Leases

Net Investment in Direct Financing Leases

The components of net investment in DFLs consisted of the following (dollars in thousands):



	December 31,
	2018			2017
Minimum lease payments receivable	$	1,013,976		$	1,062,452
Estimated residual value	507,484			504,457
Less unearned income	(807,642		)	(852,557		)
Net investment in direct financing leases	$	713,818		$	714,352
Properties subject to direct financing leases	29			29

Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2018 (in thousands):



Year	Amount
2019	$	114,970
2020	63,308
2021	63,687
2022	58,135
2023	58,570
Thereafter	655,306
	$	1,013,976

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for net investment in DFLs at December 31, 2018 (dollars in thousands):



				Internal Ratings
Segment	Carrying Amount		Percentage of DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
Senior housing triple-net	$	629,214	88	$	278,503	$	350,711	$	—
Other non-reportable segments	84,604		12	84,604		—		—
	$	713,818	100	$	363,107	$	350,711	$	—

Beginning September 30, 2013, the Company placed a 14 property senior housing DFL (the “DFL Portfolio”) on nonaccrual status and classified the DFL Portfolio on “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Portfolio has been recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on December 31, 2018 and determined that the DFL Portfolio was not impaired based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s carrying amount. The fair value of the DFL Portfolio was estimated based on an income approach and utilizes inputs which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates, and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the years ended December 31, 2018, 2017 and 2016, the Company recognized DFL income of $14 million, $13 million and $13 million, respectively, and received cash payments of $19 million, $18 million and $18 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $351 million and $356 million at December 31, 2018 and 2017, respectively.

Operating Leases

Future Minimum Rents

The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of December 31, 2018 (in thousands):



Year	Amount
2019	$	971,417
2020	928,102
2021	853,451
2022	751,972
2023	675,537
Thereafter	2,320,847
	$	6,501,326

Tenant Purchase Options

Certain leases, including DFLs contain purchase options whereby the tenant may elect to acquire the underlying real estate. Annualized base rent from leases subject to purchase options, summarized by the year the purchase options are exercisable, are as follows (dollars in thousands):



Year	Annualized Base Rent⁽¹⁾		Number of Properties
2019	$	23,771	10
2020	14,545		4
2021	12,747		6
2022	13,315		3
Thereafter	50,577		34
	$	114,955	57

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(1)	Represents the most recent month’s base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and deferred revenues).

Operating Lease Expense

In certain situations, the Company leases land or equipment needed for the operation of its business. Such leases generally require fixed annual rent payments, may include escalation clauses and renewal options, and have terms that are up to 99 years, excluding extension options. The Company’s rental expense attributable to continuing operations was $10 million for each of the years ended December 31, 2018, 2017 and 2016.

Future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2018 were as follows (in thousands):



Year	Amount
2019	$	5,597
2020	5,687
2021	5,776
2022	5,862
2023	5,983
Thereafter	466,130
	$	495,035