Leases

9 Months Ended

Sep. 30, 2020

Leases [Abstract]

Leases

Leases

    Lessor – Operating Leases

    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 nine months ended September 30, 2020, we recognized $80.9 million and $233.1 million of rental income related to operating lease payments, of which $67.4 million and $194.9 million are for fixed lease payments and $13.4 million and $38.1 million are for variable lease payments, respectively. For the comparable three and nine month-period ended September 30, 2019, we recognized $65.0 million and $184.5 million of rental income related to operating lease payments, of which $54.4 million and $154.6 million were for fixed lease payments and $10.6 million and $29.9 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 September 30, 2020 (in thousands):

Twelve Months Ended September 30,
2021	$	261,237
2022	222,605
2023	180,006
2024	135,767
2025	96,394
Thereafter	308,692
Total	$	1,204,701

    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.

    Lessor – Sales-Type Lease

In June 2020, we executed a five-year lease for a 58,802 rentable square foot unit at our property located at 2722 Fairview Street (“Fairview”). The lease contained an option whereby the tenant could purchase the entire 116,575 rentable square foot property at a purchase price of $20.4 million, by executing its purchase option on or before December 10, 2020.

On September 9, 2020, the tenant exercised its option to purchase Fairview, which resulted in a change in lease classification from an operating lease to a sales-type lease. As a result of this change in classification, on September 9, 2020, we derecognized the net book value of the property, recorded a sales-type lease receivable of $20.3 million (measured as the discounted present value of the fixed purchase option price), and recognized a $3.8 million gain on sale due to lease reclassification. On September 30, 2020, the sale of Fairview closed and we collected the lease receivable and recorded $0.6 million of selling costs/write-offs, for a total net gain on sale of $3.3 million. The net proceeds from the sale of Fairview are included in net cash provided by operating activities in the consolidated statements of cash flows.

    Lessee    

    We lease office space as part of conducting our day-to-day business. As of September 30, 2020, our office space leases have remaining lease terms ranging from approximately one to four 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 September 30, 2020, total ROU assets and lease liabilities were approximately $4.1 million and $4.8 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 nine months ended September 30, 2020 and 2019, and as of September 30, 2020 and December 31, 2019.

	Three Months Ended September 30,				Nine Months Ended September 30,
Lease Cost (in thousands)	2020		2019		2020		2019
Operating lease cost(1)	$	335	$	250	$	956	$	795
Variable lease cost(1)	7		10		31		33
Sublease income(2)	—		(5)		—		(163)
Total lease cost	$	342	$	255	$	987	$	665

(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 September 30,				Nine Months Ended September 30,
Other Information (in thousands)	2020		2019		2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	331	$	259	$	774	$	781
Right-of-use assets obtained in exchange for new operating lease liabilities(1)	$	—	$	—	$	1,353	$	6,720

(1)For the nine months ended September 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	September 30, 2020		December 31, 2019
Weighted-average remaining lease term	4.1 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 September 30, 2020 were as follows (in thousands):

October 1, 2020 - December 31, 2020	$	352
2021	1,199
2022	1,201
2023	1,198
2024	1,161
Thereafter	97
Total undiscounted lease payments	$	5,208
Less imputed interest	(396)
Total lease liabilities	$	4,812

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

Leases

Leases

    Lessor – Operating Leases

    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 nine months ended September 30, 2020, we recognized $80.9 million and $233.1 million of rental income related to operating lease payments, of which $67.4 million and $194.9 million are for fixed lease payments and $13.4 million and $38.1 million are for variable lease payments, respectively. For the comparable three and nine month-period ended September 30, 2019, we recognized $65.0 million and $184.5 million of rental income related to operating lease payments, of which $54.4 million and $154.6 million were for fixed lease payments and $10.6 million and $29.9 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 September 30, 2020 (in thousands):

Twelve Months Ended September 30,
2021	$	261,237
2022	222,605
2023	180,006
2024	135,767
2025	96,394
Thereafter	308,692
Total	$	1,204,701

    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.

    Lessor – Sales-Type Lease

In June 2020, we executed a five-year lease for a 58,802 rentable square foot unit at our property located at 2722 Fairview Street (“Fairview”). The lease contained an option whereby the tenant could purchase the entire 116,575 rentable square foot property at a purchase price of $20.4 million, by executing its purchase option on or before December 10, 2020.

On September 9, 2020, the tenant exercised its option to purchase Fairview, which resulted in a change in lease classification from an operating lease to a sales-type lease. As a result of this change in classification, on September 9, 2020, we derecognized the net book value of the property, recorded a sales-type lease receivable of $20.3 million (measured as the discounted present value of the fixed purchase option price), and recognized a $3.8 million gain on sale due to lease reclassification. On September 30, 2020, the sale of Fairview closed and we collected the lease receivable and recorded $0.6 million of selling costs/write-offs, for a total net gain on sale of $3.3 million. The net proceeds from the sale of Fairview are included in net cash provided by operating activities in the consolidated statements of cash flows.

    Lessee    

    We lease office space as part of conducting our day-to-day business. As of September 30, 2020, our office space leases have remaining lease terms ranging from approximately one to four 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 September 30, 2020, total ROU assets and lease liabilities were approximately $4.1 million and $4.8 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 nine months ended September 30, 2020 and 2019, and as of September 30, 2020 and December 31, 2019.

	Three Months Ended September 30,				Nine Months Ended September 30,
Lease Cost (in thousands)	2020		2019		2020		2019
Operating lease cost(1)	$	335	$	250	$	956	$	795
Variable lease cost(1)	7		10		31		33
Sublease income(2)	—		(5)		—		(163)
Total lease cost	$	342	$	255	$	987	$	665

(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 September 30,				Nine Months Ended September 30,
Other Information (in thousands)	2020		2019		2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	331	$	259	$	774	$	781
Right-of-use assets obtained in exchange for new operating lease liabilities(1)	$	—	$	—	$	1,353	$	6,720

(1)For the nine months ended September 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	September 30, 2020		December 31, 2019
Weighted-average remaining lease term	4.1 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 September 30, 2020 were as follows (in thousands):

October 1, 2020 - December 31, 2020	$	352
2021	1,199
2022	1,201
2023	1,198
2024	1,161
Thereafter	97
Total undiscounted lease payments	$	5,208
Less imputed interest	(396)
Total lease liabilities	$	4,812

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