Leases

12 Months Ended

Dec. 31, 2022

Leases [Abstract]

Leases

9. Leases

As of December 31, 2022, the Company operated 295 communities under long-term leases (246 operating leases and 49 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, 2022, the weighted average remaining lease term of the Company's operating and financing leases was 5.2 and 3.6 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. As of December 31, 2022, none of the Company's renewal or extension option periods are 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 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 December 31, 2022, 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 net cash outflows from leases is as follows.

	Years Ended December 31,
Operating Leases (in thousands)	2022		2021		2020
Facility operating expense	$	6,329	$	12,606	$	19,241
Facility lease expense	165,294		174,358		224,033
Operating lease expense	171,623		186,964		243,274
Operating lease expense adjustment (1)	34,896		23,280		136,276
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(13,718)		(30,965)		(22,242)
Operating net cash outflows from operating leases	$	192,801	$	179,279	$	357,308

(1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense. Operating cash flows from operating leases for the year ended December 31, 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.

	Years Ended December 31,
Financing Leases (in thousands)	2022		2021		2020
Depreciation and amortization	$	30,065	$	30,542	$	32,647
Interest expense: financing lease obligations	48,061		46,282		48,534
Financing lease expense	$	78,126	$	76,824	$	81,181
Operating cash outflows from financing leases	$	48,061	$	46,282	$	48,534
Financing cash outflows from financing leases	22,221		19,874		18,867
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(11,932)		(11,135)		(5,603)
Total net cash outflows from financing leases	$	58,350	$	55,021	$	61,798

As of December 31, 2022, the weighted average discount rate of the Company's operating and financing leases was 7.6% and 8.3%, respectively.

In the three months ended December 31, 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 16 of these communities were previously accounted for as failed sale-leaseback transactions as the Company had not previously transferred control of the underlying assets for accounting purposes. The Company determined that the adjustment of the extension option provisions and the removal of the asset repurchase clauses in December 2022 resulted in the transfer of control of the assets of the 16 communities for accounting purposes and resulted in qualification as a sale. The Company recognized a $73.9 million non-cash gain on sale of communities for the transaction in the three months ended December 31, 2022. In addition, the amended leases for such communities are prospectively classified as operating leases as of December 31, 2022, the effective date of the amendment. The prospective reclassification of such lease costs to operating lease expense resulted in a $22.2 million increase in minimum lease payments due for operating leases in 2023 and an offsetting decrease in minimum lease payments due for financing leases in 2023. See Note 20 for more information regarding the impact to the Company’s consolidated balance sheet as a result of this transaction.

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2022 (after giving effect to the change in lease classification for the lease amendment previously described) are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2023	$	233,409	$	48,615
2024	219,311		49,303
2025	217,526		37,184
2026	102,712		37,889
2027	99,566		5,856
Thereafter	135,306		24,172
Total lease payments	1,007,830		203,019
Purchase option liability and non-cash gain on future sale of property	—		135,751
Imputed interest and variable lease payments	(214,099)		(89,910)
Total lease obligations	$	793,731	$	248,860

Leases

9. Leases

As of December 31, 2022, the Company operated 295 communities under long-term leases (246 operating leases and 49 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, 2022, the weighted average remaining lease term of the Company's operating and financing leases was 5.2 and 3.6 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. As of December 31, 2022, none of the Company's renewal or extension option periods are 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 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 December 31, 2022, 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 net cash outflows from leases is as follows.

	Years Ended December 31,
Operating Leases (in thousands)	2022		2021		2020
Facility operating expense	$	6,329	$	12,606	$	19,241
Facility lease expense	165,294		174,358		224,033
Operating lease expense	171,623		186,964		243,274
Operating lease expense adjustment (1)	34,896		23,280		136,276
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements	(13,718)		(30,965)		(22,242)
Operating net cash outflows from operating leases	$	192,801	$	179,279	$	357,308

(1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense. Operating cash flows from operating leases for the year ended December 31, 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.

	Years Ended December 31,
Financing Leases (in thousands)	2022		2021		2020
Depreciation and amortization	$	30,065	$	30,542	$	32,647
Interest expense: financing lease obligations	48,061		46,282		48,534
Financing lease expense	$	78,126	$	76,824	$	81,181
Operating cash outflows from financing leases	$	48,061	$	46,282	$	48,534
Financing cash outflows from financing leases	22,221		19,874		18,867
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement	(11,932)		(11,135)		(5,603)
Total net cash outflows from financing leases	$	58,350	$	55,021	$	61,798

As of December 31, 2022, the weighted average discount rate of the Company's operating and financing leases was 7.6% and 8.3%, respectively.

In the three months ended December 31, 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 16 of these communities were previously accounted for as failed sale-leaseback transactions as the Company had not previously transferred control of the underlying assets for accounting purposes. The Company determined that the adjustment of the extension option provisions and the removal of the asset repurchase clauses in December 2022 resulted in the transfer of control of the assets of the 16 communities for accounting purposes and resulted in qualification as a sale. The Company recognized a $73.9 million non-cash gain on sale of communities for the transaction in the three months ended December 31, 2022. In addition, the amended leases for such communities are prospectively classified as operating leases as of December 31, 2022, the effective date of the amendment. The prospective reclassification of such lease costs to operating lease expense resulted in a $22.2 million increase in minimum lease payments due for operating leases in 2023 and an offsetting decrease in minimum lease payments due for financing leases in 2023. See Note 20 for more information regarding the impact to the Company’s consolidated balance sheet as a result of this transaction.

The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2022 (after giving effect to the change in lease classification for the lease amendment previously described) are as follows (in thousands).

Year Ending December 31,	Operating Leases		Financing Leases
2023	$	233,409	$	48,615
2024	219,311		49,303
2025	217,526		37,184
2026	102,712		37,889
2027	99,566		5,856
Thereafter	135,306		24,172
Total lease payments	1,007,830		203,019
Purchase option liability and non-cash gain on future sale of property	—		135,751
Imputed interest and variable lease payments	(214,099)		(89,910)
Total lease obligations	$	793,731	$	248,860