, the tenant of which was in default under the applicable lease with us as of June 30, 2024.

Rental income.

2 unchanged sentences

The three wellness centers we repossessed were subsequently re-leased to other tenants.

The activity for our non-comparable properties primarily reflects the 18 triple net leased senior living communities classified as held for sale as of September 30, 2024.

Property operating expenses.

Property operating expenses consist of real estate taxes, insurance and other expenses that are not paid directly by our tenants.

We also continue to pay real estate taxes and other expenses for one wellness center until the lease commences, which we expect to occur during the first quarter of 2025.

Net operating income.

4 unchanged sentences

General and administrative expense .

General and administrative expense increased primarily due to an increase in our business management fees of $1,416, partially offset by a reduction in legal and other professional fees.

General and administrative expense increased primarily due to $6,934 of estimated business management incentive fees that we recognized for the nine months ended September 30, 2024 as a result of our total shareholder return exceeding the returns for the MSCI U.S.

REIT/Health Care REIT Index over the applicable measurement period and an increase in our business management fees of $2,038, as a result of an increase in average share price and weighted average debt, partially offset by a decrease in legal and other professional fees.

Acquisition and certain other transaction related costs.

We incurred transition costs, including termination and other fees, during the 2024 period as a result of our transition of 13 communities to an existing third party manager.

For more information about such transition of communities, see Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

For more information

about such transition of communities, see Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Impairment of assets.

2 unchanged sentences

For information regarding loss (gain) on sale of properties, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 3 to our consolidated financial statements included in Part IV, Item 15 of our Annual Report.

Gains and losses on equity securities, net.

Gains and losses on equity securities, net, represent the net unrealized losses to adjust our investment in AlerisLife to its fair value.

Gains on equity securities, net.

Gains and losses on equity securities, net, represent the net unrealized losses to adjust our investment in AlerisLife to its fair value during 2023.

For further information regarding our investment in AlerisLife, see Note 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Interest and other income.

The decrease in interest and other income is primarily due to lower average invested cash balances during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 and $1,466 of funds we received from certain programs under the CARES Act, ARPA and various state programs in the 2023 period.

The decrease in interest and other income is primarily due to lower average invested cash balances during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 and $1,581 of funds we received from certain programs under the Coronavirus Aid, Relief, and Economic Security Act, the American Rescue Plan Act and various state programs during the 2023 period.

Interest expense.

Interest expense increased primarily due to the issuance of $940,534 of our senior secured notes due 2026 in December 2023, resulting in discount accretion of $42,099 in the 2024 period.

Interest expense increased primarily due to the issuance of $940,534 of our senior secured notes due 2026 in December 2023, resulting in discount accretion of $64,133 during the 2024 period.

Additionally, we executed a $120,000 mortgage loan in May 2024 at a fixed interest rate of 6.864% per annum.

1 unchanged sentence

The net proceeds from our $940,534 senior secured notes due 2026 were used to make these repayments in December 2023 aggregating $700,000.

Additionally, in June 2024, we redeemed $60,000 of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120,000 mortgage loan executed in May 2024.

Loss on modification or early extinguishment of debt .

During the six months ended June 30, 2024, we recorded a loss on early extinguishment of debt in connection with the redemption of $60,000 of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120,000 mortgage loan executed in May 2024.

During the six months ended June 30, 2023, we recorded a loss on modification or early extinguishment of debt in connection with an amendment to our then credit agreement.

During the nine months ended September 30, 2024, we recorded a loss on early extinguishment of debt in connection with the redemption of $60,000 of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120,000 mortgage loan executed in May 2024.

During the nine months ended September 30, 2023, we recorded a loss on modification or early extinguishment of debt in connection with an amendment to our then credit agreement.

Income tax expense .

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Non-GAAP Financial Measures (dollars in thousands, except per share amounts)

We present certain "non-GAAP financial measures" within the meaning of applicable rules of the Securities and Exchange Commission, or the SEC, including funds from operations, or FFO, normalized funds from operations, or Normalized FFO, and NOI for the three and six months ended June 30, 2024 and 2023.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity.

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Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

Our calculations of FFO and Normalized FFO for the three and six months ended June 30, 2024 and 2023 and reconciliations of net income (loss), the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to FFO and Normalized FFO appear in the following table.

Our calculations of FFO and Normalized FFO for the three and nine months ended September 30, 2024 and 2023 and reconciliations of net income (loss), the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to FFO and Normalized FFO appear in the following table.

This table also provides a comparison of distributions to shareholders, FFO and Normalized FFO and net income (loss) per share for these periods.

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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Depreciation and amortization 68,959 67,236 207,449 200,430

Loss (gain) on sale of properties 13,213 — 19,087 (1,233)

(Gain) loss on sale of properties (111) — 18,976 (1,233)

Impairment of assets 23,031 1,156 41,718 18,380

Gains on equity securities, net — — — (8,126)

Equity in net losses (earnings) of investees 12,307 (2,929) 10,409 (2,282)

Equity in net (earnings) losses of investees (527) 145 9,882 (2,137)

Share of FFO from unconsolidated joint ventures 2,273 1,912 6,334 5,808

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Business management incentive fees (1)

6,934 — 6,934 —

Acquisition and certain other transaction related costs 331 3,676 2,243 9,812

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The calculation of NOI by reportable segment is included above in this Item 2.

The following table includes the reconciliation of net loss to NOI for the three and six months ended June 30, 2024 and 2023.

Three Months Ended June 30, Six Months Ended June 30,

The following table includes the reconciliation of net loss to NOI for the three and nine months ended September 30, 2024 and 2023.

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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Net loss $ (98,689) $ (65,779) $ (282,809) $ (191,008)

Equity in net losses (earnings) of investees 12,307 (2,929) 10,409 (2,282)

Equity in net (earnings) losses of investees (527) 145 9,882 (2,137)

Income tax expense 148 189 505 379

Loss before income tax expense and equity in net losses (earnings) of investees (85,384) (75,279) (173,354) (127,321)

Loss before income tax expense and equity in net (earnings) losses of investees (99,068) (65,445) (272,422) (192,766)

Loss on modification or early extinguishment of debt — — 209 1,075

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Gains on equity securities, net — — — (8,126)

Losses (gains) on sale of properties 13,213 — 19,087 (1,233)

(Gain) loss on sale of properties (111) — 18,976 (1,233)

Impairment of assets 23,031 1,156 41,718 18,380

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The net proceeds from this mortgage loan were approximately $117.1 million after deducting estimated closing costs, and we used $60.0 million of the net proceeds to partially redeem our then outstanding $500.0 million senior notes due 2025.

As a result of these transactions, we have no significant debt maturities until June 2025 when $440.0 million of our senior notes will become due, and as of June 30, 2024, we had $265.6 million of cash and cash equivalents.

Additionally, as of June 30, 2024, our ratio of consolidated income available for debt service to debt service is above the 1.5x incurrence requirement under our senior notes, on a pro forma basis.

As a result of these transactions, we have no significant debt maturities until June 2025 when $440.0 million of our senior notes will become due, and as of September 30, 2024, we had $256.5 million of cash and cash equivalents.

Additionally, as of September 30, 2024, our ratio of consolidated income available for debt service to debt service is above the 1.5x incurrence requirement under our senior notes, on a pro forma basis.

We are able to refinance existing or maturing debt and issue new debt as long as this ratio is at or above 1.5x on a pro forma basis at the time of such refinancing or issuance.

Based on the significant number of unencumbered properties in our SHOP segment and our demonstrated ability to execute debt financings, we believe we will likely be able to obtain additional debt financing that will allow us to satisfy the $440.0 million outstanding principal amount of our 9.75% senior unsecured notes due 2025.

During the six months ended June 30, 2024, we sold two properties for an aggregate sales price of $7.8 million, excluding closing costs.

Subsequent to June 30, 2024, we sold two properties for an aggregate sales price of $21.3 million, excluding closing costs, and as of July 31, 2024, we had an additional property under agreement to sell for a sales price of $5.5 million, excluding closing costs.

During the nine months ended September 30, 2024, we sold four properties for an aggregate sales price of $29.1 million, excluding closing costs.

Subsequent to September 30, 2024, we sold one of these properties for a sales price of $6.6 million, excluding closing costs.

As of November 4, 2024, we had 28 properties under agreements or letters of intent to sell for an aggregate sales price of $348.1 million, excluding closing costs.

If these sales are completed, approximately $302.1 million of the proceeds are required to be used to partially redeem our outstanding senior secured notes due 2026.

We may not complete the sales of any or all of the properties we currently plan to sell.

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The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Cash and cash equivalents and restricted cash at beginning of period $ 246,961 $ 688,302

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We generally receive minimum rents from tenants at our medical office and life science properties, triple net leased senior living communities and wellness centers monthly, we receive residents fees and services revenues, net of expenses, from our managed senior living communities monthly and we receive percentage rents from tenants at certain of our senior living communities monthly, quarterly or annually.

The increase in cash provided by operating activities for the six months ended June 30, 2024 compared to the prior period was primarily due to increased NOI as a result of increased rates and occupancy at the senior living communities in our SHOP segment.

Additionally, cash interest payments decreased in the 2024 period compared to the 2023 period primarily due to the repayment and termination of our former credit facility and the redemption of $250.0 million of our senior notes in December 2023.

The increase in cash provided by operating activities for the nine months ended September 30, 2024 compared to the prior period was primarily due to increased NOI as a result of increased rates and occupancy at the senior living communities in our SHOP segment.

Additionally, cash interest payments decreased during the 2024 period compared to the 2023 period primarily

due to the repayment and termination of our former credit facility and the redemption of $250.0 million of our senior notes in December 2023.

Our Investing Liquidity and Resources

The increase in cash used in investing activities for the six months ended June 30, 2024 compared to the prior period was primarily due to our purchase on February 16, 2024 of approximately 34.0% of the then outstanding AlerisLife common shares from ABP Trust at the tender offer price of $1.31 per share for a total purchase price, including transaction related costs, of $15.5 million.

In the 2023 period, we tendered all of our AlerisLife common shares at $1.31 per share.

The increase was partially offset by a decrease in real estate improvements and an increase in proceeds from the sale of properties in the 2024 period compared to the 2023 period.

The decrease in cash used in investing activities for the nine months ended September 30, 2024 compared to the prior period was primarily due to a decrease in real estate improvements and an increase in proceeds from the sale of properties during the 2024 period compared to the 2023 period.

The decrease was partially offset by our purchase on February 16, 2024 of approximately 34.0% of the then outstanding AlerisLife common shares from ABP Trust at the tender offer price of $1.31 per share for a total purchase price, including transaction related costs, of $15.5 million.

During the 2023 period, we tendered all of our AlerisLife common shares at $1.31 per share.

The following is a summary of capital expenditures, development, redevelopment and other activities for the periods presented (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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We generally plan to continue investing capital in our properties, including redevelopment projects, to better position these properties in their respective markets in order to increase our returns in future years.

As of June 30, 2024, we had estimated unspent leasing related obligations at our triple net leased wellness centers and our medical office and life science properties of approximately $37.9 million, of which we expect to spend approximately $26.7 million during the next 12 months.

As of September 30, 2024, we had estimated unspent leasing related obligations at our triple net leased wellness centers and our medical office and life science properties of approximately $31.4 million, of which we expect to spend approximately $20.3 million during the next 12 months.

We expect to fund these obligations using operating cash flows we generate as rental income from our leased properties, residents fees and services revenues from our managed communities, cash on hand, proceeds from the disposition of certain properties and future financing activities.

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We continue to assess opportunities to redevelop other properties in our Medical Office and Life Science Portfolio and SHOP segment.

These redevelopment projects may require significant capital expenditures and time to complete, and we may defer certain redevelopment projects to preserve liquidity.

These redevelopment projects may require significant capital expenditures and time to complete, and we may defer certain redevelopment projects to preserve

Due to labor availability constraints and wage and commodity price inflation, the capital investments we plan to make may be delayed or cost more than we expect.

Our Financing Liquidity and Resources

The change in cash provided by financing activities for the six months ended June 30, 2024 compared to cash used in financing activities for the prior period was primarily due to our execution of a $120.0 million mortgage loan in the 2024 period and our redemption of $250.0 million of our senior notes in the 2023 period, partially offset by the redemption of $60.0 million of our senior notes in the 2024 period.

As of June 30, 2024, we had $265.6 million of cash and cash equivalents.

The change in cash provided by financing activities for the nine months ended September 30, 2024 compared to cash used in financing activities for the prior period was primarily due to our execution of a $120.0 million mortgage loan during the 2024 period and $250.0 million in repayments of borrowings under our former credit facility during the 2023 period, which was partially offset by the redemption of $60.0 million of our senior notes during the 2024 period.

As of September 30, 2024, we had $256.5 million of cash and cash equivalents.

We typically use cash balances, net proceeds from offerings of securities, debt issuances or dispositions of assets and cash flows from our operations to fund our operations, debt repayments, distributions, acquisitions, investments, capital expenditures and other general business purposes.

During the six months ended June 30, 2024, we paid quarterly cash distributions to our shareholders totaling approximately $4.8 million using existing cash balances.

On July 11, 2024, we declared a quarterly distribution payable to common shareholders of record on July 22, 2024 in the amount of $0.01 per share, or approximately $2.4 million.

We expect to pay this distribution on or about August 15, 2024 using cash on hand.

During the nine months ended September 30, 2024, we paid quarterly cash distributions to our shareholders totaling approximately $7.2 million using existing cash balances.

On October 16, 2024, we declared a quarterly distribution payable to common shareholders of record on October 28, 2024 in the amount of $0.01 per share, or approximately $2.4 million.

We expect to pay this distribution on or about November 14, 2024 using cash on hand.

For further information regarding the distribution we paid during 2024, see Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We believe we may have access to certain types of financings, including debt or equity offerings, to fund our operations and repay our debts and other obligations as they become due.

Our ability to complete, and the costs associated with, future debt or equity transactions depends primarily upon credit market conditions and our then creditworthiness and our ability to be in compliance with our debt covenants as discussed below.

We have no control over market conditions.

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Further, those conditions could also disrupt capital markets and limit our access to financing from public sources, particularly if the global financial markets experience significant disruptions.

In January 2023, we repaid $113.6 million in outstanding borrowings under our former credit facility and the commitments were reduced to $586.4 million.

In February 2023, we reduced the commitments from $586.4 million to $450.0 million following our repayment of $136.4 million in outstanding borrowings under our former credit facility.

Until its repayment in full and termination on December 21, 2023, we had a $450.0 million credit facility that was fully drawn.

At December 21, 2023, our former credit facility required interest to be paid on borrowings at an annual rate of 8.4%, plus a facility fee of $0.3 million per quarter.

Our $940.5 million in outstanding senior secured notes due 2026 are fully and unconditionally guaranteed, on a joint, several and senior secured basis, by the Collateral Guarantors, and on a joint, several and unsecured basis, by all our subsidiaries other than the Collateral Guarantors and certain excluded subsidiaries.

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The accreted value of these notes will increase at a rate of 11.25% per annum compounded semiannually on January 15 and July 15 of each year.

We are currently under agreements or letters of intent to sell 22 of the properties securing our senior secured notes due 2026 for an aggregate sales price of $302.1 million, excluding closing costs.

If these sales are completed, the proceeds are required to be used to partially redeem our outstanding senior secured notes due 2026.

In January 2023, we repaid $113.6 million in outstanding borrowings under our former credit facility and the commitments were reduced to $586.4 million.

In February 2023, we reduced the commitments from $586.4 million to $450.0 million following our repayment of $136.4 million in outstanding borrowings under our former credit facility.

Until its repayment in full and termination on December 21, 2023, we had a $450.0 million credit facility that was fully drawn.

At December 21, 2023, our former credit facility required interest to be paid on borrowings at an annual rate of 8.4%, plus a facility fee of $0.3 million per quarter.

In May 2024, we executed a $120.0 million fixed rate, interest only mortgage loan secured by eight medical office and life science properties.

This mortgage loan matures in June 2034 and requires that interest be paid at an annual rate of 6.864%.

In June 2024, we redeemed $60.0 million of our outstanding 9.75% senior unsecured notes due 2025 using proceeds from the $120.0 million mortgage loan executed in May 2024.

In January 2024, Moody's Investors Service, or Moody's, upgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from Ca to Caa3 and our senior unsecured debt rating from C to Ca, and Moody's also assigned a Caa2 rating to our senior secured notes due 2026.

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Debt Covenants

Our principal debt obligations at June 30, 2024 were:

Our principal debt obligations at September 30, 2024 were:

(1) $2.0 billion outstanding principal amount of senior unsecured notes;

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Our senior notes indentures and their supplements also contain covenants that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts and require us to maintain various financial ratios.

As of June 30, 2024, we believe we were in compliance with all of the covenants under our senior notes indentures and their supplements and our other debt obligations.

As of September 30, 2024, we believe we were in compliance with all of the covenants under our senior notes indentures and their supplements and our other debt obligations.

Although we continue to take steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from wage or commodity price inflation, high interest rates, geopolitical risks or other economic, market or industry conditions, including the delayed recovery of the senior housing industry, economic downturns or a possible recession, may cause increased pressure on our ability to satisfy financial and other covenants.

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On February 3, 2021, we issued $500.0 million of our 4.375% senior notes due 2031.

As of June 30, 2024, all $440.0 million of our 9.75% senior notes due 2025 and all $500.0 million of our 4.375% senior notes due 2031 were fully and unconditionally guaranteed, on a joint, several and unsecured basis, by all of our subsidiaries except certain excluded subsidiaries.

The notes and related guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the applicable collateral, and are structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes.

As of September 30, 2024, all $440.0 million of our 9.75% senior notes due 2025 and all $500.0 million of our 4.375% senior notes due 2031 were fully and unconditionally guaranteed, on a joint, several and unsecured basis, by all of our subsidiaries except certain excluded subsidiaries.

other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes.

Our remaining $1.1 billion of senior unsecured notes do not have the benefit of any guarantees.

A subsidiary guarantor's guarantee of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, and all other obligations of such subsidiary guarantor under the indenture governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and the indenture under certain circumstances, including on or after the date (a) the notes have an investment grade rating from two rating agencies and one of such investment grade ratings is a mid-BBB investment grade rating and (b) no default or event of default has occurred and is continuing under the indenture.

Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on our 9.75% senior notes due 2025 or our 4.375% senior notes due 2031 or the respective guarantees, or to make any funds available therefor, whether by

dividend, distribution, loan or other payments.

The rights of holders of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders.

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The following tables present summarized financial information for guarantor entities and issuer, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor (dollars in thousands):

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Real estate properties, net $ 3,341,486 $ 3,634,953

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Total liabilities $ 3,057,487 $ 3,044,555

Six Months Ended June 30, 2024

Nine Months Ended September 30, 2024

Revenues $ 952,838

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Actual results could differ from those estimates.

Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets.

Significant estimates in our condensed consolidated

financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets.

A discussion of our critical accounting estimates is included in our Annual Report.

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Impact of Government Reimbursement

For the six months ended June 30, 2024, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources, and a small amount of our NOI was generated from properties where a majority of the revenues are derived from Medicare and Medicaid payments.

Nonetheless, we own, and our

tenants, managers and operators operate, facilities in many states that participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs and other federal and state healthcare payment programs.

For the nine months ended September 30, 2024, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources, and a small amount of our NOI was generated from properties where a majority of the revenues are derived from Medicare and Medicaid payments.

Nonetheless, we own, and our tenants, managers and operators operate, facilities in many states that participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs and other federal and state healthcare payment programs.

Also, some of our medical office and life science property tenants participate in federal Medicare and state Medicaid programs and other government healthcare payment programs.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis