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Lease Accounting | 9 Months Ended
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Sep. 30, 2021
Leases [Abstract] |
Lease Accounting | Lease Accounting The following is a summary of the Company's accounting for leases as of and during the nine months ended September 30, 2021 and 2020: Lessor Lexington’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased industrial and office real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred. Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price upon expiration of the lease term or before. Accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions. The Company analyzes its accounts receivable, customer creditworthiness and current economic trends when evaluating the adequacy of the collectability of the lessee's total accounts receivable balance on a lease by lease basis. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected pre-petition and post-petition claims. If a lessee's accounts receivable balance is considered uncollectable, the Company will write-off the receivable balances associated with the lease to rental revenue and cease to recognize lease income, including straight-line rent, unless cash is received. If the Company subsequently determines that it is probable it will collect substantially all of the lessee's remaining lease payments under the lease term; the Company will reinstate the straight-line balance adjusting for the amount related to the period when the lease was accounted for on a cash basis. During the nine months ended September 30, 2020, the Company wrote off a deferred rent receivable balance of $615, as a reduction of rental revenue, related to a tenant that dissolved and surrendered its leased premises in an industrial property located in the Columbus, Ohio market. Certain tenants have been experiencing financial difficulties as a result of the COVID-19 pandemic. During the nine months ended September 30, 2020, the Company wrote off an aggregate deferred rent receivable balance of $1,383, as a reduction of rental revenue, related to tenants with rent collectability concerns. During the nine months ended September 30, 2021 and 2020, the Company wrote off an aggregate of $463 and $177, respectively, accounts receivable relating to certain tenants suffering from the current economic conditions. The Company determined that the lease and non-lease components in its leases are a single lease component, which is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service is included within rental revenue is CAM services provided as part of the Company’s real estate leases. Topic 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. As of September 30, 2020, the Company incurred $67 of costs that were not incremental to the execution of leases, which are included in property operating expenses on its unaudited condensed consolidated statements of operations. The Company incurred no leasing costs that were not incremental for the execution of leases as of September 30, 2021. The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties. The following table presents the Company’s classification of rental revenue for its operating leases for the three and nine months ended September 30, 2021 and 2020:
|  | Three Months Ended |  | Nine Months Ended
Classification |  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Fixed |  | $ | 71,357 |  |  | $ | 74,902 |  |  | $ | 213,929 |  |  | $ | 219,542 |
Variable(1)(2) |  | 10,996 |  |  | 8,690 |  |  | 40,641 |  |  | 23,879 |
Total |  | $ | 82,353 |  |  | $ | 83,592 |  |  | $ | 254,570 |  |  | $ | 243,421 |
(1) Primarily comprised of tenant reimbursements. (2) Variable income contains termination income of $14,105 and $662 for the nine months ended September 30, 2021 and 2020, respectively. The 2021 termination fee income primarily related to a tenant that terminated its lease at the Company's Durham, New Hampshire industrial property. Future fixed rental receipts for leases, assuming no new or re-negotiated leases as of September 30, 2021 were as follows:
2021 - remainder | $ | 68,554 |
2022 | 277,267 |
2023 | 277,523 |
2024 | 241,780 |
2025 | 211,975 |
2026 | 188,128 |
Thereafter | 767,235 |
Total | $ | 2,032,462 |
Lessee The Company, as lessee, has ground leases, corporate leases for office space, and office equipment leases. All leases were classified as operating leases as of September 30, 2021. The leases have remaining lease terms of up to 42 years, some of which include options to extend the leases in 5 to 10-year increments for up to 52 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred. The accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or termination provisions and determining the discount rate. The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract as a lease. The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized discount rate for each portfolio of leases. Supplemental information related to operating leases is as follows:
|  | Nine Months Ended
|  | September 30, 2021 |  | September 30, 2020
Weighted-average remaining lease term |  |  |
Operating leases (years) | 11.3 |  | 12.3
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.2 | %
The components of lease expense for the nine months ended September 30, 2021 and 2020 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2021: |  |  |  |  |
Property operating | $ | 2,734 |  |  | $ | 2 |  |  | $ | 2,736 |
General and administrative | 1,037 |  |  | 24 |  |  | 1,061 |
Total | $ | 3,771 |  |  | $ | 26 |  |  | $ | 3,797 |
2020: |  |  |  |  |
Property operating | $ | 2,985 |  |  | $ | — |  |  | $ | 2,985 |
General and administrative | 1,012 |  |  | 76 |  |  | 1,088 |
Total | $ | 3,997 |  |  | $ | 76 |  |  | $ | 4,073 |
The Company recognized sublease income of $2,569 and $2,824 for the nine months ended September 30, 2021 and 2020, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of September 30, 2021:
|  | Operating Leases
2021 - remainder |  | $ | 1,192 |
2022 |  | 5,005 |
2023 |  | 5,155 |
2024 |  | 5,021 |
2025 |  | 5,021 |
2026 |  | 3,985 |
Thereafter |  | 13,486 |
Total lease payments |  | $ | 38,865 |
Less: Imputed interest |  | (8,756) |
Present value of operating lease liabilities |  | $ | 30,109 |
Lease Accounting | Lease Accounting The following is a summary of the Company's accounting for leases as of and during the nine months ended September 30, 2021 and 2020: Lessor Lexington’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased industrial and office real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred. Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price upon expiration of the lease term or before. Accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions. The Company analyzes its accounts receivable, customer creditworthiness and current economic trends when evaluating the adequacy of the collectability of the lessee's total accounts receivable balance on a lease by lease basis. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected pre-petition and post-petition claims. If a lessee's accounts receivable balance is considered uncollectable, the Company will write-off the receivable balances associated with the lease to rental revenue and cease to recognize lease income, including straight-line rent, unless cash is received. If the Company subsequently determines that it is probable it will collect substantially all of the lessee's remaining lease payments under the lease term; the Company will reinstate the straight-line balance adjusting for the amount related to the period when the lease was accounted for on a cash basis. During the nine months ended September 30, 2020, the Company wrote off a deferred rent receivable balance of $615, as a reduction of rental revenue, related to a tenant that dissolved and surrendered its leased premises in an industrial property located in the Columbus, Ohio market. Certain tenants have been experiencing financial difficulties as a result of the COVID-19 pandemic. During the nine months ended September 30, 2020, the Company wrote off an aggregate deferred rent receivable balance of $1,383, as a reduction of rental revenue, related to tenants with rent collectability concerns. During the nine months ended September 30, 2021 and 2020, the Company wrote off an aggregate of $463 and $177, respectively, accounts receivable relating to certain tenants suffering from the current economic conditions. The Company determined that the lease and non-lease components in its leases are a single lease component, which is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service is included within rental revenue is CAM services provided as part of the Company’s real estate leases. Topic 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. As of September 30, 2020, the Company incurred $67 of costs that were not incremental to the execution of leases, which are included in property operating expenses on its unaudited condensed consolidated statements of operations. The Company incurred no leasing costs that were not incremental for the execution of leases as of September 30, 2021. The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties. The following table presents the Company’s classification of rental revenue for its operating leases for the three and nine months ended September 30, 2021 and 2020:
|  | Three Months Ended |  | Nine Months Ended
Classification |  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Fixed |  | $ | 71,357 |  |  | $ | 74,902 |  |  | $ | 213,929 |  |  | $ | 219,542 |
Variable(1)(2) |  | 10,996 |  |  | 8,690 |  |  | 40,641 |  |  | 23,879 |
Total |  | $ | 82,353 |  |  | $ | 83,592 |  |  | $ | 254,570 |  |  | $ | 243,421 |
(1) Primarily comprised of tenant reimbursements. (2) Variable income contains termination income of $14,105 and $662 for the nine months ended September 30, 2021 and 2020, respectively. The 2021 termination fee income primarily related to a tenant that terminated its lease at the Company's Durham, New Hampshire industrial property. Future fixed rental receipts for leases, assuming no new or re-negotiated leases as of September 30, 2021 were as follows:
2021 - remainder | $ | 68,554 |
2022 | 277,267 |
2023 | 277,523 |
2024 | 241,780 |
2025 | 211,975 |
2026 | 188,128 |
Thereafter | 767,235 |
Total | $ | 2,032,462 |
Lessee The Company, as lessee, has ground leases, corporate leases for office space, and office equipment leases. All leases were classified as operating leases as of September 30, 2021. The leases have remaining lease terms of up to 42 years, some of which include options to extend the leases in 5 to 10-year increments for up to 52 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred. The accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or termination provisions and determining the discount rate. The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract as a lease. The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized discount rate for each portfolio of leases. Supplemental information related to operating leases is as follows:
|  | Nine Months Ended
|  | September 30, 2021 |  | September 30, 2020
Weighted-average remaining lease term |  |  |
Operating leases (years) | 11.3 |  | 12.3
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.2 | %
The components of lease expense for the nine months ended September 30, 2021 and 2020 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2021: |  |  |  |  |
Property operating | $ | 2,734 |  |  | $ | 2 |  |  | $ | 2,736 |
General and administrative | 1,037 |  |  | 24 |  |  | 1,061 |
Total | $ | 3,771 |  |  | $ | 26 |  |  | $ | 3,797 |
2020: |  |  |  |  |
Property operating | $ | 2,985 |  |  | $ | — |  |  | $ | 2,985 |
General and administrative | 1,012 |  |  | 76 |  |  | 1,088 |
Total | $ | 3,997 |  |  | $ | 76 |  |  | $ | 4,073 |
The Company recognized sublease income of $2,569 and $2,824 for the nine months ended September 30, 2021 and 2020, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of September 30, 2021:
|  | Operating Leases
2021 - remainder |  | $ | 1,192 |
2022 |  | 5,005 |
2023 |  | 5,155 |
2024 |  | 5,021 |
2025 |  | 5,021 |
2026 |  | 3,985 |
Thereafter |  | 13,486 |
Total lease payments |  | $ | 38,865 |
Less: Imputed interest |  | (8,756) |
Present value of operating lease liabilities |  | $ | 30,109 |

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