Leases

9 Months Ended

Sep. 30, 2022

Leases [Abstract]

Leases

8. Leases

As of September 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 September 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 $1.9 million and $11.5 million for the three and nine months ended September 30, 2022, 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 and property damage sustained at certain communities. The Company recognized $10.5 million for the nine months ended September 30, 2021, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, of which none were recognized for the three months ended September 30, 2021, 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 September 30,				Nine Months Ended September 30,
Operating Leases (in thousands)	2022		2021		2022		2021
Facility operating expense	$	1,621	$	1,634	$	4,705	$	10,996
Facility lease expense	41,317		43,226		124,419		131,508
Operating lease expense	42,938		44,860		129,124		142,504
Operating lease expense adjustment (1)	8,714		6,273		25,329		16,263
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(4,367)		(11,551)		(9,224)		(27,057)
Operating net cash outflows from operating leases	$	47,285	$	39,582	$	145,229	$	131,710

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

	Three Months Ended September 30,				Nine Months Ended September 30,
Financing Leases (in thousands)	2022		2021		2022		2021
Depreciation and amortization	$	7,405	$	7,677	$	22,678	$	22,901
Interest expense: financing lease obligations	11,916		11,674		35,968		34,549
Financing lease expense	$	19,321	$	19,351	$	58,646	$	57,450
Operating cash outflows from financing leases	$	11,916	$	11,674	$	35,968	$	34,549
Financing cash outflows from financing leases	5,506		5,039		16,606		14,692
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(2,727)		(4,136)		(9,704)		(7,583)
Total net cash outflows from financing leases	$	14,695	$	12,577	$	42,870	$	41,658

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, 2022 are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2022 (three months)	$	51,658	$	17,168
2023	210,831		69,739
2024	196,311		70,957
2025	194,019		60,340
2026	78,660		61,600
Thereafter	210,253		54,305
Total lease payments	941,732		334,109
Purchase option liability and non-cash gain on future sale of property	—		426,656
Imputed interest and variable lease payments	(202,874)		(214,221)
Total lease obligations	$	738,858	$	546,544

In October 2022, the Company and a lessor entered into an amendment to the Company's existing master lease pursuant to which the Company continues to lease 24 communities. The amendment removed certain asset repurchase clauses and adjusted the extension option provisions. The amendment did not change the amount of required lease payments or the initial term of the lease. The leases for certain communities are accounted for as failed sale-leaseback transactions as of September 30, 2022 and the Company expects the amended leases to result in sale accounting for such communities and a non-cash gain on sale of assets recognized in the three months ended December 31, 2022. In addition, the Company expects the amended leases for such communities to be prospectively classified as operating leases subsequent to December 31, 2022, the effective date of the amendment.

Leases

8. Leases

As of September 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 September 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 $1.9 million and $11.5 million for the three and nine months ended September 30, 2022, 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 and property damage sustained at certain communities. The Company recognized $10.5 million for the nine months ended September 30, 2021, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, of which none were recognized for the three months ended September 30, 2021, 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 September 30,				Nine Months Ended September 30,
Operating Leases (in thousands)	2022		2021		2022		2021
Facility operating expense	$	1,621	$	1,634	$	4,705	$	10,996
Facility lease expense	41,317		43,226		124,419		131,508
Operating lease expense	42,938		44,860		129,124		142,504
Operating lease expense adjustment (1)	8,714		6,273		25,329		16,263
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(4,367)		(11,551)		(9,224)		(27,057)
Operating net cash outflows from operating leases	$	47,285	$	39,582	$	145,229	$	131,710

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

	Three Months Ended September 30,				Nine Months Ended September 30,
Financing Leases (in thousands)	2022		2021		2022		2021
Depreciation and amortization	$	7,405	$	7,677	$	22,678	$	22,901
Interest expense: financing lease obligations	11,916		11,674		35,968		34,549
Financing lease expense	$	19,321	$	19,351	$	58,646	$	57,450
Operating cash outflows from financing leases	$	11,916	$	11,674	$	35,968	$	34,549
Financing cash outflows from financing leases	5,506		5,039		16,606		14,692
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(2,727)		(4,136)		(9,704)		(7,583)
Total net cash outflows from financing leases	$	14,695	$	12,577	$	42,870	$	41,658

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, 2022 are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2022 (three months)	$	51,658	$	17,168
2023	210,831		69,739
2024	196,311		70,957
2025	194,019		60,340
2026	78,660		61,600
Thereafter	210,253		54,305
Total lease payments	941,732		334,109
Purchase option liability and non-cash gain on future sale of property	—		426,656
Imputed interest and variable lease payments	(202,874)		(214,221)
Total lease obligations	$	738,858	$	546,544

In October 2022, the Company and a lessor entered into an amendment to the Company's existing master lease pursuant to which the Company continues to lease 24 communities. The amendment removed certain asset repurchase clauses and adjusted the extension option provisions. The amendment did not change the amount of required lease payments or the initial term of the lease. The leases for certain communities are accounted for as failed sale-leaseback transactions as of September 30, 2022 and the Company expects the amended leases to result in sale accounting for such communities and a non-cash gain on sale of assets recognized in the three months ended December 31, 2022. In addition, the Company expects the amended leases for such communities to be prospectively classified as operating leases subsequent to December 31, 2022, the effective date of the amendment.