NOTE 11 – LEASES

The Company leases real estate and equipment under cancelable and non-cancelable arrangements. The following table sets forth rent expense by business segment (in thousands):

	Year ended December 31,
	2015		2014		2013
Hospital division:
Buildings:
Ventas	$	118,511	$	118,130	$	107,431
Other landlords		56,186		56,210		55,481
Equipment		31,995		30,823		32,055
		206,692		205,163		194,967
Kindred at Home:
Home health:
Buildings		33,118		7,027		3,621
Equipment		1,607		805		502
		34,725		7,832		4,123
Hospice:
Buildings		16,577		895		892
Equipment		420		55		86
		16,997		950		978
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Buildings		29,423		6,488		6,821
Equipment		1,357		553		505
		30,780		7,041		7,326
RehabCare:
Buildings		1,236		1,314		1,311
Equipment		2,589		2,885		3,415
		3,825		4,199		4,726
Nursing center division:
Buildings:
Ventas		43,948		43,809		40,667
Other landlords		34,398		33,412		38,628
Equipment		7,891		8,348		8,493
		86,237		85,569		87,788
Support center:
Buildings		3,233		2,109		2,120
Equipment		120		176		164
		3,353		2,285		2,284
Totals:
Buildings:
Ventas		162,459		161,939		148,098
Other landlords		174,171		107,455		108,874
Equipment		45,979		43,645		45,220
	$	382,609	$	313,039	$	302,192

NOTE 11 – LEASES (Continued)

Various facility leases include contingent annual rent escalators based upon a change in the Consumer Price Index or other agreed upon terms such as a patient revenue test. These contingent rents are included in rent expense in the year incurred. The Company recorded contingent rent of $0.5 million, $0.8 million and $2.5 million for the years ended December 31, 2015, 2014 and 2013, respectively, including both continuing operations and discontinued operations.

Future minimum payments under non-cancelable operating leases are as follows (in thousands):

	Minimum payments
	Ventas		Other		Total
2016	$	166,802	$	159,519	$	326,321
2017		168,290		131,676		299,966
2018		139,356		113,576		252,932
2019		125,030		100,686		225,716
2020		107,840		87,019		194,859
Thereafter		372,970		419,999		792,969

Ventas master lease agreements

At December 31, 2015, the Company leased from Ventas and its affiliates 38 nursing centers and 38 TC hospitals under four master lease agreements (as amended, the “Master Lease Agreements”). Included in the 38 nursing centers leased at December 31, 2015 are the two remaining 2014 Expiring Facilities. For accounting purposes, the Company reflected the operating results of the 2014 Expiring Facilities as discontinued operations in the accompanying consolidated statement of operations for all historical periods.

There are one or more bundles of leased properties under each Master Lease Agreement, with each bundle containing leased nursing centers and/or TC hospitals.

2014 lease expirations

On December 27, 2014, the Company entered into an agreement with Ventas to transition the operations for the 2014 Expiring Facilities. Each lease terminates when the operation of such nursing center is transferred to a new operator. Through December 31, 2015, the Company transferred the operations of seven of the 2014 Expiring Facilities and recorded a gain on divestiture of $2.0 million ($1.2 million net of income taxes). The lease term for eight of these nursing centers was scheduled to expire on April 30, 2018. The lease term for the ninth of these nursing centers was scheduled to expire on April 30, 2020. At December 31, 2015, the Company continued to operate the two remaining facilities and will continue to do so until the operations are transferred. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and the Company reflected the operating results as discontinued operations in the accompanying consolidated statement of operations for all historical periods. Under the terms of the agreement to transition operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015. The early termination fee was accrued as rent expense in discontinued operations in 2014.

NOTE 11 – LEASES (Continued)

Renewals

Following the exit of the two remaining 2014 Expiring Facilities, the Company will lease 36 nursing centers and 38 TC hospitals from Ventas within eight separate renewal bundles. Each bundle may be renewed for at least one five-year renewal term, provided notice of renewal is provided between 12 and 18 months prior to the expiration of the lease term. The following chart sets forth the remaining lease renewals under the Master Lease Agreements:

							Facility renewals
Master Lease	Renewal bundle name		Expiration date		Renewal date		Nursing centers		TC hospitals
1		3		April 30, 2018		October 31, 2016 – April 29, 2017		4		1
1		8		April 30, 2020		October 31, 2018 – April 29, 2019		7		2
2		1		April 30, 2018		October 31, 2016 – April 29, 2017		3		3
2		4		April 30, 2020		October 31, 2018 – April 29, 2019		7		1
4		1		April 30, 2018		October 31, 2016 – April 29, 2017		4		2
5		1		April 30, 2023		October 31, 2021 – April 29, 2022		–		10
5		2		April 30, 2025		October 31, 2023 – April 29, 2024		–		19
5		3		April 30, 2025		October 31, 2023 – April 29, 2024		11		–

Conditions to effectiveness of renewals

The Company may not extend the Master Lease Agreements beyond any previously exercised renewal term if, at the time the Company seeks such extension and at the time such extension takes effect: (1) an event of default has occurred and is continuing or (2) a Medicare/Medicaid event of default and/or a licensed bed event of default has occurred and is continuing with respect to one, two or three leased properties, depending on the number of leased properties under a particular Master Lease Agreement. The renewal term of each Master Lease Agreement is subject to termination upon default by the Company and certain other conditions described in the Master Lease Agreements.

Rent appraisal process and the Company’s right to revoke such renewals

Under the Master Lease Agreements, if the Company provides Ventas with notice that it intends to renew one or more renewal bundles following the initial renewal term, Ventas may then initiate an appraisal process to establish a new fair market rental (as defined in the Master Lease Agreements) (“FMR”) for any or all of the bundles being renewed.

Under the appraisal process, an independent appraiser determines the FMR for each renewal bundle and each property within such renewal bundle. Ventas, in its sole discretion, then determines whether: (1) to accept the appraised FMR for the renewal bundle in the aggregate or (2) make no changes to the current base rent and contingent annual rent escalator for the renewal bundle. If Ventas selects the new FMR for a renewal bundle, then the new FMR would become effective at the start of the renewal term unless the Company elects to revoke its renewal by the applicable deadline set forth in the Master Lease Agreements.

The determination of FMR requires certain levels of subjectivity and judgment related to the many variables that may be considered under the circumstances. As a result, it is important for investors to consider the possibility of a wide range of outcomes with respect to the appraisal process.