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Leases

9 Months Ended

Sep. 30, 2020

Lessor Accounting

The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2035. Some leases provide for fixed rent renewal terms in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. The Company’s single-tenant net leases generally require the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.

The Company's leases typically have escalators that are either based on a stated percentage or an index such as CPI (consumer price index). In addition, most of the Company's leases include nonlease components, such as reimbursement of operating expenses as additional rent, or include the reimbursement of expected operating expenses as part of the lease payment. The Company adopted an accounting policy to combine lease and nonlease components. Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's operating leases recognized for the three and nine months ended September 30, 2020 was $123.4 million and $368.4 million, respectively.

In May 2020, the Company and Mercy Health negotiated the sale of two single-tenant net leased properties, a medical office building in Oklahoma and an orthopedic specialty hospital in Missouri, for $244.5 million. The sale was structured through amendments to the leases to allow for the early exercise of existing purchase options. The amendments resulted in the application of lease modification accounting under ASC Topic 842, which resulted in lease classification changes from operating to sales-type. During the second quarter, the Company derecognized the real estate assets on the Condensed Consolidated Balance Sheets and recognized the net investment in sales-type leases, resulting in a gain of $68.3 million. The Company disposed of these properties on July 30, 2020.

Tabular Disclosure of the Components of Sales-Type Leases

The table below presents the components of sale-type leases for the three and nine months ended September 30, 2020:


	SALES-TYPE LEASES
In thousands	three months ended September 30, 2020		nine months ended September 30, 2020
Profit recognized at commencement date	$	—	$	68,267	Gain on sales of real estate assets
Interest income	1,454		3,007		Rental income

Future lease payments under the non-cancelable operating leases, excluding any reimbursements, as of September 30, 2020 were as follows:


In thousands	Operating
2020	$	93,722
2021	352,341
2022	307,166
2023	261,187
2024	200,578
2025 and thereafter	555,264
	$	1,770,258

Lessee Accounting

As of September 30, 2020, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of September 30, 2020, the Company had 103 properties totaling 8.7 million square feet that were held under ground leases. Some of the ground leases' renewal terms are based on fixed rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally either stated or based on the CPI. The Company had 42 prepaid ground leases as of September 30, 2020. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.2 million of the Company’s rental expense for the three months ended September 30, 2020 and 2019, respectively and $0.5 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company’s future lease payments (primarily for its 61 non-prepaid ground leases) as of September 30, 2020 were as follows:


In thousands	OPERATING		FINANCING
2020	$	1,008	$	143
2021	4,844		930
2022	4,875		783
2023	4,913		793
2024	4,969		815
2025 and thereafter	307,665		88,808
Total undiscounted lease payments	328,274		92,272
Discount	(236,808)		(73,575)
Lease liabilities	$	91,466	$	18,697

The following table provides details of the Company's total lease expense for the three and nine months ended September 30, 2020 and 2019:


	THREE MONTHS ENDED September 30,						NINE MONTHS ENDED September 30,
In thousands	2020			2019			2020		2019
Operating lease cost
Operating lease expense	$	1,180		$	1,169		$	3,534	$	3,448
Variable lease expense	1,066			845			2,664		2,380

Finance lease cost
Amortization of right-of-use assets	88			51			236		101
Interest on lease liabilities	245			196			722		392
Total lease expense	$	2,579		$	2,261		$	7,156	$	6,321

Other information
Operating cash flows outflows related to operating leases	$	1,440		$	1,313		$	5,412	$	5,461
Financing cash flows outflows related to financing leases	$	143		$	107		$	3,310	$	249
Right-of-use assets obtained in exchange for new finance lease liabilities	$	—		$	—		$	7,212	$	14,294

Weighted-average remaining lease term (excluding renewal options) - operating leases	48.9			49.7
Weighted-average remaining lease term (excluding renewal options) -finance leases	64.7			70.1
Weighted-average discount rate - operating leases	5.7		%	5.7		%
Weighted-average discount rate - finance leases	5.4		%	5.5		%

Leases