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Leases

12 Months Ended

Dec. 31, 2019

Lease Income

The following table summarizes the Company’s lease income (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Fixed income from operating leases	$	984,942	$	1,013,757	$	944,796
Variable income from operating leases	237,136		223,479		268,853
Interest income from direct financing leases	37,481		54,274		54,217

Direct Financing Leases

Net investment in DFLs consists of the following (dollars in thousands):



	December 31, 2019
Present value of minimum lease payments receivable	$	19,138
Present value of estimated residual value	84,604
Less deferred selling profits	(19,138		)
Net investment in direct financing leases before allowance	84,604
Allowance for direct financing lease losses	—
Net investment in direct financing leases	$	84,604
Properties subject to direct financing leases	2



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

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at December 31, 2019 (dollars in thousands):



				Internal Ratings
Segment	Carrying Amount		Percentage of DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
Other non-reportable segments	$	84,604	100	$	84,604	—		—
	$	84,604	100	$	84,604	$	—	$	—

Direct Financing Lease Conversion

During the first quarter of 2019, the Company converted a DFL portfolio of 14 senior housing triple-net properties, previously on “Watch List” status, to a RIDEA structure, requiring the Company to recognize net assets equal to the lower of the net assets’ fair value or the carrying value of the net investment in the DFL. As a result, the Company derecognized the $351 million carrying value of the net investment in DFL related to the 14 properties and recognized a combination of net real estate ($331 million) and net intangibles assets ($20 million) for the same aggregate amount, with no gain or loss recognized. As a result of the transaction, the 14 properties were transitioned from the senior housing triple-net segment to the SHOP segment during the first quarter of 2019.

Direct Financing Lease Sale

During the second quarter of 2019, the Company entered into agreements to sell 13 senior housing facilities under DFLs (the “DFL Sale Portfolio”) for $274 million. Upon entering into the agreements, the Company recognized an allowance for DFL losses and related impairment charge of $10 million to write-down the carrying value of the DFL Sale Portfolio to its fair value. The fair value of the DFL Sale Portfolio was based upon the agreed on sale price, less estimated costs to sell, which is considered to be a Level 2 measurement within the fair value hierarchy. In conjunction with the entering into agreements to sell the DFL Sale Portfolio, the Company placed the portfolio on nonaccrual status and began recognizing income equal to the amount of cash received.

The Company completed the sale of the DFL Sale Portfolio in September 2019.

The following table summarizes the activity of the DFL Sale Portfolio during the periods presented (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Income from DFLs	$	17,287	$	23,616	$	23,820
Cash payments received	16,005		19,633		19,494

Direct Financing Lease Receivable Maturities

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2019 (in thousands):



Year	Amount
2020	$	9,553
2021	8,409
2022	1,176
2023	—
2024	—
Thereafter	—
Undiscounted minimum lease payments receivable	19,138
Less: imputed interest	—
Present value of minimum lease payments receivable	$	19,138

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

Residual Value Risk

Quarterly, the Company reviews the estimated unguaranteed residual value of assets under DFLs to determine if there have been any material changes compared to the prior quarter. As needed, the Company and/or the related tenants will invest necessary funds to maintain the residual value of each asset.

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, 2019 (in thousands):



Year	Amount
2020	$	998,376
2021	968,622
2022	904,799
2023	822,259
2024	708,871
Thereafter	2,522,333
	$	6,925,260



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
2020	$	17,219	10
2021	27,947		7
2022	10,924		3
2023	—		—
2024	2,924		1
Thereafter	25,022		19
	$	84,036	40

_______________________________________


(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).

During the fourth quarter of 2019, the Company's tenant exercised its option to acquire from the Company an acute care hospital and adjacent land parcel located in Irvine, California for $226 million. The sale is scheduled to close during the first half of 2021. The annualized base rent associated with the assets covered by this purchase option is included in the table above for 2021.

Lease Costs

The following tables provide information regarding the Company’s leases to which it is the lessee, such as corporate offices and ground leases (dollars in thousands):



	Year Ended December 31,
Lease Expense Information:	2019		2018		2017
Total lease expense⁽¹⁾	$	16,238	$	14,783	$	13,674

_______________________________________


(1)	Lease expense related to corporate assets is included in general and administrative expenses and lease expense related to ground leases is included within operating expenses in the Company’s consolidated statements of operations.



	Year Ended December 31,
Supplemental Cash Flow Information:	2019		2018		2017
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows for operating leases	$	12,727	11,655		$	10,745

ROU asset obtained in exchange for new lease liability:
Operating leases	$	5,733	$	—	$	—



Weighted Average Lease Term and Discount Rate:	December 31, 2019
Weighted average remaining lease term (years):
Operating leases	51

Weighted average discount rate:
Operating leases	4.36	%

The following table summarizes future minimum lease payments under non-cancelable ground and other operating leases included in the Company’s lease liability as of December 31, 2019 (in thousands):



Year	Amount
2020	$	9,407
2021	9,208
2022	9,045
2023	8,985
2024	7,139
Thereafter	451,790
Undiscounted minimum lease payments included in the lease liability	495,574
Less: imputed interest	(338,963		)
Present value of lease liability	$	156,611

The following table summarizes future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2018 (in thousands):



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

Depreciation Expense

While the Company leases the majority of its property, plant, and equipment to various tenants under operating leases and DFLs, in certain situations, the Company owns and operates certain property, plant, and equipment for general corporate purposes. Corporate assets are recorded within other assets, net within the Company’s consolidated balance sheets and depreciation expense for those assets is recorded in general and administrative expenses in the Company’s consolidated statements of operations. Included within other assets, net as of December 31, 2019 and December 31, 2018 is $4 million and $2 million, respectively, of accumulated depreciation related to corporate assets. Included within general and administrative expenses for the year ended December 31, 2019, 2018, and 2017 is $2 million, $4 million and $1 million, respectively, of depreciation expense related to corporate assets.

Leases

Lease Income

The following table summarizes the Company’s lease income (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Fixed income from operating leases	$	984,942	$	1,013,757	$	944,796
Variable income from operating leases	237,136		223,479		268,853
Interest income from direct financing leases	37,481		54,274		54,217

Direct Financing Leases

Net investment in DFLs consists of the following (dollars in thousands):



	December 31, 2019
Present value of minimum lease payments receivable	$	19,138
Present value of estimated residual value	84,604
Less deferred selling profits	(19,138		)
Net investment in direct financing leases before allowance	84,604
Allowance for direct financing lease losses	—
Net investment in direct financing leases	$	84,604
Properties subject to direct financing leases	2



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

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at December 31, 2019 (dollars in thousands):



				Internal Ratings
Segment	Carrying Amount		Percentage of DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
Other non-reportable segments	$	84,604	100	$	84,604	—		—
	$	84,604	100	$	84,604	$	—	$	—

Direct Financing Lease Conversion

Direct Financing Lease Sale

The Company completed the sale of the DFL Sale Portfolio in September 2019.

The following table summarizes the activity of the DFL Sale Portfolio during the periods presented (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Income from DFLs	$	17,287	$	23,616	$	23,820
Cash payments received	16,005		19,633		19,494

Direct Financing Lease Receivable Maturities

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2019 (in thousands):



Year	Amount
2020	$	9,553
2021	8,409
2022	1,176
2023	—
2024	—
Thereafter	—
Undiscounted minimum lease payments receivable	19,138
Less: imputed interest	—
Present value of minimum lease payments receivable	$	19,138

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

Residual Value Risk

Operating Leases

Future Minimum Rents



Year	Amount
2020	$	998,376
2021	968,622
2022	904,799
2023	822,259
2024	708,871
Thereafter	2,522,333
	$	6,925,260



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



Year	Annualized Base Rent⁽¹⁾		Number of Properties
2020	$	17,219	10
2021	27,947		7
2022	10,924		3
2023	—		—
2024	2,924		1
Thereafter	25,022		19
	$	84,036	40

_______________________________________


(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).

Lease Costs

The following tables provide information regarding the Company’s leases to which it is the lessee, such as corporate offices and ground leases (dollars in thousands):



	Year Ended December 31,
Lease Expense Information:	2019		2018		2017
Total lease expense⁽¹⁾	$	16,238	$	14,783	$	13,674

_______________________________________


(1)	Lease expense related to corporate assets is included in general and administrative expenses and lease expense related to ground leases is included within operating expenses in the Company’s consolidated statements of operations.



	Year Ended December 31,
Supplemental Cash Flow Information:	2019		2018		2017
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows for operating leases	$	12,727	11,655		$	10,745

ROU asset obtained in exchange for new lease liability:
Operating leases	$	5,733	$	—	$	—



Weighted Average Lease Term and Discount Rate:	December 31, 2019
Weighted average remaining lease term (years):
Operating leases	51

Weighted average discount rate:
Operating leases	4.36	%

The following table summarizes future minimum lease payments under non-cancelable ground and other operating leases included in the Company’s lease liability as of December 31, 2019 (in thousands):



Year	Amount
2020	$	9,407
2021	9,208
2022	9,045
2023	8,985
2024	7,139
Thereafter	451,790
Undiscounted minimum lease payments included in the lease liability	495,574
Less: imputed interest	(338,963		)
Present value of lease liability	$	156,611

The following table summarizes future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2018 (in thousands):



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

Depreciation Expense

Leases

Lease Income

The following table summarizes the Company’s lease income (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Fixed income from operating leases	$	984,942	$	1,013,757	$	944,796
Variable income from operating leases	237,136		223,479		268,853
Interest income from direct financing leases	37,481		54,274		54,217

Direct Financing Leases

Net investment in DFLs consists of the following (dollars in thousands):



	December 31, 2019
Present value of minimum lease payments receivable	$	19,138
Present value of estimated residual value	84,604
Less deferred selling profits	(19,138		)
Net investment in direct financing leases before allowance	84,604
Allowance for direct financing lease losses	—
Net investment in direct financing leases	$	84,604
Properties subject to direct financing leases	2



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

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at December 31, 2019 (dollars in thousands):



				Internal Ratings
Segment	Carrying Amount		Percentage of DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
Other non-reportable segments	$	84,604	100	$	84,604	—		—
	$	84,604	100	$	84,604	$	—	$	—

Direct Financing Lease Conversion

Direct Financing Lease Sale

The Company completed the sale of the DFL Sale Portfolio in September 2019.

The following table summarizes the activity of the DFL Sale Portfolio during the periods presented (dollars in thousands):



	Year Ended December 31,
	2019		2018		2017
Income from DFLs	$	17,287	$	23,616	$	23,820
Cash payments received	16,005		19,633		19,494

Direct Financing Lease Receivable Maturities

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2019 (in thousands):



Year	Amount
2020	$	9,553
2021	8,409
2022	1,176
2023	—
2024	—
Thereafter	—
Undiscounted minimum lease payments receivable	19,138
Less: imputed interest	—
Present value of minimum lease payments receivable	$	19,138

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

Residual Value Risk

Operating Leases

Future Minimum Rents



Year	Amount
2020	$	998,376
2021	968,622
2022	904,799
2023	822,259
2024	708,871
Thereafter	2,522,333
	$	6,925,260



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



Year	Annualized Base Rent⁽¹⁾		Number of Properties
2020	$	17,219	10
2021	27,947		7
2022	10,924		3
2023	—		—
2024	2,924		1
Thereafter	25,022		19
	$	84,036	40

_______________________________________


(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).

Lease Costs

The following tables provide information regarding the Company’s leases to which it is the lessee, such as corporate offices and ground leases (dollars in thousands):



	Year Ended December 31,
Lease Expense Information:	2019		2018		2017
Total lease expense⁽¹⁾	$	16,238	$	14,783	$	13,674

_______________________________________


(1)	Lease expense related to corporate assets is included in general and administrative expenses and lease expense related to ground leases is included within operating expenses in the Company’s consolidated statements of operations.



	Year Ended December 31,
Supplemental Cash Flow Information:	2019		2018		2017
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows for operating leases	$	12,727	11,655		$	10,745

ROU asset obtained in exchange for new lease liability:
Operating leases	$	5,733	$	—	$	—



Weighted Average Lease Term and Discount Rate:	December 31, 2019
Weighted average remaining lease term (years):
Operating leases	51

Weighted average discount rate:
Operating leases	4.36	%

The following table summarizes future minimum lease payments under non-cancelable ground and other operating leases included in the Company’s lease liability as of December 31, 2019 (in thousands):



Year	Amount
2020	$	9,407
2021	9,208
2022	9,045
2023	8,985
2024	7,139
Thereafter	451,790
Undiscounted minimum lease payments included in the lease liability	495,574
Less: imputed interest	(338,963		)
Present value of lease liability	$	156,611

The following table summarizes future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2018 (in thousands):



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

Depreciation Expense