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Lease Accounting | 6 Months Ended
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Jun. 30, 2023
Leases [Abstract] |
Lease Accounting | Lease Accounting 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. There were no write offs for the six months ended June 30, 2023. During the six months ended June 30, 2022, the Company wrote off an aggregate of $198, 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 unaudited condensed 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. For the six months ended June 30, 2023, the Company incurred no costs that were not incremental to the execution of leases. For the six months ended June 30, 2022, the Company incurred $34 of costs that were not incremental to the execution of leases. 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. As of June 30, 2023, the Company had one lease that qualified as a sales-type lease. The Company has 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 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. For the six months ended June 30, 2023, the interest income earned from sales-type leases of $3,681 is included in rental revenue in the unaudited condensed consolidated statements of operations. The Company earned no interest income from sales-type leases in 2022. In May 2022, one of the Company's tenants exercised the purchase option for $28,000 in its operating lease with a sale date of August 2022. The purchase option was not reasonably certain to be exercised at lease inception, resulting in a modification of the operating lease. As a result of this modification to the lease, the Company re-evaluated the lease classification and classified the lease as a sales-type lease. The Company recorded $28,000 in Investment in a sales-type lease and derecognized $17,292 from Real estate, net, $619 from Deferred expenses and $775 from Rent receivable-deferred on its unaudited condensed consolidated balance sheet. The Company recognized $9,314 in selling profit from sales-type leases in its unaudited condensed consolidated statements of operations for the six months ended June 30, 2022. The remaining rent payments under the lease in 2022 in addition to the purchase option price was $371. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating leases and sales-type lease for the three and six months ended June 30, 2023 and 2022:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
Classification |  | 2023 |  | 2022 |  | 2023 |  | 2022
Fixed |  | $ | 69,049 |  |  | $ | 67,015 |  |  | $ | 137,136 |  |  | $ | 133,997 |
Sales-type lease income |  | 1,848 |  |  | — |  |  | 3,681 |  |  | — |
Variable(1) |  | 14,168 |  |  | 10,924 |  |  | 27,665 |  |  | 22,478 |
Total |  | $ | 85,065 |  |  | $ | 77,939 |  |  | $ | 168,482 |  |  | $ | 156,475 |
(1) Primarily comprised of tenant reimbursements. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of June 30, 2023 were as follows:
| Operating | Sales-Type
2023 - remainder | $ | 133,883 |  | $ | 2,614 |
2024 | 251,719 |  | 5,263 |
2025 | 234,071 |  | 5,473 |
2026 | 214,826 |  | 5,692 |
2027 | 178,132 |  | 5,920 |
2028 | 147,865 |  | 6,156 |
Thereafter | 500,591 |  | 733,006 |
Total | $ | 1,661,087 |  | $ | 764,124 |
Difference between undiscounted cash flow and present value |  | (701,731) |
Investment in a sales-type lease |  | $ | 62,393 |
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, unless such payments are reasonably certain to be received. 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 June 30, 2023. The leases have remaining lease terms of up to 37 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:
|  | Six Months Ended
|  | June 30, 2023 |  | June 30, 2022
Weighted-average remaining lease term |  |  |
Operating leases (years) | 9.2 |  | 9.5
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.0 | %
The components of lease expense for the six months ended June 30, 2023 and 2022 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2023: |  |  |  |  |
Property operating | $ | 1,771 |  |  | $ | 7 |  |  | $ | 1,778 |
General and administrative | 767 |  |  | 151 |  |  | 918 |
Total | $ | 2,538 |  |  | $ | 158 |  |  | $ | 2,696 |
2022: |  |  |  |  |
Property operating | $ | 1,771 |  |  | $ | — |  |  | $ | 1,771 |
General and administrative | 767 |  |  | 42 |  |  | 809 |
Total | $ | 2,538 |  |  | $ | 42 |  |  | $ | 2,580 |
The Company recognized sublease income of $1,660 for the six months ended June 30, 2023 and 2022, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of June 30, 2023:
|  | Operating Leases
2023 - remainder |  | $ | 2,501 |
2024 |  | 5,199 |
2025 |  | 5,204 |
2026 |  | 4,174 |
2027 |  | 3,673 |
2028 |  | 1,061 |
Thereafter |  | 6,440 |
Total lease payments |  | $ | 28,252 |
Less: Imputed interest |  | (5,447) |
Present value of lease liabilities |  | $ | 22,805 |
Lease Accounting | Lease Accounting 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. There were no write offs for the six months ended June 30, 2023. During the six months ended June 30, 2022, the Company wrote off an aggregate of $198, 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 unaudited condensed 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. For the six months ended June 30, 2023, the Company incurred no costs that were not incremental to the execution of leases. For the six months ended June 30, 2022, the Company incurred $34 of costs that were not incremental to the execution of leases. 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. As of June 30, 2023, the Company had one lease that qualified as a sales-type lease. The Company has 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 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. For the six months ended June 30, 2023, the interest income earned from sales-type leases of $3,681 is included in rental revenue in the unaudited condensed consolidated statements of operations. The Company earned no interest income from sales-type leases in 2022. In May 2022, one of the Company's tenants exercised the purchase option for $28,000 in its operating lease with a sale date of August 2022. The purchase option was not reasonably certain to be exercised at lease inception, resulting in a modification of the operating lease. As a result of this modification to the lease, the Company re-evaluated the lease classification and classified the lease as a sales-type lease. The Company recorded $28,000 in Investment in a sales-type lease and derecognized $17,292 from Real estate, net, $619 from Deferred expenses and $775 from Rent receivable-deferred on its unaudited condensed consolidated balance sheet. The Company recognized $9,314 in selling profit from sales-type leases in its unaudited condensed consolidated statements of operations for the six months ended June 30, 2022. The remaining rent payments under the lease in 2022 in addition to the purchase option price was $371. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating leases and sales-type lease for the three and six months ended June 30, 2023 and 2022:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
Classification |  | 2023 |  | 2022 |  | 2023 |  | 2022
Fixed |  | $ | 69,049 |  |  | $ | 67,015 |  |  | $ | 137,136 |  |  | $ | 133,997 |
Sales-type lease income |  | 1,848 |  |  | — |  |  | 3,681 |  |  | — |
Variable(1) |  | 14,168 |  |  | 10,924 |  |  | 27,665 |  |  | 22,478 |
Total |  | $ | 85,065 |  |  | $ | 77,939 |  |  | $ | 168,482 |  |  | $ | 156,475 |
(1) Primarily comprised of tenant reimbursements. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of June 30, 2023 were as follows:
| Operating | Sales-Type
2023 - remainder | $ | 133,883 |  | $ | 2,614 |
2024 | 251,719 |  | 5,263 |
2025 | 234,071 |  | 5,473 |
2026 | 214,826 |  | 5,692 |
2027 | 178,132 |  | 5,920 |
2028 | 147,865 |  | 6,156 |
Thereafter | 500,591 |  | 733,006 |
Total | $ | 1,661,087 |  | $ | 764,124 |
Difference between undiscounted cash flow and present value |  | (701,731) |
Investment in a sales-type lease |  | $ | 62,393 |
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, unless such payments are reasonably certain to be received. 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 June 30, 2023. The leases have remaining lease terms of up to 37 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:
|  | Six Months Ended
|  | June 30, 2023 |  | June 30, 2022
Weighted-average remaining lease term |  |  |
Operating leases (years) | 9.2 |  | 9.5
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.0 | %
The components of lease expense for the six months ended June 30, 2023 and 2022 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2023: |  |  |  |  |
Property operating | $ | 1,771 |  |  | $ | 7 |  |  | $ | 1,778 |
General and administrative | 767 |  |  | 151 |  |  | 918 |
Total | $ | 2,538 |  |  | $ | 158 |  |  | $ | 2,696 |
2022: |  |  |  |  |
Property operating | $ | 1,771 |  |  | $ | — |  |  | $ | 1,771 |
General and administrative | 767 |  |  | 42 |  |  | 809 |
Total | $ | 2,538 |  |  | $ | 42 |  |  | $ | 2,580 |
The Company recognized sublease income of $1,660 for the six months ended June 30, 2023 and 2022, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of June 30, 2023:
|  | Operating Leases
2023 - remainder |  | $ | 2,501 |
2024 |  | 5,199 |
2025 |  | 5,204 |
2026 |  | 4,174 |
2027 |  | 3,673 |
2028 |  | 1,061 |
Thereafter |  | 6,440 |
Total lease payments |  | $ | 28,252 |
Less: Imputed interest |  | (5,447) |
Present value of lease liabilities |  | $ | 22,805 |

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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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