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Net Investment in Sales-type Leases and Ground Lease Receivables

6 Months Ended

Jun. 30, 2024

Net Investment in Sales-type Leases and Ground Lease Receivables

Note 4—Net Investment in Sales-type Leases and Ground Lease Receivables

The Company classifies certain of its Ground Leases as sales-type leases and records the leases within “Net investment in sales-type leases” on the Company’s consolidated balance sheets and records interest income in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases directly with the seller. These Ground Leases qualify as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in “Ground Lease receivables” on the Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in “Interest income from sales-type leases” in the Company’s consolidated statements of operations.

In May 2023, the Company entered into a joint venture with a sovereign wealth fund, which is also an existing shareholder, focused on new acquisitions for certain Ground Lease investments. The Company committed approximately $275 million for a 55% controlling interest in the joint venture and the sovereign wealth fund committed approximately $225 million for a 45% noncontrolling interest in the joint venture. Each party’s commitment is

discretionary. The joint venture is a voting interest entity and the Company consolidates the joint venture in its financial statements due to its controlling interest. The Company’s joint venture partners’ interest is recorded in “Noncontrolling interests” on the Company’s consolidated balance sheets. The Company receives a management fee, measured on an asset-by-asset basis, equal to 25 basis points on invested equity for such asset for the first five years following its acquisition, and 15 basis points on invested equity thereafter. The Company will also receive a promote of 15% over a 9% internal rate of return, subject to a 1.275x multiple on invested capital. The venture has first look rights on qualifying investments for 18 months. Since formation, the joint venture acquired eight Ground Leases for an aggregate purchase price of $146.7 million, of which $88.9 million has been funded as of June 30, 2024.

In January 2024, the Company acquired a Ground Lease from the Ground Lease Plus Fund for $38.3 million, excluding $36.5 million funded by the Company pursuant to a leasehold improvement allowance (refer to Note 14).

The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):


	June 30, 2024		December 31, 2023
Total undiscounted cash flows⁽¹⁾	$	32,029,582	$	30,586,189
Unguaranteed estimated residual value⁽¹⁾		2,993,536		2,946,928
Present value discount		(31,641,589)		(30,277,457)
Allowance for credit losses		(1,522)		(465)
Net investment in sales-type leases⁽²⁾	$	3,380,007	$	3,255,195

(1)

As of June 30, 2024, total discounted cash flows were approximately $3,350 million and the discounted unguaranteed estimated residual value was $31.2 million. As of December 31, 2023, total discounted cash flows were approximately $3,225 million and the discounted unguaranteed estimated residual value was $30.4 million.

(2)	As of June 30, 2024 and December 31, 2023, $16.5 million and $16.4 million, respectively, was attributable to noncontrolling interests.

The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the six months ended June 30, 2024 and 2023 ($ in thousands):


	Net Investment in		Ground Lease
	Sales-type Leases		Receivables		Total
Six Months Ended June 30, 2024
Beginning balance	$	3,255,195	$	1,622,298	$	4,877,493
Origination/acquisition/fundings⁽¹⁾		95,916		110,206		206,122
Accretion		29,953		14,467		44,420
(Provision for) recovery of credit losses		(1,057)		(404)		(1,461)
Ending balance⁽²⁾	$	3,380,007	$	1,746,567	$	5,126,574


	Net Investment in		Ground Lease
	Sales-type Leases		Receivables		Total
Six Months Ended June 30, 2023
Beginning balance	$	3,106,599	$	1,374,716	$	4,481,315
Impact from adoption of new accounting standard		(351)		(199)		(550)
Origination/acquisition/fundings⁽¹⁾		33,122		97,948		131,070
Accretion		28,579		12,505		41,084
(Provision for) recovery of credit losses		15		(22)		(7)
Ending balance⁽²⁾	$	3,167,964	$	1,484,948	$	4,652,912

(1)

The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed estimated residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement.

(2)

As of June 30, 2024 and December 31, 2023, all of the Company’s net investment in sales-type leases and Ground Lease receivables were current in their payment status. As of June 30, 2024, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was 5.3% and 5.5%, respectively. As of June 30, 2024, the weighted average remaining life of the Company’s 39 Ground Lease receivables was 97.7 years.

Allowance for Credit Losses—Changes in the Company’s allowance for credit losses on net investment in sales-type leases for the three and six months ended June 30, 2024 and 2023 were as follows ($ in thousands):


	Net investment in sales-type leases
	Stabilized		Development		Unfunded
Three Months Ended June 30, 2024	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	712	$	195	$	11	$	918
Provision for (recovery of) credit losses⁽¹⁾		719		(104)		(10)		605
Allowance for credit losses at end of period⁽²⁾	$	1,431	$	91	$	1	$	1,523

Three Months Ended June 30, 2023
Allowance for credit losses at beginning of period	$	255	$	70	$	1	$	326
Provision for (recovery of) credit losses⁽¹⁾		4		7		—		11
Allowance for credit losses at end of period⁽²⁾	$	259	$	77	$	1	$	337

Six Months Ended June 30, 2024
Allowance for credit losses at beginning of period	$	387	$	78	$	—	$	465
Provision for (recovery of) credit losses⁽¹⁾		1,044		13		1		1,058
Allowance for credit losses at end of period⁽²⁾	$	1,431	$	91	$	1	$	1,523

Six Months Ended June 30, 2023
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard ⁽³⁾		280		71		6		357
Provision for (recovery of) credit losses⁽¹⁾		(21)		6		(5)		(20)
Allowance for credit losses at end of period⁽²⁾	$	259	$	77	$	1	$	337

(1)

During the three and six months ended June 30, 2024, the Company recorded a provision for credit losses on net investment in sales-type leases of $0.6 million and $1.1 million, respectively. The provision for credit losses was due primarily to current market conditions, including an increase in the Ground Lease cost to value ratio on the Company’s portfolio of Ground Leases since March 31, 2024 and December 31, 2023. During the three and six months ended June 30, 2023, the Company recorded a provision for (recovery of) credit losses on net investment in sales-type leases of $11 thousand and ($20) thousand, respectively. The provision for credit losses for the three months ended June 30, 2023 was due primarily to a declining macroeconomic forecast since March 31, 2023. The recovery of credit losses for the six months ended June 30, 2023 was due primarily to an improving macroeconomic forecast since December 31, 2022.

(2)	Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets.

(3)

On January 1, 2023, the Company recorded an allowance for credit losses on net investment in sales-type leases of $0.4 million upon the adoption of ASU 2016-13, of which an aggregate of $6 thousand related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities."

Changes in the Company’s allowance for credit losses on Ground Lease receivables for the three and six months ended June 30, 2024 and 2023 were as follows ($ in thousands):


	Ground Lease receivables
	Stabilized		Development		Unfunded
Three Months Ended June 30, 2024	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	234	$	458	$	38	$	730
Provision for (recovery of) credit losses⁽¹⁾		237		(156)		(25)		56
Allowance for credit losses at end of period⁽²⁾	$	471	$	302	$	13	$	786

Three Months Ended June 30, 2023
Allowance for credit losses at beginning of period	$	93	$	102	$	63	$	258
Provision for (recovery of) credit losses⁽¹⁾		1		25		(3)		23
Allowance for credit losses at end of period⁽²⁾	$	94	$	127	$	60	$	281


Six Months Ended June 30, 2024
Allowance for credit losses at beginning of period	$	123	$	246	$	37	$	406
Provision for (recovery of) credit losses⁽¹⁾		348		56		(24)		380
Allowance for credit losses at end of period⁽²⁾	$	471	$	302	$	13	$	786

Six Months Ended June 30, 2023
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard⁽³⁾		102		97		84		283
Provision for (recovery of) credit losses⁽¹⁾		(8)		30		(24)		(2)
Allowance for credit losses at end of period⁽²⁾	$	94	$	127	$	60	$	281

(1)

During the three and six months ended June 30, 2024, the Company recorded a provision for credit losses on Ground Lease receivables of $0.1 million and $0.4 million, respectively. The provision for credit losses was due primarily to current market conditions, including an increase in the Ground Lease cost to value ratio on the Company’s portfolio of Ground Leases since March 31, 2024 and December 31, 2023. During the three and six months ended June 30, 2023, the Company recorded a provision for (recovery of) credit losses on Ground Lease receivables of $23 thousand and ($2) thousand, respectively. The provision for credit losses for the three months ended June 30, 2023 was due primarily to a declining macroeconomic forecast since March 31, 2023. The recovery of credit losses for the six months ended June 30, 2023 was due primarily to an improving macroeconomic forecast since December 31, 2022.

(2)	Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets.

(3)

On January 1, 2023, the Company recorded an allowance for credit losses on Ground Lease receivables of $0.3 million upon the adoption of ASU 2016-13, of which an aggregate of $0.1 million related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities."

The Company’s amortized cost basis in net investment in sales-type leases and Ground Lease receivables, presented by year of origination and by stabilized or development status, was as follows as of June 30, 2024 ($ in thousands):


	Year of Origination
	2024		2023		2022		2021		2020		Prior to 2020		Total
Net investment in sales-type leases
Stabilized properties	$	11,057	$	49,785	$	648,018	$	1,087,078	$	212,419	$	1,079,701	$	3,088,058
Development properties		85,403		21,845		38,137		120,296		—		27,790		293,471
Total	$	96,460	$	71,630	$	686,155	$	1,207,374	$	212,419	$	1,107,491	$	3,381,529


	Year of Origination
	2024		2023		2022		2021		2020		Prior to 2020		Total
Ground Lease receivables
Stabilized properties	$	—	$	19,314	$	154,443	$	198,975	$	182,397	$	454,512	$	1,009,641
Development properties		47,659		5,472		606,672		77,896		—		—		737,699
Total	$	47,659	$	24,786	$	761,115	$	276,871	$	182,397	$	454,512	$	1,747,340


	Year of Origination
	2023		2022		2021		2020		2019		Prior to 2019		Total
Net investment in sales-type leases
Stabilized properties	$	49,266	$	642,340	$	1,077,813	$	210,481	$	1,069,583	$	—	$	3,049,483
Development properties		21,634		37,793		119,191		—		27,559		—		206,177
Total	$	70,900	$	680,133	$	1,197,004	$	210,481	$	1,097,142	$	—	$	3,255,660


	Year of Origination
	2023		2022		2021		2020		2019		Prior to 2019		Total
Ground Lease receivables
Stabilized properties	$	19,106	$	152,966	$	171,664	$	180,739	$	450,123	$	—	$	974,598
Development properties		139		545,509		102,421		—		—		—		648,069
Total	$	19,245	$	698,475	$	274,085	$	180,739	$	450,123	$	—	$	1,622,667

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of June 30, 2024, are as follows by year ($ in thousands):


					Fixed Bumps
	Fixed Bumps				with
	with Inflation		Fixed		Percentage
	Adjustments		Bumps		Rent		Total
2024 (remaining six months)	$	60,660	$	1,974	$	293	$	62,927
2025		109,805		4,001		586		114,392
2026		111,909		4,067		586		116,562
2027		113,944		4,135		586		118,665
2028		115,980		4,294		637		120,911
Thereafter		30,234,155		1,162,938		99,032		31,496,125
Total undiscounted cash flows	$	30,746,453	$	1,181,409	$	101,720	$	32,029,582

During the three and six months ended June 30, 2024 and 2023, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):


	Net Investment		Ground
	in Sales-type		Lease
Three Months Ended June 30, 2024	Leases		Receivables		Total
Cash	$	27,846	$	14,826	$	42,672
Non-cash		15,026		7,537		22,563
Total interest income from sales-type leases	$	42,872	$	22,363	$	65,235


	Net Investment		Ground
	in Sales-type		Lease
Three Months Ended June 30, 2023	Leases		Receivables		Total
Cash	$	25,168	$	12,286	$	37,454
Non-cash		14,353		6,351		20,704
Total interest income from sales-type leases	$	39,521	$	18,637	$	58,158


	Net Investment		Ground
	in Sales-type		Lease
Six Months Ended June 30, 2024	Leases		Receivables		Total
Cash	$	55,116	$	28,917	$	84,033
Non-cash		29,953		14,467		44,420
Total interest income from sales-type leases	$	85,069	$	43,384	$	128,453


	Net Investment		Ground
	in Sales-type		Lease
Six Months Ended June 30, 2023	Leases		Receivables		Total
Cash	$	50,050	$	24,090	$	74,140
Non-cash		28,575		12,505		41,080
Total interest income from sales-type leases	$	78,625	$	36,595	$	115,220