Note 7 - Long-term Leases

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Leases of Lessee Disclosure [Text Block]

Note 7 – 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 2 to 15 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 the inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.

On 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 12 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 values 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 healthcare 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

At June 30, 2019, we leased from NHI the real property of 35 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.

On January 1, 2007, a 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 5–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 annually with rent thereafter escalating by 4% of the increase in facility revenue over a 2007 base year.

In September 2013 and under the second lease agreement, NHC began operating seven skilled nursing facilities in New Hampshire and Massachusetts. The 15-year lease term consists of base rent of $3,450,000 annually with rent escalating by 4% 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 annually. 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 was $965,000 and $928,000 for the three months ended June 30, 2019 and 2018, respectively. Percentage rent expense under both leases was $1,930,000 and $1,856,000 for the six months ended June 30, 2019 and 2018, 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 June 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 10-year lease with two 5–year renewal options. Under the terms of the leases, base rent totals $5,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the 2014 base year.

Lease Classification

At June 30, 2019, the Company recorded the following on the condensed consolidated balance sheets (in thousands):

Right-of-Use Assets	Balance Sheet Classification	June 30, 2019
Finance lease assets	Net property and equipment	$	18,114
Operating lease right-of-use assets	Operating lease right-of-use assets		214,367
Total		$	232,481

Lease Liabilities	Balance Sheet Classification	June 30, 2019
Current:
Finance lease liabilities	Finance lease obligations, current portion	$	4,043
Operating lease liabilities	Operating lease liabilities, current portion		23,625
Noncurrent:
Finance lease liabilities	Finance lease obligations, less current portion		17,077
Operating lease liabilities	Operating lease liabilities, less current portion		190,742
Total		$	235,487

Weighted-average remaining lease terms and discount rates at June 30, 2019 were as follows:

Weighted-average remaining lease terms (in years)
Finance	4.7
Operating	7.6
Weighted-average discount rate
Finance	6.0	%
Operating	6.0	%

Lease Costs

For the three and six months ended June 30, 2019, the lease costs recorded in the condensed consolidated statement of operations are as follows (in thousands):

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Finance lease costs:
Depreciation of leased assets	$	968	$	1,949
Interest of lease liabilities		334		682
Total finance lease costs		1,302		2,631
Operating lease costs:
Operating lease costs		9,004		18,090
Variable lease costs		965		1,930
Short-term lease costs		228		415
Total operating lease costs		10,197		20,435
Total lease costs	$	11,499	$	23,066

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of June 30, 2019 (in thousands):

	Finance Leases			Operating Leases
2020	$	5,200		$	35,658
2021		5,200			35,351
2022		5,200			35,047
2023		5,200			34,564
2024		3,467			34,369
Thereafter		-			91,294
Total minimum lease payments	$	24,267		$	266,283
Less: amounts representing interest		(3,147	)		(51,916	)
Present value of future minimum lease payments		21,120			214,367
Less: current portion		(4,043	)		(23,625	)
Noncurrent lease liabilities	$	17,077		$	190,742

Other

Supplemental cash flow data for the six months ended June 30, 2019 was as follows (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	18,090
Operating cash flows for finance leases		682
Financing cash flows for finance leases		1,932