Investment in Rental Property and Lease Arrangements

6 Months Ended

Jun. 30, 2022

Investment in Rental Property and Lease Arrangements

7. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office property types. At June 30, 2022, the Company had 764 real estate properties, 751 of which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, one that has been classified as a sales-type lease, and two that were vacant. Of the 10 leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Most leases have initial terms of 10 to 20 years. The Company's leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index ("CPI"), or increases in the tenant's sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.

Investment in Rental Property – Accounted for Using the Operating Method

Depreciation expense on investment in rental property was as follows:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Depreciation	$	27,730	$	24,144	$	54,388	$	47,887

Estimated lease payments to be received under non-cancelable operating leases with tenants at June 30, 2022 are as follows:


(in thousands)
Remainder of 2022	$	178,218
2023		359,960
2024		357,102
2025		350,807
2026		341,436
Thereafter		2,695,940
	$	4,283,463

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant's gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.

Investment in Rental Property – Direct Financing Leases

The Company's net investment in direct financing leases was comprised of the following:


(in thousands)	June 30, 2022			December 31, 2021
Undiscounted estimated lease payments to be received	$	40,983		$	42,602
Estimated unguaranteed residual values		15,203			15,203
Unearned revenue		(27,473	)		(28,893	)
Reserve for credit losses		(129	)		(130	)
Net investment in direct financing leases	$	28,584		$	28,782

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at June 30, 2022 are as follows:


(in thousands)
Remainder of 2022	$	1,622
2023		3,304
2024		3,361
2025		3,475
2026		3,547
Thereafter		25,674
	$	40,983

The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.

The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands)	2022			2021			2022			2021
Contractual rental amounts billed for operating leases	$	87,505		$	75,011		$	171,901		$	148,256
Adjustment to recognize contractual operating lease billings on a straight-line basis		5,090			4,724			10,111			9,533
Net write-offs of accrued rental income		—			—			(1,326	)		(442	)
Variable rental amounts earned		291			114			477			205
Earned income from direct financing leases		721			728			1,444			1,458
Interest income from sales-type leases		15			15			29			29
Operating expenses billed to tenants		4,263			4,196			8,998			8,584
Other income from real estate transactions		134			28			176			33
Adjustment to revenue recognized for uncollectible rental amounts billed, net		(6	)		(57	)		44			(199	)
Total lease revenues, net	$	98,013		$	84,759		$	191,854		$	167,457