Leases

12 Months Ended

Dec. 31, 2020

(6) Leases

Lessor

The Company leases its rental equipment on either short-term operating leases through master lease agreements, long-term non-cancelable leases, or finance leases. The following table summarizes the components of lease revenue (in thousands):


	Year Ended December 31,
	2020		2019
Lease revenue - operating leases	$	231,198	$	238,971
Interest income on finance leases		46,031		45,568
Other revenue		13,031		12,338
Interest income on financing receivable		3,753		1,976
Total lease revenue	$	294,013	$	298,853

For finance leases, the net selling loss recognized at lease commencement, representing the difference between the estimated fair value of rental equipment placed on lease and net book value, in the amount of $0.2 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, is included in ‘gain on sale of rental equipment’ in the consolidated statements of income.

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The following represents future minimum rents receivable under long-term non-cancelable operating leases of continuing operations as of December 31, 2020 (in thousands):


2021	$	175,205
2022		149,004
2023		110,298
2024		76,629
2025		57,727
2026 and thereafter		101,222
Total	$	670,085

See below for contractual maturities of the Company’s gross finance lease receivables.

Net investment in finance leases

The following table represents the components of the Company’s net investment in finance leases (in thousands):



	December 31,		December 31,
	2020		2019
Gross finance lease receivables (1)	$	909,727	$	804,880
Unearned income (2)		(280,116)		(238,164)
Net investment in finance leases		629,611		566,716
Allowance for credit losses		(46)		-
Net investment in finance leases, net of allowance for credit losses	$	629,565	$	566,716

(1)At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received. There was $98.2 million and $74.3 million unguaranteed residual value at December 31, 2020 and 2019, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of December 31, 2020 and 2019.

(2)The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of December 31, 2020 and 2019.

(3)One major customer represented 75% and 65% of the Company’s finance lease portfolio as of December 31, 2020 and 2019, respectively. No other customer represented more than 10% of the Company’s finance lease portfolio in each of those periods.

Contractual maturities of the Company’s gross finance lease receivables subsequent to December 31, 2020 for the years ending December 31 are as follows (in thousands):



2021	$	125,821
2022		123,704
2023		105,486
2024		78,563
2025		65,755
2026 and thereafter		410,398
	$	909,727

Financing Receivable

The Company has purchased containers and leased back the containers to the seller-lessee through finance leaseback arrangements. As control of the equipment was retained by the customers, the Company concluded that sale-leaseback accounting was not applicable and treated the arrangements as financing transactions. The Company recorded a financing receivable in the amount paid for the containers. Payments made by the seller-lessee are recorded as a reduction to the financing receivable and as interest income, calculated using the effective interest method.

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The following table summarizes the components of the Company’s financing receivable (in thousands):


	December 31,		December 31,
	2020		2019
Gross financing receivable	$	71,761	$	45,530
Unearned income		(13,320)		(11,111)
		58,441		34,419
Allowance for credit losses		(3)		-
Total financing receivable	$	58,438	$	34,419
Amounts due within one year (1)		9,550		3,726
Amounts due beyond one year (2)		48,888		30,693
Total financing receivable	$	58,438	$	34,419

(1)Included in prepaid expenses and other current assets in the consolidated balance sheets.

(2)Included in financing receivable in the consolidated balance sheets.

Credit quality information

In order to estimate the allowance for losses contained in net investment in finance leases and financing receivable, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, historical credit loss activity, current market and economic conditions, and reasonable and supportable forecasts.

The Company uses the following definitions for risk ratings:

Tier 1— These customers are typically large international shipping lines that have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to moderate.

Tier 2— These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.

Tier 3— Customers in this category exhibit volatility in payments on a regular basis.

As of December 31, 2020 and 2019, based on the most recent analysis performed, the risk category of the Company’s net investment in finance leases and financing receivable, based on year of origination is as follows (in thousands):


December 31, 2020	2020		2019		2018		2017		2016		Prior		Total
Net investment in finance leases
Tier 1	$	127,215	$	49,986	$	228,802	$	160,197	$	5,945	$	875	$	573,020
Tier 2		8,425		25,726		12,576		4,272		1,136		4,456		56,591
Tier 3		-		-		-		-		-		-		-
Total net investment in finance leases	$	135,640	$	75,712	$	241,378	$	164,469	$	7,081	$	5,331	$	629,611

Financing receivable
Tier 1	$	27,762	$	30,083	$	-	$	-	$	-	$	-	$	57,845
Tier 2		-		596		-		-		-		-		596
Tier 3		-		-		-		-		-		-		-
Total financing receivable	$	27,762	$	30,679	$	-	$	-	$	-	$	-	$	58,441

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	Net investment in		Financing
December 31, 2019	finance leases		receivable
Tier 1	$	502,265	$	33,694
Tier 2		64,451		725
Tier 3		-		-
	$	566,716	$	34,419

Lessee

The Company has entered into various non-cancelable office space leases with original lease periods expiring between 2021 and 2025. As of December 31, 2020 and 2019, the Company’s operating lease right-of-use assets of $3.2 million and $5.3 million, respectively, were reported in other non-current assets in the consolidated balance sheets. As of December 31, 2020 and 2019, the Company’s operating lease liability amounts due within one year of $2.2 million and $2.1 million, respectively, were recorded in accrued expenses and other current liabilities, and amounts due beyond one year of $1.8 million and $4.0 million, respectively, were recorded in other non-current liabilities in the consolidated balance sheets.

Lease expense for lease payments is recognized on a straight-line basis over the lease term and is reported in administrative expenses in the consolidated statements of income.

The following table summarizes the components of lease expense (in thousands):


	Year Ended December 31,
	2020		2019
Operating lease cost	$	2,140	$	2,141
Short-term lease cost		114		73
Variable lease cost		274		216
Total lease cost	$	2,528	$	2,430

Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of December 31, 2020 were as follows (in thousands):



2021	$	2,316
2022		1,467
2023		280
2024		150
2025		15
Total lease payments		4,228
Less imputed interest		(189)
Total operating lease liabilities	$	4,039

The weighted-average remaining term of the Company’s operating leases was 2.0 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 3.6% as of December 31, 2020.

Cash paid for operating leases was $2.2 million and $2.1 million during the year ended December 31, 2020 and 2019, respectively.