UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2024
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _____________ to _____________
Commission File Number: 001-32641
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(Registrant's telephone number, including area code) (615 ) 221-2250
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 5, 2024, 199,212,529 shares of the registrant's common stock, $0.01 par value, were outstanding (excluding restricted stock and restricted stock units).
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TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2024
| PAGE | ||||||||
| PART I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)
| September 30, 2024 | December 31, 2023 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets, net | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment and leasehold intangibles, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Restricted cash | |||||||||||
| Goodwill | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Current portion of financing lease obligations | |||||||||||
| Current portion of operating lease obligations | |||||||||||
| Trade accounts payable | |||||||||||
| Accrued expenses | |||||||||||
| Refundable fees and deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Financing lease obligations, less current portion | |||||||||||
| Operating lease obligations, less current portion | |||||||||||
| Deferred tax liability | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in-capital | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total Brookdale Senior Living Inc. stockholders' equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
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BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Resident fees | $ | $ | $ | $ | |||||||||||||||||||
| Management fees | |||||||||||||||||||||||
| Reimbursed costs incurred on behalf of managed communities | |||||||||||||||||||||||
| Other operating income | |||||||||||||||||||||||
| Total revenue and other operating income | |||||||||||||||||||||||
Facility operating expense (excluding facility depreciation and amortization of $ | |||||||||||||||||||||||
General and administrative expense (including non-cash stock-based compensation expense of $ | |||||||||||||||||||||||
| Facility operating lease expense | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Asset impairment | |||||||||||||||||||||||
| Loss (gain) on sale of communities, net | ( | ||||||||||||||||||||||
| Costs incurred on behalf of managed communities | |||||||||||||||||||||||
| Income (loss) from operations | ( | ||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||
| Debt | ( | ( | ( | ( | |||||||||||||||||||
| Financing lease obligations | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of deferred financing costs | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of derivatives | ( | ( | |||||||||||||||||||||
| Gain (loss) on debt modification and extinguishment, net | ( | ( | |||||||||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | ( | ( | |||||||||||||||||||||
| Non-operating gain (loss) on sale of assets, net | |||||||||||||||||||||||
| Other non-operating income (loss) | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Benefit (provision) for income taxes | ( | ( | |||||||||||||||||||||
| Net income (loss) | ( | ( | ( | ( | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interest | |||||||||||||||||||||||
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic and diluted net income (loss) per share attributable to Brookdale Senior Living Inc. common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares used in computing basic and diluted net income (loss) per share | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Total equity, balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Shares issued for settlement of prepaid stock purchase contracts | — | — | |||||||||||||||||||||
| Shares issued for warrant exercise | — | — | |||||||||||||||||||||
| Restricted stock and restricted stock units, net | — | — | |||||||||||||||||||||
| Shares withheld for employee taxes | — | — | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Additional paid-in-capital: | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Compensation expense related to restricted stock grants | |||||||||||||||||||||||
| Shares issued for settlement of prepaid stock purchase contracts | ( | — | ( | — | |||||||||||||||||||
| Shares issued for warrant exercise | ( | — | ( | — | |||||||||||||||||||
| Restricted stock and restricted stock units, net | — | — | ( | ( | |||||||||||||||||||
| Shares withheld for employee taxes | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Treasury stock: | |||||||||||||||||||||||
| Balance at beginning and end of period | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Accumulated deficit: | |||||||||||||||||||||||
| Balance at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Noncontrolling interest: | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interest | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Total equity, balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Common stock share activity | |||||||||||||||||||||||
| Outstanding shares of common stock: | |||||||||||||||||||||||
| Balance at beginning of period | |||||||||||||||||||||||
| Shares issued for settlement of prepaid stock purchase contracts | — | — | |||||||||||||||||||||
| Shares issued for warrant exercise | — | — | |||||||||||||||||||||
| Restricted stock and restricted stock units, net | |||||||||||||||||||||||
| Shares withheld for employee taxes | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Loss (gain) on debt modification and extinguishment, net | |||||||||||
| Depreciation and amortization, net | |||||||||||
| Asset impairment | |||||||||||
| Equity in (earnings) loss of unconsolidated ventures | |||||||||||
| Distributions from unconsolidated ventures from cumulative share of net earnings | |||||||||||
| Amortization of entrance fees | ( | ||||||||||
| Proceeds from deferred entrance fee revenue | |||||||||||
| Deferred income tax (benefit) provision | ( | ( | |||||||||
| Operating lease expense adjustment | ( | ( | |||||||||
| Change in fair value of derivatives | ( | ||||||||||
| Loss (gain) on sale of assets, net | ( | ( | |||||||||
| Non-cash stock-based compensation expense | |||||||||||
| Property and casualty insurance income | ( | ( | |||||||||
| Other non-operating (income) loss | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Prepaid expenses and other assets, net | ( | ||||||||||
| Prepaid insurance premiums financed with notes payable | ( | ( | |||||||||
| Trade accounts payable and accrued expenses | |||||||||||
| Refundable fees and deferred revenue | |||||||||||
| Operating lease assets and liabilities for lessor capital expenditure reimbursements | |||||||||||
| Net cash provided by (used in) operating activities | |||||||||||
| Cash Flows from Investing Activities | |||||||||||
| Purchase of marketable securities | ( | ( | |||||||||
| Sale and maturities of marketable securities | |||||||||||
| Capital expenditures, net of related payables | ( | ( | |||||||||
| Acquisition of assets, net of cash acquired | ( | ||||||||||
| Investment in unconsolidated ventures | ( | ||||||||||
| Proceeds from sale of assets, net | |||||||||||
| Property and casualty insurance proceeds | |||||||||||
| Change in lease acquisition deposits, net | ( | ||||||||||
| Purchase of interest rate cap instruments | ( | ( | |||||||||
| Proceeds from interest rate cap instruments | |||||||||||
| Other | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from debt | |||||||||||
| Repayment of debt and financing lease obligations | ( | ( | |||||||||
| Payment of financing costs, net of related payables | ( | ( | |||||||||
| Payments of employee taxes for withheld shares | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Brookdale Senior Living Inc. together with its consolidated subsidiaries ("Brookdale" or the "Company") is an operator of 648 senior living communities throughout the United States. The Company is committed to its mission of enriching the lives of the people it serves with compassion, respect, excellence, and integrity. The Company operates and manages independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). The Company's senior living communities and its comprehensive network help to provide seniors with care, connection, and services in an environment that feels like home. As of September 30, 2024, the Company owned 342 communities, representing a majority of the Company's community portfolio, leased 277 communities, and managed 29 communities.
2. Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
Use of Estimates
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires expanded annual and interim disclosures for significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the effect of this pronouncement on its segment disclosures.
8
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which standardizes categories for the effective tax rate reconciliation, requires disaggregation of income taxes and additional income tax-related disclosures. This ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the effect this pronouncement will have on its income tax disclosures.
3. Fair Value Measurements
Marketable Securities
As of September 30, 2024 and December 31, 2023, marketable securities of $29.7 million and $29.8 million, respectively, are stated at fair value based on valuations provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy.
Interest Rate Derivatives
The Company's derivative assets include interest rate cap and swap instruments that effectively manage the risk above certain interest rates for a portion of the Company's long-term variable rate debt. The Company has not designated the interest rate cap and swap instruments as hedging instruments and as such, changes in the fair value of the instruments are recognized in earnings in the period of the change. The interest rate derivative positions are valued using models developed by the respective counterparty that use as their basis readily available observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. The Company considers the credit risk of its counterparties when evaluating the fair value of its derivatives.
The following table summarizes the Company's Secured Overnight Financing Rate ("SOFR") interest rate cap instruments as of September 30, 2024.
| ($ in millions) | |||||
| Current notional balance | $ | ||||
| Weighted average fixed cap rate | % | ||||
| Weighted average remaining term | |||||
| Estimated asset fair value (included in other assets, net) | $ | ||||
As of December 31, 2023, the estimated fair value of the interest rate cap instruments was $13.3 million.
The following table summarizes the Company's SOFR interest rate swap instrument as of September 30, 2024.
| ($ in millions) | |||||
| Current notional balance | $ | ||||
| Fixed interest rate | % | ||||
| Remaining term | |||||
| Estimated fair value (included in other liabilities) | $ | ( | |||
As of December 31, 2023, the estimated fair value of the interest rate swap instrument was $1.6 million included in other assets, net.
Long-term debt
The Company estimates the fair value of its debt primarily using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company estimates the fair value of its convertible senior notes based on valuations provided by third-party pricing services. The Company had outstanding long-term debt with a carrying amount of approximately $3.7 3.6 billion and $3.4 billion as of September 30, 2024 and December 31, 2023, respectively. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy.
9
4. Revenue
The Company disaggregates its revenue from contracts with customers by payor source as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Resident fee revenue by payor source is as follows.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Private pay | % | % | % | % | |||||||||||||||||||
| Government reimbursement | % | % | % | % | |||||||||||||||||||
| Other third-party payor programs | % | % | % | % | |||||||||||||||||||
Refer to Note 13 for disaggregation of revenue by reportable segment.
The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source, although terms generally include payment to be made within 30 days. Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain healthcare services is generally billed monthly in arrears. Additionally, certain of the Company's revenue-generating contracts include non-refundable fees that are generally billed and collected in advance or upon move-in of a resident under the Company's independent living, assisted living, and memory care residency agreements. Amounts of revenue that are collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied.
The Company had total deferred revenue (included within refundable fees and deferred revenue and other liabilities within the condensed consolidated balance sheets) of $53.6 million and $48.3 million, including $28.0 million and $24.1 million of monthly resident fees billed and received in advance, as of September 30, 2024 and December 31, 2023, respectively. For the nine months ended September 30, 2024 and 2023, the Company recognized $47.0 million and $49.1 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2024 and 2023, respectively. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance obligations that have original expected durations of one year or less.
5. Property, Plant and Equipment and Leasehold Intangibles, Net
As of September 30, 2024 and December 31, 2023, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following.
| (in thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Furniture and equipment | |||||||||||
| Resident in-place lease intangibles | |||||||||||
| Construction in progress | |||||||||||
| Assets under financing leases and leasehold improvements | |||||||||||
| Property, plant and equipment and leasehold intangibles | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Property, plant and equipment and leasehold intangibles, net | $ | $ | |||||||||
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $90.1 million and $85.9 million for the three months ended September 30, 2024 and 2023, respectively, and $264.2 million and $255.3 million for the nine months ended September 30, 2024 and 2023, respectively. The Company recognized $0.9 million and $2.6 million for the three and nine months ended September 30, 2024, respectively, of non-cash impairment charges in its operating results for its property, plant and equipment and leasehold
10
intangibles assets due to property damage sustained at certain communities. The Company recognized $5.3 million and $5.8 million for the three and nine months ended September 30, 2023, respectively, of non-cash impairment charges in its operating results for its property, plant and equipment and leasehold intangibles assets, primarily due to the planned disposition of certain underperforming communities that have since been sold.
6. Debt
Long-term debt consists of the following.
| (in thousands) | September 30, 2024 | December 31, 2023 | |||||||||
Fixed rate mortgage notes payable due 2026 through 2047; weighted average interest rate of | $ | $ | |||||||||
Variable rate mortgage notes payable due 2025 through 2030; weighted average interest rate of | |||||||||||
Convertible notes payable due October 2026; interest rate of | |||||||||||
Tangible equity units senior amortizing notes due November 2025; interest rate of | |||||||||||
Notes payable for insurance premium financing due 2024; interest rate of | |||||||||||
| Deferred financing costs, net | ( | ( | |||||||||
| Total long-term debt | |||||||||||
| Current portion | |||||||||||
| Total long-term debt, less current portion | $ | $ | |||||||||
As of September 30, 2024, the long-term debt, less current portion within the Company's condensed consolidated balance sheet includes $100.0 million of mortgage notes payable scheduled to mature in January 2025 with two one-year extension options, exercisable by the Company subject to the satisfaction of certain conditions.
As of September 30, 2024, 91.5 %, or $3.4 billion, of the Company's total debt obligations represented non-recourse property-level mortgage financings.
As of September 30, 2024, $58.5 million of letters of credit and no cash borrowings were outstanding under the Company's $100.0 million secured credit facility. The Company also had a separate secured letter of credit facility providing up to $17.0 million of letters of credit as of September 30, 2024 under which $15.7 million had been issued as of that date.
2024 Mortgage Financings
In February 2024, the Company obtained $50.0 million of debt secured by first priority mortgages on 11 communities. The loan bears interest at a variable rate equal to plus a margin of 350 basis points. The debt matures in February 2027 with two one-year extension options, exercisable subject to certain performance criteria.
In September 2024, the Company obtained $182.5 million of debt secured by first priority mortgages on 16 communities. The loan bears interest at a fixed rate of 5.67 % and is interest only for the first two years . The debt matures in October 2029. At the closing, the Company repaid $197.1 million of outstanding mortgage debt, which was scheduled to mature in September 2025, using proceeds from the $182.5 million debt and cash on hand.
Convertible Senior Notes
On September 30, 2024, the Company entered into privately negotiated exchange and subscription agreements (the “Exchange and Subscription Agreements”) with certain holders (the "Investors") of the Company’s outstanding 2.00 % convertible senior notes due 2026 (the “2026 Notes”), each of whom may have also beneficially owned shares of the Company's common stock as of such date and at closing. On October 3, 2024, pursuant to the Exchange and Subscription Agreements, the Company issued $369.4 million aggregate principal amount of its 3.50 % convertible senior notes due 2029 (the “2029 New Notes”). At closing, $219.4 million principal amount of the 2029 New Notes were issued in exchange for $206.7 million principal amount of the 2026 Notes and $150.0 million principal amount of the 2029 New Notes were issued for cash. The 2029 New Notes were
11
issued pursuant to, and are governed by, an Indenture (the “2029 New Notes Indenture”), dated as of October 3, 2024 between the Company and Equiniti Trust Co., as trustee (the “Trustee”). Following the closing, $23.3 million in aggregate principal amount of the 2026 Notes remain outstanding with the terms unchanged.
The 2029 New Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of its indebtedness that is expressly subordinated in right of payment to the 2029 New Notes, and equal in right of payment to any indebtedness that is not so subordinated. The 2029 New Notes are effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally junior to all indebtedness and other liabilities (including trade payables) and any preferred equity of current or future subsidiaries of the Company. Under the terms of the 2029 New Notes Indenture, subject to certain exceptions, the Company may not incur pari passu indebtedness in an aggregate principal amount exceeding $500 million.
The 2029 New Notes bear interest at a rate of 3.50 % per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2025. The 2029 New Notes will mature on October 15, 2029, unless earlier converted or repurchased in accordance with their terms. Holders of the 2029 New Notes may convert all or any portion of their 2029 New Notes at their option at any time prior to the close of business on the business day immediately preceding July 15, 2029, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2024 (and only during such calendar quarter), if the last reported sale price of the common stock of the Company for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2029 New Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the common stock of the Company and the conversion rate for the 2029 New Notes on each such trading day; or (3) upon the occurrence of specified corporate events. On or after July 15, 2029, holders may convert all or any portion of their 2029 New Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. Under the 2029 New Notes Indenture, the Company will not be obligated to deliver any shares of common stock to any holder upon any conversion of the 2029 New Notes whereby such holder would beneficially own a number of shares of Company common stock in excess of 19.9 % of the total number of shares of Company common stock issued and outstanding immediately following such conversion.
The conversion rate for the 2029 New Notes will initially be 111.1111 shares of common stock per $1,000 principal amount of the 2029 New Notes (equivalent to an initial conversion price of approximately $9.00 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2029 New Notes in connection with such a corporate event.
The Company does not have the right to redeem the 2029 New Notes at its election before the maturity date. No sinking fund is provided for the 2029 New Notes.
The Company’s net cash proceeds from the exchange and issuance transactions, after subtracting fees, discounts and estimated expenses payable by the Company, were approximately $135.0 million. The Company intends to use the proceeds to fund acquisitions and for general corporate purposes.
The Company expects to recognize an approximately $15.0 million loss on debt extinguishment in the three months ended December 31, 2024 for the completed exchange and issuance transactions.
Financial Covenants
Certain of the Company's debt documents contain restrictions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. In addition, the Company's debt documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
The Company's failure to comply with applicable covenants could constitute an event of default under the applicable debt documents. Many of the Company's debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
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Furthermore, the Company's mortgage debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of September 30, 2024, the Company is in compliance with the financial covenants of its debt agreements.
7. Leases
As of September 30, 2024, the Company operated 277 communities under long-term leases (227 operating leases and 50 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. In certain cases, the Company guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs and maintenance, property taxes, and insurance. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of September 30, 2024, the Company is in compliance with the financial covenants of its long-term lease agreements.
Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not 3.8
A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
Operating Leases (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Facility operating expense | $ | $ | $ | $ | |||||||||||||||||||
| Facility lease expense | |||||||||||||||||||||||
| Operating lease expense | |||||||||||||||||||||||
Operating lease expense adjustment (1) | |||||||||||||||||||||||
| Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | ( | ( | ( | ||||||||||||||||||||
| Operating net cash outflows from operating leases | $ | $ | $ | $ | |||||||||||||||||||
(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
Financing Leases (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
| Interest expense: financing lease obligations | |||||||||||||||||||||||
| Financing lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Operating cash outflows from financing leases | $ | $ | $ | $ | |||||||||||||||||||
| Financing cash outflows from financing leases | |||||||||||||||||||||||
| Total net cash outflows from financing leases | $ | $ | $ | $ | |||||||||||||||||||
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the condensed consolidated balance sheet as of September 30, 2024 are as follows (in millions).
| Year Ending December 31, | Operating Leases | Financing Leases | |||||||||
| 2024 (three months) | $ | $ | |||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | |||||||||||
| Purchase price for communities subject to acquisition agreements | |||||||||||
| Reacquisition price in excess of sale-leaseback proceeds | ( | ||||||||||
| Imputed interest and variable lease payments | ( | ( | |||||||||
| Other financing obligations | |||||||||||
| Total lease obligations | $ | $ | |||||||||
Omega Lease Amendment
In August 2024, the Company and Omega Healthcare Investors, Inc. ("Omega") amended the existing master lease pursuant to which the Company continues to lease 24 communities from Omega. The Company's amended master lease has an initial term to expire on December 31, 2037. As part of the amendment, Omega agreed to make available up to $80.0 million to fund costs associated with capital expenditures for the communities through December 31, 2037. The annual rent under the lease will not be adjusted upon reimbursements for capital expenditures in the aggregate amount of up to $30.0 million of the $80.0 million pool, which is available in certain tranches through June 30, 2028. With respect to the remaining $50.0 million of the $80.0 million pool, the annual rent under the lease will prospectively increase by the amount of each reimbursement multiplied by 9.5 %. The $50.0 million will be available in certain tranches beginning January 1, 2025, subject to certain annual reimbursement caps specified in the lease. Under the terms of the amendment, rent will escalate annually per the terms of the existing lease escalator, with a potential minor contingent rent adjustment beginning in 2028 depending on lease performance. The amendment to the lease arrangements increased the operating lease right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $253.4
International JV / Welltower Portfolio Acquisition
In September 2024, the Company entered into a definitive agreement to acquire 11 senior living communities that are currently leased by the Company from a joint venture between Welltower Inc. (“Welltower”) and its joint venture partners for a purchase price of $300.0 million. As part of this transaction, the Company will assume approximately $194.5 million of existing 4.92 % fixed rate agency debt which is scheduled to mature in March 2027. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $22.3 million and a current maturity of August 31, 2028. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate
14
transactions. The Company expects to fund its acquisition of the 11 communities through the assumption of the existing mortgage debt, a portion of the net cash proceeds from the sale of the 2029 New Notes, and cash on hand.
The leases for the 11 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
| (in millions) | |||||
| Property, plant and equipment and leasehold intangibles, net | $ | ||||
| Operating lease right-of-use assets | ( | ||||
| Total assets | $ | ||||
| Financing lease obligations | $ | ||||
| Operating lease obligations | ( | ||||
| Total liabilities | $ | ||||
Welltower Portfolio Acquisition
In September 2024, the Company entered into a definitive agreement to acquire five senior living communities that are currently leased by the Company from Welltower for a purchase price of $175.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $13.4 million and a current maturity of December 31, 2024. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the five communities through a portion of the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on the assets, and cash on hand.
The definitive agreement included the finalization of the purchase price under the provisions of a purchase option arrangement with a variable price component based upon the fair value of the assets. The amendment of the leasing arrangement increased the financing lease right-of-use assets and lease obligations recognized for two of these communities on the Company's consolidated balance sheet each by $17.7 three of these communities are accounted for as failed sale-leaseback transactions as the Company has not previously transferred control of the underlying assets for accounting purposes under a sale and leaseback arrangement with a purchase option.
Diversified Healthcare Trust Portfolio Acquisition
In September 2024, the Company entered into a definitive agreement to acquire 25 senior living communities that are currently leased by the Company from Diversified Healthcare Trust for a purchase price of $135.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $10.2 million and a current maturity of December 31, 2032. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the 25 communities through a portion of 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.
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The leases for the 25 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
| (in millions) | |||||
| Property, plant and equipment and leasehold intangibles, net | $ | ||||
| Operating lease right-of-use assets | ( | ||||
| Total assets | $ | ||||
| Financing lease obligations | $ | ||||
| Operating lease obligations | ( | ||||
| Total liabilities | $ | ||||
8. Litigation
The Company has been and is currently involved in litigation and claims incidental to the conduct of its business, which it believes are generally comparable to other companies in the senior living and healthcare industries. In addition, the Company has been and currently is involved in putative class action litigation regarding staffing at the Company's communities and compliance with consumer protection laws and the Americans with Disabilities Act (and similar state laws). Certain claims and lawsuits allege large damage amounts, seek injunctive relief, and may require (and have required) significant costs to defend and resolve. The Company continues to vigorously defend against the putative class action cases, and an estimate of the possible loss or range of possible loss in connection with any such putative class action cannot be made.
As a result, the Company maintains general liability, professional liability, excess liability, and other insurance policies in amounts and with coverage and deductibles the Company believes are appropriate, based on the nature and risks of its business, historical experience, availability, and industry standards. The Company's current policies provide for deductibles for each claim and contain various exclusions from coverage. The Company uses its wholly-owned captive insurance company for the purpose of insuring certain portions of its risk retention under its general and professional liability insurance programs. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts, for claims that exceed the funding level of the Company's wholly-owned captive insurance company, and for claims or portions of claims that are not covered by such policies and/or exceed the policy limits.
The senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement actions, or litigation related to regulatory compliance matters. In addition, the Company is subject to various government reviews, audits, and investigations to verify compliance with Medicare and Medicaid programs and other applicable laws and regulations. The Centers for Medicare & Medicaid Services ("CMS") has engaged third-party firms to review claims data to evaluate appropriateness of billings. In addition to identifying overpayments, audit contractors can refer suspected violations to government authorities. In addition, states' Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. An adverse outcome of government scrutiny may result in citations, sanctions, other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and damage to the Company's business reputation. The Company's costs to respond to and defend any such audits, reviews, and investigations may be significant.
In June 2020, the Company and several current and former executive officers were named as defendants in a putative class action lawsuit alleging violations of the federal securities laws filed in the federal court for the Middle District of Tennessee. The lawsuit asserted that the defendants made material misstatements and omissions concerning the Company's business, operational and compliance policies, compliance with applicable regulations and statutes, and staffing practices that caused the Company's stock price to be artificially inflated between August 2016 and April 2020. The district court dismissed the lawsuit and entered judgment in favor of the defendants in September 2021, and the plaintiffs did not file an appeal. Between October 2020 and June 2021, alleged stockholders of the Company filed several stockholder derivative lawsuits in the federal courts for the Middle District of Tennessee and the District of Delaware, which were subsequently transferred to the Middle District of Tennessee and consolidated into two lawsuits. In January 2024, the court dismissed one of the two derivative lawsuits. Plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. The other derivative lawsuit remains pending with the Middle District of Tennessee and asserts claims on behalf of the Company against certain current and former officers and directors for alleged breaches of duties owed to the Company. The complaint incorporates substantively similar allegations to the securities lawsuit previously described.
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9. Stock-Based Compensation
Grants of restricted stock units and stock awards under the Company's 2014 and 2024 Omnibus Incentive Plan were as follows.
| (in thousands, except for weighted average amounts) | Restricted Stock Unit and Stock Award Grants | Weighted Average Grant Date Fair Value | Total Grant Date Fair Value | ||||||||||||||
| Three months ended March 31, 2024 | $ | $ | |||||||||||||||
| Three months ended June 30, 2024 | $ | $ | |||||||||||||||
| Three months ended September 30, 2024 | $ | $ | |||||||||||||||
10. Earnings Per Share
Potentially dilutive common stock equivalents for the Company include convertible senior notes, warrants, unvested restricted stock, restricted stock units, and prepaid stock purchase contracts.
On October 1, 2021, the Company issued $230.0 million principal amount of 2.00 % convertible senior notes due 2026. As of September 30, 2024, the maximum number of shares issuable upon settlement of the 2026 Notes is 38.3 million (after giving effect to 9.9 million additional shares that would be issuable upon conversion in connection with the occurrence of certain corporate or other events). After giving effect to the Company's convertible notes exchange and issuance transactions on October 3, 2024, the maximum number of shares issuable upon settlement of the Company’s outstanding convertible senior notes is 58.9 million (after giving effect to 14.9 million additional shares that would be issuable upon conversion in connection with the occurrence of certain corporate or other events). Refer to Note 6 for information on the Company's convertible notes exchange and issuance transactions on October 3, 2024.
On July 26, 2020, the Company issued to Ventas, Inc. ("Ventas") a warrant (the "Warrant") to purchase 16.3 million shares of the Company’s common stock, $0.01 par value per share, at a price per share of $3.00 . The Warrant is exercisable at Ventas' option at any time and from time to time, in whole or in part, until December 31, 2025. The exercise price and the number of shares issuable on exercise of the Warrant are subject to certain anti-dilution adjustments, including for cash dividends, stock dividends, stock splits, reclassifications, non-cash distributions, certain repurchases of common stock, and business combination transactions. During the three and nine months ended September 30, 2024, the Company issued 1,162,946 shares of common stock and 2,105,370 shares of common stock, respectively, upon the partial exercise of the Warrant by Ventas for 2.0 million shares and 3.7 million shares, net of shares withheld to satisfy the aggregate exercise price during the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, the Warrant remains outstanding for the right to purchase 12.6 million shares of the Company's common stock.
During the three months ended December 31, 2022, the Company issued 2,875,000 of its 7.00 % tangible equity units (the "Units") at a public offering price of $50.00 per Unit for an aggregate offering of $143.8 million. Each Unit is comprised of a prepaid stock purchase contract and a senior amortizing note with an initial principal amount of $8.8996 . Unless settled early in accordance with the terms of the instruments, under each purchase contract, the Company is obligated to deliver to the holder on November 15, 2025 a minimum of 12.9341 , and a maximum of 15.1976 , shares of the Company's common stock depending on the daily volume-weighted average price of its common stock for the 20 trading days preceding the settlement date. During the three and nine months ended September 30, 2024, 65,000 and 583,662 , respectively, of the Units were separated at the election of the holders into the two components, prepaid stock purchase contracts and senior amortizing notes, and the Company delivered 840,716 and 7,549,141 shares of the Company’s common stock upon settlement of such prepaid stock purchase contracts for the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, 2,291,338 prepaid stock purchase contracts remain outstanding, and the maximum number of shares issuable upon settlement of the Units' prepaid stock purchase contracts is 34.8 million.
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Basic earnings per share ("EPS") is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding, after giving effect to the minimum number of shares issuable upon settlement of the prepaid stock purchase contract component of the Units. The following table summarizes the computation of basic weighted average shares presented in the condensed consolidated statements of operations.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Weighted average minimum shares issuable under purchase contracts | |||||||||||||||||||||||
| Weighted average shares outstanding - basic | |||||||||||||||||||||||
Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. Diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. For the purposes of computing diluted EPS, weighted average shares outstanding do not include potentially dilutive securities that are anti-dilutive under the treasury stock method or if-converted method, and performance-based equity awards are included based on the attainment of the applicable performance metrics as of the end of the reporting period. The Company has the following potentially outstanding shares of common stock, which were excluded from the computation of diluted net income (loss) per share attributable to common stockholders in both periods as a result of the net loss.
As of September 30, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Convertible senior notes at initial conversion rate | |||||||||||
| Incremental shares issuable upon certain events for convertible senior notes | |||||||||||
| Warrants | |||||||||||
| Restricted stock and restricted stock units | |||||||||||
| Incremental shares issuable under purchase contracts | |||||||||||
| Total | |||||||||||
11. Income Taxes
The difference between the Company's 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. The difference between the Company's 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.
The Company 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 to the valuation allowance of $12.5 million. The Company 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 to the valuation allowance of $28.8 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $12.2 million for the three months ended September 30, 2023, which was partially offset by an increase to the valuation allowance of $10.0 million. The Company recorded an aggregate deferred federal, state, and local tax benefit of $23.0 million for the nine months ended September 30, 2023, which was partially offset by an increase to the valuation allowance of $21.0 million.
The Company evaluates its deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company's valuation allowance as of September 30, 2024 and December 31, 2023 was $503.0 million and $474.2 million, respectively.
The increase in the valuation allowance for both the nine months ended September 30, 2024 and 2023 is the result of current operating losses during the periods and the anticipated reversal of future tax liabilities offset by future tax deductions.
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12. Supplemental Disclosure of Cash Flow Information
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Supplemental Disclosure of Cash Flow Information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid, net of (refunds) | $ | $ | ( | ||||||||
| Capital expenditures, net of related payables: | |||||||||||
| Capital expenditures - non-development, net | $ | $ | |||||||||
| Capital expenditures - development, net | |||||||||||
| Capital expenditures - non-development - reimbursable from lessor | |||||||||||
| Trade accounts payable | ( | ( | |||||||||
| Net cash paid | $ | $ | |||||||||
| Acquisition of assets, net of cash acquired: | |||||||||||
| Prepaid expenses and other assets, net | $ | $ | |||||||||
| Property, plant and equipment and leasehold intangibles, net | |||||||||||
| Investment in unconsolidated ventures | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Other non-operating loss (income) | ( | ||||||||||
| Net cash paid | $ | $ | |||||||||
| Proceeds from sale of assets, net: | |||||||||||
| Prepaid expenses and other assets, net | $ | ( | $ | ( | |||||||
| Property, plant and equipment and leasehold intangibles, net | ( | ( | |||||||||
| Refundable fees and deferred revenue | |||||||||||
| Other liabilities | |||||||||||
| Non-operating loss (gain) on sale of assets, net | ( | ( | |||||||||
| Loss (gain) on sale of communities, net | ( | ||||||||||
| Net cash received | $ | ( | $ | ( | |||||||
| Supplemental Schedule of Non-cash Operating, Investing, and Financing Activities: | |||||||||||
| Non-cash lease transactions, net: | |||||||||||
| Property, plant and equipment and leasehold intangibles, net | $ | $ | ( | ||||||||
| Operating lease right-of-use assets | |||||||||||
| Financing lease obligations | ( | ||||||||||
| Operating lease obligations | ( | ( | |||||||||
| Net | $ | $ | |||||||||
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Restricted cash consists principally of escrow deposits for interest rate caps, real estate taxes, property insurance, capital expenditures, and debt service reserves required by certain lenders under mortgage debt agreements, deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs, and regulatory reserves for certain CCRCs. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sums to the total of the same such amounts shown in the condensed consolidated statements of cash flows.
| (in thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash - current | |||||||||||
| Restricted cash - non-current | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
13. Segment Information
The Company has three reportable segments: Independent Living; Assisted Living and Memory Care; and CCRCs. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
Independent Living. The Company's Independent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors who desire to live in a residential setting that feels like home, without the efforts of ownership. The majority of the Company's independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services to accommodate their changing needs.
Assisted Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily living for the Company's residents. The Company's assisted living and memory care communities include both freestanding, multi-story communities, as well as smaller, freestanding, single story communities. The Company also provides memory care services at freestanding memory care communities that are specially designed for residents with Alzheimer's disease and other dementias.
CCRCs. The Company's CCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate a broad spectrum of physical ability and healthcare needs. Most of the Company's CCRCs have independent living, assisted living, memory care, and skilled nursing available on one campus.
All Other. All Other includes communities operated by the Company pursuant to management agreements. Under the management agreements for these communities, the Company receives management fees as well as reimbursement of expenses it incurs on behalf of the owners.
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The following tables set forth selected segment financial data.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Revenue and other operating income: | |||||||||||||||||||||||
Independent Living(1) | $ | $ | $ | $ | |||||||||||||||||||
Assisted Living and Memory Care(1) | |||||||||||||||||||||||
CCRCs(1) | |||||||||||||||||||||||
| All Other | |||||||||||||||||||||||
| Total revenue and other operating income | $ | $ | $ | $ | |||||||||||||||||||
Segment operating income:(2) | |||||||||||||||||||||||
| Independent Living | $ | $ | $ | $ | |||||||||||||||||||
| Assisted Living and Memory Care | |||||||||||||||||||||||
| CCRCs | |||||||||||||||||||||||
| All Other | |||||||||||||||||||||||
| Total segment operating income | |||||||||||||||||||||||
| General and administrative expense (including non-cash stock-based compensation expense) | |||||||||||||||||||||||
| Facility operating lease expense | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Asset impairment | |||||||||||||||||||||||
| Loss (gain) on sale of communities, net | ( | ||||||||||||||||||||||
| Income (loss) from operations | $ | $ | ( | $ | $ | ||||||||||||||||||
| As of | |||||||||||
| (in thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Total assets: | |||||||||||
Independent Living(3) | $ | $ | |||||||||
| Assisted Living and Memory Care | |||||||||||
| CCRCs | |||||||||||
| Corporate and All Other | |||||||||||
| Total assets | $ | $ | |||||||||
(1)All revenue and other operating income is earned from external third parties in the United States.
(2)Segment operating income is defined as segment revenues and other operating income less segment facility operating expenses (excluding facility depreciation and amortization) and costs incurred on behalf of managed communities.
(3)The Company's total carrying amount of goodwill is included within the Independent Living segment and was $27.3
21
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.
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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.
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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.
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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 | % | |||||||||||||||
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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(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).
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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.
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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.
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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) | |||||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks from changes in interest rates charged on our credit facilities and other variable rate indebtedness. The impact on earnings and the value of our long-term debt are subject to change as a result of movements in market rates and prices. As of September 30, 2024, 62.0%, or $2.3 billion, of our long-term debt had a weighted average fixed interest rate of 4.17%. As of September 30, 2024, we had $1.4 billion of long-term variable rate debt, at a weighted average interest rate of 7.53%.
In the normal course of business, we enter into certain interest rate cap and swap agreements with major financial institutions to manage our risk above certain interest rates on variable rate debt. As of September 30, 2024, our $1.4 billion of outstanding long-term variable rate debt is indexed to SOFR plus a weighted average margin of 243 basis points. Accordingly, our annual interest expense related to long-term variable rate debt is directly affected by movements in SOFR. As of September 30, 2024, we had SOFR interest rate cap and swap agreements with a notional amount of $1.5 billion, a weighted average fixed interest rate of 3.95%, and a weighted average remaining term of 0.6 years. Many of our long-term variable rate debt instruments include provisions that obligate us to obtain additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The costs of obtaining additional interest rate cap agreements may offset the benefits of our existing interest rate cap agreements.
The table below reflects the additional annual debt interest expense that would have resulted for the respective basis point increases in SOFR as of September 30, 2024.
Increase in Index (in basis points) | Annual Interest Expense Increase (1) (in millions) | |||||||
| 100 | $ | 1.7 | ||||||
| 200 | 3.1 | |||||||
| 500 | 6.7 | |||||||
| 1,000 | 11.7 | |||||||
(1)Amounts are after consideration of interest rate cap and swap agreements in place as of September 30, 2024.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of September 30, 2024, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note 8 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by this reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information regarding purchases of our common stock made during the quarter ended September 30, 2024 by or on behalf of the Company or any ''affiliated purchaser,'' as defined by Rule 10b-18(a)(3) of the Exchange Act.
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in thousands) (2) | |||||||||||||||||||
| 7/1/2024 - 7/31/2024 | — | $ | — | — | $ | 44,026 | |||||||||||||||||
| 8/1/2024 - 8/31/2024 | 2,998 | 6.63 | — | 44,026 | |||||||||||||||||||
| 9/1/2024 - 9/30/2024 | — | — | — | 44,026 | |||||||||||||||||||
| Total | 2,998 | $ | 6.63 | — | |||||||||||||||||||
(1)Consists entirely of shares withheld to satisfy tax liabilities due upon the vesting of restricted stock units. The average price paid per share for such share withholding is based on the closing price per share on the vesting date of the restricted stock units or, if such date is not a trading day, the trading day immediately prior to such vesting date.
(2)In 2016, our Board of Directors approved a share repurchase program that authorizes us to purchase up to $100.0 million in the aggregate of our common stock. The share repurchase program is intended to be implemented through purchases made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases will be based on business, market and other conditions and factors, including price, regulatory and contractual requirements, and capital availability. The repurchase program does not obligate us to acquire any particular amount of common stock and the program may be suspended, modified or discontinued at any time at our discretion without prior notice. Shares of stock repurchased under the program will be held as treasury shares. As of September 30, 2024, $44.0 million remained available under the repurchase program.
Item 5. Other Information
Insider Adoption or Termination of Trading Arrangements
During the fiscal quarter ended September 30, 2024, none of our directors or officers adopted terminated
Relocation of Community Support Center
Our lease of our community support center in Brentwood, Tennessee expired, and we entered into a new lease for and moved into a 52,755 square foot community support center at 105 Westwood Place, Suite 400, Brentwood, Tennessee 37027.
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 4.6 | ||||||||
| 4.7 | ||||||||
| 4.8 | ||||||||
| 4.9 | ||||||||
| 4.10 | ||||||||
| 4.11 | ||||||||
| 4.12 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL (included in Exhibit 101). | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BROOKDALE SENIOR LIVING INC. | |||||||||||
| (Registrant) | |||||||||||
| By: | /s/ Dawn L. Kussow | ||||||||||
| Name: | Dawn L. Kussow | ||||||||||
| Title: | Executive Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer) | ||||||||||
| Date: | November 7, 2024 | ||||||||||
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