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Leases | 3 Months Ended
--- | ---
Mar. 31, 2023
Leases [Abstract] |
Leases | 8. Leases As of March 31, 2023, the Company operated 295 communities under long-term leases (246 operating leases and 49 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. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. 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 March 31, 2023, the Company is in compliance with the financial covenants of its long-term leases. Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $8.6 million for the three months ended March 31, 2022 of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic. The Company did not recognize any impairment charges for the three months ended March 31, 2023. A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows.
| Three Months Ended March 31, |  |
Operating Leases (in thousands) | 2023 |  | 2022 |  |  |  |
Facility operating expense | $ | 1,626 |  |  | $ | 1,523 |  |  |  |  |
Facility lease expense | 46,127 |  |  | 41,564 |  |  |  |  |
Operating lease expense | 47,753 |  |  | 43,087 |  |  |  |  |
Operating lease expense adjustment (1) | 10,805 |  |  | 8,307 |  |  |  |  |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (2,244) |  |  | (1,490) |  |  |  |  |
Operating net cash outflows from operating leases | $ | 56,314 |  |  | $ | 49,904 |  |  |  |  |
(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.
| Three Months Ended March 31, |  |
Financing Leases (in thousands) | 2023 |  | 2022 |  |  |  |
Depreciation and amortization | $ | 5,228 |  |  | $ | 7,665 |  |  |  |  |
Interest expense: financing lease obligations | 6,552 |  |  | 12,058 |  |  |  |  |
Financing lease expense | $ | 11,780 |  |  | $ | 19,723 |  |  |  |  |
Operating cash outflows from financing leases | $ | 6,552 |  |  | $ | 12,058 |  |  |  |  |
Financing cash outflows from financing leases | 5,852 |  |  | 5,490 |  |  |  |  |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | — |  |  | (3,207) |  |  |  |  |
Total net cash outflows from financing leases | $ | 12,404 |  |  | $ | 14,341 |  |  |  |  |
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of March 31, 2023 are as follows (in thousands).
Year Ending December 31, | Operating Leases |  | Financing Leases
2023 (nine months) | $ | 174,844 |  |  | $ | 36,463 |
2024 | 218,481 |  |  | 49,309 |
2025 | 216,638 |  |  | 37,189 |
2026 | 101,785 |  |  | 37,894 |
2027 | 98,606 |  |  | 5,861 |
Thereafter | 135,448 |  |  | 24,174 |
Total lease payments | 945,802 |  |  | 190,890 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 135,751 |
Imputed interest and variable lease payments | (192,305) |  |  | (83,609) |
Total lease obligations | $ | 753,497 |  |  | $ | 243,032 |
Subsequent to the three months ended March 31, 2023, the Company and Welltower Inc. ("Welltower") entered into amendments to the Company’s existing lease arrangements pursuant to which the Company continues to lease 74 communities. In connection with the amendments, the Company extended the maturity of one lease involving 39 communities from December 31, 2026 until June 30, 2032. As a result, the Company's amended lease arrangements provide that the current term for 69 of the communities will expire on June 30, 2032 and the current term for five of the communities will expire on December 31, 2024. The amendments did not change the amount of required lease payments over the previous term of the leases or the annual lease escalators. In addition, Welltower agreed to make available a pool in the aggregate amount of up to $17.0 million to fund costs associated with certain capital expenditure projects for 69 of the communities. Upon reimbursement of such expenditures, the annual minimum rent under the lease will prospectively increase by the amount of the reimbursement multiplied by the sum of the then current SOFR (subject to a floor of 3.0%) and a margin of 4.0%, and such amount will escalate annually consistent with the minimum rent escalation provisions of the 39 community lease. The Company preliminarily estimates that the amendment to the lease arrangements will increase the right-of-use assets and lease obligations recognized on its condensed consolidated balance sheet each by approximately $125.0 million.The amendments replaced the net worth covenant provisions requiring the Company to maintain at least $400.0 million of stockholders' equity with a consolidated tangible net worth covenant requiring the Company to maintain at least $2.0 billion of tangible net worth, generally calculated as stockholders' equity plus accumulated depreciation and amortization less intangible assets and further adjusted for certain other items. Such calculation is generally similar to the tangible net worth covenants within certain of the Company’s long-term debt documents. So long as it maintains tangible net worth as defined in the leases of at least $1.5 billion, the Company will also be able to cure any breach by posting collateral with Welltower.
Leases | 8. Leases As of March 31, 2023, the Company operated 295 communities under long-term leases (246 operating leases and 49 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. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. 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 March 31, 2023, the Company is in compliance with the financial covenants of its long-term leases. Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized $8.6 million for the three months ended March 31, 2022 of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic. The Company did not recognize any impairment charges for the three months ended March 31, 2023. A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and net cash outflows from leases is as follows.
| Three Months Ended March 31, |  |
Operating Leases (in thousands) | 2023 |  | 2022 |  |  |  |
Facility operating expense | $ | 1,626 |  |  | $ | 1,523 |  |  |  |  |
Facility lease expense | 46,127 |  |  | 41,564 |  |  |  |  |
Operating lease expense | 47,753 |  |  | 43,087 |  |  |  |  |
Operating lease expense adjustment (1) | 10,805 |  |  | 8,307 |  |  |  |  |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (2,244) |  |  | (1,490) |  |  |  |  |
Operating net cash outflows from operating leases | $ | 56,314 |  |  | $ | 49,904 |  |  |  |  |
(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.
| Three Months Ended March 31, |  |
Financing Leases (in thousands) | 2023 |  | 2022 |  |  |  |
Depreciation and amortization | $ | 5,228 |  |  | $ | 7,665 |  |  |  |  |
Interest expense: financing lease obligations | 6,552 |  |  | 12,058 |  |  |  |  |
Financing lease expense | $ | 11,780 |  |  | $ | 19,723 |  |  |  |  |
Operating cash outflows from financing leases | $ | 6,552 |  |  | $ | 12,058 |  |  |  |  |
Financing cash outflows from financing leases | 5,852 |  |  | 5,490 |  |  |  |  |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | — |  |  | (3,207) |  |  |  |  |
Total net cash outflows from financing leases | $ | 12,404 |  |  | $ | 14,341 |  |  |  |  |
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of March 31, 2023 are as follows (in thousands).
Year Ending December 31, | Operating Leases |  | Financing Leases
2023 (nine months) | $ | 174,844 |  |  | $ | 36,463 |
2024 | 218,481 |  |  | 49,309 |
2025 | 216,638 |  |  | 37,189 |
2026 | 101,785 |  |  | 37,894 |
2027 | 98,606 |  |  | 5,861 |
Thereafter | 135,448 |  |  | 24,174 |
Total lease payments | 945,802 |  |  | 190,890 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 135,751 |
Imputed interest and variable lease payments | (192,305) |  |  | (83,609) |
Total lease obligations | $ | 753,497 |  |  | $ | 243,032 |
Subsequent to the three months ended March 31, 2023, the Company and Welltower Inc. ("Welltower") entered into amendments to the Company’s existing lease arrangements pursuant to which the Company continues to lease 74 communities. In connection with the amendments, the Company extended the maturity of one lease involving 39 communities from December 31, 2026 until June 30, 2032. As a result, the Company's amended lease arrangements provide that the current term for 69 of the communities will expire on June 30, 2032 and the current term for five of the communities will expire on December 31, 2024. The amendments did not change the amount of required lease payments over the previous term of the leases or the annual lease escalators. In addition, Welltower agreed to make available a pool in the aggregate amount of up to $17.0 million to fund costs associated with certain capital expenditure projects for 69 of the communities. Upon reimbursement of such expenditures, the annual minimum rent under the lease will prospectively increase by the amount of the reimbursement multiplied by the sum of the then current SOFR (subject to a floor of 3.0%) and a margin of 4.0%, and such amount will escalate annually consistent with the minimum rent escalation provisions of the 39 community lease. The Company preliminarily estimates that the amendment to the lease arrangements will increase the right-of-use assets and lease obligations recognized on its condensed consolidated balance sheet each by approximately $125.0 million.The amendments replaced the net worth covenant provisions requiring the Company to maintain at least $400.0 million of stockholders' equity with a consolidated tangible net worth covenant requiring the Company to maintain at least $2.0 billion of tangible net worth, generally calculated as stockholders' equity plus accumulated depreciation and amortization less intangible assets and further adjusted for certain other items. Such calculation is generally similar to the tangible net worth covenants within certain of the Company’s long-term debt documents. So long as it maintains tangible net worth as defined in the leases of at least $1.5 billion, the Company will also be able to cure any breach by posting collateral with Welltower.

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- Definition The entire disclosure for finance leases of lessee. Includes, but is not limited to, description of lessee's finance lease and maturity analysis of finance lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=77888251 + Details
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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 -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=77888251 + Details
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