Leases

6 Months Ended

Jun. 30, 2022

Leases [Abstract]

Leases

8. Leases

As of June 30, 2022, the Company operated 295 communities under long-term leases (230 operating leases and 65 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 liquidity, 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 and maintain insurance coverage.

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 June 30, 2022, the Company is in compliance with the financial covenants of its long-term leases.

Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $1.0 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $9.6 million and $10.5 million for the six months ended June 30, 2022 and 2021, respectively, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continuing impacts of the COVID-19 pandemic.

A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows.

	Three Months Ended June 30,				Six Months Ended June 30,
Operating Leases (in thousands)	2022		2021		2022		2021
Facility operating expense	$	1,561	$	4,520	$	3,084	$	9,362
Facility lease expense	41,538		43,864		83,102		88,282
Operating lease expense	43,099		48,384		86,186		97,644
Operating lease expense adjustment (1)	8,308		5,326		16,615		9,990
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(3,367)		(7,943)		(4,857)		(15,506)
Operating net cash outflows from operating leases	$	48,040	$	45,767	$	97,944	$	92,128

(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.

	Three Months Ended June 30,				Six Months Ended June 30,
Financing Leases (in thousands)	2022		2021		2022		2021
Depreciation and amortization	$	7,607	$	7,594	$	15,273	$	15,224
Interest expense: financing lease obligations	11,994		11,492		24,052		22,875
Financing lease expense	$	19,601	$	19,086	$	39,325	$	38,099
Operating cash outflows from financing leases	$	11,994	$	11,492	$	24,052	$	22,875
Financing cash outflows from financing leases	5,610		4,864		11,100		9,653
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(3,770)		(2,057)		(6,977)		(3,446)
Total net cash outflows from financing leases	$	13,834	$	14,299	$	28,175	$	29,082

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of June 30, 2022 are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2022 (six months)	$	102,321	$	34,171
2023	209,006		69,401
2024	194,536		70,615
2025	192,255		59,994
2026	76,955		61,250
Thereafter	206,716		53,382
Total lease payments	981,789		348,813
Purchase option liability and non-cash gain on future sale of property	—		424,316
Imputed interest and variable lease payments	(207,299)		(223,532)
Total lease obligations	$	774,490	$	549,597

Leases

8. Leases

As of June 30, 2022, the Company operated 295 communities under long-term leases (230 operating leases and 65 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 liquidity, 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 and maintain insurance coverage.

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 June 30, 2022, the Company is in compliance with the financial covenants of its long-term leases.

Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $1.0 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $9.6 million and $10.5 million for the six months ended June 30, 2022 and 2021, respectively, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continuing impacts of the COVID-19 pandemic.

A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows.

	Three Months Ended June 30,				Six Months Ended June 30,
Operating Leases (in thousands)	2022		2021		2022		2021
Facility operating expense	$	1,561	$	4,520	$	3,084	$	9,362
Facility lease expense	41,538		43,864		83,102		88,282
Operating lease expense	43,099		48,384		86,186		97,644
Operating lease expense adjustment (1)	8,308		5,326		16,615		9,990
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(3,367)		(7,943)		(4,857)		(15,506)
Operating net cash outflows from operating leases	$	48,040	$	45,767	$	97,944	$	92,128

(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.

	Three Months Ended June 30,				Six Months Ended June 30,
Financing Leases (in thousands)	2022		2021		2022		2021
Depreciation and amortization	$	7,607	$	7,594	$	15,273	$	15,224
Interest expense: financing lease obligations	11,994		11,492		24,052		22,875
Financing lease expense	$	19,601	$	19,086	$	39,325	$	38,099
Operating cash outflows from financing leases	$	11,994	$	11,492	$	24,052	$	22,875
Financing cash outflows from financing leases	5,610		4,864		11,100		9,653
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(3,770)		(2,057)		(6,977)		(3,446)
Total net cash outflows from financing leases	$	13,834	$	14,299	$	28,175	$	29,082

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of June 30, 2022 are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2022 (six months)	$	102,321	$	34,171
2023	209,006		69,401
2024	194,536		70,615
2025	192,255		59,994
2026	76,955		61,250
Thereafter	206,716		53,382
Total lease payments	981,789		348,813
Purchase option liability and non-cash gain on future sale of property	—		424,316
Imputed interest and variable lease payments	(207,299)		(223,532)
Total lease obligations	$	774,490	$	549,597