Note 6 - Long-term Leases

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Leases of Lessee Disclosure [Text Block]

Note 6 – Long–Term Leases

Upon adopting ASC Topic 842, as noted in Note 1 - Summary of Significant Accounting Policies, 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 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

As of December 31, 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 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 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 for 2019, 2018, and 2017 was $3,587,000, $3,713,000 and $3,057,000, 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 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 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 4% of the increase in facility revenue over the 2014 base year.

Fixed assets recorded under the finance leases, which are included in property and equipment in the consolidated balance sheets, are as follows (in thousands):

	December 31,
	2019			2018
Buildings and personal property	$	39,032		$	39,032
Accumulated amortization		(22,859	)		(18,970	)
	$	16,173		$	20,062

Lease Classification

At December 31, 2019, the Company recorded the following on the consolidated balance sheets (in thousands):

Right-of-Use Assets	Balance Sheet Classification	December 31, 2019
Finance lease assets	Net property and equipment	$	16,173
Operating lease right-of-use assets	Operating lease right-of-use assets		202,909
Total		$	219,082

Lease Liabilities	Balance Sheet Classification	December 31, 2019
Current:
Finance lease liabilities	Finance lease obligations, current portion	$	4,166
Operating lease liabilities	Operating lease liabilities, current portion		24,243
Noncurrent:
Finance lease liabilities	Finance lease obligations, less current portion		14,963
Operating lease liabilities	Operating lease liabilities, less current portion		178,666
Total		$	222,038

Weighted-average remaining lease terms and discount rates at December 31, 2019 is as follows:

Weighted-average remaining lease terms (in years)
Finance	4.2
Operating	7.1
Weighted-average discount rate
Finance	6.0	%
Operating	6.0	%

Lease Costs 

For the year ended December 31, 2019, the lease costs recorded in the consolidated statement of operations are as follows (in thousands):

	Year Ended December 31, 2019
Finance lease costs:
Depreciation of leased assets	$	3,889
Interest of lease liabilities		1,306
Total finance lease costs		5,195
Operating lease costs:
Operating lease costs		35,881
Variable lease costs		3,587
Short-term lease costs		1,050
Total operating lease costs		40,518
Total lease costs	$	45,713

Minimum Lease Payments

The following table summarizes the maturity of our finance and operating lease liabilities as of December 31, 2019 (in thousands):

	Finance Leases			Operating Leases
2020	$	5,200		$	35,569
2021		5,200			35,236
2022		5,200			34,869
2023		5,200			34,475
2024		867			34,319
Thereafter		–			74,150
Total minimum lease payments	$	21,667		$	248,618
Less: amounts representing interest		(2,538	)		(45,709	)
Present value of future minimum lease payments		19,129			202,909
Less: current portion		(4,166	)		(24,243	)
Noncurrent lease liabilities	$	14,963		$	178,666

Other

Supplemental cash flow data for the year ended December 31, 2019 was as follows (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	35,881
Operating cash flows for finance leases		1,306
Financing cash flows for finance leases		3,923