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Leases | 6 Months Ended
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Jun. 30, 2020
Leases [Abstract] |
Leases | NOTE 3. — LEASES As of June 30, 2020, we owned 887 properties and leased 59 properties from third-party landlords. These 946 properties are located in 35 states across the United States and Washington, D.C. Substantially all of our properties are leased on a triple-net basis primarily to petroleum distributors, convenience store retailers and, to a lesser extent, automotive service and other retail operators. Generally, our tenants supply fuel and either operate our properties directly or sublet our properties to operators who operate their convenience stores, gasoline stations, automotive service or other retail businesses at our properties. Our triple-net lease tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to our properties, and are also responsible for environmental contamination occurring during the terms of their leases and in certain cases also for environmental contamination that existed before their leases commenced. For additional information regarding environmental obligations, see Note 6 – Environmental Obligations. Substantially all of our tenants’ financial results depend on the sale of refined petroleum products, convenience store sales or rental income from their subtenants. As a result, our tenants’ financial results are highly dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. During the terms of our leases, we monitor the credit quality of our triple-net lease tenants by reviewing their published credit rating, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements which are delivered to us pursuant to applicable lease agreements, monitoring news reports regarding our tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases. We adopted ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) as of January 1, 2019. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. Under ASU 2016-02, lessor accounting will remain similar to lessor accounting under previous GAAP, while aligning with the FASB’s new revenue recognition guidance. For leases in which we are the lessor, we are (i) retaining classification of our historical leases as we are not required to reassess classification upon adoption of the new standard, (ii) expensing indirect leasing costs in connection with new or extended tenant leases, the recognition of which would have been deferred under prior accounting guidance and (iii) aggregating revenue from our lease components and non-lease components (comprised of tenant reimbursements) into revenue from rental properties. Revenues from rental properties were $36,336,000 and $70,986,000 for the three and six months ended June 30, 2020, respectively, and $33,560,000 and $66,847,000 for three and six months ended June 30, 2019, respectively. Rental income contractually due from our tenants included in revenues from rental properties was $31,784,000 and $63,178,000 for the three and six months ended June 30, 2020, respectively, and $29,378,000 and $58,586,000 for three and six months ended June 30, 2019, respectively. In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due during the periods presented. As a result, revenues from rental properties include non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line basis over the current lease term, the net amortization of above-market and below-market leases, rental income recorded under direct financing leases using the effective interest method which produces a constant periodic rate of return on the net investments in the leased properties and the amortization of deferred lease incentives (the “Revenue Recognition Adjustments”). Revenue Recognition Adjustments included in revenues from rental properties was a charge of $86,000 and $156,000 for the three and six months ended June 30, 2020, respectively, and income of $235,000 and $614,000 for the three and six months ended June 30, 2019, respectively. Tenant reimbursements, which are included in revenues from rental properties and which consist of real estate taxes and other municipal charges paid by us which were reimbursable by our tenants pursuant to the terms of triple-net lease agreements, were $4,638,000 and $7,964,000 for the three and six months ended June 30, 2020, respectively, and $3,947,000 and $7,647,000 for the three and six months ended June 30, 2019, respectively. We incurred $191,000 and $93,000 of lease origination costs for the six months ended June 30, 2020 and 2019, respectively. This deferred expense is recognized on a straight-line basis as amortization expense in our consolidated statements of operations over the terms of the various leases. The components of the $79,767,000 investment in direct financing leases as of June 30, 2020, are lease payments receivable of $119,864,000 plus unguaranteed estimated residual value of $13,928,000 less unearned income of $53,447,000 and $578,000 allowance for credit losses. The components of the $82,366,000 investment in direct financing leases as of December 31, 2019, are lease payments receivable of $126,412,000 plus unguaranteed estimated residual value of $13,928,000 less unearned income of $57,974,000. We recorded a credit loss reserve related to these direct financing leases totaling $578,000, which was recognized as a cumulative adjustment to retained earnings and as a reduction of the investment in direct financing leases balance on our consolidated balance sheets on January 1, 2020. As of June 30, 2020, future contractual annual rentals receivable from our tenants, which have terms in excess of one year are as follows (in thousands):
|  | Operating Leases |  |  | Direct Financing Leases |
2020 |  | $ | 56,653 |  |  | $ | 6,607 |
2021 |  |  | 114,098 |  |  |  | 13,339 |
2022 |  |  | 113,843 |  |  |  | 13,420 |
2023 |  |  | 114,031 |  |  |  | 13,467 |
2024 |  |  | 112,172 |  |  |  | 13,611 |
Thereafter |  |  | 713,496 |  |  |  | 59,419 |
Total |  | $ | 1,224,293 |  |  | $ | 119,863 |
For leases in which we are the lessee, ASU 2016-02 requires leases with durations greater than twelve months to be recognized on our consolidated balance sheets. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (i) whether contracts are or contain leases, (ii) lease classification and (iii) initial direct costs. As of January 1, 2019, we recognized operating lease right-of-use assets of $25,561,000 (net of deferred rent expense) and operating lease liabilities of $26,087,000, which were presented on our consolidated financial statements. The right-of-use assets and lease liabilities are carried at the present value of the remaining expected future lease payments. When available, we use the rate implicit in the lease to discount lease payments to present value; however, our current leases did not provide a readily determinable implicit rate. Therefore, we estimated our incremental borrowing rate to discount the lease payments based on information available and considered factors such as interest rates available to us on a fully collateralized basis and terms of the leases. ASU 2016-02 did not have a material impact on our consolidated balance sheets or on our consolidated statements of operations. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. The following presents the lease-related assets and liabilities (in thousands):
|  | June 30, 2020 |
Assets |  |  |  |
Right-of-use assets – operating |  | $ | 17,953 |
Right-of-use assets – finance |  |  | 875 |
Total lease assets |  | $ | 18,828 |
Liabilities |  |  |  |
Lease liability – operating |  | $ | 18,614 |
Lease liability – finance |  |  | 3,879 |
Total lease liabilities |  | $ | 22,493 |
The following presents the weighted average lease terms and discount rates of our leases:
Weighted-average remaining lease term (years) |  |  |  |
Operating leases |  | 8.8 |
Finance leases |  | 11.09 |
Weighted-average discount rate |  |  |  |
Operating leases (a) |  |  | 5.31 | %
Finance leases |  |  | 17.24 | %
(a) | Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
The following presents our total lease costs (in thousands):
|  | Three Months Ended June 30, 2020 |  |  | Six Months Ended June 30, 2020 |
Operating lease cost |  | $ | 991 |  |  | $ | 2,002 |
Finance lease cost |  |  |  |  |  |  |  |
Amortization of leased assets |  |  | 159 |  |  |  | 312 |
Interest on lease liabilities |  |  | 183 |  |  |  | 372 |
Short-term lease cost |  |  | 12 |  |  |  | 49 |
Total lease cost |  | $ | 1,345 |  |  | $ | 2,735 |
The following presents supplemental cash flow information related to our leases (in thousands):
|  | Three Months Ended June 30, 2020 |  |  | Six Months Ended June 30, 2020 |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |  |  |
Operating cash flows for operating leases |  | $ | 971 |  |  | $ | 1,867 |
Operating cash flows for finance leases |  |  | 183 |  |  |  | 372 |
Financing cash flows for finance leases |  | $ | 159 |  |  | $ | 312 |
As of June 30, 2020, scheduled lease liabilities mature as follows (in thousands):
|  | Operating Leases |  |  | Direct Financing Leases |
2020 |  | $ | 1,935 |  |  | $ | 1,349 |
2021 |  |  | 3,380 |  |  |  | 1,154 |
2022 |  |  | 2,738 |  |  |  | 990 |
2023 |  |  | 2,617 |  |  |  | 806 |
2024 |  |  | 2,461 |  |  |  | 646 |
Thereafter |  |  | 10,676 |  |  |  | 1,767 |
Total lease payments |  |  | 23,807 |  |  |  | 6,712 |
Less: amount representing interest |  |  | (5,193 | ) |  |  | (2,833 | )
Present value of lease payments |  | $ | 18,614 |  |  | $ | 3,879 |
Major Tenants As of June 30, 2020, we had three significant tenants by revenue:
| • | We leased 150 convenience store and gasoline station properties in three separate unitary leases and three stand-alone leases to subsidiaries of Global Partners LP (NYSE: GLP) (“Global”). In the aggregate, our leases with subsidiaries of
|  | Global represented 16% and 18% of our total revenues for the six months ended June 30, 2020 and 2019. All of our unitary leases with subsidiaries of Global are guaranteed by the parent company.
| • | We leased 77 convenience store and gasoline station properties pursuant to three separate unitary leases to Apro, LLC (d/b/a “United Oil”). In the aggregate, our leases with United Oil represented 12% and 13% of our total revenues for the six months ended June 30, 2020 and 2019.
| • | We leased 74 convenience store and gasoline station properties pursuant to two separate unitary leases to subsidiaries of Chestnut Petroleum Dist., Inc. (“Chestnut”). In the aggregate, our leases with subsidiaries of Chestnut represented 10% and 11% of our total revenues for the six months ended June 30, 2020 and 2019. The largest of these unitary leases, covering 56 of our properties, is guaranteed by the parent company, its principals and numerous Chestnut affiliates.
Getty Petroleum Marketing Inc. Getty Petroleum Marketing Inc. (“Marketing”) was our largest tenant from 1997 until 2012 under a unitary triple-net master lease that was terminated in April 2012 as a consequence of Marketing’s bankruptcy, at which time we either sold or released these properties. As of June 30, 2020, 359 of the properties we own or lease were previously leased to Marketing, of which 317 properties are subject to long-term triple-net leases with petroleum distributors in 14 separate property portfolios and 31 properties are leased as single unit triple-net leases. The leases covering properties previously leased to Marketing are unitary triple-net lease agreements generally with an initial term of 15 years and options for successive renewal terms of up to 20 years. Rent is scheduled to increase at varying intervals during both the initial and renewal terms of the leases. Several of the leases provide for additional rent based on the aggregate volume of fuel sold. In addition, the majority of the leases require the tenants to invest capital in our properties, substantially all of which is related to the replacement of USTs that are owned by our tenants. As of June 30, 2020, we have a remaining commitment to fund up to $6,967,000 in the aggregate with our tenants for our portion of such capital improvements. Our commitment provides us with the option to either reimburse our tenants or to offset rent when these capital expenditures are made. This deferred expense is recognized on a straight-line basis as a reduction of rental revenue in our consolidated statements of operations over the life of the various leases. As part of the triple-net leases for properties previously leased to Marketing, we transferred title of the USTs to our tenants, and the obligation to pay for the retirement and decommissioning or removal of USTs at the end of their useful lives, or earlier if circumstances warranted, was fully or partially transferred to our new tenants. We remain contingently liable for this obligation in the event that our tenants do not satisfy their responsibilities. Accordingly, through June 30, 2020, we removed $13,813,000 of asset retirement obligations and $10,808,000 of net asset retirement costs related to USTs from our balance sheet. The cumulative change of $1,423,000 (net of accumulated amortization of $1,582,000) is recorded as deferred rental revenue and will be recognized on a straight-line basis as additional revenues from rental properties over the terms of the various leases.

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