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LEASES | 3 Months Ended
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Mar. 31, 2024
Leases [Abstract] |
LEASES | LEASES The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 99 independent skilled nursing and senior living facilities used in the Company’s operations, 98 of which are under nine “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 13 to 20 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease. Additionally, four of the 99 facilities leased from CareTrust include an option to purchase that the Company can exercise starting on December 1, 2024. During three months ended March 31, 2024, the Company added two operations and extended the term for one of the Master Leases to 20 years. As a result, the total lease liabilities and right-of-use assets increased by $48,112 to reflect the new lease obligations. The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property. The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. In addition to rent, the Company is 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 facility 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. The terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above. Total rent expense under the Master Leases was approximately $16,800 and $16,283 for the three months ended March 31, 2024 and 2023, respectively. Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is in compliance with requirements of the Master Leases as of March 31, 2024. In connection with the spin-off that occurred in 2019, the Company guaranteed certain leases of Pennant based on the underlying terms of the leases. The Company does not consider performance under these guarantees to be probable and the likelihood of Pennant defaulting is remote, and therefore no liabilities have been accrued. The Company leases facilities where its independent subsidiaries operate and certain administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rent increases. Eighty-two of the Company’s independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases with CareTrust, are operated under 13 separate master lease arrangements. During the three months ended March 31, 2024, the Company amended one of the separate master lease arrangements to add two stand-alone skilled nursing operations operated by the Company's independent subsidiaries. The amended master lease increased the lease liabilities and right-of-use assets by $30,980 to reflect the new lease obligations and extended the term to 20 years. Under the master leases, a default at a single facility could subject one or more of the other facilities 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, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The components of operating lease expense are as follows:
| Three Months Ended March 31, |  |
| 2024 |  | 2023 |  |  |  |  |  |
Rent - cost of services(1) | $ | 51,876 |  |  | $ | 46,637 |  |  |  |  |  |  |
General and administrative expense | 153 |  |  | 124 |  |  |  |  |  |  |
Depreciation and amortization(2) | 303 |  |  | 298 |  |  |  |  |  |  |
Variable lease costs(3) | 5,770 |  |  | 4,832 |  |  |  |  |  |  |
| $ | 58,102 |  |  | $ | 51,891 |  |  |  |  |  |  |
(1)Rent- cost of services includes deferred rent expense adju stments of $195 and $263 for the three months ended March 31, 2024 and 2023, respectively. Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $3,057 and $2,060 for the three months ended March 31, 2024 and 2023, respectively. (2) Depreciation and amortization is related to the amortization of favorable and direct lease costs. (3) Variable lease costs, including property taxes and insurance, are classified in cost of services in the Company's condensed consolidated statements of income. Future minimum lease payments for all third-party leases as of March 31, 2024 are as follows:
Year |  | Amount
2024 (remainder) |  | $ | 147,657 |
2025 |  | 196,805 |
2026 |  | 196,598 |
2027 |  | 196,009 |
2028 |  | 194,981 |
2029 |  | 191,269 |
Thereafter |  | 1,651,949 |
TOTAL LEASE PAYMENTS |  | 2,775,268 |
Less: present value adjustment |  | (987,718) |
PRESENT VALUE OF TOTAL LEASE LIABILITIES |  | 1,787,550 |
Less: current lease liabilities |  | (85,898) |
LONG-TERM OPERATING LEASE LIABILITIES |  | $ | 1,701,652 |
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 the lease commencement date. As of March 31, 2024, the weighted average remaining lease term is 15.1 years and the weighted average discount rate used to determine the operating lease liabilities is 6.4%. Subsequent to March 31, 2024, the Company expanded its operations through long-term leases with the addition of three standalone skilled nursing operations. The aggregate impact to the carrying value of lease liabilities and right-of-use assets related to the long-term leases is estimated to be approximately $39,689. Lessor Activities The Company leases its owned real estate properties to third-party operators, of which 29 senior living operations are operated by Pennant. All of these properties are triple-net leases, whereby the respective tenants are responsible for all costs at the properties including: (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 facility 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. The initial terms range from 14 to 16 years. During the first quarter of 2023, the Company entered into a sublease agreement for three stand-alone skilled nursing operations with a third-party operator with an initial lease term of 18 years. Total rental income from all third-party sources for the three months ended March 31, 2024 and 2023 is as follows:
| Three Months Ended March 31, |  |
| 2024 |  | 2023 |  |  |  |  |  |
Pennant(1) | $ | 3,820 |  |  | $ | 3,742 |  |  |  |  |  |  |
Other third-party(2) | 1,867 |  |  | 1,181 |  |  |  |  |  |  |
TOTAL | $ | 5,687 |  |  | $ | 4,923 |  |  |  |  |  |  |
(1) Pennant rental income includes variable rent such as property taxes of $318 and $325 during the three months ended March 31, 2024 and 2023, respectively. (2) Other third-party includes rental revenue associated with the Company's subleases to third parties of $1,080 and $708 for the three months ended March 31, 2024 and 2023. Future annual rental income for all third-party leases as of March 31, 2024 were as follows:
Year |  | Amount(1)
2024 (remainder) |  | $ | 16,589 |
2025 |  | 21,569 |
2026 |  | 21,269 |
2027 |  | 21,176 |
2028 |  | 21,151 |
2029 |  | 21,109 |
Thereafter |  | 108,459 |
TOTAL |  | $ | 231,322 |
(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2024.
LEASES | LEASES The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 99 independent skilled nursing and senior living facilities used in the Company’s operations, 98 of which are under nine “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 13 to 20 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease. Additionally, four of the 99 facilities leased from CareTrust include an option to purchase that the Company can exercise starting on December 1, 2024. During three months ended March 31, 2024, the Company added two operations and extended the term for one of the Master Leases to 20 years. As a result, the total lease liabilities and right-of-use assets increased by $48,112 to reflect the new lease obligations. The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property. The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. In addition to rent, the Company is 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 facility 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. The terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above. Total rent expense under the Master Leases was approximately $16,800 and $16,283 for the three months ended March 31, 2024 and 2023, respectively. Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is in compliance with requirements of the Master Leases as of March 31, 2024. In connection with the spin-off that occurred in 2019, the Company guaranteed certain leases of Pennant based on the underlying terms of the leases. The Company does not consider performance under these guarantees to be probable and the likelihood of Pennant defaulting is remote, and therefore no liabilities have been accrued. The Company leases facilities where its independent subsidiaries operate and certain administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rent increases. Eighty-two of the Company’s independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases with CareTrust, are operated under 13 separate master lease arrangements. During the three months ended March 31, 2024, the Company amended one of the separate master lease arrangements to add two stand-alone skilled nursing operations operated by the Company's independent subsidiaries. The amended master lease increased the lease liabilities and right-of-use assets by $30,980 to reflect the new lease obligations and extended the term to 20 years. Under the master leases, a default at a single facility could subject one or more of the other facilities 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, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The components of operating lease expense are as follows:
| Three Months Ended March 31, |  |
| 2024 |  | 2023 |  |  |  |  |  |
Rent - cost of services(1) | $ | 51,876 |  |  | $ | 46,637 |  |  |  |  |  |  |
General and administrative expense | 153 |  |  | 124 |  |  |  |  |  |  |
Depreciation and amortization(2) | 303 |  |  | 298 |  |  |  |  |  |  |
Variable lease costs(3) | 5,770 |  |  | 4,832 |  |  |  |  |  |  |
| $ | 58,102 |  |  | $ | 51,891 |  |  |  |  |  |  |
(1)Rent- cost of services includes deferred rent expense adju stments of $195 and $263 for the three months ended March 31, 2024 and 2023, respectively. Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $3,057 and $2,060 for the three months ended March 31, 2024 and 2023, respectively. (2) Depreciation and amortization is related to the amortization of favorable and direct lease costs. (3) Variable lease costs, including property taxes and insurance, are classified in cost of services in the Company's condensed consolidated statements of income. Future minimum lease payments for all third-party leases as of March 31, 2024 are as follows:
Year |  | Amount
2024 (remainder) |  | $ | 147,657 |
2025 |  | 196,805 |
2026 |  | 196,598 |
2027 |  | 196,009 |
2028 |  | 194,981 |
2029 |  | 191,269 |
Thereafter |  | 1,651,949 |
TOTAL LEASE PAYMENTS |  | 2,775,268 |
Less: present value adjustment |  | (987,718) |
PRESENT VALUE OF TOTAL LEASE LIABILITIES |  | 1,787,550 |
Less: current lease liabilities |  | (85,898) |
LONG-TERM OPERATING LEASE LIABILITIES |  | $ | 1,701,652 |
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 the lease commencement date. As of March 31, 2024, the weighted average remaining lease term is 15.1 years and the weighted average discount rate used to determine the operating lease liabilities is 6.4%. Subsequent to March 31, 2024, the Company expanded its operations through long-term leases with the addition of three standalone skilled nursing operations. The aggregate impact to the carrying value of lease liabilities and right-of-use assets related to the long-term leases is estimated to be approximately $39,689. Lessor Activities The Company leases its owned real estate properties to third-party operators, of which 29 senior living operations are operated by Pennant. All of these properties are triple-net leases, whereby the respective tenants are responsible for all costs at the properties including: (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 facility 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. The initial terms range from 14 to 16 years. During the first quarter of 2023, the Company entered into a sublease agreement for three stand-alone skilled nursing operations with a third-party operator with an initial lease term of 18 years. Total rental income from all third-party sources for the three months ended March 31, 2024 and 2023 is as follows:
| Three Months Ended March 31, |  |
| 2024 |  | 2023 |  |  |  |  |  |
Pennant(1) | $ | 3,820 |  |  | $ | 3,742 |  |  |  |  |  |  |
Other third-party(2) | 1,867 |  |  | 1,181 |  |  |  |  |  |  |
TOTAL | $ | 5,687 |  |  | $ | 4,923 |  |  |  |  |  |  |
(1) Pennant rental income includes variable rent such as property taxes of $318 and $325 during the three months ended March 31, 2024 and 2023, respectively. (2) Other third-party includes rental revenue associated with the Company's subleases to third parties of $1,080 and $708 for the three months ended March 31, 2024 and 2023. Future annual rental income for all third-party leases as of March 31, 2024 were as follows:
Year |  | Amount(1)
2024 (remainder) |  | $ | 16,589 |
2025 |  | 21,569 |
2026 |  | 21,269 |
2027 |  | 21,176 |
2028 |  | 21,151 |
2029 |  | 21,109 |
Thereafter |  | 108,459 |
TOTAL |  | $ | 231,322 |
(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2024.

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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 842 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//842-20/tableOfContent + Details
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