LEASES

12 Months Ended

Dec. 31, 2019

The Company’s independent operating subsidiaries lease 52 senior living communities and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 21 years. Most of these leases contain renewal options, most involve rent increases and none contain purchase options. The lease term excludes lease renewals because the renewal rents are not at a bargain, there are no economic penalties for the Company to renew the lease, and it is not reasonably certain that the Company will exercise the extension options. As of December 31, 2019, the Company’s independent operating subsidiaries leased 29 communities from subsidiaries of Ensign (“Ensign Leases”) under a master lease arrangement. The existing leases with subsidiaries of Ensign are for initial terms of between 14 to 16 years. In addition to rent, each of the operating companies are required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all community maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

Fifteen of the Company’s affiliated senior living communities, excluding the communities that are operated under the Ensign Leases (as defined herein), are operated under two separate master lease arrangements. Under these master leases, a breach at a single community could subject one or more of the other communities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases and master leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the master lease without the consent of the landlord.

Impact of New Leases Guidance

The adoption of Topic 842 did not result in adjustments to the Company’s condensed combined statements of income. The components of operating lease cost, are as follows:


	Year Ended December 31,
	2019
Operating Lease Costs:
Facility Rent—cost of services	$	32,011
Office Rent—cost of services	2,964
Rent—cost of services^(a)	$	34,975

General and administrative expense	162
Variable lease cost ^(b)	4,608

(a) Rent—cost of services includes non-cash lease expense of $220 for the year ended December 31, 2019. Rent—cost of services includes short-term leases, which are immaterial.

(b) Represents variable lease cost for operating leases. Includes property taxes and insurance, common area maintenance, and consumer price index increases, incurred as part of our triple net lease, and is included in cost of services for the year ended December 31, 2019.

The following table shows the lease maturity analysis for all leases as of December 31, 2019:


Year	Amount
2020	$	37,087
2021	36,654
2022	36,131
2023	35,712
2024	35,359
Thereafter	387,878
Total lease payments	568,821
Less: present value adjustments	(252,492)

Present value of total lease liabilities	316,329
Less: current lease liabilities	(12,285)
Long-term operating lease liabilities	$	304,044

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at each lease’s commencement date to determine each lease's operating lease liability. As of December 31, 2019, the weighted average remaining lease term is 16.0 years and the weighted average discount rate is 8.1%.

On October 1, 2019, in connection with the Spin-Off, the Company amended its master lease agreements with Ensign and certain other landlords. These amendments modified the rental payments, the initial term or both. In accordance with Topic 842, the amended lease agreements are considered to be modified and subjected to lease modification guidance. The right-of-use asset and lease liabilities related to these agreements were remeasured based on the change in the lease conditions such as rent payment and lease terms. The incremental borrowing rate was also adjusted to mirror the revised lease terms which became effective at the date of the modification, which was the date of the Spin-Off. The Ensign Leases and new third-party master lease agreements have initial terms ranging between ten and 21 years, with extension options and annual rent escalators based on changes in the consumer price index. The net impact of the lease modification of these agreements resulted in an increase in the right-of-use asset and lease liability of $77,627 on October 1, 2019.

Rent expense for operating leases classified under Topic 840 for the years ended December 31, 2018 and 2017 were $31,199 and $31,304, respectively. Future minimum lease payments for all leases under Topic 840 as of December 31, 2018 were as follows:


Year	Amount
2019	$	33,055
2020	32,181
2021	31,625
2022	31,241
2023	30,896
Thereafter	243,333
Total lease payments	$	402,331