Leases

3 Months Ended

Mar. 31, 2019

As of March 31, 2019, the Company operated 342 communities under long-term leases (251 operating leases and 91 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of such leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.

The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of March 31, 2019, the weighted-average remaining lease term of the Company’s operating and financing leases was 7.5 and 9.0 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. Refer to Note 4 for more information about the Company’s options to terminate a limited number of community leases under the terms of the Ventas Master Lease and leases with Welltower.

The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum net worth and stockholders’ equity levels and lease coverage ratios, and not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company’s lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements.

The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company’s debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company’s leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.

As of March 31, 2019, the Company is in compliance with the financial covenants of its long-term leases.

A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and cash flows from leasing transactions is as follows:



Operating Leases (in thousands)	Three Months Ended March 31, 2019
Facility operating expense	$	4,625
Facility lease expense	68,668
Operating lease expense	73,293
Operating lease expense adjustment	4,383
Operating cash flows from operating leases	$	77,676

Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations	$	1,358



Financing Leases (in thousands)	Three Months Ended March 31, 2019
Depreciation and amortization	$	11,678
Interest expense: financing lease obligations	16,743
Financing lease expense	$	28,421

Operating cash flows from financing leases	$	16,743
Financing cash flows from financing leases	5,453
Total cash flows from financing leases	$	22,196

As of March 31, 2019, the weighted-average discount rate of the Company’s operating and financing leases was 8.6% and 7.8%, respectively. As the Company's community leases do not contain an implicit rate, the Company utilized its incremental borrowing rate based on information available on January 1, 2019 to determine the present value of lease payments for operating leases that commenced prior to that date.

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of March 31, 2019 are as follows (in thousands):



Year Ending December 31,	Operating Leases			Financing Leases
2019	$	231,489		$	66,190
2020	308,607			89,003
2021	292,531			90,243
2022	289,447			91,633
2023	285,741			93,104
Thereafter	786,649			428,952
Total lease payments	2,194,464			859,125
Purchase option liability and non-cash gain on future sale of property	—			575,276
Imputed interest and variable lease payments	(618,081		)	(565,314		)
Total lease obligations	$	1,576,383		$	869,087

The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases not recognized on the condensed consolidated balance sheet under ASC 840 as of December 31, 2018 are as follows (in thousands):



Year Ending December 31,	Operating Leases
2019	$	310,340
2020	307,493
2021	290,661
2022	291,114
2023	285,723
Thereafter	786,647
Total lease payments	$	2,271,978

Leases

As of March 31, 2019, the Company is in compliance with the financial covenants of its long-term leases.



Operating Leases (in thousands)	Three Months Ended March 31, 2019
Facility operating expense	$	4,625
Facility lease expense	68,668
Operating lease expense	73,293
Operating lease expense adjustment	4,383
Operating cash flows from operating leases	$	77,676

Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations	$	1,358



Financing Leases (in thousands)	Three Months Ended March 31, 2019
Depreciation and amortization	$	11,678
Interest expense: financing lease obligations	16,743
Financing lease expense	$	28,421

Operating cash flows from financing leases	$	16,743
Financing cash flows from financing leases	5,453
Total cash flows from financing leases	$	22,196



Year Ending December 31,	Operating Leases			Financing Leases
2019	$	231,489		$	66,190
2020	308,607			89,003
2021	292,531			90,243
2022	289,447			91,633
2023	285,741			93,104
Thereafter	786,649			428,952
Total lease payments	2,194,464			859,125
Purchase option liability and non-cash gain on future sale of property	—			575,276
Imputed interest and variable lease payments	(618,081		)	(565,314		)
Total lease obligations	$	1,576,383		$	869,087



Year Ending December 31,	Operating Leases
2019	$	310,340
2020	307,493
2021	290,661
2022	291,114
2023	285,723
Thereafter	786,647
Total lease payments	$	2,271,978