Note

– Long-Term Leases

The Company’s lease portfolio primarily consists of finance and operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare offices, and pharmacy warehouses. The original terms of the leases typically range from

two

fifteen

years. Several of the real estate leases include renewal options which vary in length and

may

not

include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.

January 1, 2019,

the Company recorded right-of-use assets and liabilities on the condensed consolidated balance sheets for non-cancelable real estate operating leases with original or remaining lease terms in excess of

one

year. Leases with a lease term of

months or less at inception are

not

recorded on our condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in our condensed consolidated statement of operations. Finance leases remain on the condensed consolidated balance sheets as required by previous accounting guidance.

Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. As most of our leases do

not

provide implicit rates, we have used incremental borrowing rates that were calculated based on information available at the later of the lease commencement date or the adoption date,

January 1, 2019.

The variable components of the lease payment that fluctuate with the operations of a health facility are

not

included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.

Accounting Policy Elections

The Company has elected the package of practical expedients offered in the transition guidance which allows management

not

to reassess lease identification, lease classification, and initial direct costs. The Company has elected the accounting policy practical expedient to exclude recording short-term leases, for all asset classes, as right-of-use assets and lease liabilities on the condensed consolidated balance sheets. Finally, the Company has elected the accounting policy practical expedient to recognize lease components and non-lease components together and

not

as separate parts of a lease for real estate leases.

Operating Leases with NHI

March 31, 2019,

we leased from NHI the real property of

skilled nursing facilities,

seven

assisted living centers and

three

independent living centers under

two

separate lease agreements. As part of the

first

lease agreement, we sublease

four

Florida skilled nursing facilities to a

third

-party operator.

January 1, 2007,

15–year

lease extension began which included

three

additional five–year renewal options. In

December 2012,

NHC extended the lease agreement through the

first

of the

three

additional

five

–year renewal options, which extended the lease date through

2026.

The

two

additional

five

–year renewal options on the lease still remain. Under the terms of the lease, base rent totals

$30,750,000

with rent thereafter escalating by

of the increase in facility revenue over a

2007

base year.

September 2013

and under the

second

lease agreement, NHC began operating

seven

skilled nursing facilities in New Hampshire and Massachusetts. The

-year lease term consists of base rent of

$3,450,000

annually with rent escalating by

of the increase in facility revenue over a

2014

base year. Additionally, NHC has the option to purchase the

seven

facilities from NHI in the

13th

year of the lease for a purchase price of

$49,000,000.

Base rent expense under both NHI lease agreements totals

$34,200,000.

Percentage rent under the leases is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Percentage rent expense under both leases for the periods ending

March 31, 2019

and

2018

was

$965,000

and

$928,000,

respectively.

We have a right of

first

refusal with NHI to purchase any of the properties should NHI receive an offer from an unrelated party during the term of the lease or up to

180

days after termination of the related lease.

Finance

Leases

Effective

March 1, 2014,

NHC began leasing and operating

three

senior healthcare facilities in the state of Missouri under

three

separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the

third

healthcare facility is a memory care facility. Each of the leases is a

ten

-year lease with

two

five–year renewal options. Under the terms of the leases, base rent totals

$5,200,000

annually with rent thereafter escalating by

of the increase in facility revenue over the

2014

base year.

Lease

Classification

March 31, 2019,

the Company recorded the following on the condensed consolidated balance sheets (

in thousands

Right-of-Use Assets	Balance Sheet Classification	March 31, 2019
Finance lease assets	Net property and equipment	$	21,881
Operating lease right-of-use assets	Operating lease right-of-use assets		220,134
Total		$	242,015

Lease Liabilities	Balance Sheet Classification	March 31, 2019
Current:
Finance lease liabilities	Finance lease obligations, current portion	$	6,780
Operating lease liabilities	Operating lease liabilities, current portion		23,353
Noncurrent:
Finance lease liabilities	Finance lease obligations, less current portion		18,110
Operating lease liabilities	Operating lease liabilities, less current portion		196,781
Total		$	245,024

Weighted-average remaining lease terms and discount rates at

March 31, 2019

were as follows:

Weighted-average remaining lease terms (in years)
Finance	4.9
Operating	7.9

Weighted-average discount rate
Finance	6.0	%
Operating	6.0	%

Lease Costs

For the

three

months ended

March 31, 2019,

the lease costs recorded in the condensed consolidated statement of operations are as follows

(in thousands):

Finance lease costs:
Depreciation of leased assets	$	981
Interest of lease liabilities		348
Total finance lease costs		1,329

Operating lease costs:
Operating lease costs		9,086
Variable lease costs		965
Short-term lease costs		187
Total operating lease costs		10,238

Total lease costs	$	11,567

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of

March 31, 2019 (

in thousands

	Finance Leases			Operating Leases
2020	$	7,998		$	35,733
2021		5,200			35,443
2022		5,200			35,112
2023		5,200			34,688
2024		4,767			34,403
Thereafter		--			99,877
Total minimum lease payments		28,365			275,256
Less: amounts representing interest		(3,475	)		(55,122	)
Present value of future minimum lease payments		24,890			220,134
Less: current portion		(6,780	)		(23,353	)
Noncurrent lease liabilities	$	18,110		$	196,781

Other

Supplemental cash flow data for the

three

months ended

March 31, 2019

was as follows

(

in thousands)

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	9,086
Operating cash flows for finance leases		348
Financing cash flows for finance leases		959