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Leases | 12 Months Ended
--- | ---
Dec. 31, 2020
Commitments and Contingencies Disclosure [Abstract] |
Lessee, Operating Leases | Leases As of December 31, 2020, the Company operated 301 communities under long-term leases (235 operating leases and 66 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of December 31, 2020, the weighted average remaining lease term of the Company's operating and financing leases was 6.7 and 6.3 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of December 31, 2020, the Company is in compliance with the financial covenants of its long-term leases. A summary of operating and financing lease expense (including the respective presentation on the consolidated statements of operations) and net cash paid from leasing transactions is as follows:
| Years Ended December 31,
Operating Leases (in thousands) | 2020 |  | 2019
Facility operating expense | $ | 19,241 |  |  | $ | 18,677 |
Facility lease expense | 224,033 |  |  | 269,666 |
Operating lease expense | 243,274 |  |  | 288,343 |
Operating lease expense adjustment (1) | 136,276 |  |  | 19,453 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (22,242) |  |  | (31,305) |
Operating cash flows from operating leases | $ | 357,308 |  |  | $ | 276,491 |
(1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense recognized in accordance with ASC 842. Operating cash flows from operating leases for the year ended December 31, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020.
| Years Ended December 31,
Financing Leases (in thousands) | 2020 |  | 2019
Depreciation and amortization | $ | 32,647 |  |  | $ | 46,646 |
Interest expense: financing lease obligations | 48,534 |  |  | 66,353 |
Financing lease expense | $ | 81,181 |  |  | $ | 112,999 |
Operating cash flows from financing leases | $ | 48,534 |  |  | $ | 66,353 |
Financing cash flows from financing leases | 18,867 |  |  | 22,242 |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | (5,603) |  |  | (3,504) |
Total cash flows from financing leases | $ | 61,798 |  |  | $ | 85,091 |
A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:
(in thousands) |  |  |  |  | Year Ended December 31, 2018
Cash basis payment - operating leases |  |  |  |  | $ | 324,870 |
Operating lease expense adjustment |  |  |  |  | (17,218) |
Amortization of deferred gain |  |  |  |  | (4,358) |
Facility lease expense |  |  |  |  | $ | 303,294 |
As of December 31, 2020, the weighted average discount rate of the Company's operating and financing leases was 7.2% and 8.0%, respectively. The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2020 are as follows (in thousands):
Year Ending December 31, | Operating Leases |  | Financing Leases
2021 | $ | 209,787 |  |  | $ | 64,914 |
2022 | 192,771 |  |  | 65,521 |
2023 | 192,381 |  |  | 66,250 |
2024 | 191,991 |  |  | 67,460 |
2025 | 189,961 |  |  | 57,499 |
Thereafter | 280,233 |  |  | 109,590 |
Total lease payments | 1,257,124 |  |  | 431,234 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 413,426 |
Imputed interest and variable lease payments | (291,469) |  |  | (281,353) |
Total lease obligations | $ | 965,655 |  |  | $ | 563,307 |
Lessee, Finance Leases | Leases As of December 31, 2020, the Company operated 301 communities under long-term leases (235 operating leases and 66 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of December 31, 2020, the weighted average remaining lease term of the Company's operating and financing leases was 6.7 and 6.3 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries. As of December 31, 2020, the Company is in compliance with the financial covenants of its long-term leases. A summary of operating and financing lease expense (including the respective presentation on the consolidated statements of operations) and net cash paid from leasing transactions is as follows:
| Years Ended December 31,
Operating Leases (in thousands) | 2020 |  | 2019
Facility operating expense | $ | 19,241 |  |  | $ | 18,677 |
Facility lease expense | 224,033 |  |  | 269,666 |
Operating lease expense | 243,274 |  |  | 288,343 |
Operating lease expense adjustment (1) | 136,276 |  |  | 19,453 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (22,242) |  |  | (31,305) |
Operating cash flows from operating leases | $ | 357,308 |  |  | $ | 276,491 |
(1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense recognized in accordance with ASC 842. Operating cash flows from operating leases for the year ended December 31, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020.
| Years Ended December 31,
Financing Leases (in thousands) | 2020 |  | 2019
Depreciation and amortization | $ | 32,647 |  |  | $ | 46,646 |
Interest expense: financing lease obligations | 48,534 |  |  | 66,353 |
Financing lease expense | $ | 81,181 |  |  | $ | 112,999 |
Operating cash flows from financing leases | $ | 48,534 |  |  | $ | 66,353 |
Financing cash flows from financing leases | 18,867 |  |  | 22,242 |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | (5,603) |  |  | (3,504) |
Total cash flows from financing leases | $ | 61,798 |  |  | $ | 85,091 |
A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:
(in thousands) |  |  |  |  | Year Ended December 31, 2018
Cash basis payment - operating leases |  |  |  |  | $ | 324,870 |
Operating lease expense adjustment |  |  |  |  | (17,218) |
Amortization of deferred gain |  |  |  |  | (4,358) |
Facility lease expense |  |  |  |  | $ | 303,294 |
As of December 31, 2020, the weighted average discount rate of the Company's operating and financing leases was 7.2% and 8.0%, respectively. The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2020 are as follows (in thousands):
Year Ending December 31, | Operating Leases |  | Financing Leases
2021 | $ | 209,787 |  |  | $ | 64,914 |
2022 | 192,771 |  |  | 65,521 |
2023 | 192,381 |  |  | 66,250 |
2024 | 191,991 |  |  | 67,460 |
2025 | 189,961 |  |  | 57,499 |
Thereafter | 280,233 |  |  | 109,590 |
Total lease payments | 1,257,124 |  |  | 431,234 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 413,426 |
Imputed interest and variable lease payments | (291,469) |  |  | (281,353) |
Total lease obligations | $ | 965,655 |  |  | $ | 563,307 |

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