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Leases | 9 Months Ended
--- | ---
Sep. 30, 2024
Leases [Abstract] |
Leases | 7. Leases As of September 30, 2024, the Company operated 277 communities under long-term leases (227 operating leases and 50 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 and maintenance, 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 September 30, 2024, the Company is in compliance with the financial covenants of its long-term lease agreements. 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 did not recognize any such impairment charges for the three and nine months ended September 30, 2024. 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. 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) | 2024 |  | 2023 |  | 2024 |  | 2023
Facility operating expense | $ | 1,999 |  |  | $ | 1,853 |  |  | $ | 6,095 |  |  | $ | 5,211 |
Facility lease expense | 51,937 |  |  | 53,145 |  |  | 154,397 |  |  | 149,784 |
Operating lease expense | 53,936 |  |  | 54,998 |  |  | 160,492 |  |  | 154,995 |
Operating lease expense adjustment (1) | 12,489 |  |  | 11,458 |  |  | 39,061 |  |  | 33,820 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (6,432) |  |  | — |  |  | (7,732) |  |  | (2,244) |
Operating net cash outflows from operating leases | $ | 59,993 |  |  | $ | 66,456 |  |  | $ | 191,821 |  |  | $ | 186,571 |
(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) | 2024 |  | 2023 |  | 2024 |  | 2023
Depreciation and amortization | $ | 2,651 |  |  | $ | 2,843 |  |  | $ | 8,421 |  |  | $ | 13,589 |
Interest expense: financing lease obligations | 5,062 |  |  | 4,950 |  |  | 15,233 |  |  | 16,955 |
Financing lease expense | $ | 7,713 |  |  | $ | 7,793 |  |  | $ | 23,654 |  |  | $ | 30,544 |
Operating cash outflows from financing leases | $ | 5,062 |  |  | $ | 4,950 |  |  | $ | 15,233 |  |  | $ | 16,955 |
Financing cash outflows from financing leases | 273 |  |  | 244 |  |  | 800 |  |  | 8,222 |
Total net cash outflows from financing leases | $ | 5,335 |  |  | $ | 5,194 |  |  | $ | 16,033 |  |  | $ | 25,177 |
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, 2024 are as follows (in millions).
Year Ending December 31, | Operating Leases |  | Financing Leases
2024 (three months) | $ | 56.9 |  |  | $ | 12.8 |
2025 | 232.4 |  |  | 7.0 |
2026 | 117.4 |  |  | 7.0 |
2027 | 118.3 |  |  | 6.3 |
2028 | 113.9 |  |  | 6.1 |
Thereafter | 736.1 |  |  | 21.2 |
Total lease payments | 1,375.0 |  |  | 60.4 |
Purchase price for communities subject to acquisition agreements | — |  |  | 610.0 |
Reacquisition price in excess of sale-leaseback proceeds | — |  |  | (32.8) |
Imputed interest and variable lease payments | (493.8) |  |  | (54.4) |
Other financing obligations | — |  |  | 20.7 |
Total lease obligations | $ | 881.2 |  |  | $ | 603.9 |
Omega Lease Amendment In August 2024, the Company and Omega Healthcare Investors, Inc. ("Omega") amended the existing master lease pursuant to which the Company continues to lease 24 communities from Omega. The Company's amended master lease has an initial term to expire on December 31, 2037. As part of the amendment, Omega agreed to make available up to $80.0 million to fund costs associated with capital expenditures for the communities through December 31, 2037. The annual rent under the lease will not be adjusted upon reimbursements for capital expenditures in the aggregate amount of up to $30.0 million of the $80.0 million pool, which is available in certain tranches through June 30, 2028. With respect to the remaining $50.0 million of the $80.0 million pool, the annual rent under the lease will prospectively increase by the amount of each reimbursement multiplied by 9.5%. The $50.0 million will be available in certain tranches beginning January 1, 2025, subject to certain annual reimbursement caps specified in the lease. Under the terms of the amendment, rent will escalate annually per the terms of the existing lease escalator, with a potential minor contingent rent adjustment beginning in 2028 depending on lease performance. The amendment to the lease arrangements increased the operating lease right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $253.4 million. International JV / Welltower Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire 11 senior living communities that are currently leased by the Company from a joint venture between Welltower Inc. (“Welltower”) and its joint venture partners for a purchase price of $300.0 million. As part of this transaction, the Company will assume approximately $194.5 million of existing 4.92% fixed rate agency debt which is scheduled to mature in March 2027. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $22.3 million and a current maturity of August 31, 2028. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the 11 communities through the assumption of the existing mortgage debt, a portion of the net cash proceeds from the sale of the 2029 New Notes, and cash on hand. The leases for the 11 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
(in millions) |  |
Property, plant and equipment and leasehold intangibles, net | $ | 281.0 |  |  |  |
Operating lease right-of-use assets | (52.0) |  |  |
Total assets | $ | 229.0 |  |  |  |
Financing lease obligations | $ | 300.0 |  |  |  |
Operating lease obligations | (71.0) |  |  |
Total liabilities | $ | 229.0 |  |  |  |
Welltower Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire five senior living communities that are currently leased by the Company from Welltower for a purchase price of $175.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $13.4 million and a current maturity of December 31, 2024. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the five communities through a portion of the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on the assets, and cash on hand. The definitive agreement included the finalization of the purchase price under the provisions of a purchase option arrangement with a variable price component based upon the fair value of the assets. The amendment of the leasing arrangement increased the financing lease right-of-use assets and lease obligations recognized for two of these communities on the Company's consolidated balance sheet each by $17.7 million. The leasing arrangements for three of these communities are accounted for as failed sale-leaseback transactions as the Company has not previously transferred control of the underlying assets for accounting purposes under a sale and leaseback arrangement with a purchase option. Diversified Healthcare Trust Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire 25 senior living communities that are currently leased by the Company from Diversified Healthcare Trust for a purchase price of $135.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $10.2 million and a current maturity of December 31, 2032. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the 25 communities through a portion of the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on certain of the assets, and cash on hand. The leases for the 25 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
(in millions) |  |
Property, plant and equipment and leasehold intangibles, net | $ | 128.6 |  |  |  |
Operating lease right-of-use assets | (40.4) |  |  |
Total assets | $ | 88.2 |  |  |  |
Financing lease obligations | $ | 135.0 |  |  |  |
Operating lease obligations | (46.8) |  |  |
Total liabilities | $ | 88.2 |  |  |  |
Leases | 7. Leases As of September 30, 2024, the Company operated 277 communities under long-term leases (227 operating leases and 50 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 and maintenance, 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 September 30, 2024, the Company is in compliance with the financial covenants of its long-term lease agreements. 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 did not recognize any such impairment charges for the three and nine months ended September 30, 2024. 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. 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) | 2024 |  | 2023 |  | 2024 |  | 2023
Facility operating expense | $ | 1,999 |  |  | $ | 1,853 |  |  | $ | 6,095 |  |  | $ | 5,211 |
Facility lease expense | 51,937 |  |  | 53,145 |  |  | 154,397 |  |  | 149,784 |
Operating lease expense | 53,936 |  |  | 54,998 |  |  | 160,492 |  |  | 154,995 |
Operating lease expense adjustment (1) | 12,489 |  |  | 11,458 |  |  | 39,061 |  |  | 33,820 |
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements | (6,432) |  |  | — |  |  | (7,732) |  |  | (2,244) |
Operating net cash outflows from operating leases | $ | 59,993 |  |  | $ | 66,456 |  |  | $ | 191,821 |  |  | $ | 186,571 |
(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) | 2024 |  | 2023 |  | 2024 |  | 2023
Depreciation and amortization | $ | 2,651 |  |  | $ | 2,843 |  |  | $ | 8,421 |  |  | $ | 13,589 |
Interest expense: financing lease obligations | 5,062 |  |  | 4,950 |  |  | 15,233 |  |  | 16,955 |
Financing lease expense | $ | 7,713 |  |  | $ | 7,793 |  |  | $ | 23,654 |  |  | $ | 30,544 |
Operating cash outflows from financing leases | $ | 5,062 |  |  | $ | 4,950 |  |  | $ | 15,233 |  |  | $ | 16,955 |
Financing cash outflows from financing leases | 273 |  |  | 244 |  |  | 800 |  |  | 8,222 |
Total net cash outflows from financing leases | $ | 5,335 |  |  | $ | 5,194 |  |  | $ | 16,033 |  |  | $ | 25,177 |
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, 2024 are as follows (in millions).
Year Ending December 31, | Operating Leases |  | Financing Leases
2024 (three months) | $ | 56.9 |  |  | $ | 12.8 |
2025 | 232.4 |  |  | 7.0 |
2026 | 117.4 |  |  | 7.0 |
2027 | 118.3 |  |  | 6.3 |
2028 | 113.9 |  |  | 6.1 |
Thereafter | 736.1 |  |  | 21.2 |
Total lease payments | 1,375.0 |  |  | 60.4 |
Purchase price for communities subject to acquisition agreements | — |  |  | 610.0 |
Reacquisition price in excess of sale-leaseback proceeds | — |  |  | (32.8) |
Imputed interest and variable lease payments | (493.8) |  |  | (54.4) |
Other financing obligations | — |  |  | 20.7 |
Total lease obligations | $ | 881.2 |  |  | $ | 603.9 |
Omega Lease Amendment In August 2024, the Company and Omega Healthcare Investors, Inc. ("Omega") amended the existing master lease pursuant to which the Company continues to lease 24 communities from Omega. The Company's amended master lease has an initial term to expire on December 31, 2037. As part of the amendment, Omega agreed to make available up to $80.0 million to fund costs associated with capital expenditures for the communities through December 31, 2037. The annual rent under the lease will not be adjusted upon reimbursements for capital expenditures in the aggregate amount of up to $30.0 million of the $80.0 million pool, which is available in certain tranches through June 30, 2028. With respect to the remaining $50.0 million of the $80.0 million pool, the annual rent under the lease will prospectively increase by the amount of each reimbursement multiplied by 9.5%. The $50.0 million will be available in certain tranches beginning January 1, 2025, subject to certain annual reimbursement caps specified in the lease. Under the terms of the amendment, rent will escalate annually per the terms of the existing lease escalator, with a potential minor contingent rent adjustment beginning in 2028 depending on lease performance. The amendment to the lease arrangements increased the operating lease right-of-use assets and lease obligations recognized on the Company's condensed consolidated balance sheet each by $253.4 million. International JV / Welltower Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire 11 senior living communities that are currently leased by the Company from a joint venture between Welltower Inc. (“Welltower”) and its joint venture partners for a purchase price of $300.0 million. As part of this transaction, the Company will assume approximately $194.5 million of existing 4.92% fixed rate agency debt which is scheduled to mature in March 2027. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $22.3 million and a current maturity of August 31, 2028. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the 11 communities through the assumption of the existing mortgage debt, a portion of the net cash proceeds from the sale of the 2029 New Notes, and cash on hand. The leases for the 11 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
(in millions) |  |
Property, plant and equipment and leasehold intangibles, net | $ | 281.0 |  |  |  |
Operating lease right-of-use assets | (52.0) |  |  |
Total assets | $ | 229.0 |  |  |  |
Financing lease obligations | $ | 300.0 |  |  |  |
Operating lease obligations | (71.0) |  |  |
Total liabilities | $ | 229.0 |  |  |  |
Welltower Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire five senior living communities that are currently leased by the Company from Welltower for a purchase price of $175.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $13.4 million and a current maturity of December 31, 2024. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the five communities through a portion of the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on the assets, and cash on hand. The definitive agreement included the finalization of the purchase price under the provisions of a purchase option arrangement with a variable price component based upon the fair value of the assets. The amendment of the leasing arrangement increased the financing lease right-of-use assets and lease obligations recognized for two of these communities on the Company's consolidated balance sheet each by $17.7 million. The leasing arrangements for three of these communities are accounted for as failed sale-leaseback transactions as the Company has not previously transferred control of the underlying assets for accounting purposes under a sale and leaseback arrangement with a purchase option. Diversified Healthcare Trust Portfolio Acquisition In September 2024, the Company entered into a definitive agreement to acquire 25 senior living communities that are currently leased by the Company from Diversified Healthcare Trust for a purchase price of $135.0 million. Currently, these communities are held in a triple-net lease with annualized current cash rent payments of $10.2 million and a current maturity of December 31, 2032. The Company expects to complete the acquisition transaction in 2024, subject to the satisfaction of customary closing conditions for real estate transactions. The Company expects to fund its acquisition of the 25 communities through a portion of the net cash proceeds from the sale of the 2029 New Notes, proceeds from non-recourse mortgage financing on certain of the assets, and cash on hand. The leases for the 25 communities were previously classified as operating leases and have been prospectively classified as financing leases subsequent to the amendment of the leasing arrangement. The amendment of the leasing arrangement resulted in the following increases to the assets and liabilities recognized on the Company's condensed consolidated balance sheet.
(in millions) |  |
Property, plant and equipment and leasehold intangibles, net | $ | 128.6 |  |  |  |
Operating lease right-of-use assets | (40.4) |  |  |
Total assets | $ | 88.2 |  |  |  |
Financing lease obligations | $ | 135.0 |  |  |  |
Operating lease obligations | (46.8) |  |  |
Total liabilities | $ | 88.2 |  |  |  |

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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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- 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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