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Leases

9 Months Ended

Sep. 30, 2019

The Company determines if an arrangement is or contains a lease at inception. The Company enters into lease arrangements primarily for data center spaces, office spaces and equipment. The Company recognizes a ROU asset and lease liability on the condensed consolidated balance sheet for all leases with a term longer than 12 months. As of September 30, 2019, the Company recorded finance lease assets of $1,135.0 million, net of accumulated amortization of $468.7 million, within the property, plant and equipment, net.

ROU assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are classified and recognized at the commencement date. ROU liabilities are measured based on the present value of fixed lease payments over the lease term. ROU assets consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. Lease payments may vary because of changes in facts or circumstances occurring after the commencement, including changes in inflation indices. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are included in the measurement of ROU assets and lease liabilities using the index or rate at the commencement date. Variable lease payments that do not depend on an index or a rate are excluded from the measurement of ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Since most of the Company's leases do not provide an implicit rate, the Company uses its own incremental borrowing rate ("IBR") on a collateralized basis in determining the present value of lease payments. The Company utilizes a market-based approach to estimate the IBR. The approach requires significant judgment. Therefore, the Company utilizes different data sets to estimate IBRs via an analysis of (i) yields on comparable credit rating composite curves; (ii) sovereign rates; (iii) yields on our outstanding public debt; and (iv) historical difference in yields on the curves of our secured and unsecured rated debt. The Company also applies adjustments to account for considerations related to (i) tenor; and (ii) country credit rating that may not be fully incorporated by the aforementioned data sets.

The majority of the Company's lease arrangements include options to extend the lease. If the Company is reasonably certain to exercise such options, the periods covered by the options are included in the lease term. The depreciable lives of certain fixed assets and leasehold improvements are limited by the expected lease term. The Company has certain leases with an initial term of 12 months or less. For such leases, the Company elects not to recognize any ROU asset or lease liability on the condensed consolidated balance sheet. The Company has lease agreements with lease and non-lease components. The Company elects to account for the lease and non-lease components as a single lease component for all classes of underlying assets for which the Company has identified lease arrangements.

Significant Lease Transactions

Hong Kong 4 ("HK4") Data Center

In August 2018, the Company entered into a lease agreement with the landlord to lease the remaining floors of the HK4 Data Center. The lease did not commence until May 2019. The Company assessed the lease classification of the HK4 lease at the commencement date and determined the lease should be accounted for as an operating lease. During the three months ended June 30, 2019, the Company recorded operating lease ROU asset and liability of 317.3 million Hong Kong dollars, or $40.6 million at the exchange rate in effect on June 30, 2019.

Seoul 1 ("SL1") Data Center

In October 2018, the Company entered into a lease agreement with the landlord for several leased spaces in SL1 Data Center. Phase 1 commenced in August 2019 with an initial term of 5 years. The Company concluded that one renewal option of 5 years is reasonably certain to be exercised after considering all relevant factors that create an economic incentive for the Company. The Company assessed the lease classification of the SL1 lease at the commencement date and determined the lease should be accounted for as a finance lease. During the three months ended September 30, 2019, the Company recorded finance lease ROU asset and liability of 35,747 million Korean Won and 34,804 million Korean Won, respectively, or $29.9 million and $29.1 million, respectively, at the exchange rate in effect on September 30, 2019.

Tokyo 11 ("TY11") Data Center

In July 2019, the Company entered into two new lease agreements for building I and building II in TY11 Data Center and at the same time terminated the original lease agreement of certain leased space in building I. The new spaces in building I and building II provide additional right-of-use assets not included in the original lease agreement and the lease payments for the new spaces are commensurate with the stand-alone price of the additional right-of-use assets. As a result, the Company concluded the new spaces in building I and building II meet the criteria to be treated as a separate contract and did not modify the accounting treatment of the original leased space. The Company assessed the lease classification of TY11 leases at the commencement date and determined that the leases for both the new spaces in building I and building II should be accounted for as finance leases. During the three months ended September 30, 2019, the Company recorded finance lease ROU asset and liability of ¥6,922.3 million in aggregate for both new spaces in building I and II, or approximately $64.0 million at the exchange rate in effect on September 30, 2019.

Singapore 4 ("SG4") Data Center

In July 2019, the Company entered into a lease agreement with the landlord to lease the land and building for its new SG4 Data Center. The Company assessed the lease classification of the SG4 lease at the commencement date and determined that the lease for the building and land components should be accounted for as a finance lease and operating lease, respectively. During the three months ended September 30, 2019, the Company recorded finance lease ROU asset and liability of 75.5 million Singapore dollars, or approximately $54.6 million, and operating lease ROU asset and liability of 48.5 million Singapore dollars, or approximately $35.1 million, at the exchange rate in effect on September 30, 2019.

Silicon Valley 3 ("SV3") Data Center

In July 2019, the Company entered into a lease agreement with the landlord to extend the term of the SV3 lease for an additional 12 years. The SV3 lease renewal is accounted for as a lease modification. The Company assessed the lease classification of the SV3 lease at modification date and determined that the lease for the building and land components should be accounted for as a finance lease and operating lease, respectively. During the three months ended September 30, 2019, the Company recorded incremental finance lease ROU asset and liability of $39.9 million. The Company also recorded incremental operating lease ROU asset and liability of $13.1 million.

Lease Expenses

The components of lease expenses are as follows (in thousands):



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Finance lease cost
Amortization of right-of-use assets ⁽¹⁾	$	21,313	$	61,210
Interest on lease liabilities	28,039		82,673
Total finance lease cost	49,352		143,883

Operating lease cost	57,946		164,505
Total lease cost	$	107,298	$	308,388

⁽¹⁾Amortization of right-of-use assets is included with depreciation expense, and is recorded within cost of revenues, sales and marketing and general and administrative expenses in the condensed consolidated statements of operations.

Other Information

Other information related to leases is as follows (in thousands):



	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	79,140
Operating cash flows from operating leases	157,106
Financing cash flows from finance leases	62,785

Right-of-use assets obtained in exchange for lease obligations: ⁽¹⁾
Finance leases	$	196,725
Operating leases	143,144

	As of September 30, 2019
Weighted-average remaining lease term - finance leases ⁽²⁾	15 years
Weighted-average remaining lease term - operating leases ⁽²⁾	13 years
Weighted-average discount rate - finance leases	9		%
Weighted-average discount rate - operating leases	4		%

⁽¹⁾Represents all non-cash changes in ROU assets, including the impact of reclassifying finance lease and operating lease ROU assets of $36.9 million and $9.2 million, respectively, to assets held for sale. Refer to Note 5.

⁽²⁾Includes lease renewal options that are reasonably certain to be exercised.

Maturities of Lease Liabilities

Maturities of lease liabilities under Topic 842 as of September 30, 2019 are as follows (in thousands):



	Operating Leases			Finance Leases			Total
2019 (3 months remaining)	$	39,216		$	39,309		$	78,525
2020	200,432			168,410			368,842
2021	188,811			168,192			357,003
2022	181,250			168,745			349,995
2023	167,098			169,689			336,787
Thereafter	1,233,604			1,752,663			2,986,267
Total lease payments	2,010,411			2,467,008			4,477,419
Plus amount representing residual property value	—			18,436			18,436
Less imputed interest	(539,508		)	(1,118,444		)	(1,657,952		)
Total	$	1,470,903		$	1,367,000		$	2,837,903

For the year ended December 31, 2018, the Company's operating lease, capital lease and other financing obligations under ASC Topic 840 are summarized as follows (in thousands):



	Capital Lease Obligations			Other Financing Obligations ⁽¹⁾			Total Capital Lease and Other Financing Obligations			Operating Leases
2019	$	103,859		$	80,292		$	184,151		$	187,280
2020	97,326			73,266			170,592			179,515
2021	95,414			73,672			169,086			166,159
2022	94,954			73,856			168,810			158,115
2023	95,463			69,423			164,886			147,677
Thereafter	878,755			722,496			1,601,251			1,130,494
Total minimum lease payments	1,365,771			1,093,005			2,458,776			1,969,240
Plus amount representing residual property value	—			389,643			389,643			—
Less amount representing interest	(602,026		)	(727,472		)	(1,329,498		)	—
Present value of net minimum lease payments	763,745			755,176			1,518,921			1,969,240
Less current portion	(43,498		)	(34,346		)	(77,844		)	—
Total	$	720,247		$	720,830		$	1,441,077		$	1,969,240

⁽¹⁾Other financing obligations are primarily related to build-to-suit arrangements.

The Company entered into agreements with various landlords primarily to lease data center spaces which have not yet commenced as of September 30, 2019. These leases will commence between fiscal years 2019 and 2020, with lease terms of 10 to 25 years and a total lease commitment of approximately $41.8 million.

Leases