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Leases | 9 Months Ended
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Sep. 30, 2023
Leases [Abstract] |
Leases | 7. Leases As of September 30, 2023, the Company operated 295 communities under long-term leases (281 operating leases and 14 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. In certain cases, the Company 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. As of September 30, 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 $3.8 million for both the three and nine months ended September 30, 2023, of non-cash impairment charges for its operating lease right-of-use assets, primarily due to lower than expected occupancy and decreased future cash flow estimates at certain communities. The Company recognized $1.9 million and $11.5 million for the three and nine months ended September 30, 2022, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continued impacts of the COVID-19 pandemic and property damage sustained at certain communities. 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 September 30, |  | Nine Months Ended September 30,
Operating Leases (in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Facility operating expense | $ | 1,853 |  |  | $ | 1,621 |  |  | $ | 5,211 |  |  | $ | 4,705 |
Facility lease expense | 53,145 |  |  | 41,317 |  |  | 149,784 |  |  | 124,419 |
Operating lease expense | 54,998 |  |  | 42,938 |  |  | 154,995 |  |  | 129,124 |
Operating lease expense adjustment (1) | 11,458 |  |  | 8,714 |  |  | 33,820 |  |  | 25,329 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | — |  |  | (4,367) |  |  | (2,244) |  |  | (9,224) |
Operating net cash outflows from operating leases | $ | 66,456 |  |  | $ | 47,285 |  |  | $ | 186,571 |  |  | $ | 145,229 |
(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
Financing Leases (in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Depreciation and amortization | $ | 1,159 |  |  | $ | 7,405 |  |  | $ | 8,902 |  |  | $ | 22,678 |
Interest expense: financing lease obligations | 4,950 |  |  | 11,916 |  |  | 16,955 |  |  | 35,968 |
Financing lease expense | $ | 6,109 |  |  | $ | 19,321 |  |  | $ | 25,857 |  |  | $ | 58,646 |
Operating cash outflows from financing leases | $ | 4,950 |  |  | $ | 11,916 |  |  | $ | 16,955 |  |  | $ | 35,968 |
Financing cash outflows from financing leases | 244 |  |  | 5,506 |  |  | 8,222 |  |  | 16,606 |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | — |  |  | (2,727) |  |  | — |  |  | (9,704) |
Total net cash outflows from financing leases | $ | 5,194 |  |  | $ | 14,695 |  |  | $ | 25,177 |  |  | $ | 42,870 |
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the condensed consolidated balance sheet as of September 30, 2023 are as follows (in thousands).
Year Ending December 31, | Operating Leases |  | Financing Leases
2023 (three months) | $ | 66,197 |  |  | $ | 5,026 |
2024 | 258,495 |  |  | 20,213 |
2025 | 258,356 |  |  | 6,798 |
2026 | 143,912 |  |  | 6,781 |
2027 | 145,751 |  |  | 6,029 |
Thereafter | 330,095 |  |  | 26,302 |
Total | 1,202,806 |  |  | 71,149 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 145,136 |
Imputed interest and variable lease payments | (289,810) |  |  | (64,491) |
Total lease obligations | $ | 912,996 |  |  | $ | 151,794 |
Welltower Lease Amendments During the three months ended June 30, 2023, the Company entered into amendments to its existing lease arrangements with Welltower Inc. ("Welltower") 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 amended leases for 35 of such communities were prospectively classified as operating leases subsequent to the amendment. The prospective change in classification of such lease costs to operating lease expense will result in a $19.3 million increase in cash lease payments for operating leases for 2023 and an offsetting decrease in cash lease payments for financing leases. For the three and nine months ended September 30, 2023, the classification of such lease costs as operating lease expense resulted in a $7.2 million and $12.0 million, respectively, increase in cash lease payments for operating leases and an offsetting decrease in cash lease payments for financing leases. The amendment to the lease arrangements increased the right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $122.3 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 | 7. Leases As of September 30, 2023, the Company operated 295 communities under long-term leases (281 operating leases and 14 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. In certain cases, the Company 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. As of September 30, 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 $3.8 million for both the three and nine months ended September 30, 2023, of non-cash impairment charges for its operating lease right-of-use assets, primarily due to lower than expected occupancy and decreased future cash flow estimates at certain communities. The Company recognized $1.9 million and $11.5 million for the three and nine months ended September 30, 2022, of non-cash impairment charges in its operating results for its operating lease right-of-use assets, primarily due to decreased occupancy and future cash flow estimates at certain communities as a result of the continued impacts of the COVID-19 pandemic and property damage sustained at certain communities. 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 September 30, |  | Nine Months Ended September 30,
Operating Leases (in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Facility operating expense | $ | 1,853 |  |  | $ | 1,621 |  |  | $ | 5,211 |  |  | $ | 4,705 |
Facility lease expense | 53,145 |  |  | 41,317 |  |  | 149,784 |  |  | 124,419 |
Operating lease expense | 54,998 |  |  | 42,938 |  |  | 154,995 |  |  | 129,124 |
Operating lease expense adjustment (1) | 11,458 |  |  | 8,714 |  |  | 33,820 |  |  | 25,329 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | — |  |  | (4,367) |  |  | (2,244) |  |  | (9,224) |
Operating net cash outflows from operating leases | $ | 66,456 |  |  | $ | 47,285 |  |  | $ | 186,571 |  |  | $ | 145,229 |
(1)Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
Financing Leases (in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Depreciation and amortization | $ | 1,159 |  |  | $ | 7,405 |  |  | $ | 8,902 |  |  | $ | 22,678 |
Interest expense: financing lease obligations | 4,950 |  |  | 11,916 |  |  | 16,955 |  |  | 35,968 |
Financing lease expense | $ | 6,109 |  |  | $ | 19,321 |  |  | $ | 25,857 |  |  | $ | 58,646 |
Operating cash outflows from financing leases | $ | 4,950 |  |  | $ | 11,916 |  |  | $ | 16,955 |  |  | $ | 35,968 |
Financing cash outflows from financing leases | 244 |  |  | 5,506 |  |  | 8,222 |  |  | 16,606 |
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement | — |  |  | (2,727) |  |  | — |  |  | (9,704) |
Total net cash outflows from financing leases | $ | 5,194 |  |  | $ | 14,695 |  |  | $ | 25,177 |  |  | $ | 42,870 |
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the condensed consolidated balance sheet as of September 30, 2023 are as follows (in thousands).
Year Ending December 31, | Operating Leases |  | Financing Leases
2023 (three months) | $ | 66,197 |  |  | $ | 5,026 |
2024 | 258,495 |  |  | 20,213 |
2025 | 258,356 |  |  | 6,798 |
2026 | 143,912 |  |  | 6,781 |
2027 | 145,751 |  |  | 6,029 |
Thereafter | 330,095 |  |  | 26,302 |
Total | 1,202,806 |  |  | 71,149 |
Purchase option liability and non-cash gain on future sale of property | — |  |  | 145,136 |
Imputed interest and variable lease payments | (289,810) |  |  | (64,491) |
Total lease obligations | $ | 912,996 |  |  | $ | 151,794 |
Welltower Lease Amendments During the three months ended June 30, 2023, the Company entered into amendments to its existing lease arrangements with Welltower Inc. ("Welltower") 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 amended leases for 35 of such communities were prospectively classified as operating leases subsequent to the amendment. The prospective change in classification of such lease costs to operating lease expense will result in a $19.3 million increase in cash lease payments for operating leases for 2023 and an offsetting decrease in cash lease payments for financing leases. For the three and nine months ended September 30, 2023, the classification of such lease costs as operating lease expense resulted in a $7.2 million and $12.0 million, respectively, increase in cash lease payments for operating leases and an offsetting decrease in cash lease payments for financing leases. The amendment to the lease arrangements increased the right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $122.3 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 -Topic 842 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//842-20/tableOfContent + Details
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