Leases

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Lessee, Operating Leases

Leases

As of December 31, 2019, the Company operated 333 communities under long-term leases (242 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. 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 December 31, 2019, the weighted average remaining lease term of the Company's operating and financing leases was 6.9 and 8.4 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes.

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 lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other lease and debt 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 December 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 consolidated statements of operations) and cash flows from leasing transactions is as follows:

Operating Leases (in thousands)	Year Ended December 31, 2019
Facility operating expense	$	18,677
Facility lease expense	269,666
Operating lease expense	288,343
Operating lease expense adjustment (1)	19,453
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(31,305		)
Operating cash flows from operating leases	$	276,491
Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations	$	28,846

(1) Represents the difference between cash paid and expense recognized. See Note 2 for the Company's accounting policy on the recognition of lease expense.

Financing Leases (in thousands)	Year Ended December 31, 2019
Depreciation and amortization	$	46,646
Interest expense: financing lease obligations	66,353
Financing lease expense	$	112,999
Operating cash flows from financing leases	$	66,353
Financing cash flows from financing leases	22,242
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(3,504		)
Total cash flows from financing leases	$	85,091

A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:

	For the Years Ended December 31,
(in thousands)	2018			2017
Cash basis payment - operating leases	$	324,870		$	365,077
Operating lease expense adjustment	(17,218		)	(20,990		)
Amortization of deferred gain	(4,358		)	(4,366		)
Facility lease expense	$	303,294		$	339,721

As of December 31, 2019, the weighted average discount rate of the Company's operating and financing leases was 8.6% and 7.9%, 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 (the date of the adoption of ASC 842) 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 consolidated balance sheet as of December 31, 2019 are as follows (in thousands):

Year Ending December 31,	Operating Leases			Financing Leases
2020	$	313,106		$	84,858
2021	298,505			85,917
2022	294,513			87,120
2023	290,175			88,460
2024	277,329			90,297
Thereafter	528,969			335,039
Total lease payments	2,002,597			771,691
Purchase option liability and non-cash gain on future sale of property	—			556,667
Imputed interest and variable lease payments	(531,832		)	(493,778		)
Total lease obligations	$	1,470,765		$	834,580

The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases, not recognized on the 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	291,113
2023	285,723
Thereafter	786,647
Total lease payments	$	2,271,977

Lessee, Finance Leases

  Leases

As of December 31, 2019, the Company operated 333 communities under long-term leases (242 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. 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 December 31, 2019, the weighted average remaining lease term of the Company's operating and financing leases was 6.9 and 8.4 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes.

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 lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other lease and debt 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 December 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 consolidated statements of operations) and cash flows from leasing transactions is as follows:

Operating Leases (in thousands)	Year Ended December 31, 2019
Facility operating expense	$	18,677
Facility lease expense	269,666
Operating lease expense	288,343
Operating lease expense adjustment (1)	19,453
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(31,305		)
Operating cash flows from operating leases	$	276,491
Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations	$	28,846

(1) Represents the difference between cash paid and expense recognized. See Note 2 for the Company's accounting policy on the recognition of lease expense.

Financing Leases (in thousands)	Year Ended December 31, 2019
Depreciation and amortization	$	46,646
Interest expense: financing lease obligations	66,353
Financing lease expense	$	112,999
Operating cash flows from financing leases	$	66,353
Financing cash flows from financing leases	22,242
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(3,504		)
Total cash flows from financing leases	$	85,091

A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:

	For the Years Ended December 31,
(in thousands)	2018			2017
Cash basis payment - operating leases	$	324,870		$	365,077
Operating lease expense adjustment	(17,218		)	(20,990		)
Amortization of deferred gain	(4,358		)	(4,366		)
Facility lease expense	$	303,294		$	339,721

As of December 31, 2019, the weighted average discount rate of the Company's operating and financing leases was 8.6% and 7.9%, 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 (the date of the adoption of ASC 842) 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 consolidated balance sheet as of December 31, 2019 are as follows (in thousands):

Year Ending December 31,	Operating Leases			Financing Leases
2020	$	313,106		$	84,858
2021	298,505			85,917
2022	294,513			87,120
2023	290,175			88,460
2024	277,329			90,297
Thereafter	528,969			335,039
Total lease payments	2,002,597			771,691
Purchase option liability and non-cash gain on future sale of property	—			556,667
Imputed interest and variable lease payments	(531,832		)	(493,778		)
Total lease obligations	$	1,470,765		$	834,580

The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases, not recognized on the 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	291,113
2023	285,723
Thereafter	786,647
Total lease payments	$	2,271,977