Leases

9 Months Ended

Sep. 30, 2020

Leases [Abstract]

Leases

Leases

As of September 30, 2020, the Company operated 302 communities under long-term leases (236 operating leases and 66 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. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.

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, 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 September 30, 2020, 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:

	Three Months Ended September 30,				Nine Months Ended September 30,
Operating Leases (in thousands)	2020		2019		2020		2019
Facility operating expense	$	4,755	$	4,532	$	14,540	$	13,761
Facility lease expense	51,620		67,253		178,480		203,610
Operating lease expense	56,375		71,785		193,020		217,371
Operating lease expense adjustment (1)	117,322		4,814		132,276		13,626
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(3,131)		(11,043)		(13,640)		(12,043)
Operating cash flows from operating leases	$	170,566	$	65,556	$	311,656	$	218,954

(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense recognized in accordance with Accounting Standards Codification, Leases ("ASC 842"). Operating cash flows from operating leases for the three and nine months ended September 30, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020.

	Three Months Ended September 30,				Nine Months Ended September 30,
Financing Leases (in thousands)	2020		2019		2020		2019
Depreciation and amortization	$	7,818	$	11,675	$	24,999	$	35,030
Interest expense: financing lease obligations	11,908		16,567		37,082		49,959
Financing lease expense	$	19,726	$	28,242	$	62,081	$	84,989
Operating cash flows from financing leases	$	11,908	$	16,567	$	37,082	$	49,959
Financing cash flows from financing leases	4,548		5,549		14,312		16,502
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(923)		—		(4,337)		—
Total cash flows from financing leases	$	15,533	$	22,116	$	47,057	$	66,461

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of September 30, 2020 are as follows (in thousands):

Year Ending December 31,	Operating Leases		Financing Leases
2020 (three months)	$	53,625	$	15,968
2021	212,133		64,630
2022	195,487		65,234
2023	195,734		65,960
2024	195,462		67,166
Thereafter	482,894		166,745
Total lease payments	1,335,335		445,703
Purchase option liability and non-cash gain on future sale of property	—		412,817
Imputed interest and variable lease payments	(314,725)		(291,524)
Total lease obligations	$	1,020,610	$	566,996

Leases

Leases

As of September 30, 2020, the Company operated 302 communities under long-term leases (236 operating leases and 66 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. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.

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, 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 September 30, 2020, 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:

	Three Months Ended September 30,				Nine Months Ended September 30,
Operating Leases (in thousands)	2020		2019		2020		2019
Facility operating expense	$	4,755	$	4,532	$	14,540	$	13,761
Facility lease expense	51,620		67,253		178,480		203,610
Operating lease expense	56,375		71,785		193,020		217,371
Operating lease expense adjustment (1)	117,322		4,814		132,276		13,626
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(3,131)		(11,043)		(13,640)		(12,043)
Operating cash flows from operating leases	$	170,566	$	65,556	$	311,656	$	218,954

(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense recognized in accordance with Accounting Standards Codification, Leases ("ASC 842"). Operating cash flows from operating leases for the three and nine months ended September 30, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020.

	Three Months Ended September 30,				Nine Months Ended September 30,
Financing Leases (in thousands)	2020		2019		2020		2019
Depreciation and amortization	$	7,818	$	11,675	$	24,999	$	35,030
Interest expense: financing lease obligations	11,908		16,567		37,082		49,959
Financing lease expense	$	19,726	$	28,242	$	62,081	$	84,989
Operating cash flows from financing leases	$	11,908	$	16,567	$	37,082	$	49,959
Financing cash flows from financing leases	4,548		5,549		14,312		16,502
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(923)		—		(4,337)		—
Total cash flows from financing leases	$	15,533	$	22,116	$	47,057	$	66,461

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of September 30, 2020 are as follows (in thousands):

Year Ending December 31,	Operating Leases		Financing Leases
2020 (three months)	$	53,625	$	15,968
2021	212,133		64,630
2022	195,487		65,234
2023	195,734		65,960
2024	195,462		67,166
Thereafter	482,894		166,745
Total lease payments	1,335,335		445,703
Purchase option liability and non-cash gain on future sale of property	—		412,817
Imputed interest and variable lease payments	(314,725)		(291,524)
Total lease obligations	$	1,020,610	$	566,996