Leases

12 Months Ended

Dec. 31, 2021

Leases [Abstract]

Leases

Leases

Lessor Accounting Under ASC 842

The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2040. 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 portfolio of single-tenant leases generally requires 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 records these expenses on a net basis, with the exception of property taxes. Property taxes are recorded on a gross basis as a lessor cost in which the tenant reimburses the Company. The Company generally expects that collectibility is probable at lease commencement. If the assessment of collectibility changes after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a cash basis and all previously recognized uncollectible Rental income is reversed in the period in which it is

determined not to be probable of collection. In addition to the lease-specific collectibility assessment performed under Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables.

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 year ended December 31, 2021 was $520.3 million.

In May 2020, the Company and Mercy Health negotiated the sale of two single-tenant 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 represents the components of sales-type leases for the year ended December 31, 2020:

	SALES-TYPE LEASES
Dollars in thousands	2020
Profit recognized at commencement date	$	68,282	Gain on sales of real estate assets
Interest income	3,007		Rental income

Future minimum lease payments under the non-cancelable operating leases, excluding any reimbursements, as of December 31, 2021 are as follows:

In thousands
2022	$	379,180
2023	323,863
2024	252,145
2025	199,630
2026	148,550
2027 and thereafter	347,962
	$	1,651,330

Revenue Concentrations

The Company’s real estate portfolio is leased to a diverse tenant base. The Company did not have any customers that account for 10% or more of the Company's revenues for the years ended December 31, 2021, 2020 and 2019.

Purchase Option Provisions

Certain of the Company’s leases include purchase option provisions. The provisions vary by agreement but generally allow the lessee to purchase the property covered by the agreement at fair market value or an amount equal to the Company’s gross investment. The Company expects that the purchase price from its purchase options will be greater than its net investment in the properties at the time of potential exercise by the lessee. The Company had investments of approximately $54.7 million in three real estate properties as of December 31, 2021 that were subject to purchase options that were exercisable.

Lessee Accounting Under ASC 842

As of December 31, 2021, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of December 31, 2021, the Company had 109 properties totaling 9.1 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 Consumer Price Index. The Company had 41 prepaid ground leases as of December 31, 2021. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.6 million for the year ended December 31, 2021, 2020 and 2019 respectively.

The Company’s future lease payments (primarily for its 68 non-prepaid ground leases) as of December 31, 2021 were as follows:

In thousands	OPERATING		FINANCING
2022	$	5,030	$	889
2023	5,071		901
2024	5,130		925
2025	5,174		942
2026	5,201		954
2027 and thereafter	306,963		97,813
Total undiscounted lease payments	332,569		102,424
Discount	(236,431)		(79,873)
Lease liabilities	$	96,138	$	22,551

The following table provides details of the Company's total lease expense for the year ended December 31, 2021:

In thousands	YEAR ENDED Dec. 31, 2021			YEAR ENDED Dec. 31, 2020
Operating lease cost
Operating lease expense	$	4,765		$	4,710
Variable lease expense	3,929			3,556
Finance lease cost
Amortization of right-of-use assets	388			324
Interest on lease liabilities	1,032			969
Total lease expense	$	10,114		$	9,559
Other information
Operating cash flows outflows related to operating leases	$	7,706		$	6,912
Operating cash flows outflows related to financing leases	$	809
Financing cash flows outflows related to financing leases	$	9,182		$	3,417
Right-of-use assets obtained in exchange for new finance lease liabilities	$	3,827		$	7,212
Right-of-use assets obtained in exchange for new operating lease liabilities	$	8,298		$	1,976
Weighted-average remaining lease term (excluding renewal options) - operating leases	47.6			48.6
Weighted-average remaining lease term (excluding renewal options) -finance leases	62.1			64.5
Weighted-average discount rate - operating leases	5.6		%	5.7		%
Weighted-average discount rate - finance leases	5.3		%	5.4		%

Leases

Leases

Lessor Accounting Under ASC 842

The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2040. 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 portfolio of single-tenant leases generally requires 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 records these expenses on a net basis, with the exception of property taxes. Property taxes are recorded on a gross basis as a lessor cost in which the tenant reimburses the Company. The Company generally expects that collectibility is probable at lease commencement. If the assessment of collectibility changes after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a cash basis and all previously recognized uncollectible Rental income is reversed in the period in which it is

determined not to be probable of collection. In addition to the lease-specific collectibility assessment performed under Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables.

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 year ended December 31, 2021 was $520.3 million.

In May 2020, the Company and Mercy Health negotiated the sale of two single-tenant 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 represents the components of sales-type leases for the year ended December 31, 2020:

	SALES-TYPE LEASES
Dollars in thousands	2020
Profit recognized at commencement date	$	68,282	Gain on sales of real estate assets
Interest income	3,007		Rental income

Future minimum lease payments under the non-cancelable operating leases, excluding any reimbursements, as of December 31, 2021 are as follows:

In thousands
2022	$	379,180
2023	323,863
2024	252,145
2025	199,630
2026	148,550
2027 and thereafter	347,962
	$	1,651,330

Revenue Concentrations

The Company’s real estate portfolio is leased to a diverse tenant base. The Company did not have any customers that account for 10% or more of the Company's revenues for the years ended December 31, 2021, 2020 and 2019.

Purchase Option Provisions

Certain of the Company’s leases include purchase option provisions. The provisions vary by agreement but generally allow the lessee to purchase the property covered by the agreement at fair market value or an amount equal to the Company’s gross investment. The Company expects that the purchase price from its purchase options will be greater than its net investment in the properties at the time of potential exercise by the lessee. The Company had investments of approximately $54.7 million in three real estate properties as of December 31, 2021 that were subject to purchase options that were exercisable.

Lessee Accounting Under ASC 842

As of December 31, 2021, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of December 31, 2021, the Company had 109 properties totaling 9.1 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 Consumer Price Index. The Company had 41 prepaid ground leases as of December 31, 2021. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.6 million for the year ended December 31, 2021, 2020 and 2019 respectively.

The Company’s future lease payments (primarily for its 68 non-prepaid ground leases) as of December 31, 2021 were as follows:

In thousands	OPERATING		FINANCING
2022	$	5,030	$	889
2023	5,071		901
2024	5,130		925
2025	5,174		942
2026	5,201		954
2027 and thereafter	306,963		97,813
Total undiscounted lease payments	332,569		102,424
Discount	(236,431)		(79,873)
Lease liabilities	$	96,138	$	22,551

The following table provides details of the Company's total lease expense for the year ended December 31, 2021:

In thousands	YEAR ENDED Dec. 31, 2021			YEAR ENDED Dec. 31, 2020
Operating lease cost
Operating lease expense	$	4,765		$	4,710
Variable lease expense	3,929			3,556
Finance lease cost
Amortization of right-of-use assets	388			324
Interest on lease liabilities	1,032			969
Total lease expense	$	10,114		$	9,559
Other information
Operating cash flows outflows related to operating leases	$	7,706		$	6,912
Operating cash flows outflows related to financing leases	$	809
Financing cash flows outflows related to financing leases	$	9,182		$	3,417
Right-of-use assets obtained in exchange for new finance lease liabilities	$	3,827		$	7,212
Right-of-use assets obtained in exchange for new operating lease liabilities	$	8,298		$	1,976
Weighted-average remaining lease term (excluding renewal options) - operating leases	47.6			48.6
Weighted-average remaining lease term (excluding renewal options) -finance leases	62.1			64.5
Weighted-average discount rate - operating leases	5.6		%	5.7		%
Weighted-average discount rate - finance leases	5.3		%	5.4		%