Investment in Rental Property and Lease Arrangements

3 Months Ended

Mar. 31, 2023

Investment in Rental Property and Lease Arrangements

5. 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 March 31, 2023, the Company had 801 real estate properties, 789 of which were leased under leases that have been classified as operating leases, nine 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 nine 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 March 31,
(in thousands)	2023		2022
Depreciation	$	31,157	$	26,658

Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2023 are as follows:


(in thousands)
Remainder of 2023	$	291,129
2024		389,055
2025		386,026
2026		381,109
2027		363,946
Thereafter		3,044,506
	$	4,855,771

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)	March 31, 2023			December 31, 2022
Undiscounted estimated lease payments to be received	$	37,492		$	38,268
Estimated unguaranteed residual values		14,547			14,547
Unearned revenue		(24,967	)		(25,645	)
Reserve for credit losses		(125	)		(125	)
Net investment in direct financing leases	$	26,947		$	27,045

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2023 are as follows:


(in thousands)
Remainder of 2023	$	2,337
2024		3,171
2025		3,285
2026		3,357
2027		3,426
Thereafter		21,916
	$	37,492

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 March 31,
(in thousands)	2023				2022
Contractual rental amounts billed for operating leases	$	98,102			$	84,396
Adjustment to recognize contractual operating lease billings on a straight-line basis		7,370				5,021
Net write-offs of accrued rental income		(105	)			(1,326	)
Variable rental amounts earned		341				186
Earned income from direct financing leases		691				723
Interest income from sales-type leases		14				14
Operating expenses billed to tenants		5,075				4,735
Other income from real estate transactions		7,392		(a)		42
Adjustment to revenue recognized for uncollectible rental amounts billed, net		112				50
Total lease revenues, net	$	118,992			$	93,841

(a)

Other income from real estate transactions during the three months ended March 31, 2023, includes $7.5 million of lease termination fee income recognized in connection with the simultaneous lease termination and sale of an underlying office property for an additional $32.0 million in proceeds.