Net Investment in Leases

6 Months Ended

Jun. 30, 2020

In May 2019, the Company entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of nine bowling centers for $56.7 million, of which seven were acquired from the lessee for $44.1 million, and a commitment to invest up to $55.0 million in additional bowling centers over the next several years. The new centers were added to the Company's existing master leases with the tenant. In connection with this transaction, the maturities of the master leases were extended by 15 years to 2047.

As a result of the modifications to the leases, the Company classified the leases as sales-type leases and recorded $424.1 million in "Net investment in leases" on its consolidated balance sheet. The Company determined that the seven bowling centers acquired did not qualify as a sale leaseback transaction and recorded $44.1 million in "Loans receivable and other lending investments, net" on its consolidated balance sheet (refer to Note 7). The Company recognized $180.4 million in "Selling profit from sales-type leases" in its consolidated statements of operations for the three and six months ended June 30, 2019 as a result of the transaction. For the three and six months ended June 30, 2020, the Company recognized $2.3 million and $9.2 million, respectively, of cash interest income and $6.0 million and $7.5 million, respectively, of non-cash interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations. For the three and six months ended June 30, 2019, the Company recognized $3.2 million of cash interest income and $0.6 million of non-cash interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations.

The Company's net investment in leases were comprised of the following as of June 30, 2020 and December 31, 2019 ($ in thousands):


	June 30, 2020		December 31, 2019
Total undiscounted cash flows	$	1,020,577	$	1,042,019
Unguaranteed estimated residual value	344,393		340,620
Present value discount	(940,297)		(963,724)
Allowance for losses on net investment in leases	(10,937)		—
Net investment in leases⁽¹⁾	$	413,736	$	418,915

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(1)As of June 30, 2020 and December 31, 2019, all of the Company's net investment in leases were current in their payment status and performing in accordance with the terms of the respective leases. As of June 30, 2020, the risk rating on the Company's net investment in leases was 2.0 (refer to Note 3).

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases, excluding lease payments that are not fixed and determinable, in effect as of June 30, 2020, are as follows by year ($ in thousands):


	Amount
2020 (remaining six months)	$	8,380
2021	28,000
2022	30,481
2023	30,481
2024	30,481
Thereafter	892,754
Total undiscounted cash flows	$	1,020,577

Allowance for Losses on Net Investment in Leases—Changes in the Company's allowance for losses on net investment in leases for the three and six months ended June 30, 2020 were as follows ($ in thousands):


	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Reserve for losses on net investment in leases at beginning of period	$	10,403	$	—
Initial allowance recorded upon adoption of new accounting standard⁽¹⁾	—		9,111
Provision for losses on net investment in leases⁽²⁾	534		1,826

Allowance for losses on net investment in leases at end of period	$	10,937	$	10,937

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(1)The Company recorded an initial allowance for losses on net investment in leases of $9.1 million upon the adoption of ASU 2016-13 on January 1, 2020 (refer to Note 3).

(2)During the three and six months ended June 30, 2020, the Company recorded an allowance for losses on net investment in leases of $0.5 million and $1.8 million, respectively, primarily resulting from the macroeconomic impact of COVID-19 on commercial real estate markets and the adoption of ASU 2016-13 (refer to Note 3).