# Brookdale Senior Living Inc. (BKD) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Brookdale Senior Living Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1332349/000133234923000047/bkd-20221231.htm Accession: 0001332349-23-000047 Filing date: 2023-02-22 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BKD/ All MD&A years: /company/BKD/mda/ Previous year: /company/BKD/mda/fy2021/ (FY 2021) Next year: /company/BKD/mda/fy2023/ (FY 2023) Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis should be read in conjunction with our historical consolidated financial statements and related notes contained in "Item 8. Financial Statements and Supplementary Data." In addition to historical information, this discussion and analysis may contain forward-looking statements that involve risks, uncertainties, and assumptions, which could cause actual results to differ materially from management's expectations. See additional risks and uncertainties described in "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995" for more information. Factors that could cause such differences include those described in this section and "Item 1A. Risk Factors" of this Annual Report on Form 10-K. Executive Overview and Recent Developments Our Business We are the nation's premier operator of senior living communities, operating and managing 673 communities in 41 states as of December 31, 2022, with the ability to serve more than 60,000 residents. We offer our residents access to a broad continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, memory care, and continuing care retirement communities. Our senior living communities and our comprehensive network help to provide seniors with care 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, and stay connected with friends and loved ones. By providing residents with a range of 42 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. Strategy Our goal is to be the first choice in senior living by being the nation's most trusted and effective senior living provider. Brookdale continues to be driven by its mission—to enrich the lives of those we serve with compassion, respect, excellence, and integrity. During this pandemic recovery phase, we have continued to focus on the health and wellbeing of our residents and associates and "Winning the Recovery" by providing valued high quality care and personalized service. We believe successful execution on this strategy provides the best opportunity to create attractive long-term stockholder value. We are focused on priorities that will position us for growth and capitalize on positive trends in demographics, customer preferences, and lower new supply in the industry, while using scale to our advantage. Our key strategic priorities are as follows: •Get every available room in service at the best profitable rate. We believe that we provide highly valuable services to seniors, and we continue to strive to expand the number of seniors we serve through targeted efforts to increase our occupancy levels and improve controllable expense management, while remaining focused on driving rate and improving margin. With this strategic priority, we intend to ensure all communities are appropriately priced within their market. Through our targeted sales and marketing efforts, we plan to drive increased move-ins through enhanced outreach with impactful points of differentiation based on quality, a portfolio of choices, and personalized service delivered by caring and engaged associates. •Attract, engage, develop, and retain the best associates. Brookdale’s culture is based on servant leadership. We believe engaged associates lead to an enhanced resident experience, higher retention, and ultimately improved operations that drive accelerated growth. Through this strategic priority, we intend to expand successful pilot programs to further support and extend length of employment with Brookdale. We expect to diversify and optimize our recruiting plans, improve training, educational, and career development opportunities for associates and enhance our already compelling value proposition for our associates in the areas of compensation, leadership, career growth, and meaningful work. •Earn resident and family trust and satisfaction by providing valued high quality care and personalized service. We believe that earning the trust of our residents and their families will allow us to build relationships that create passionate advocates and generate referrals. We intend to create a consistent high quality experience for residents, including through the implementation and execution of our high quality clinical, operational, and resident engagement programs. We are a learning organization that uses multiple tools to obtain feedback from residents, their families, and our associates to improve our services to meet the changing needs of residents. We expect to strengthen associate engagement for an enhanced resident experience. The above three priorities coupled with improving supply-demand fundamentals are intended to provide long-term returns to our stockholders by focusing on growing RevPAR, Adjusted EBITDA, and cash flow. As we execute our "Winning the Recovery" strategy, we expect RevPAR will be driven by both occupancy and RevPOR growth, propelled by (i) our strategic priorities, (ii) accelerating growth within our target demographic, and (iii) significantly lower supply growth. Our goal is to reach or exceed our historical occupancy high over the long term. As occupancy grows, we anticipate benefiting from operating leverage, resulting in improving margins. With the combination of RevPAR growth and operating leverage, we expect to drive Adjusted EBITDA and cash flow growth. 43 Strategic innovation also continues to be an important factor for our long-term growth. We are piloting programs in several areas and plan to roll out initiatives to accelerate our growth further. We plan to explore additional products and services that we may offer to our residents or to seniors living outside of our communities and, in the longer term where opportunities arise, pursue development, investment, and acquisition opportunities. •Enhance healthcare and wellness. Our vision is to enable those we serve to live well by offering our residents a high-quality healthcare and wellness platform. We believe Brookdale is uniquely positioned to be a key participant and partner in the value-based healthcare ecosystem. Our initiatives include piloting redesigned delivery of clinical care within assisted living communities and embedding technology-enabled care management capabilities, in order to better align our communities with payors, providers, and healthcare systems by demonstrating improved outcomes for residents. We are also piloting the expansion of our private duty services business to serve those living outside of our communities. We believe the successful execution of these initiatives will improve resident health and wellbeing and drive incremental revenue and value creation (including through increasing move-ins and extending residents' average length of stay resulting in increased occupancy). •Drive innovation and leverage technology. We are engaged in a variety of innovation initiatives and over time plan to pilot and test new ideas, technologies, and operating models in order to enhance our residents' engagement and experience, improve outcomes, and increase average length of stay and occupancy. With our technology platform, we also expect to identify solutions to reduce complexity, increase productivity, lower costs, and increase our ability to collaborate with third parties. •Improve and grow our senior living portfolio. As we look to return to pre-pandemic results, we intend to (i) exit non-strategic or underperforming owned assets or leases when possible, (ii) expand our footprint and services in core markets where we have, or can achieve, a clear leadership position, and (iii) explore further growth opportunities. Over the longer term, we will also continue to invest in our development capital expenditures program through which we expand, reposition, and redevelop selected existing senior living communities where economically advantageous. We believe that our successful execution on these strategic priorities and our longer-term growth plans will allow us to achieve our goal to improve profitability and be the first choice in senior living by being the nation’s most trusted and effective senior living provider. COVID-19 Pandemic The COVID-19 pandemic continued to significantly affect our operations during 2022. The health and wellbeing of our residents and associates has been and continues to be our highest priority. Occupancy and Revenue Recovery We believe that recovering our occupancy lost due to the pandemic while maintaining rate discipline is critical to turning around our operational losses. During 2020 and, to a lesser degree, 2021, we had in place restrictive measures at many of our communities, including restrictions on visitors and move-ins. From March 2020 through February 2021 we lost 1,330 basis points of weighted average consolidated senior housing occupancy due to the pandemic, resulting in our lowest weighted average occupancy of 69.4% during February 2021. In the aggregate, for the three years ended December 31, 2022, we estimate the pandemic resulted in $1.0 billion of lost resident fee revenue in our consolidated senior housing portfolio and former Health Care Services segment compared to our pre-pandemic expectations, including an estimated $0.4 billion of lost resident fee revenue for the year ended December 31, 2022. Throughout 2022, we continued to execute on key initiatives to rebuild our occupancy. By December 31, 2022, we had recovered 760 basis points of weighted average consolidated senior housing occupancy, ending with December 2022 occupancy of 77.0%. We also increased our consolidated senior housing RevPOR by 4.5% during 2022 compared to the prior year. During 2023, we intend to continue to focus on rebuilding our occupancy back to, or above, pre-pandemic levels. We cannot predict with reasonable certainty when our occupancy will return to pre-pandemic levels. The table below sets forth our recent consolidated occupancy trend. 44 [[GREPCENT_TABLE]] [["","Q1 2020","Q2 2020","Q3 2020","Q4 2020","Q1 2021","Q2 2021","Q3 2021","Q4 2021","Q1 2022","Q2 2022","Q3 2022","Q4 2022"],["Weighted average","83.2","%","78.7","%","75.3","%","72.7","%","69.6","%","70.5","%","72.5","%","73.5","%","73.4","%","74.6","%","76.4","%","77.1","%"],["Quarter end","82.2","%","77.8","%","75.0","%","71.5","%","70.6","%","72.6","%","74.2","%","74.5","%","75.0","%","76.6","%","78.4","%","78.1","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","","","","","","","","","","","","Jan 2022","Feb 2022","Mar 2022","Apr 2022","May 2022","Jun 2022","Jul 2022","Aug 2022","Sep 2022","Oct 2022","Nov 2022","Dec 2022","Jan 2023"],["Weighted average","","","","","","","","","","","","","73.4","%","73.3","%","73.6","%","73.9","%","74.6","%","75.2","%","75.9","%","76.4","%","76.9","%","77.2","%","77.0","%","77.0","%","76.6","%"],["Month end","","","","","","","","","","","","","74.2","%","74.4","%","75.0","%","75.3","%","76.2","%","76.6","%","77.1","%","77.9","%","78.4","%","78.2","%","78.1","%","78.1","%","77.6","%"]] [[/GREPCENT_TABLE]] Reductions to Pandemic-Related Costs With significantly lower case volumes in 2022, our incremental direct costs to respond to the pandemic were $17.4 million for the year ended December 31, 2022, representing a 63.5% decrease compared to the year ended December 31, 2021. On a cumulative basis, for the three years ended December 31, 2022, we have incurred $190.6 million of facility operating expense for such incremental direct costs to respond to the pandemic. The direct costs include those for: acquisition of additional personal protective equipment, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers' compensation, and health plan expense; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. Government Provided Financial Relief In the aggregate, government provided financial relief has offset our incremental direct costs to respond to the pandemic and a minor portion of our estimated lost revenue. During the year ended December 31, 2022, we recognized $80.5 million of other operating income for government provided grants and employee retention credits, including $61.1 million of grants from the Provider Relief Fund. For the three years ended December 31, 2022, we recognized an aggregate of $208.6 million of other operating income for government provided grants and employee retention credits, including pursuant to the Provider Relief Fund. We were eligible to claim employee retention credits for certain of our associates under COVID-related legislation. During the years ended December 31, 2022 and 2021, we recognized $9.4 million and $9.9 million of such employee retention credits within other operating income, respectively. As of December 31, 2022, we had a receivable of approximately $14.7 million for such credits. During the year ended December 31, 2022, we repaid the final amounts of the employer portion of social security payroll taxes deferred pursuant to pandemic-related legislation, and all remaining amounts of our advanced payments under the Accelerated and Advance Payment Program administered by CMS were recouped. We cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on our business, results of operations, cash flow, and liquidity, and our response efforts may delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth of the pandemic and any resurgence or variants of the disease; the impact of COVID-19 on the nation's economy and debt and equity markets and the local economies in our markets; the development, availability, utilization, and efficacy of COVID-19 testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals, including our ability to qualify for and satisfy the terms and conditions of financial relief; restrictions on visitors and move-ins at our communities as a result of infections at a community or as necessary to comply with regulatory requirements or at the direction of authorities having jurisdiction; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents' and their families' ability to afford our resident fees, including due to changes in unemployment rates, consumer confidence, housing markets, and equity markets caused by COVID-19; changes in the acuity levels of our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, health plan, and other expenses; greater use of contract labor and other premium labor due to COVID-19 and general labor market conditions; the impact of COVID-19 on our ability to complete financings and refinancings of various assets or other transactions or to generate sufficient cash flow to cover required debt, interest, and lease payments and to satisfy financial and other covenants in our debt and lease documents; increased regulatory requirements, including the costs of unfunded, mandatory testing of residents and associates and provision of test kits to our health plan participants; increased enforcement actions resulting from COVID-19; government action that may limit our collection or discharge efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts. 45 Macroeconomic Conditions A confluence of macroeconomic conditions, including an intensely competitive labor environment and higher inflation and interest rates, affected our operations during 2022 and continue to do so. Labor Pressures Labor costs comprise approximately two-thirds of our total facility operating expense. We began to experience pressures associated with the intensely competitive labor environment during 2021, which continued throughout 2022. The United States’ unemployment rate remained at or below 4.0% each month during 2022, and more than half of states experienced record low unemployment rates. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. We have increased our recruiting efforts to fill existing open positions, resulting in increasing the size of our workforce by approximately 4,800 community associates during 2022. We continue to review wage rates in our markets and make competitive adjustments. To cover existing open positions, during 2021 and continuing into 2022, we needed to rely on more expensive premium labor, primarily contract labor and overtime. From its peak in December 2021 to December 2022, we have decreased our monthly contract labor expense by approximately 80%, while maintaining focus on resident satisfaction and high-quality care. We continue to work to reduce our reliance on premium labor. The labor component of our facility operating expense increased $122.1 million, or 9.6%, during 2022 compared to the prior year. In our same community portfolio, such expense increased 11.0% during 2022 compared to the prior year. These increases primarily resulted from merit and market wage rate adjustments, more hours worked with higher occupancy during the period, and an increase in the use of premium labor, primarily overtime. For 2023, we expect to continue to experience labor cost pressure as a result of the continuing labor conditions previously described and an anticipated increase in hours worked as our occupancy levels grow. Continued increased competition for, or a shortage of, nurses or other associates and general inflationary pressures have required and may require that we enhance our pay and benefits package to compete effectively for such associates. Inflation Our non-labor facility operating expense comprises approximately one-third of our total facility operating expense and is subject to inflationary pressures. The United States consumer price index increased 6.5% during 2022, with food and energy prices increasing above 10%. We mitigated a portion of the increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. We mitigated a portion of the rising utility costs through sustainability investments we made in 2022 and recent years, such as lighting retrofits and water consumption projects. Despite our mitigation efforts and with higher occupancy, for 2022 our non-labor facility operating expense increased $57.1 million, or 8.9%, compared to the prior year. In our same community portfolio, such expense increased 9.2% during 2022 compared to the prior year. For 2023, we expect to continue to experience inflationary pressures. Interest Rates As of December 31, 2022, we had approximately $1.6 billion of long-term variable rate debt outstanding which is indexed to LIBOR or SOFR, plus a weighted average margin of approximately 230 basis points. Accordingly, our annual interest expense related to long-term variable rate debt is directly affected by movements in LIBOR or SOFR. The LIBOR and SOFR steadily increased throughout 2022, ending the year more than 400 basis points higher than year-end 2021. Approximately 92% of our long-term variable rate debt is subject to interest rate cap or swap agreements, which had a weighted average fixed interest rate of 4.14% and a weighted average remaining term of 1.2 years as of December 31, 2022. Many of our long-term variable rate debt instruments include provisions that obligate us to obtain additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The costs of obtaining additional interest rate cap agreements may offset the benefits of our existing interest rate cap agreements. For the year ended December 31, 2022, our debt interest expense increased $16.5 million, or 11.6%, compared to the prior year, substantially all due to an increase in our interest expense associated with our long-term variable rate debt. Interest earned on our cash, cash equivalents, and marketable securities partially offset such increased interest expense. Resident Fee Increases The rates we charge our residents are highly dependent on local market conditions and the competitive environment in which the communities operate. As the senior living industry rebuilds occupancy lost due to the pandemic, we continue to experience a highly competitive environment for new residents. 46 Generally, we have increased our monthly rates, including rates for care and other services, for private pay residents on an annual basis beginning January 1 each year. We made the annual rate adjustment effective January 1, 2022 for our in-place private pay residents, which was higher than our typical annual rate adjustment and resulted in a 4.5% net increase in same community RevPOR for 2022 compared to 2021. We have recently made the annual rate adjustment effective January 1, 2023 for our in-place private pay residents. The increase was again higher than our typical annual rate adjustment in order to help offset our recent increased costs as a result of labor pressures, high inflation, and increased interest rates previously described. As a result of rate and occupancy increases, consolidated RevPAR for January 2023 increased approximately 13% compared to January 2022. Due to the competitive environment for new residents in our recovering industry, the higher rate adjustment could slow our occupancy recovery progress or result in a decrease in occupancy in our communities. Any use of promotional or other discounting would offset a portion of such rate adjustments in our RevPAR and RevPOR results. In addition, the rate adjustment may not be sufficient to offset our increased costs. Tangible Equity Units During the three months ended December 31, 2022, we issued 2,875,000 of our 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. We received proceeds of $139.4 million after the deduction of the underwriters’ discount and intend to use the proceeds for general corporate purposes. Each Unit is comprised of a prepaid stock purchase contract and a senior amortizing note with an initial principal amount of $8.8996. Under each purchase contract, we are obligated to deliver to the holder on November 15, 2025 a minimum of 12.9341, and a maximum of 15.1976, shares of our common stock depending on the volume-weighted average price of our common stock for the 20 trading days preceding the settlement date. Each amortizing note bears interest at the rate of 10.25% per annum, requires quarterly installment payments of principal and interest, and has a final installment payment date of November 15, 2025. The cash installment payments will be equivalent to 7.00% per year with respect to each $50.00 stated amount of Unit. The Units, purchase contracts, and amortizing notes are subject to the terms and conditions set forth in the Purchase Contract Agreement dated November 21, 2022 between us and American Stock Transfer & Trust Company, LLC ("AST") as purchase contract agent, and the Indenture and First Supplemental Indenture, each dated November 21, 2022, between us and AST as trustee, including certain early settlement, repurchase, and adjustment events as set forth therein. Transaction Activity Sale of Health Care Services On July 1, 2021, we completed the sale of 80% of our equity in our Health Care Services segment to affiliates of HCA Healthcare for a purchase price of $400.0 million in cash, subject to certain adjustments set forth in the Securities Purchase Agreement (the "Purchase Agreement") dated February 24, 2021, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment (the "HCS Sale"). We received net cash proceeds of $312.6 million, including $305.8 million at closing on July 1, 2021 and $6.8 million upon completion of the post-closing net working capital adjustment in October 2021. The Purchase Agreement also contained certain agreed upon indemnities for the benefit of the purchaser. The results and financial position of the Health Care Services segment were deconsolidated from our consolidated financial statements as of July 1, 2021 and our retained 20% equity interest in the HCS Venture is accounted for under the equity method of accounting subsequent to that date. As of July 1, 2021, we recognized a $100.0 million asset within investment in unconsolidated ventures on our consolidated balance sheet for the estimated fair value of our retained 20% noncontrolling interest in the HCS Venture. We recognized a $286.5 million gain on sale, net of transaction costs, within our consolidated statement of operations for the year ended December 31, 2021 for the HCS Sale. Refer to Note 21 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for selected financial data for the Health Care Services segment through June 30, 2021. On November 1, 2021, the HCS Venture sold certain home health, hospice, and outpatient therapy agencies in areas not served by HCA Healthcare to LHC Group Inc. Upon the completion of the sale, we received $35.0 million of cash distributions from the HCS Venture from the net sale proceeds, which decreased our investment in unconsolidated ventures. We continue to own a 20% equity interest in the remaining HCS Venture, which continues to operate home health and hospice agencies in areas served by HCA Healthcare. 47 Community Transactions During 2022, we continued execution on our ongoing capital recycling program through which we have exited non-strategic or underperforming owned assets or leases. During the year ended December 31, 2022, we completed the sale of two owned communities (130 units) for cash proceeds of $4.4 million, net of transaction costs, and the termination of triple-net lease obligations on four communities (386 units) (including through the acquisition of one formerly leased community (114 units)). During the year ended December 31, 2021, we completed the sale of three owned communities (249 units) for cash proceeds of $16.5 million, net of transaction costs, and the termination of triple-net lease obligations on two communities (164 units). Resident Fee Revenue and Facility Operating Expense Impacts of Transaction Activity The table below sets forth our resident fee revenue and facility operating expense attributable to our former Health Care Services segment and communities disposed since January 1, 2020. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["(in thousands)","2022","","2021","","2020"],["Resident fee revenue attributable to Health Care Services and disposed communities","$","6,578","","","$","202,337","","","$","437,598"],["Facility operating expense attributable to Health Care Services and disposed communities","6,408","","","199,366","","","455,435"]] [[/GREPCENT_TABLE]] Results of Operations As of December 31, 2022, our total operations included 673 communities with a capacity to serve over 60,000 residents. As of that date, we owned 346 communities (31,597 units), leased 295 communities (20,570 units), and managed 32 communities (4,725 units). The following discussion should be read in conjunction with our consolidated financial statements and the related notes, which are included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period of January 1, 2021 to December 31, 2022 affect the comparability of our results of operations, and summaries of such transactions and their impact on our results of operations are discussed above in "Transaction Activity." We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. •Senior housing operating results and data presented on a same community basis reflect results and data of a consistent population of communities by excluding the impact of changes in the composition of our portfolio of communities. The operating results exclude natural disaster expense and related insurance recoveries. We define our same community portfolio as communities consolidated and operational for the full period in both comparison years. Consolidated communities excluded from the same community portfolio include communities acquired or disposed of since the beginning of the prior year, communities classified as assets held for sale, certain communities planned for disposition, certain communities that have undergone or are undergoing expansion, redevelopment, and repositioning projects, and certain communities that have experienced a casualty event that significantly impacts their operations. Our management uses same community operating results and data for decision making, and we believe such results and data provide useful information to investors, because it enables comparisons of revenue, expense, and other operating measures for a consistent portfolio over time without giving effect to the impacts of communities that were not consolidated and operational for the comparison periods, communities acquired or disposed during the comparison periods (or planned for disposition), and communities with results that are or likely will be impacted by completed or in-process development-related capital expenditure projects. •RevPAR, or average monthly senior housing resident fee revenue per available unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding revenue from our former Health Care Services segment, revenue for private duty services provided to seniors living outside of our communities, and entrance fee amortization), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPAR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPAR for decision making, and we believe the measure provides useful information to investors, because the measure is an indicator of senior housing resident fee revenue performance that reflects the impact of both senior housing occupancy and rate. 48 •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 from our former Health Care Services segment, 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 rate reflects the percentage of units at our owned and leased communities being utilized by residents over a reporting period. We measure occupancy rates with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments, and also measure this metric both on a consolidated senior housing and a same community basis. Our management uses weighted average occupancy, and we believe the measure provides useful information to investors, because it is a significant driver of our senior housing revenue performance. This section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable measure in accordance with GAAP. As of December 31, 2022, we had three reportable segments: Independent Living; Assisted Living and Memory Care; and CCRCs. These segments were determined based on the way that our chief operating decision maker organizes our business activities for making operating decisions, assessing performance, developing strategy, and allocating capital resources. On July 1, 2021, we sold 80% of our equity in our Health Care Services segment. For periods beginning July 1, 2021, the results and financial position of our Health Care Services segment were deconsolidated from our consolidated financial statements and our retained 20% equity interest in the HCS Venture is accounted for under the equity method of accounting. Discussion of our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below. Discussion of our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 15, 2022. Comparison of Years Ended December 31, 2022 and 2021 Summary Operating Results The following table summarizes our overall operating results for the years ended December 31, 2022 and 2021. [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Increase (Decrease)"],["(in thousands)","2022","","2021","","Amount","","Percent"],["Total resident fees and management fees revenue","$","2,597,549","","","$","2,564,446","","","$","33,103","","","1.3","%"],["Other operating income","80,469","","","12,368","","","68,101","","","NM"],["Facility operating expense","2,083,605","","","2,075,863","","","7,742","","","0.4","%"],["Net income (loss)","(238,340)","","","(99,364)","","","138,976","","","139.9","%"],["Adjusted EBITDA","241,305","","","138,476","","","102,829","","","74.3","%"]] [[/GREPCENT_TABLE]] The increase in total resident fees and management fees revenue was primarily attributable to a 10.2% increase in same community RevPAR, comprised of a 390 basis point increase in same community weighted average occupancy and a 4.5% increase in same community RevPOR. The increase in resident fees was partially offset by the deconsolidation of results of the Health Care Services segment effective July 1, 2021, which resulted in a decrease of $174.2 million of resident fees compared to the prior year. Management fee revenue decreased $8.6 million primarily due to the transition of management agreements on 43 net communities since the beginning of the prior year. During the years ended December 31, 2022 and 2021, we recognized $80.5 million and $12.4 million, respectively, of government grants and employee retention credits as other operating income based on our estimates of our satisfaction of the 49 conditions of the grants and credits during the year, including $61.1 million during 2022 of grants from the Phase 4 general distribution from the Provider Relief Fund. The increase in facility operating expense was primarily attributable to a 10.4% increase in same community facility operating expense, including a $131.7 million, or 11.0%, increase in our same community labor expense primarily resulting from merit and market wage rate adjustments, more hours worked with higher occupancy during the period, and an increase in the use of premium labor, primarily overtime. Additionally, broad inflationary pressure, an increase in food costs with higher occupancy during the year, and higher repairs and maintenance volume contributed to the increase in our same community facility operating expense. The increase in facility operating expense was partially offset by the deconsolidation of results of the Health Care Services segment effective July 1, 2021, which resulted in a $171.5 million decrease in facility operating expenses. Facility operating expense for the years ended December 31, 2022 and 2021 includes $17.4 million and $47.7 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. Same community facility operating expense for the years ended December 31, 2022 and 2021 excludes $8.2 million and $1.6 million, respectively, of natural disaster expense, consisting primarily of remediation of storm damage as a result of Hurricane Ian and Winter Storm Elliott in 2022. The increase in net loss was primarily attributable to the net gain on sale of $286.5 million for the HCS Sale in the prior year, a decrease in equity in earnings of unconsolidated ventures compared to the prior year, and an increase in debt interest expense compared to the prior year. These changes were partially offset by the increases in other operating income and resident fee revenue previously discussed and a $73.9 million non-cash gain on sale of communities recognized for the amendment of leases for 16 communities that were previously accounted for as failed sale-leaseback transactions. Refer to Note 9 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the lease amendment. The increase in Adjusted EBITDA was primarily attributable to an increase in other operating income compared to the prior year, the net impact of the revenue and facility operating expense factors previously discussed, and a decrease in general and administrative expense compared to the prior year primarily as a result of the HCS Sale and a decrease in estimated incentive compensation costs. 50 Operating Results - Senior Housing Segments The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the years ended December 31, 2022 and 2021 including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. [[GREPCENT_TABLE]] [["(in thousands, except communities, units, occupancy, RevPAR, and RevPOR)","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","Amount","","Percent"],["Resident fees","$","2,585,529","","","$","2,369,684","","","$","215,845","","","9.1","%"],["Other operating income","$","80,469","","","$","9,263","","","$","71,206","","","NM"],["Facility operating expense","$","2,083,605","","","$","1,904,410","","","$","179,195","","","9.4","%"],["Number of communities (period end)","641","","","646","","","(5)","","","(0.8)","%"],["Total average units","52,320","","","52,840","","","(520)","","","(1.0)","%"],["RevPAR","$","4,113","","","$","3,734","","","$","379","","","10.1","%"],["Occupancy rate (weighted average)","75.4","%","","71.5","%","","390","bps","","n/a"],["RevPOR","$","5,457","","","$","5,221","","","$","236","","","4.5","%"],["Same Community Operating Results and Data"],["Resident fees","$","2,495,297","","","$","2,263,996","","","$","231,301","","","10.2","%"],["Other operating income","$","77,627","","","$","8,423","","","$","69,204","","","NM"],["Facility operating expense","$","1,991,277","","","$","1,803,891","","","$","187,386","","","10.4","%"],["Number of communities","632","","","632","","","\u2014","","","\u2014","%"],["Total average units","50,553","","","50,555","","","(2)","","","\u2014","%"],["RevPAR","$","4,113","","","$","3,732","","","$","381","","","10.2","%"],["Occupancy rate (weighted average)","75.4","%","","71.5","%","","390","bps","","n/a"],["RevPOR","$","5,453","","","$","5,220","","","$","233","","","4.5","%"]] [[/GREPCENT_TABLE]] 51 Independent Living Segment The following table summarizes the operating results and data for our Independent Living segment for the years ended December 31, 2022 and 2021, including operating results and data on a same community basis. [[GREPCENT_TABLE]] [["(in thousands, except communities, units, occupancy, RevPAR, and RevPOR)","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","Amount","","Percent"],["Resident fees","$","507,793","","","$","475,538","","","$","32,255","","","6.8","%"],["Other operating income","$","10,906","","","$","1,512","","","$","9,394","","","NM"],["Facility operating expense","$","359,749","","","$","330,942","","","$","28,807","","","8.7","%"],["Number of communities (period end)","68","","","68","","","\u2014","","","\u2014","%"],["Total average units","12,569","","","12,556","","","13","","","0.1","%"],["RevPAR","$","3,367","","","$","3,156","","","$","211","","","6.7","%"],["Occupancy rate (weighted average)","77.0","%","","74.2","%","","280","bps","","n/a"],["RevPOR","$","4,371","","","$","4,252","","","$","119","","","2.8","%"],["Same Community Operating Results and Data"],["Resident fees","$","501,115","","","$","470,072","","","$","31,043","","","6.6","%"],["Other operating income","$","10,649","","","$","1,492","","","$","9,157","","","NM"],["Facility operating expense","$","353,334","","","$","326,695","","","$","26,639","","","8.2","%"],["Number of communities","67","","","67","","","\u2014","","","\u2014","%"],["Total average units","12,379","","","12,376","","","3","","","\u2014","%"],["RevPAR","$","3,373","","","$","3,165","","","$","208","","","6.6","%"],["Occupancy rate (weighted average)","77.0","%","","74.2","%","","280","bps","","n/a"],["RevPOR","$","4,384","","","$","4,269","","","$","115","","","2.7","%"]] [[/GREPCENT_TABLE]] The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 280 basis point increase in same community weighted average occupancy and a 2.7% 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 in-place rent increases. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $15.0 million, or 7.7%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments as well as an increase in the use of premium labor, primarily overtime and contract labor. Additionally, broad inflationary pressure, an increase in food costs with higher occupancy during the year, and higher repairs and maintenance volume contributed to the increase in the segment's same community facility operating expense. The segment's facility operating expense for the years ended December 31, 2022 and 2021 includes $2.3 million and $5.9 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 52 Assisted Living and Memory Care Segment The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the years ended December 31, 2022 and 2021, including operating results and data on a same community basis. [[GREPCENT_TABLE]] [["(in thousands, except communities, units, occupancy, RevPAR, and RevPOR)","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","Amount","","Percent"],["Resident fees","$","1,755,092","","","$","1,589,721","","","$","165,371","","","10.4","%"],["Other operating income","$","60,630","","","$","5,963","","","$","54,667","","","NM"],["Facility operating expense","$","1,435,764","","","$","1,301,364","","","$","134,400","","","10.3","%"],["Number of communities (period end)","554","","","559","","","(5)","","","(0.9)","%"],["Total average units","34,555","","","34,977","","","(422)","","","(1.2)","%"],["RevPAR","$","4,230","","","$","3,787","","","$","443","","","11.7","%"],["Occupancy rate (weighted average)","75.1","%","","70.7","%","","440","bps","","n/a"],["RevPOR","$","5,636","","","$","5,357","","","$","279","","","5.2","%"],["Same Community Operating Results and Data"],["Resident fees","$","1,737,704","","","$","1,558,719","","","$","178,985","","","11.5","%"],["Other operating income","$","60,207","","","$","5,751","","","$","54,456","","","NM"],["Facility operating expense","$","1,412,729","","","$","1,271,372","","","$","141,357","","","11.1","%"],["Number of communities","550","","","550","","","\u2014","","","\u2014","%"],["Total average units","34,204","","","34,204","","","\u2014","","","\u2014","%"],["RevPAR","$","4,234","","","$","3,798","","","$","436","","","11.5","%"],["Occupancy rate (weighted average)","75.1","%","","70.7","%","","440","bps","","n/a"],["RevPOR","$","5,641","","","$","5,376","","","$","265","","","4.9","%"]] [[/GREPCENT_TABLE]] The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 440 basis point increase in same community weighted average occupancy and a 4.9% 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 in-place rent increases. The increase in the segment's resident fees was partially offset by the disposition of nine communities (695 units) since the beginning of the prior year, which resulted in $15.0 million less in resident fees during the year ended December 31, 2022 compared to the prior year. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $102.3 million, or 11.8%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments, more hours worked with higher occupancy during the period, and an increase in the use of premium labor, primarily overtime. Additionally, broad inflationary pressure, an increase in food costs with higher occupancy during the year, and higher repairs and maintenance volume contributed to the increase in the segment's same community facility operating expense. The increase in the segment's facility operating expense was partially offset by the disposition of communities since the beginning of the prior year, which resulted in $14.1 million less in facility operating expense during the year ended December 31, 2022 compared to the prior year. The segment's facility operating expense for the years ended December 31, 2022 and 2021 includes $12.3 million and $32.3 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. The segment's same community facility operating expense for the years ended December 31, 2022 and 2021 excludes $6.2 million and $1.6 million, respectively, of natural disaster expense, consisting primarily of remediation of storm damage as a result of Hurricane Ian and Winter Storm Elliott in 2022. 53 CCRCs Segment The following table summarizes the operating results and data for our CCRCs segment for the years ended December 31, 2022 and 2021, including operating results and data on a same community basis. [[GREPCENT_TABLE]] [["(in thousands, except communities, units, occupancy, RevPAR, and RevPOR)","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","Amount","","Percent"],["Resident fees","$","322,644","","","$","304,425","","","$","18,219","","","6.0","%"],["Other operating income","$","8,933","","","$","1,788","","","$","7,145","","","NM"],["Facility operating expense","$","288,092","","","$","272,104","","","$","15,988","","","5.9","%"],["Number of communities (period end)","19","","","19","","","\u2014","","","\u2014","%"],["Total average units","5,196","","","5,307","","","(111)","","","(2.1)","%"],["RevPAR","$","5,138","","","$","4,753","","","$","385","","","8.1","%"],["Occupancy rate (weighted average)","73.4","%","","70.6","%","","280","bps","","n/a"],["RevPOR","$","6,997","","","$","6,733","","","$","264","","","3.9","%"],["Same Community Operating Results and Data"],["Resident fees","$","256,478","","","$","235,205","","","$","21,273","","","9.0","%"],["Other operating income","$","6,771","","","$","1,180","","","$","5,591","","","NM"],["Facility operating expense","$","225,214","","","$","205,824","","","$","19,390","","","9.4","%"],["Number of communities","15","","","15","","","\u2014","","","\u2014","%"],["Total average units","3,970","","","3,975","","","(5)","","","(0.1)","%"],["RevPAR","$","5,384","","","$","4,931","","","$","453","","","9.2","%"],["Occupancy rate (weighted average)","74.0","%","","70.6","%","","340","bps","","n/a"],["RevPOR","$","7,279","","","$","6,987","","","$","292","","","4.2","%"]] [[/GREPCENT_TABLE]] The increase in the segment's resident fees was primarily attributable to an increase in the segment's same community RevPAR, comprised of a 340 basis point increase in same community weighted average occupancy and a 4.2% 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 in-place rent increases and an occupancy mix shift to more skilled nursing services within the segment. The increase in the segment's resident fees was partially offset by the disposition of one community (120 units) since the beginning of the prior year period, which resulted in $6.5 million less in resident fees during the year ended December 31, 2022 compared to the prior year. The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including a $14.3 million, or 10.1%, increase in the segment's same community labor expense primarily resulting from merit and market wage rate adjustments as well as an increase in the use of premium labor, primarily contract labor and overtime. Additionally, broad inflationary pressure, higher repairs and maintenance volume, and an increase in food costs with higher occupancy during the year contributed to the increase in the segment's same community facility operating expense. The increase in the segment's facility operating expense was partially offset by the disposition of one community since the beginning of the prior year, which resulted in $7.4 million less in facility operating expense during the year ended December 31, 2022 compared to the prior year. The segment's facility operating expense for the years ended December 31, 2022 and 2021 includes $2.9 million and $7.4 million, respectively, of incremental direct costs to respond to the COVID-19 pandemic. 54 Operating Results - Other Income and Expense Items The following table summarizes other income and expense items in our operating results for the years ended December 31, 2022 and 2021. [[GREPCENT_TABLE]] [["(in thousands)","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","Amount","","Percent"],["Management fees","$","12,020","","","$","20,598","","","$","(8,578)","","","(41.6)","%"],["Reimbursed costs incurred on behalf of managed communities","147,361","","","181,445","","","(34,084)","","","(18.8)","%"],["Costs incurred on behalf of managed communities","147,361","","","181,445","","","(34,084)","","","(18.8)","%"],["General and administrative expense","168,594","","","184,916","","","(16,322)","","","(8.8)","%"],["Facility operating lease expense","165,294","","","174,358","","","(9,064)","","","(5.2)","%"],["Depreciation and amortization","347,444","","","337,613","","","9,831","","","2.9","%"],["Asset impairment","29,618","","","23,003","","","6,615","","","28.8","%"],["Loss (gain) on sale of communities, net","(73,850)","","","\u2014","","","73,850","","","NM"],["Loss (gain) on facility operating lease termination, net","\u2014","","","(2,003)","","","(2,003)","","","NM"],["Interest income","6,935","","","1,349","","","5,586","","","NM"],["Interest expense","204,717","","","195,140","","","9,577","","","4.9","%"],["Gain (loss) on debt modification and extinguishment, net","(1,357)","","","(1,932)","","","(575)","","","(29.8)","%"],["Equity in earnings (loss) of unconsolidated ventures","(10,782)","","","10,394","","","(21,176)","","","NM"],["Non-operating gain (loss) on sale of assets, net","595","","","288,835","","","(288,240)","","","(99.8)","%"],["Other non-operating income (loss)","12,114","","","5,903","","","6,211","","","105.2","%"],["Benefit (provision) for income taxes","1,559","","","8,163","","","(6,604)","","","(80.9)","%"]] [[/GREPCENT_TABLE]] Management Fees. The decrease in management fees was primarily attributable to the transition of management arrangements on 43 net communities since the beginning of the prior year, generally for management arrangements on certain former unconsolidated ventures in which we sold our interest and interim management arrangements on formerly leased communities. Reimbursed Costs Incurred on Behalf of Managed Communities and Costs Incurred on Behalf of Managed Communities. The decrease in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year, partially offset by an increase in reimbursed community labor costs for communities managed in both years. General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to decreases in compensation costs as a result of reductions in our corporate headcount in the prior year related to the HCS Sale, estimated incentive compensation costs, and transaction and organizational restructuring costs. General and administrative expense includes transaction and organizational restructuring costs of $1.2 million and $3.8 million for the years ended December 31, 2022 and 2021, 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. For the three months ending March 31, 2023, we expect our general and administrative expense will include approximately $3.0 million of organizational restructuring costs, primarily for severance costs for our recently announced senior leadership changes. Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to expense reductions for lease incentives received for capital expenditures since the beginning of the prior year, expense reductions subsequent to the recognition of impairment of operating lease right-of-use assets since the beginning of the prior year, and lease termination activity since the beginning of the prior year. 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 for leased communities since the beginning of the prior year. 55 Asset Impairment. During the current year, we recorded $29.6 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased occupancy and future cash flow estimates as a result of the continuing impacts of the COVID-19 pandemic and for natural disaster related property damage sustained at certain communities during the year, including property damage sustained from Hurricane Ian in September 2022 and Winter Storm Elliott in December 2022. During the prior year, we recorded $23.0 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic and for natural disaster related property damage sustained at certain communities during the year. Loss (Gain) on Sale of Communities, net. During the current year, we recognized a $73.9 million non-cash gain on sale of communities for the amendment of leases for 16 communities that were previously accounted for as failed sale-leaseback transactions, as the amendment resulted in the transfer of control of the assets of the communities for accounting purposes and qualification as a sale. Refer to Note 9 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the amendment. Interest Expense. The increase in interest expense was primarily due to a $16.5 million increase in interest expense on long-term debt primarily as a result of increases in variable interest rates, partially offset by increases in the fair value of interest rate derivatives. Equity in Earnings (Loss) of Unconsolidated Ventures. The change in equity in earnings (loss) of unconsolidated ventures was primarily due to the gain on sale of assets recognized by our unconsolidated entrance fee venture for the sale of the two remaining entry fee CCRCs during the prior year. The equity in loss of unconsolidated ventures for the current year was primarily for our share of the operating results of the HCS Venture. Non-operating Gain (Loss) on Sale of Assets, net. The decrease in gain on sale of assets is due to the $286.5 million gain recognized for the HCS Sale in the prior year. Other Non-operating Income (Loss). The increase in other non-operating income is due to increased income recognized for insurance recoveries from our property and casualty insurance policies. Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the years ended December 31, 2022 and 2021 was primarily due to the tax impact of the HCS Sale in the prior year. We recorded an aggregate deferred federal, state, and local tax benefit of $58.4 million for the year ended December 31, 2022. The tax benefit was offset by an increase in the valuation allowance of $57.1 million resulting from current operating losses and the anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax expense of $3.2 million in the year ended December 31, 2021, of which $104.3 million was recorded as a result of the HCS Sale, offset by a benefit of $101.1 million as a result of the operating loss for the year ended December 31, 2021. The tax expense was offset by a decrease in the valuation allowance of $13.0 million, resulting from the HCS Sale, current operating losses, and the anticipated reversal of future tax liabilities offset by future tax deductions. Liquidity and Capital Resources This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measure. 56 Liquidity The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash flows, and our Adjusted Free Cash Flow. [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Increase (Decrease)"],["(in thousands)","2022","","2021","","Amount","","Percent"],["Net cash provided by (used in) operating activities","$","3,281","","","$","(94,634)","","","$","97,915","","","NM"],["Net cash provided by (used in) investing activities","(67,429)","","","181,457","","","(248,886)","","","NM"],["Net cash provided by (used in) financing activities","100,382","","","(113,657)","","","214,039","","","NM"],["Net increase (decrease) in cash, cash equivalents, and restricted cash","36,234","","","(26,834)","","","63,068","","","NM"],["Cash, cash equivalents, and restricted cash at beginning of year","438,314","","","465,148","","","(26,834)","","","(5.8)","%"],["Cash, cash equivalents, and restricted cash at end of year","$","474,548","","","$","438,314","","","$","36,234","","","8.3","%"],["Adjusted Free Cash Flow","$","(201,385)","","","$","(286,694)","","","$","85,309","","","29.8","%"]] [[/GREPCENT_TABLE]] The change in net cash provided by (used in) operating activities was attributable primarily to a $65.6 million increase in government grants and credits received and an increase in same community revenue compared to the prior year. These changes were partially offset by an increase in same community facility operating expense and a decrease in lessor reimbursements for capital expenditures for operating leases compared to the prior year. Net cash provided by operating activities of $3.3 million in the current year includes $34.6 million of repayments and recoupments in the current year as a result of the temporary liquidity relief under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") received in 2020. Net cash used in operating activities of $94.6 million in the prior year reflects the significant disruption on our business as a result of the COVID-19 pandemic and $52.4 million of repayments and recoupments in the prior year as a result of the temporary liquidity relief under the CARES Act received in 2020. The change in net cash provided by (used in) investing activities was primarily attributable to $305.8 million of net proceeds from the HCS Sale received in the prior year, a $36.1 million decrease in distributions received from unconsolidated ventures compared to the prior year, a $20.3 million increase in cash paid for capital expenditures compared to the prior year, and a $16.8 million decrease in net proceeds from the sale of other assets compared to the prior year. These changes were partially offset by a $98.6 million decrease in purchases of marketable securities and a $45.8 million increase in proceeds from sales and maturities of marketable securities compared to the prior year period. The change in net cash provided by (used in) financing activities was primarily attributable to a $160.4 million decrease in repayment of debt and financing lease obligations, a $139.4 million increase in proceeds from issuance of the Units, and a $15.9 million decrease related to payments in connection with the capped call transactions in the prior year, partially offset by a $98.7 million decrease in debt proceeds compared to the prior year period. The change in Adjusted Free Cash Flow was primarily attributable to a $65.6 million increase in government grants and credits received and an increase in same community revenue compared to the prior year period. These changes were partially offset by an increase in same community facility operating expense and a $30.8 million increase in non-development capital expenditures, net compared to the prior year period. Our principal sources of liquidity have historically been from: •cash balances on hand, cash equivalents, and marketable securities; •cash flows from operations; •proceeds from our credit facilities; •funds generated through unconsolidated venture arrangements; •proceeds from mortgage financing or refinancing of various assets; •funds raised in the debt or equity markets; and •proceeds from the disposition of assets. Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. We also have received pandemic-related government relief, including cash grants. 57 Our liquidity requirements have historically arisen from: •working capital; •operating costs such as labor costs, severance costs, general and administrative expense, and supply costs; •debt, interest, and lease payments; •acquisition consideration, lease termination and restructuring costs, and transaction and integration costs; •capital expenditures and improvements, including the renovation, expansion, redevelopment, and repositioning of our current communities and the development of new communities; •cash collateral required to be posted in connection with our financial instruments and insurance programs; •purchases of common stock under our share repurchase authorizations; •other corporate initiatives (including integration, information systems, branding, and other strategic projects); and •prior to 2009, dividend payments. Over the near-term, we expect that our liquidity requirements will primarily arise from: •working capital; •operating costs such as labor costs, severance costs, general and administrative expense, and supply costs; •debt, interest, and lease payments; •transaction costs and investment in our healthcare and wellness initiatives; •capital expenditures and improvements, including the renovation of our current communities and remediation or replacement of assets as a result of casualty losses; •cash collateral required to be posted in connection with our financial instruments and insurance programs; and •other corporate initiatives (including information systems and other strategic projects). We are highly leveraged and have significant debt and lease obligations. As of December 31, 2022, we had $3.9 billion of debt outstanding at a weighted average interest rate of 5.08%. As of December 31, 2022, our 2023 mortgage debt maturities are $29.7 million, excluding recurring monthly principal payments. As of December 31, 2022, we had $1.0 billion of operating and financing lease obligations. For the twelve months ending December 31, 2023, we will be required to make approximately $233.4 million and $48.6 million of cash lease payments in connection with our existing operating and financing leases, respectively. As of December 31, 2022, we had $72.6 million of letters of credit and no cash borrowings were outstanding under our $80.0 million secured credit facility. The credit facility matures on January 15, 2024 and we have the option to extend the facility for two additional terms of one year each subject to the satisfaction of certain conditions. We also had a separate secured letter of credit facility providing for up to $15.0 million of letters of credit as of December 31, 2022, under which $13.9 million had been issued as of that date. Total liquidity of $452.6 million as of December 31, 2022 included $398.9 million of unrestricted cash and cash equivalents (excluding restricted cash of $75.7 million), $48.7 million of marketable securities, and $5.0 million of availability on our secured credit facility. Total liquidity as of December 31, 2022 decreased $84.2 million from total liquidity of $536.8 million as of December 31, 2021. The decrease was primarily attributable to negative $201.4 million of Adjusted Free Cash Flow and $236.6 million of repayment of mortgage debt, partially offset by $220.0 million of proceeds from mortgage debt and $139.4 million of proceeds from the issuance of the Units. As of December 31, 2022, our current liabilities exceeded current assets by $4.1 million. Included in our current liabilities is $200.8 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 consolidated balance sheet. We currently estimate our historical principal sources of liquidity, primarily our cash flows from operations, together with cash balances on hand, cash equivalents, and marketable securities will be sufficient to fund our liquidity needs for at least the next 12 months. We continue to seek opportunities to preserve and enhance our liquidity, including through increasing our RevPAR, maintaining expense discipline, continuing to refinance maturing debt, continuing to evaluate our capital structure and the state of debt and equity markets, and monetizing non-strategic or underperforming owned assets. There is no assurance that financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in monetizing certain assets. Our 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." The amount of mortgage financing available for our communities is generally dependent on their appraised 58 values and performance. In addition, our inability to satisfy underwriting criteria for individual communities may limit our access to our historical lending sources for such communities, including Fannie Mae and Freddie Mac. Due to lower operating performance for certain of our communities resulting from the COVID-19 pandemic, during 2021 and 2022 we sought and obtained non-agency mortgage financings to partially refinance maturing Freddie Mac and Fannie Mae indebtedness. We have completed the refinancing of all of our debt maturities due in 2023, except for $29.7 million of mortgage debt secured by an asset planned for sale. Our inability to obtain refinancing proceeds sufficient to cover 2024 and later maturing indebtedness could adversely impact our liquidity, and may cause us to seek additional alternative sources of financing, which may be less attractive or unavailable. Shortfalls in cash flows from estimated operating results or other principal sources of liquidity may have an adverse impact on our ability to fund our planned capital expenditures, to pursue any potential lease restructuring opportunities that we identify, or to fund investments to support our strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us. The closing of the planned sale transaction is subject to the satisfaction of various closing conditions, including the receipt of regulatory approvals. There can be no assurance that the transaction will close or, if it does, when the actual closing will occur. 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 $500 per unit), and other major building infrastructure projects (including replacements of major building systems). Corporate capital expenditures include those for information technology systems and equipment, the expansion of our support platform and the remediation or replacement of assets as a result of casualty losses. Development capital expenditures include community expansions, major community redevelopment and repositioning projects, and the development of new communities. With our development capital expenditures program, we intend to expand, redevelop, and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These development projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications. The following table summarizes our capital expenditures for the year ended December 31, 2022 for our consolidated business. [[GREPCENT_TABLE]] [["(in millions)"],["Community-level capital expenditures, net (1)","$","138.7"],["Corporate capital expenditures, net (2)","29.5"],["Non-development capital expenditures, net (3)","168.2"],["Development capital expenditures, net","6.2"],["Total capital expenditures, net","$","174.4"]] [[/GREPCENT_TABLE]] (1)Reflects the amount invested, net of lessor reimbursements of $25.7 million. (2)Includes $9.7 million of remediation costs at our communities resulting from natural disasters, including $8.9 million of capital expenditures for property remediation resulting from the impact of Hurricane Ian. (3)Amount is included in Adjusted Free Cash Flow. In the aggregate, we expect our full-year 2023 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $220.0 million, including remediation costs at our communities resulting from recent natural disasters. We anticipate that our 2023 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, reimbursements from lessors, and approximately $20.0 million of reimbursement from our property and casualty insurance policies. As of December 31, 2022, the average age of the buildings in our consolidated senior housing portfolio was approximately 25 years. Our community-level non-development capital expenditures, net of lessor reimbursements, were $2,651 per unit in 2022, and our 2023 plans equate to approximately $3,200 per unit. The planned increase in our non-development capital expenditures, net of lessor reimbursements, for 2023 is primarily attributable to reduced lessor reimbursements under the terms of our community leases, broad inflationary pressures, increased remediation costs at our communities resulting from recent natural disasters, and increased replacements of major building systems. To support our strategy and to protect the value of our community portfolio and ensure that our communities are in appropriate 59 physical condition, over the intermediate term, we expect that our community-level non-development capital expenditures, net of lessor reimbursements, will be at annual levels in a similar range of recent and 2023 projected per unit spend. We have no planned development capital expenditures for 2023, as we plan to prioritize our capital expenditures on community-level non-development expenditures for the near-term in order to support our communities and execution on our strategy. Over the longer term, we will continue to invest in our development capital expenditures program through which we expand, reposition, and redevelop selected existing senior living communities where economically advantageous. Funding our planned capital expenditures, any potential lease restructuring opportunities that we identify, or investments to support our strategy may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences, or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon our plans. Indebtedness As of December 31, 2022, we had $3.9 billion of debt outstanding, at a weighted average interest rate of 5.08%. As of such date, 92.0%, or $3.5 billion, of our total debt obligations represented non-recourse property-level mortgage financings. As of December 31, 2022, we had approximately $2.3 billion of long-term fixed rate debt (including our $230.0 million principal amount of 2.00% convertible senior notes due 2026 and our $25.6 million principal amount of the senior amortizing notes component of the Units previously described), at a weighted average interest rate of 4.00%. As of December 31, 2022, we had approximately $1.6 billion of long-term variable rate debt, at a weighted average interest rate of 6.68%. Increases in prevailing interest rates as a result of inflation or other factors will increase our payment obligations on our variable-rate obligations to the extent they are unhedged and may increase our future borrowing and hedging costs. In the normal course of business, we enter into interest rate agreements with major financial institutions to manage our risk above certain interest rates on variable rate debt. Although we have interest rate cap or swap agreements in place for a majority of our long-term variable-rate debt, these agreements only limit our exposure to increases in interest rates above certain levels and generally must be renewed every two to three years. As of December 31, 2022, 78% of our $1.6 billion of outstanding long-term variable rate debt is indexed to LIBOR plus a weighted average margin of 229 basis points and 22% of our outstanding long-term variable rate debt is indexed to SOFR plus a weighted average margin of 237 basis points. As of such date, $1.4 billion, or 92%, of our long-term variable rate debt is subject to interest rate cap or swap agreements, and $128.7 million of our long-term variable rate debt is not subject to any interest rate cap or swap agreements. For our LIBOR and SOFR interest rate cap and swap agreements as of December 31, 2022, the weighted average fixed interest rate is 4.14%, and the weighted average remaining term is 1.2 years. Many of our long-term variable rate debt instruments include provisions that obligate us to obtain additional interest rate cap agreements upon the maturity of the existing interest rate cap agreements. The annual aggregate scheduled maturities (including recurring principal payments) of long-term debt outstanding as of December 31, 2022 are as follows (in thousands). [[GREPCENT_TABLE]] [["Years Ending December 31,","","","","","Long-term Debt","Weighted Rate"],["2023","","","","","$","73,176","","6.47","%"],["2024","","","","","310,214","","4.70","%"],["2025","","","","","573,885","","6.41","%"],["2026","","","","","304,779","","2.64","%"],["2027","","","","","959,872","","5.53","%"],["Thereafter","","","","","1,658,082","","4.81","%"],["Total obligations","","","","","3,880,008","","5.08","%"],["Less amount representing deferred financing costs, net","","","","","(29,866)"],["Total","","","","","$","3,850,142"]] [[/GREPCENT_TABLE]] 60 Convertible Senior Notes On October 1, 2021, we issued $230.0 million principal amount of 2.00% convertible senior notes due 2026 (the "Notes"). We received net proceeds of $224.3 million at closing after the deduction of the initial purchasers’ discount. We used $15.9 million of the net proceeds to pay the cost of the capped call transactions described below. Additionally, we used the remaining net proceeds together with cash on hand to repay $284.4 million of long-term mortgage debt and a $45.0 million note payable. The Notes were issued pursuant to, and are governed by, the Indenture dated as of October 1, 2021 by and between us and American Stock Transfer & Trust Company, LLC, as trustee. The Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of our indebtedness that is not so subordinated. The Notes are effectively junior in right of payment to any of our 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 our current or future subsidiaries. The Notes bear interest at 2.00% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2026, unless earlier converted, redeemed or repurchased in accordance with their terms. Holders of the Notes may convert all or any portion of their Notes at their option at any time prior to the close of business on the business day immediately preceding July 15, 2026, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock 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 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the Notes on each such trading day; (3) if we call any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date, but only with respect to the Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events. On or after July 15, 2026, holders may convert all or any portion of their 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, we will satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock at our election. The conversion rate for the Notes is initially 123.4568 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $8.10 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 or following the issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert our Notes in connection with such a corporate event or who elects to convert any Notes called (or deemed called) for redemption during the related redemption period in certain circumstances. We may not redeem the Notes prior to October 21, 2024. We may redeem for cash all or (subject to certain limitations) any portion of the Notes, at our option, on or after October 21, 2024 and prior to the 51st scheduled trading day immediately preceding the maturity date if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes. If we undergo a fundamental change (as defined in the Indenture) prior to the maturity date, holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Notes and the shares of common stock issuable upon conversion of the Notes, if any, were issued to the initial purchasers in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended. The Notes were resold by the initial purchasers to persons whom the initial purchasers reasonably believed are "qualified institutional buyers," as defined in, and in accordance with, Rule 144A under the Securities Act. In connection with the offering of the Notes, we entered into privately negotiated capped call transactions ("Capped Call Transactions") with each of Bank of America, N.A., Royal Bank of Canada, Wells Fargo Bank, National Association or their 61 respective affiliates (the "Capped Call Counterparties"). The Capped Call Transactions initially cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Notes and initially have an exercise price of $8.10 per share of common stock. The cap price of the Capped Call Transactions is initially approximately $9.90 per share of our common stock, representing a premium of 65% above the last reported sale price of $6.00 per share of our common stock on September 28, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are expected generally to reduce or offset potential dilution to holders of our common stock upon conversion of the Notes and/or offset the potential cash payments that we could be required to make in excess of the principal amount of any converted Notes upon conversion thereof, with such reduction and/or offset subject to a cap based on the cap price. The Capped Call Transactions are separate transactions entered into by us with the Capped Call Counterparties and are not part of the terms of the Notes. The Capped Call Transactions had a cost of $15.9 million, which was paid on October 1, 2021 from the proceeds of the Notes. We account for Capped Call Transactions separately from the Notes and recognized the cost as a reduction of additional paid-in capital in the year ended December 31, 2021 as the Capped Call Transactions are indexed to our common stock. Credit Facilities On December 11, 2020, we entered into a revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of up to $80.0 million which can be drawn in cash or as letters of credit. The credit facility matures on January 15, 2024 and we have the option to extend the facility for two additional terms of one year each subject to the satisfaction of certain conditions. Amounts drawn under the facility will bear interest at SOFR plus an applicable margin which was 2.75% as of December 31, 2022. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of December 31, 2022. The revolving credit facility is currently secured by first priority mortgages and negative pledges on certain of our communities. Available capacity under the facility will vary from time to time based upon borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and the variable interest rate of the credit facility. As of December 31, 2022, $72.6 million of letters of credit and no cash borrowings were outstanding under our $80.0 million secured credit facility, and the facility had $5.0 million of availability. We also had a separate secured letter of credit facility providing up to $15.0 million of letters of credit as of December 31, 2022 under which $13.9 million had been issued as of that date. Long-Term Leases As of December 31, 2022, we operated 295 communities under long-term leases (246 operating leases and 49 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. We typically 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. 62 The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or leased property revenue. Approximately 89% of our community lease payments are subject to a weighted average maximum annual increase of 2.7% for community leases subject to fixed annual escalators or variable annual escalators based on the consumer price index subject to a cap. The remaining community lease payments are subject to variable annual escalators primarily based upon the change in the consumer price index. An additional 1% increase in the consumer price index would have resulted in additional cash lease payments of approximately $0.2 million for the twelve months ended December 31, 2022. We are responsible for all operating costs, including repairs, property taxes, and insurance. As of December 31, 2022, the weighted average remaining lease term of our operating and financing leases was 5.2 and 3.6 years, respectively. The lease terms generally provide for renewal or extension options from 5 to 20 years, and, in some instances, purchase options. The lease maturities of our senior housing community leases are as follows without giving effect to future renewals or extension options. [[GREPCENT_TABLE]] [["Years Ending December 31,","","Community Count","","Total Units"],["2023","","35","","","1,468"],["2024","","7","","","904"],["2025","","121","","","10,289"],["2026","","41","","","1,994"],["2027","","24","","","2,555"],["Thereafter","","67","","","3,360"],["Total","","295","","","20,570"]] [[/GREPCENT_TABLE]] 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 capital expenditure plans for 2023 include required minimum spend of approximately $15.0 million for capital expenditures under certain of our community leases. We are required to spend an average of approximately $27.0 million per year for each of the following two years and approximately $19.0 million in aggregate thereafter under the initial lease terms of such leases. 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 year ended December 31, 2022, our cash lease payments for our operating leases were $206.5 million and for our financing leases were $70.3 million. The prospective reclassification of lease costs for 16 communities from financing leases to operating leases resulted in a $22.2 million increase in minimum lease payments due for operating leases in 2023 and an offsetting decrease in minimum lease payments due for financing leases in 2023. Refer to Note 9 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the lease 63 reclassification. The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2022 are as follows (in millions). [[GREPCENT_TABLE]] [["Years Ending December 31,","Operating Lease Payments","Financing Lease Payments","Total Minimum Lease Payments"],["2023","$","233.4","","$","48.6","","$","282.0"],["2024","219.3","","49.3","","268.6"],["2025","217.5","","37.2","","254.7"],["2026","102.7","","37.9","","140.6"],["2027","99.6","","5.8","","105.4"],["Thereafter","135.3","","24.2","","159.5"],["Total minimum lease payments","$","1,007.8","","$","203.0","","$","1,210.8"]] [[/GREPCENT_TABLE]] 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 or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. 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 and a requirement contained in certain of our lease documents for us to maintain stockholders' equity of at least $400.0 million at each quarter-end determination date. As of December 31, 2022, our liquidity and our stockholders' equity were $452.6 million and $582.6 million, respectively. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, our long-term debt and leases are secured by our communities and, in certain cases, 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 December 31, 2022, we are in compliance with the financial covenants of our debt agreements and long-term leases. 64 Summary of Contractual Obligations The following table presents a summary of our material indebtedness and lease obligations, as of December 31, 2022. [[GREPCENT_TABLE]] [["","Payments Due during the Years Ending December 31,"],["(in millions)","2023","","2024","","2025","","2026","","2027","","Thereafter","","Total"],["Principal on long-term debt(1)","$","73.2","","","$","310.2","","","$","573.9","","","$","304.8","","","$","959.9","","","$","1,658.0","","","$","3,880.0"],["Interest on long-term debt(2)","196.8","","","190.9","","","167.0","","","140.5","","","113.8","","","140.8","","","949.8"],["Long-term debt obligations","270.0","","","501.1","","","740.9","","","445.3","","","1,073.7","","","1,798.8","","","4,829.8"],["Lease obligations(3)","282.0","","","268.6","","","254.7","","","140.6","","","105.4","","","159.5","","","1,210.8"],["Total long-term debt and lease obligations","$","552.0","","","$","769.7","","","$","995.6","","","$","585.9","","","$","1,179.1","","","$","1,958.3","","","$","6,040.6"]] [[/GREPCENT_TABLE]] (1)Excludes deferred financing costs of $29.9 million as of December 31, 2022. (2)Represents contractual interest for all fixed-rate obligations and interest on variable rate instruments at the December 31, 2022 rate applicable for each instrument excluding the impact of interest rate cap and swap agreements. As of December 31, 2022, our long-term variable rate debt had a weighted average interest rate of 6.68%. We are subject to market risks from changes in interest rates and increases in prevailing interest rates would increase our payment obligations on our variable-rate obligations. (3)Reflects future minimum lease payments prior to giving effect to variable payments. Critical Accounting Estimates The preparation of our financial statements in conformity with GAAP, requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. We believe the following accounting estimates are the most critical as they require assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates that could have been selected, could have a material impact on our consolidated results of operations or financial condition. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Our significant accounting policies are discussed in Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data." Long-Lived Asset Impairment As of December 31, 2022, our long-lived assets were comprised primarily of $4.5 billion and $0.6 billion of net property, plant and equipment and leasehold intangibles and operating lease right-of-use assets, respectively. We test long-lived assets for recoverability annually during our fourth quarter or whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. Recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, we are required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. In estimating the recoverability of asset groups for purposes of our long-lived asset impairment testing, we utilize future cash flow projections that are generally developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at our cash flow projections, we consider our historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, estimated asset holding periods, and other factors. In estimating the future cash flows of asset groups for purposes of our long-lived asset impairment test, we make certain key assumptions. Those assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that we would receive upon a sale of the assets using estimated capitalization rates in the case of communities. We corroborate the estimated capitalization rates we use in these calculations with capitalization rates observable from recent market transactions. Determining the future cash flows of an asset group involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense growth rates, operating margins, and asset holding periods used to calculate projected future cash flows. Future events may indicate differences from 65 management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, and our decision to dispose of assets, including execution on our ongoing capital recycling program through exiting non-strategic or underperforming owned assets or leases. Significant adverse changes in our future revenues and/or operating margins, significant changes in the market for senior housing, or the valuation of the real estate of senior living communities, as well as other events and circumstances, including, but not limited to, increased competition and changing economic or market conditions, could result in changes in estimated future cash flows and the determination that additional assets are impaired. During 2022, 2021, and 2020, we evaluated long-lived depreciable assets and lease right-of-use assets and determined that the carrying amount of these assets exceeded the undiscounted cash flows for certain of our communities. Estimated fair values were determined for these certain properties and we recorded asset impairment charges. The following is a summary of asset impairment expense for these assets. [[GREPCENT_TABLE]] [["","For the Years Ended December 31,"],["(in millions)","2022","","2021","","2020"],["Operating lease right-of-use assets","$","13.7","","","$","16.6","","","$","76.3"],["Property, plant and equipment and leasehold intangibles, net","15.9","","","6.4","","","29.3"],["Total","$","29.6","","","$","23.0","","","$","105.6"]] [[/GREPCENT_TABLE]] These impairment charges are primarily due to the COVID-19 pandemic and lower than expected operating performance at these communities and reflect the amount by which the carrying amounts of the assets exceeded their estimated fair value. In arriving at our cash flow projections, we considered our estimates of the impacts of the pandemic. Management’s estimates of the impacts of the pandemic are highly dependent on variables that are difficult to predict, as further described in Note 3 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data." Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there have been changes in circumstances that indicate the carrying amount may not be recoverable, the recoverability of asset groups, and, if necessary, the fair value of our assets. As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of the future cash flows of assets, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss. Self-Insurance Liability Accruals We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and professional liability insurance policies for our owned, leased, and managed communities under a master insurance program, our current policies provide for deductibles for each claim and contain various exclusions from coverage. We use our wholly-owned captive insurance company for the purpose of insuring certain portions of our risk retention under our general and professional liability insurance programs. Accordingly, we are, in effect, self-insured for claims that are less than the deductible amounts, for claims that exceed the funding level of our 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. In addition, we maintain a high-deductible workers' compensation program. Third-party insurers are responsible for claim costs above program deductibles and retentions. Outstanding losses and expenses for general liability, professional liability, and workers' compensation are estimated based on the recommendations of independent actuaries and management's estimates. The actuarial methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel, and industry data, and adjust accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. These estimates require significant judgment, and as a result these estimates are uncertain and our actual exposure may be different from our estimates. Subsequent changes in actual experience are monitored and estimates are updated as information becomes available. As of December 31, 2022, we accrued reserves of $104.0 million for general liability, professional liability, and workers' compensation programs. During the years ended December 31, 2022, 2021, and 2020, we reduced our estimate of the amount of 66 aggregate accrued liabilities for these programs based on recent claims experience, resulting in decreases to operating expenses by $12.0 million, $14.2 million, and $4.2 million, respectively. New Accounting Pronouncements See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statement and Supplementary Data" for a discussion of new accounting pronouncements. Non-GAAP Financial Measures This Annual Report on Form 10-K 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, gain/loss on facility operating lease termination, operating lease expense adjustment, non-cash stock-based compensation expense, gain/loss on sale of communities, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, and are primarily comprised of legal, finance, consulting, professional fees, and other third-party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance. We believe that presentation of Adjusted EBITDA as a performance measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day operating decisions; (ii) it provides an assessment of operational factors that management can impact in the short-term, namely revenues and the controllable cost structure of the organization, by eliminating items related to our financing and capital structure and other items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods; and (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. 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. 67 The table below reconciles Adjusted EBITDA from net income (loss). [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["(in thousands)","2022","","2021"],["Net income (loss)","$","(238,340)","","","$","(99,364)"],["Provision (benefit) for income taxes","(1,559)","","","(8,163)"],["Equity in (earnings) loss of unconsolidated ventures","10,782","","","(10,394)"],["Loss (gain) on debt modification and extinguishment, net","1,357","","","1,932"],["Non-operating loss (gain) on sale of assets, net","(595)","","","(288,835)"],["Other non-operating (income) loss","(12,114)","","","(5,903)"],["Interest expense","204,717","","","195,140"],["Interest income","(6,935)","","","(1,349)"],["Income (loss) from operations","(42,687)","","","(216,936)"],["Depreciation and amortization","347,444","","","337,613"],["Asset impairment","29,618","","","23,003"],["Loss (gain) on sale of communities, net","(73,850)","","","\u2014"],["Loss (gain) on facility operating lease termination, net","\u2014","","","(2,003)"],["Operating lease expense adjustment","(34,896)","","","(23,280)"],["Non-cash stock-based compensation expense","14,466","","","16,270"],["Transaction and organizational restructuring costs","1,210","","","3,809"],["Adjusted EBITDA(1)","$","241,305","","","$","138,476"]] [[/GREPCENT_TABLE]] (1)Adjusted EBITDA includes $80.5 million and $12.4 million benefit for the years ended December 31, 2022 and 2021, respectively, of government grants and credits recognized in other operating income. Adjusted Free Cash Flow Adjusted Free Cash Flow is a non-GAAP liquidity measure that we define as net cash provided by (used in) operating activities before: distributions from unconsolidated ventures from cumulative share of net earnings, changes in prepaid insurance premiums financed with notes payable, changes in operating lease assets and liabilities for lease termination, cash paid/received for gain/loss on facility operating lease termination, and lessor capital expenditure reimbursements under operating leases; plus: property insurance proceeds and proceeds from refundable entrance fees, net of refunds; less: non-development capital expenditures and payment of financing lease obligations. Non-development capital expenditures are comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades, and other major building infrastructure projects for our communities and is presented net of lessor reimbursements. Non-development capital expenditures do not include capital expenditures for: community expansions, major community redevelopment and repositioning projects, and the development of new communities. We believe that presentation of Adjusted Free Cash Flow as a liquidity measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective sources of operating liquidity, and to review our ability to service our outstanding indebtedness, pay dividends to stockholders, engage in share repurchases, and make capital expenditures, including development capital expenditures; and (ii) it provides an indicator to management to determine if adjustments to current spending decisions are needed. Adjusted Free Cash Flow has material limitations as a liquidity measure, including: (i) it does not represent cash available for dividends, share repurchases, or discretionary expenditures since certain non-discretionary expenditures, including mandatory debt principal payments, are not reflected in this measure; (ii) the cash portion of non-recurring charges related to gain/loss on facility lease termination generally represent charges/gains that may significantly affect our liquidity; and (iii) the impact of timing of cash expenditures, including the timing of non-development capital expenditures, limits the usefulness of the measure for short-term comparisons. Additionally, Adjusted Free Cash Flow excludes cash used to purchase interest rate cap instruments, as well as any cash provided by settlements of interest rate cap instruments. 68 The table below reconciles Adjusted Free Cash Flow from net cash provided by (used in) operating activities. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["(in thousands)","2022","","2021"],["Net cash provided by (used in) operating activities","$","3,281","","","$","(94,634)"],["Net cash provided by (used in) investing activities","(67,429)","","","181,457"],["Net cash provided by (used in) financing activities","100,382","","","(113,657)"],["Net increase (decrease) in cash, cash equivalents, and restricted cash","$","36,234","","","$","(26,834)"],["Net cash provided by (used in) operating activities","$","3,281","","","$","(94,634)"],["Distributions from unconsolidated ventures from cumulative share of net earnings","(561)","","","(6,191)"],["Changes in operating lease assets and liabilities for lease termination","\u2014","","","2,380"],["Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases","(13,718)","","","(30,965)"],["Non-development capital expenditures, net","(168,166)","","","(137,410)"],["Payment of financing lease obligations","(22,221)","","","(19,874)"],["Adjusted Free Cash Flow(1)","$","(201,385)","","","$","(286,694)"]] [[/GREPCENT_TABLE]] (1) Adjusted Free Cash Flow includes: •$69.5 million and $3.9 million benefit for the years ended December 31, 2022 and 2021, respectively, from government grants and credits received. •$3.1 million and $20.8 million recoupment for the years ended December 31, 2022 and 2021, respectively, of accelerated/advanced Medicare payments. •$31.6 million paid during both the years ended December 31, 2022 and 2021, for deferred payroll taxes for the year ended December 31, 2020. •$1.2 million and $3.8 million for the years ended December 31, 2022 and 2021, respectively, for transaction and organizational restructuring costs.