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Leases | 12 Months Ended
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Dec. 31, 2022
Leases [Abstract] |
Leases | Leases Lessor Operating Leases. The Company’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased 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 the 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 ASC 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 uncollectible, 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. Certain tenants have been experiencing financial difficulties as a result of the current economic conditions. During the years ended December 31, 2022, 2021 and 2020, the Company wrote off an aggregate of $417, $370 and $389, respectively, accounts receivable, net, relating to certain tenants suffering from the current economic conditions. The Company elected 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 consolidated statements of operations. The primary non-lease service included within rental revenue is CAM services provided as part of the Company’s real estate leases. ASC 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 December 31, 2022, 2021 and 2020, the Company incurred $2, $19 and $67, respectively, of costs that were not incremental to the execution of leases, which are included in property operating expenses in its consolidated statements of operations. 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. Sales-Type Leases. During the year ended December 31 2022, the Company had three transactions that qualified as sales-type leases. In 2022, the Company had two tenants that exercised the purchase option within their lease for an aggregate purchase option price of $34,841. The purchase options were not reasonably certain to be exercised at the commencement date of each lease, resulting in modifications of the operating leases. As a result of these modifications to the leases, the Company re-evaluated the lease classifications and classified both leases as sales-type leases. The Company recognized an aggregate of $10,184 in selling profit from sales-type leases in its consolidated statements of operations related to these transactions for the year ended December 31, 2022. As of December 31, 2022, the Company had one ground lease for a 100-acre industrial development land parcel located in the Phoenix, Arizona market that is classified as a sales-type lease. At the commencement date of the lease, the Company evaluated the lease classification and classified the lease as a sales-type lease. The lease contains a purchase option in the amount of $20.00 per land square foot starting on the second anniversary date of the lease ending and ending on the third anniversary date. The Company determined that the purchase option is not reasonably certain of being exercised. The lease met the sales-type lease criteria because the present value of the lease payments was equal to substantially all of the fair value of the underlying asset on the lease commencement date. The Company recorded $60,984 in investment in a sales-type lease, net and derecognized $24,109 from land held for development in the consolidated balance sheets. The Company recognized $36,875 in selling profit from sales-type leases and $4,119 of direct costs to enter into the lease within transaction costs in the consolidated statements of operations for the year ended December 31, 2022. The interest income earned from sales-type leases is included in rental revenue in the consolidated statements of operations. The residual value of the land parcel at the end of the ground lease is estimated to equal it's fair value on the commencement date of the lease of $60,984 because land values typically appreciate over time but the accounting guidance does not allow the residual value at the end of the lease to be in excess of the fair value at the commencement date of the lease. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating and sales-type leases for the year ended December 31, 2022, 2021 and 2020:
|  | Years Ended December 31,
Classification |  | 2022 |  | 2021 |  | 2020
Fixed |  | $ | 267,644 |  |  | $ | 287,552 |  |  | $ | 293,457 |
Sales-type lease income |  | 1,936 |  |  | — |  |  | — |
Variable(1)(2) |  | 44,412 |  |  | 52,392 |  |  | 32,354 |
Total |  | $ | 313,992 |  |  | $ | 339,944 |  |  | $ | 325,811 |
(1) Primarily comprised of tenant reimbursements. (2) Variable lease payments contain termination revenue of $238, $15,371, and $857 for the years ending December 31, 2022, 2021 and 2020, respectively. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of December 31, 2022 were as follows:
Year ending December 31, | Operating | Sales-Type
2023 | $ | 263,035 |  | $ | 5,228 |
2024 | 240,160 |  | 5,263 |
2025 | 220,981 |  | 5,473 |
2026 | 201,251 |  | 5,692 |
2027 | 164,056 |  | 5,920 |
Thereafter | 615,728 |  | 739,162 |
Total | $ | 1,705,211 |  | $ | 766,738 |
Difference between undiscounted cash flow and present value |  | 705,412 |
Investment in a sales-type lease |  | $ | 61,326 |
The above minimum lease payments do not include reimbursements to be received from tenants for certain operating expenses and real estate taxes and do not include early termination payments provided for in certain leases, if not reasonably certain. Certain leases allow for the tenant to terminate the lease if the property is deemed obsolete, as defined, and upon payment of a termination fee to the landlord, as stipulated in the lease. In addition, certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price. 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 December 31, 2022. The leases have remaining lease terms of up to 38 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 ASC 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:
|  | Years Ended December 31,
|  | 2022 |  | 2021
Weighted-average remaining lease term |  |  |
Operating leases (years) | 9.4 |  | 9.7
Weighted-average discount rate |  |  |
Operating leases | 4.0 | % |  | 4.0 | %
The components of lease expense for the year ended December 31, 2022, 2021 and 2020 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2022: |  |  |  |  |
Property operating | $ | 3,543 |  |  | $ | — |  |  | $ | 3,543 |
General and administrative | 1,520 |  |  | 122 |  |  | 1,642 |
Total | $ | 5,063 |  |  | $ | 122 |  |  | $ | 5,185 |
2021: |  |  |  |  |
Property operating | $ | 3,645 |  |  | $ | 3 |  |  | $ | 3,648 |
General and administrative | 1,380 |  |  | 70 |  |  | 1,450 |
Total | $ | 5,025 |  |  | $ | 73 |  |  | $ | 5,098 |
2020: |  |  |  |  |
Property operating | $ | 3,969 |  |  | $ | 2 |  |  | $ | 3,971 |
General and administrative | 1,348 |  |  | 105 |  |  | 1,453 |
Total | $ | 5,317 |  |  | $ | 107 |  |  | $ | 5,424 |
The Company recognized sublease income of $3,320, $3,425 and $3,756 in 2022, 2021 and 2020, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of December 31, 2022:
Year ending December 31, |  | Operating Leases
2023 |  | $ | 5,290 |
2024 |  | 5,199 |
2025 |  | 5,204 |
2026 |  | 4,174 |
2027 |  | 3,673 |
Thereafter |  | 7,501 |
Total lease payments |  | 31,041 |
Less: Imputed interest |  | (5,923) |
Present value of lease liabilities |  | $ | 25,118 |
Leases | Leases Lessor Operating Leases. The Company’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased 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 the 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 ASC 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 uncollectible, 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. Certain tenants have been experiencing financial difficulties as a result of the current economic conditions. During the years ended December 31, 2022, 2021 and 2020, the Company wrote off an aggregate of $417, $370 and $389, respectively, accounts receivable, net, relating to certain tenants suffering from the current economic conditions. The Company elected 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 consolidated statements of operations. The primary non-lease service included within rental revenue is CAM services provided as part of the Company’s real estate leases. ASC 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 December 31, 2022, 2021 and 2020, the Company incurred $2, $19 and $67, respectively, of costs that were not incremental to the execution of leases, which are included in property operating expenses in its consolidated statements of operations. 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. Sales-Type Leases. During the year ended December 31 2022, the Company had three transactions that qualified as sales-type leases. In 2022, the Company had two tenants that exercised the purchase option within their lease for an aggregate purchase option price of $34,841. The purchase options were not reasonably certain to be exercised at the commencement date of each lease, resulting in modifications of the operating leases. As a result of these modifications to the leases, the Company re-evaluated the lease classifications and classified both leases as sales-type leases. The Company recognized an aggregate of $10,184 in selling profit from sales-type leases in its consolidated statements of operations related to these transactions for the year ended December 31, 2022. As of December 31, 2022, the Company had one ground lease for a 100-acre industrial development land parcel located in the Phoenix, Arizona market that is classified as a sales-type lease. At the commencement date of the lease, the Company evaluated the lease classification and classified the lease as a sales-type lease. The lease contains a purchase option in the amount of $20.00 per land square foot starting on the second anniversary date of the lease ending and ending on the third anniversary date. The Company determined that the purchase option is not reasonably certain of being exercised. The lease met the sales-type lease criteria because the present value of the lease payments was equal to substantially all of the fair value of the underlying asset on the lease commencement date. The Company recorded $60,984 in investment in a sales-type lease, net and derecognized $24,109 from land held for development in the consolidated balance sheets. The Company recognized $36,875 in selling profit from sales-type leases and $4,119 of direct costs to enter into the lease within transaction costs in the consolidated statements of operations for the year ended December 31, 2022. The interest income earned from sales-type leases is included in rental revenue in the consolidated statements of operations. The residual value of the land parcel at the end of the ground lease is estimated to equal it's fair value on the commencement date of the lease of $60,984 because land values typically appreciate over time but the accounting guidance does not allow the residual value at the end of the lease to be in excess of the fair value at the commencement date of the lease. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating and sales-type leases for the year ended December 31, 2022, 2021 and 2020:
|  | Years Ended December 31,
Classification |  | 2022 |  | 2021 |  | 2020
Fixed |  | $ | 267,644 |  |  | $ | 287,552 |  |  | $ | 293,457 |
Sales-type lease income |  | 1,936 |  |  | — |  |  | — |
Variable(1)(2) |  | 44,412 |  |  | 52,392 |  |  | 32,354 |
Total |  | $ | 313,992 |  |  | $ | 339,944 |  |  | $ | 325,811 |
(1) Primarily comprised of tenant reimbursements. (2) Variable lease payments contain termination revenue of $238, $15,371, and $857 for the years ending December 31, 2022, 2021 and 2020, respectively. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of December 31, 2022 were as follows:
Year ending December 31, | Operating | Sales-Type
2023 | $ | 263,035 |  | $ | 5,228 |
2024 | 240,160 |  | 5,263 |
2025 | 220,981 |  | 5,473 |
2026 | 201,251 |  | 5,692 |
2027 | 164,056 |  | 5,920 |
Thereafter | 615,728 |  | 739,162 |
Total | $ | 1,705,211 |  | $ | 766,738 |
Difference between undiscounted cash flow and present value |  | 705,412 |
Investment in a sales-type lease |  | $ | 61,326 |
The above minimum lease payments do not include reimbursements to be received from tenants for certain operating expenses and real estate taxes and do not include early termination payments provided for in certain leases, if not reasonably certain. Certain leases allow for the tenant to terminate the lease if the property is deemed obsolete, as defined, and upon payment of a termination fee to the landlord, as stipulated in the lease. In addition, certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price. 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 December 31, 2022. The leases have remaining lease terms of up to 38 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 ASC 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:
|  | Years Ended December 31,
|  | 2022 |  | 2021
Weighted-average remaining lease term |  |  |
Operating leases (years) | 9.4 |  | 9.7
Weighted-average discount rate |  |  |
Operating leases | 4.0 | % |  | 4.0 | %
The components of lease expense for the year ended December 31, 2022, 2021 and 2020 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2022: |  |  |  |  |
Property operating | $ | 3,543 |  |  | $ | — |  |  | $ | 3,543 |
General and administrative | 1,520 |  |  | 122 |  |  | 1,642 |
Total | $ | 5,063 |  |  | $ | 122 |  |  | $ | 5,185 |
2021: |  |  |  |  |
Property operating | $ | 3,645 |  |  | $ | 3 |  |  | $ | 3,648 |
General and administrative | 1,380 |  |  | 70 |  |  | 1,450 |
Total | $ | 5,025 |  |  | $ | 73 |  |  | $ | 5,098 |
2020: |  |  |  |  |
Property operating | $ | 3,969 |  |  | $ | 2 |  |  | $ | 3,971 |
General and administrative | 1,348 |  |  | 105 |  |  | 1,453 |
Total | $ | 5,317 |  |  | $ | 107 |  |  | $ | 5,424 |
The Company recognized sublease income of $3,320, $3,425 and $3,756 in 2022, 2021 and 2020, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of December 31, 2022:
Year ending December 31, |  | Operating Leases
2023 |  | $ | 5,290 |
2024 |  | 5,199 |
2025 |  | 5,204 |
2026 |  | 4,174 |
2027 |  | 3,673 |
Thereafter |  | 7,501 |
Total lease payments |  | 31,041 |
Less: Imputed interest |  | (5,923) |
Present value of lease liabilities |  | $ | 25,118 |

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