Operating Leases

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

Operating Leases

Operating Leases

Lessor

We lease industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.

For the three and six months ended June 30, 2020, we recognized $77.1 million and $152.2 million of rental income related to operating lease payments, of which $64.6 million and $127.5 million are for fixed lease payments and $12.5 million and $24.7 million are for variable lease payments, respectively. For the comparable three and six month-period ended June 30, 2019, we recognized $61.7 million and $119.6 million of rental income related to operating lease payments, of which $51.7 million and $100.3 million were for fixed lease payments and $10.0 million and $19.3 million were for variable lease payments, respectively.

The following table sets forth the undiscounted cash flows for future minimum base rents to be received under operating leases as of June 30, 2020 (in thousands):

Twelve Months Ended June 30,
2021	$	256,961
2022	216,923
2023	176,305
2024	134,294
2025	96,251
Thereafter	312,614
Total	$	1,193,348

The future minimum base rents in the table above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.

In June 2020, we executed a five-year lease for a 58,802 rentable square feet unit at our property located at 2722 Fairview Street. The lease contains an option whereby the tenant can purchase the entire 116,575 rentable square foot property at a purchase price of $20.4 million. The tenant must give us notice on or before December 10, 2020 in order to exercise its purchase option.

Lessee    

We lease office space as part of conducting our day-to-day business. As of June 30, 2020, our office space leases have remaining lease terms ranging from approximately one to five years and some include options to renew. These renewal terms can extend the lease term from three to five years and are included in the lease term when it is reasonably certain that we will exercise the option.

In connection with the acquisition of 1055 Sandhill Avenue, we assumed a ground lease from the seller for a parcel of land that is adjacent to our property and used as a parking lot. The ground lease, which expires on August 11, 2023, has a remaining lease term of approximately three years, with two additional ten-year options to renew, and monthly rent of $9,000 through expiration.

As of June 30, 2020, total ROU assets and lease liabilities were approximately $4.4 million and $5.1 million, respectively. As of December 31, 2019, total ROU assets and lease liabilities were approximately $3.5 million and $3.8 million, respectively. All operating lease expense is recognized on a straight-line basis over the lease term.

The tables below present financial information associated with our leases for the three and six months ended June 30, 2020 and 2019, and as of June 30, 2020 and December 31, 2019.

	Three Months Ended June 30,					Six Months Ended June 30,
Lease Cost (in thousands)	2020		2019			2020		2019
Operating lease cost(1)	$	316	$	285		$	621	$	545
Variable lease cost(1)	12		10			24		23
Sublease income(2)	—		(79		)	—		(158		)
Total lease cost	$	328	$	216		$	645	$	410

(1) Amounts are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.

(2) Amount is included in “Rental income” in the accompanying consolidated statements of operations.

	Three Months Ended June 30,				Six Months Ended June 30,
Other Information (in thousands)	2020		2019		2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	262	$	283	$	442	$	522
Right-of-use assets obtained in exchange for new operating lease liabilities(1)	$	339	$	—	$	1,353	$	6,720

(1) For the six months ended June 30, 2019, the reported amount includes $3.3 million for operating leases existing on January 1, 2019, the date we adopted ASC 842.

Lease Term and Discount Rate	June 30, 2020		December 31, 2019
Weighted-average remaining lease term	4.3 years		4.7 years
Weighted-average discount rate(1)	3.6	%	3.9	%

(1) Because the rate implicit in each of our leases was not readily determinable, we used our incremental borrowing rate. In determining our incremental borrowing rate for each lease, we considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to our creditworthiness, the impact of collateralization and the term of each of our lease agreements.

Maturities of lease liabilities as of June 30, 2020 were as follows (in thousands):

July 1, 2020 - December 31, 2020	$	674
2021	1,199
2022	1,201
2023	1,198
2024	1,161
Thereafter	97
Total undiscounted lease payments	$	5,530
Less imputed interest	(440		)
Total lease liabilities	$	5,090

We have one operating lease for office space of $1.9 million which has not commenced as June 30, 2020, and as such, has not been recognized on our consolidated balance sheets. This operating lease is expected to commence in 2020 and has a 5-year lease term.

Operating Leases

Operating Leases

Lessor

We lease industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.

For the three and six months ended June 30, 2020, we recognized $77.1 million and $152.2 million of rental income related to operating lease payments, of which $64.6 million and $127.5 million are for fixed lease payments and $12.5 million and $24.7 million are for variable lease payments, respectively. For the comparable three and six month-period ended June 30, 2019, we recognized $61.7 million and $119.6 million of rental income related to operating lease payments, of which $51.7 million and $100.3 million were for fixed lease payments and $10.0 million and $19.3 million were for variable lease payments, respectively.

The following table sets forth the undiscounted cash flows for future minimum base rents to be received under operating leases as of June 30, 2020 (in thousands):

Twelve Months Ended June 30,
2021	$	256,961
2022	216,923
2023	176,305
2024	134,294
2025	96,251
Thereafter	312,614
Total	$	1,193,348

The future minimum base rents in the table above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.

In June 2020, we executed a five-year lease for a 58,802 rentable square feet unit at our property located at 2722 Fairview Street. The lease contains an option whereby the tenant can purchase the entire 116,575 rentable square foot property at a purchase price of $20.4 million. The tenant must give us notice on or before December 10, 2020 in order to exercise its purchase option.

Lessee    

We lease office space as part of conducting our day-to-day business. As of June 30, 2020, our office space leases have remaining lease terms ranging from approximately one to five years and some include options to renew. These renewal terms can extend the lease term from three to five years and are included in the lease term when it is reasonably certain that we will exercise the option.

In connection with the acquisition of 1055 Sandhill Avenue, we assumed a ground lease from the seller for a parcel of land that is adjacent to our property and used as a parking lot. The ground lease, which expires on August 11, 2023, has a remaining lease term of approximately three years, with two additional ten-year options to renew, and monthly rent of $9,000 through expiration.

As of June 30, 2020, total ROU assets and lease liabilities were approximately $4.4 million and $5.1 million, respectively. As of December 31, 2019, total ROU assets and lease liabilities were approximately $3.5 million and $3.8 million, respectively. All operating lease expense is recognized on a straight-line basis over the lease term.

The tables below present financial information associated with our leases for the three and six months ended June 30, 2020 and 2019, and as of June 30, 2020 and December 31, 2019.

	Three Months Ended June 30,					Six Months Ended June 30,
Lease Cost (in thousands)	2020		2019			2020		2019
Operating lease cost(1)	$	316	$	285		$	621	$	545
Variable lease cost(1)	12		10			24		23
Sublease income(2)	—		(79		)	—		(158		)
Total lease cost	$	328	$	216		$	645	$	410

(1) Amounts are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.

(2) Amount is included in “Rental income” in the accompanying consolidated statements of operations.

	Three Months Ended June 30,				Six Months Ended June 30,
Other Information (in thousands)	2020		2019		2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	262	$	283	$	442	$	522
Right-of-use assets obtained in exchange for new operating lease liabilities(1)	$	339	$	—	$	1,353	$	6,720

(1) For the six months ended June 30, 2019, the reported amount includes $3.3 million for operating leases existing on January 1, 2019, the date we adopted ASC 842.

Lease Term and Discount Rate	June 30, 2020		December 31, 2019
Weighted-average remaining lease term	4.3 years		4.7 years
Weighted-average discount rate(1)	3.6	%	3.9	%

(1) Because the rate implicit in each of our leases was not readily determinable, we used our incremental borrowing rate. In determining our incremental borrowing rate for each lease, we considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to our creditworthiness, the impact of collateralization and the term of each of our lease agreements.

Maturities of lease liabilities as of June 30, 2020 were as follows (in thousands):

July 1, 2020 - December 31, 2020	$	674
2021	1,199
2022	1,201
2023	1,198
2024	1,161
Thereafter	97
Total undiscounted lease payments	$	5,530
Less imputed interest	(440		)
Total lease liabilities	$	5,090

We have one operating lease for office space of $1.9 million which has not commenced as June 30, 2020, and as such, has not been recognized on our consolidated balance sheets. This operating lease is expected to commence in 2020 and has a 5-year lease term.