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Note 9 - Leases

9 Months Ended

Sep. 30, 2021

9. Leases

Lessor Leases

The Company’s primary source of revenues is derived from lease agreements, which includes rental income and expense reimbursement. The Company’s lease income is comprised of minimum base rent, expense reimbursements, percentage rent, lease termination fee income, ancillary income, amortization of above-market and below-market rent adjustments and straight-line rent adjustments.

The disaggregation of the Company’s lease income, which is included in Revenues from rental properties, net on the Company’s Condensed Consolidated Statements of Operations, as either fixed or variable lease income based on the criteria specified in ASC 842, for the nine months ended September 30, 2021 and 2020, is as follows (in thousands):

	Nine Months Ended September 30,
	2021		2020
Lease income:
Fixed lease income (1)	$	720,174	$	659,913
Variable lease income (2)		181,980		173,216
Above-market and below-market leases amortization, net		11,915		17,500
Adjustments for potentially uncollectible revenues and disputed amounts (3)		15,228		(72,057	)
Total lease income	$	929,297	$	778,572

(1)

Includes minimum base rents, expense reimbursements, ancillary income and straight-line rent adjustments.

(2)

Includes minimum base rents, expense reimbursements, percentage rent, lease termination fee income and ancillary income.

(3)

The amounts represent adjustments associated with potentially uncollectible revenues and disputed amounts primarily due to the COVID-19 pandemic.

Lessee Leases

The Company currently leases real estate space under non-cancelable operating lease agreements for ground leases and administrative office leases. The Company’s operating leases have remaining lease terms ranging from less than one year to 64.3 years, some of which include options to extend the terms for up to an additional 75 years. The Company does not typically include any of its renewal options in its lease terms for calculating its lease liability as the renewal options allow the Company to maintain operational flexibility unless the Company is reasonably certain it will exercise these renewal options.

The Company’s operating lease liabilities are determined based on the estimated present value of the Company’s minimum lease payments under its lease agreements. The discount rate used to determine the lease liabilities is based on the estimated incremental borrowing rate on a lease-by-lease basis. When calculating the incremental borrowing rates, the Company utilized data from (i) its recent debt issuances, (ii) publicly available data for instruments with similar characteristics, (iii) observable mortgage rates and (iv) unlevered property yields and discount rates. The Company then applied adjustments to account for considerations related to term and security that may not be fully incorporated by the data sets.

In connection with the Merger, the Company obtained $32.6 million of operating right-of-use assets in exchange for new operating lease liabilities related to six properties under operating lease agreements for ground leases. In addition, the Company acquired two properties under finance leasing arrangements that consists of variable lease payments with a bargain purchase option. As a result, the Company obtained finance right-of-use assets of $23.8 million (which are included in Other assets on the Company’s Condensed Consolidated Balance Sheets) in exchange for new finance lease liabilities (which are included in Other liabilities on the Company’s Condensed Consolidated Balance Sheets).

The weighted-average remaining non-cancelable lease term and weighted-average discount rates for the Company’s operating and finance leases as of September 30, 2021 were as follows:

	Operating Leases			Finance Leases
Weighted-average remaining lease term (in years)		25.7			2.3
Weighted-average discount rate		6.62	%		4.44	%

The components of the Company’s lease expense, which are included in interest expense, rent expense and general and administrative expense on the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021 and 2020, were as follows (in thousands):

	Nine Months Ended September 30,
	2021		2020
Lease cost:
Finance lease cost (1)	$	263	$	-
Operating lease cost		8,562		7,782
Variable lease cost		2,520		2,104
Total lease cost	$	11,345	$	9,886

(1)

Relates to interest expense on finance lease liabilities, which were acquired in connection with the Merger.