Leases

3 Months Ended

Mar. 31, 2022

Leases [Abstract]

Leases

Leases

Lessor Accounting

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 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 the consumer price index ("CPI"). 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 months ended March 31, 2022 was $138.5 million.

On March 30, 2022, the Company executed a lease as a ground lessor for a 1.9 acre parcel of land in Texas previously recorded in land held for development. The lease is classified as a sales-type lease under Topic 842 as the present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset. The land value of $1.8 million was reclassified from Land held for development to Other assets.

Future lease payments under the non-cancelable operating leases, excluding any reimbursements and the sale-type lease, as of March 31, 2022 were as follows:

Dollars in thousands	OPERATING
2022	$	312,208
2023	375,370
2024	304,440
2025	247,731
2026	195,917
2027 and thereafter	469,372
	$	1,905,038

Lessee Accounting

As of March 31, 2022, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of March 31, 2022, the Company had 108 properties totaling 8.9 million square feet that were held under ground leases. Some of the ground lease 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 CPI. The Company had 41 prepaid ground leases as of March 31, 2022. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.1 million and $0.2 million of the Company’s rental expense for the three months ended March 31, 2022 and 2021, respectively.

The Company’s future lease payments (primarily for its 67 non-prepaid ground leases) as of March 31, 2022 were as follows:

Dollars in thousands	OPERATING		FINANCING
2022	$	3,272	$	1,106
2023	5,071		1,654
2024	5,130		1,692
2025	5,174		1,723
2026	5,201		1,749
2027 and thereafter	306,956		368,730
Total undiscounted lease payments	330,804		376,654
Discount	(236,168)		(314,922)
Lease liabilities	$	94,636	$	61,732

The following table provides details of the Company's total lease expense for the three months ended March 31, 2022 and 2021:

	THREE MONTHS ENDED March 31,
Dollars in thousands	2022			2021
Operating lease cost
Operating lease expense	$	1,215		$	1,178
Variable lease expense	1,024			896
Finance lease cost
Amortization of right-of-use assets	172			88
Interest on lease liabilities	287			247
Total lease expense	$	2,698		$	2,409
Other information
Operating cash flows outflows related to operating leases	$	2,797		$	1,844
Operating cash flows outflows related to financing leases	$	258		$	233
Financing cash flows outflows related to financing leases	$	257		$	129
Right-of-use assets obtained in exchange for new finance lease liabilities	$	40,589		$	—
Weighted-average remaining lease term (excluding renewal options) - operating leases	47.6			48.4
Weighted-average remaining lease term (excluding renewal options) - finance leases	61.9			64.2
Weighted-average discount rate - operating leases	5.6		%	5.7		%
Weighted-average discount rate - finance leases	5.0		%	5.4		%

Leases

Leases

Lessor Accounting

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 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 the consumer price index ("CPI"). 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 months ended March 31, 2022 was $138.5 million.

On March 30, 2022, the Company executed a lease as a ground lessor for a 1.9 acre parcel of land in Texas previously recorded in land held for development. The lease is classified as a sales-type lease under Topic 842 as the present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset. The land value of $1.8 million was reclassified from Land held for development to Other assets.

Future lease payments under the non-cancelable operating leases, excluding any reimbursements and the sale-type lease, as of March 31, 2022 were as follows:

Dollars in thousands	OPERATING
2022	$	312,208
2023	375,370
2024	304,440
2025	247,731
2026	195,917
2027 and thereafter	469,372
	$	1,905,038

Lessee Accounting

As of March 31, 2022, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of March 31, 2022, the Company had 108 properties totaling 8.9 million square feet that were held under ground leases. Some of the ground lease 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 CPI. The Company had 41 prepaid ground leases as of March 31, 2022. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.1 million and $0.2 million of the Company’s rental expense for the three months ended March 31, 2022 and 2021, respectively.

The Company’s future lease payments (primarily for its 67 non-prepaid ground leases) as of March 31, 2022 were as follows:

Dollars in thousands	OPERATING		FINANCING
2022	$	3,272	$	1,106
2023	5,071		1,654
2024	5,130		1,692
2025	5,174		1,723
2026	5,201		1,749
2027 and thereafter	306,956		368,730
Total undiscounted lease payments	330,804		376,654
Discount	(236,168)		(314,922)
Lease liabilities	$	94,636	$	61,732

The following table provides details of the Company's total lease expense for the three months ended March 31, 2022 and 2021:

	THREE MONTHS ENDED March 31,
Dollars in thousands	2022			2021
Operating lease cost
Operating lease expense	$	1,215		$	1,178
Variable lease expense	1,024			896
Finance lease cost
Amortization of right-of-use assets	172			88
Interest on lease liabilities	287			247
Total lease expense	$	2,698		$	2,409
Other information
Operating cash flows outflows related to operating leases	$	2,797		$	1,844
Operating cash flows outflows related to financing leases	$	258		$	233
Financing cash flows outflows related to financing leases	$	257		$	129
Right-of-use assets obtained in exchange for new finance lease liabilities	$	40,589		$	—
Weighted-average remaining lease term (excluding renewal options) - operating leases	47.6			48.4
Weighted-average remaining lease term (excluding renewal options) - finance leases	61.9			64.2
Weighted-average discount rate - operating leases	5.6		%	5.7		%
Weighted-average discount rate - finance leases	5.0		%	5.4		%