Finance Receivables

9 Months Ended

Sep. 30, 2023

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in finance leases and loans receivable (net of allowance for credit losses). Operating leases are not included in finance receivables.

Finance Receivables

Net investments in finance leases and loans receivable are summarized as follows (in thousands):


	Maturity Date	September 30, 2023		December 31, 2022
Net investments in direct financing leases (a)	2024 – 2036	$	476,410	$	498,313
Net investments in sales-type leases (b)	2024	451,421		—
Sale-leaseback transactions accounted for as loans receivable (b) (c)	2038 – 2052	233,590		234,198
Secured loans receivable (d)	2023	11,250		39,250
		$	1,172,671	$	771,761

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(a)Amounts are net of allowance for credit losses, as disclosed below under Net Investments in Direct Financing Leases.

(b)These investments are assessed for credit loss allowances but no such allowances were recorded as of September 30, 2023 or December 31, 2022.

(c)These investments are accounted for as loans receivable in accordance with ASC 310, Receivables and ASC 842, Leases. Maturity dates reflect the current lease maturity dates.

(d)Amounts are net of allowance for credit losses of $2.1 million as of both September 30, 2023 and December 31, 2022.

Net Investments in Direct Financing Leases

Net investments in direct financing leases is summarized as follows (in thousands):


	September 30, 2023		December 31, 2022
Lease payments receivable	$	293,617	$	332,618
Unguaranteed residual value	444,892		470,839
	738,509		803,457
Less: unearned income	(259,479)		(296,411)
Less: allowance for credit losses (a)	(2,620)		(8,733)
	$	476,410	$	498,313

__________

(a)During the nine months ended September 30, 2023 and 2022, we recorded a net release of allowance for credit losses of $6.1 million and $6.7 million, respectively, on our net investments in direct financing leases due to changes in expected economic conditions and improved credit quality for certain tenants, which was included within Other gains and (losses) in our consolidated statements of income.

Income from direct financing leases, which is included in Income from finance leases and loans receivable in the consolidated financial statements, was $12.6 million and $13.0 million for the three months ended September 30, 2023 and 2022, respectively, and $38.1 million and $40.2 million for the nine months ended September 30, 2023 and 2022.

During the nine months ended September 30, 2023, we reclassified five properties with an aggregate carrying value of $25.4 million from Net investments in finance leases and loans receivable to Land, buildings and improvements — net lease and other in connection with changes in lease classifications due to extensions of the underlying leases. During the nine months ended September 30, 2023, the U.S. dollar strengthened against the euro, resulting in a $1.7 million decrease in the carrying value of Net investments in finance leases and loans receivable from December 31, 2022 to September 30, 2023.

Net Investments in Sales-Type Leases

On February 28, 2023, the tenant occupying our portfolio of 78 net-lease self-storage properties located in the United States provided notice of its intention to exercise its option to repurchase the properties. The purchase price will be calculated using the U.S. CPI as of the closing date.

In accordance with ASC 842, Leases, we reclassified these net-lease assets to net investments in sales-type leases totaling $451.4 million on our consolidated balance sheets as of September 30, 2023 (based on the present value of remaining rents and estimated purchase price, using the CPI rates as of the exercise notice date), since the tenant provided notice of its intention to exercise its purchase option. In connection with this transaction, we reclassified the following amounts to Net investments in finance leases and loans receivable: (i) $393.7 million from Land, buildings and improvements — net lease and other, (ii) $36.6 million from In-place lease intangible assets and other, (iii) $22.4 million from Above-market rent intangible assets, (iv) $18.5 million from Below-market rent and other intangible liabilities, net, and (v) $159.0 million from Accumulated depreciation and amortization. We recognized an aggregate Gain on sale of real estate, net, of $176.2 million during the nine months ended September 30, 2023 related to this transaction.

Earnings from our net investments in sales-type leases are included in Income from finance leases and loans receivable in the consolidated financial statements, and totaled $9.7 million and $22.6 million for the three and nine months ended September 30, 2023, respectively. Prior to this reclassification to net investments in sales-type leases, earnings from this investment were recognized in Lease revenues in the consolidated financial statements.

Net investments in sales-type leases is summarized as follows (in thousands):


	September 30, 2023		December 31, 2022
Lease payments receivable (a)	$	470,836	$	—

	470,836		—
Less: unearned income	(19,415)		—

	$	451,421	$	—

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(a)Includes estimated purchase price and total rents owed.

Loans Receivable

In August 2023, one of our secured loans receivable was repaid to us for $28.0 million. In connection with this repayment, we received an $0.6 million prepayment penalty from the borrower, which was included in Income from finance leases and loans receivable in the consolidated financial statements for both the three and nine months ended September 30, 2023.

Earnings from our loans receivable are included in Income from finance leases and loans receivable in the consolidated financial statements, and totaled $5.3 million and $7.6 million for the three months ended September 30, 2023 and 2022, respectively, and $15.0 million and $16.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Credit Quality of Finance Receivables

We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. During the nine months ended September 30, 2023, we reclassified certain assets to net investments in sales-type leases (which are considered finance receivables), as described above under Net Investments in Sales-Type Leases. At both September 30, 2023 and December 31, 2022, no material balances of our finance receivables were past due. Other than the lease extension noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the nine months ended September 30, 2023.

We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly.

A summary of our finance receivables by internal credit quality rating, excluding our allowance for credit losses, is as follows (dollars in thousands):


	Number of Tenants / Obligors at		Carrying Value at
Internal Credit Quality Indicator	September 30, 2023	December 31, 2022	September 30, 2023		December 31, 2022
1 – 3	19	19	$	1,098,791	$	664,761
4	6	8	78,600		117,833
5	—	—	—		—
			$	1,177,391	$	782,594