Leases

3 Months Ended

Mar. 31, 2020

The Company leases office, warehouse and multi-recreational facilities under non-cancelable operating leases. Also, the Company has operating and finance leases for certain equipment. In addition to base rent, the facility leases generally provide for additional payments to cover common area maintenance charges incurred and to pass along increases in real estate taxes. Also, certain leases provide for additional rent based on revenue or operating results of the respective facilities. The Company accrues for any unpaid common area maintenance charges and real estate taxes on a club-by-club basis. Under the provisions of certain of these leases, the Company is required to maintain irrevocable letters of credit, which amounted to $4,343 as of March 31, 2020. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, current portion of operating lease liabilities, and long-term operating lease liabilities on its condensed consolidated balance sheet. Finance leases are recorded in fixed assets, net, current portion of long-term debt, and long-term debt on its condensed consolidated balance sheet.

Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The leases expire at various times through June 30, 2038 and certain leases may be extended at the Company’s option. Escalation terms on these leases generally include fixed rent escalations, escalations based on an inflation index such as the consumer price index, and fair market value adjustments.

The Company, as landlord, subleases space to third party tenants under non-cancelable operating leases and licenses. In addition to base rent, certain leases provide for additional rent based on increases in real estate taxes, indexation, utilities and defined amounts based on the operating results of the lessee. The sub-leases expire at various times through January 2023.

Property and equipment and lease-related right-of-use assets, along with other long-lived assets, are evaluated for impairment periodically whenever triggering events or indicators exist that the carrying values may not be fully recoverable. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for certain clubs. The Company performed undiscounted cash flow analyses over the long-lived assets of certain clubs with impairment indicators and compared it to the carrying value of those assets. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had carrying values that exceeded their estimated undiscounted cash flows. Fair values of the long-lived assets are estimated using an income approach based on (a) management’s forecast of future cash flows derived from continued operations and (b) the fair value of individual operating lease assets based on estimated market rental rates. Significant estimates are used in determining future cash flows of each club over its remaining lease term including our expectations of future projected cash flows which include revenues, operating expenses, and market conditions. An impairment loss is recorded if the carrying amount of the long-lived asset exceeds its fair value. As a result, the Company recognized a pre-tax charge of $62,865 for impairment of its right-of-use assets and a pre-tax charge of $46,822 for impairment of its club leasehold improvements and furniture and fixtures for the three months ended March 31, 2020. The charges for right-of-use assets were recorded in operating expenses in the consolidated statements of operations.

The balance sheet classification of lease assets and liabilities was as follows:



	Balance Sheet Classification	March 31, 2020
Assets
Operating lease assets, gross	Operating lease right-of-use assets, net	$	634,441
Accumulated lease expense	Operating lease right-of-use assets, net	(87,438		)
Accumulated impairment	Operating lease right-of-use assets, net	(62,865		)
Total operating lease assets	Operating lease right-of-use assets, net	484,138
Finance lease assets, gross	Fixed assets, net	8,842
Accumulated depreciation	Fixed assets, net	(2,559		)
Total finance lease assets	Fixed assets, net	6,283
Total lease assets		$	490,421
Liabilities
Current
Operating leases	Current portion of operating lease liabilities	$	74,106
Finance leases	Current portion of long-term debt	1,920
Non-current
Operating leases	Long-term operating lease liabilities	516,681
Finance leases	Long-term debt	3,864
Total lease liabilities		$	596,571

The components of lease costs were as follows:



	Statement of Operations Classification	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Operating lease costs	Club operating	$	29,504		$	30,022
Amortization of lease assets	Depreciation and amortization	430			259
Interest on lease liabilities	Interest expense	140			54
Finance lease costs		570			313
Variable lease costs	Club operating	179			210
Sublease income	Fees and other revenue	(632		)	866
Total lease costs		$	29,621		$	31,411

As of March 31, 2020, the maturities of our lease liabilities were as follows:



	Operating Leases			Finance Leases			Total
2020	$	89,357		$	1,781		$	91,138
2021	111,432			2,364			113,796
2022	102,979			1,909			104,888
2023	94,679			545			95,224
2024	85,485			—			85,485
2025 and thereafter	352,563			—			352,563
Total lease payments	836,495			6,599			843,094
Less: imputed interest	(245,708		)	(815		)	(246,523		)
Lease liabilities	$	590,787		$	5,784		$	596,571

As of December 31, 2019, future minimum rental payments by fiscal year under non-cancelable leases and future capital lease payments are shown in the chart below.



	Minimum Annual Rental
Year Ending December 31,
2020	$	121,113
2021	113,779
2022	104,904
2023	95,261
2024	85,540
2025 and thereafter	348,857
Total	869,454

The Company, as landlord, leases space to third party tenants under non-cancelable operating leases and licenses. Future minimum rentals receivable under non-cancelable leases are shown in the chart below.



	Minimum Annual Rental
Year Ending December 31,
2020	$	2,301
2021	1,841
2022	1,099
2023	362
2024	258
2025 and thereafter	514
Total	6,375

The weighted average remaining lease term and weighted average discount rate were as follows:



	March 31, 2020
Weighted average remaining lease term
Operating leases	8.5 years
Finance leases	3.0 years
Weighted average discount rate
Operating leases	8.0	%
Finance leases	9.8	%

Supplemental cash flow information related to leases was as follows:



	Three months ended March 31, 2020		Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	29,603	$	29,503
Operating cash flows from finance leases	$	612	$	54
Financing cash flows from finance leases	$	1,970	$	189
Leased assets obtained in exchange for new operating lease liabilities	$	1,548	$	17,812
Leased assets obtained in exchange for new finance lease liabilities	$	3,937	$	934

Leases