LEASES (Notes)

6 Months Ended

Jun. 30, 2019

Adoption of Standard

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms in excess of twelve months. Sufficient disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard was effective for us beginning January 1, 2019. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We also elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. In preparation for adoption of the standard, we have implemented internal control procedures and key system functionality to enable the preparation of financial information.

The adoption of the standard had a material impact on our condensed consolidated balance sheets, but did not have material impact on our condensed consolidated income statements or cash flows. Adoption of the standard resulted in the recognition of an operating lease liability of $455.5 million. Operating lease ROU assets were recorded in the amount of $419.0 million. Inclusive in the adoption was the transfer of $35.3 million in deferred rent liability and $792,000 in unfavorable rental contract liabilities to operating lease ROU assets. For finance leases, the effect of the adoption amounted to a finance lease liability of $12.1 million, which was transfered from capital lease debt and a finance right of use assets in the amount of $14.1 million which remained in property, plant and equipment.

Lease Liability

We have operating leases for medical facilities, administrative offices, warehouse space and major medical equipment. We lease the premises at which these facilities are located and do not have options to purchase the facilities we rent. Our most common initial term varies in length from 5 to 15 years. Including renewal options negotiated with the landlord, we can have a total span of 10 to 35 years at the facilities we lease. We also lease smaller satellite X-Ray locations on mutually renewable terms, usually lasting one year. Additionally, we have operating and finance leases for certain medical and office equipment, with lease terms generally lasting from 5 to 8 years. Our Incremental Borrowing Rate ("IBR") used to discount the stream of lease payments is closely related to the interest rates charged on our collateralized debt obligations and our IBR is adjusted when those rates experience a substantial change.

The components of lease expense were as follows:




	Three months ended		Six months ended
(In thousands)	June 30, 2019

Operating lease cost	$	24,280	$	47,072

Finance lease cost:
Depreciation of leased equipment	$	785	$	1,567
Interest on lease liabilities	106		229
Total finance lease cost	$	891	$	1,796

Supplemental cash flow information related to leases was as follows:



	Three months ended		Six months ended
(In thousands)	June 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	24,267	$	47,187
Operating cash flows from financing leases	106		229
Financing cash flows from financing leases	1,414		2,936
Right-of-use & Equipment assets obtained in exchange for lease obligations:
Operating leases⁽¹⁾	33,933		446,628
Financing leases	—		14,056

⁽¹⁾Amounts for the six months ended June 30, 2019 include the transition adjustment for the adoption of Topic 842 discussed in Note 2, Significant Accounting Policies for further information.

Supplemental balance sheet information related to leases was as follows:



(In thousands, except lease term and discount rates)
	June 30, 2019

Operating Leases
Operating lease right-of-use assets	$	432,557
Current portion of operating lease liability	$	65,461
Operating lease liabilities	404,463
Total operating lease liabilities	$	469,924

Finance Leases
Property and Equipment, at cost	$	14,056
Accumulated depreciation	(1,567		)
Equipment, net	$	12,489
Current portion of finance lease	$	4,334
Finance lease liabilities	4,851
Total finance lease liabilities	$	9,185

Weighted Average Remaining Lease Term
Operating leases - years	8.6
Finance leases - years	3.4

Weighted Average Discount Rate
Operating leases	6.4		%
Finance leases	4.4		%

Maturities of lease liabilities were as follows:



(In thousands)
	Operating			Financing
Year Ending December 31,	Leases			Leases
2019 (excluding the six months ended June 30, 2019)	$	47,558		$	2,854
2020	89,784			3,481
2021	83,656			2,614
2022	73,751			692
2023	62,634			—
Thereafter	265,997			—
Total Lease Payments	623,380			9,641
Less imputed interest	(153,456		)	(456		)
Total	$	469,924		$	9,185

As of June 30, 2019 , we have additional operating leases for facilities that have not yet commenced of approximately $5.5 million. These operating leases will commence in 2019 with lease terms of 1 to 14 years.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of operating lease liabilities were as follows as of December 31, 2018 (in thousands):



	Facilities		Equipment		Total
2019	$	75,588	$	14,924	$	90,512
2020	66,116		14,385		80,501
2021	57,826		12,966		70,792
2022	48,542		10,264		58,806
2023	38,800		7,095		45,895
Thereafter	160,327		5,144		165,471
	$	447,199	$	64,778	$	511,977

LEASES