Net Investment in Sales-type Leases and Ground Lease Receivables

9 Months Ended

Sep. 30, 2024

Leases [Abstract]

Net Investment in Sales-type Leases and Ground Lease Receivables

Note 4—Net Investment in Sales-type Leases and Ground Lease Receivables

The Company classifies certain of its Ground Leases as sales-type leases and records the leases within “Net investment in sales-type leases” on the Company’s consolidated balance sheets and records interest income in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases directly with the seller. These Ground Leases qualify as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in “Ground Lease receivables” on the Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in “Interest income from sales-type leases” in the Company’s consolidated statements of operations.

In May 2023, the Company entered into a joint venture with a sovereign wealth fund, which is also an existing shareholder, focused on new acquisitions for certain Ground Lease investments. The Company committed approximately $275 million for a 55% controlling interest in the joint venture and the sovereign wealth fund committed approximately $225 million for a 45% noncontrolling interest in the joint venture. Each party’s commitment is discretionary. The joint venture is a voting interest entity and the Company consolidates the joint venture in its financial statements due to its controlling interest. The Company’s joint venture partners’ interest was recorded in “Noncontrolling interests” on the Company’s consolidated balance sheet as of December 31, 2023. The Company receives a management fee, measured on an asset-by-asset basis, equal to 25 basis points on invested equity for such asset for the first five years following its acquisition, and 15 basis points on invested equity thereafter. The Company will also receive a promote of 15% over a 9% internal rate of return, subject to a 1.275x multiple on invested capital. On August 30, 2024, the Company acquired its partners’ share of the Ground Leases for $48.3 million. The excess of the purchase price and related transactions costs over the carrying value of $46.0 million was recorded as a reduction to additional paid-in capital in the Company’s consolidated statement of changes in equity. Since formation through August 30, 2024, the joint venture acquired nine Ground Leases for an aggregate purchase price of $170.4 million, of which $101.2 million had been funded as of August 30, 2024. The partner's participation right in certain qualifying Ground Lease investment opportunities expired on September 30, 2024.

In January 2024, the Company acquired a Ground Lease from the Ground Lease Plus Fund for $38.3 million, excluding amounts funded by the Company pursuant to a leasehold improvement allowance (refer to Note 7 and Note 14).

The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):

	September 30, 2024		December 31, 2023
Total undiscounted cash flows(1)	$	32,964,934	$	30,586,189
Unguaranteed estimated residual value(1)		3,040,268		2,946,928
Present value discount		(32,559,113)		(30,277,457)
Allowance for credit losses		(6,047)		(465)
Net investment in sales-type leases	$	3,440,042	$	3,255,195

(1) As of September 30, 2024, total discounted cash flows were approximately $3,414 million and the discounted unguaranteed estimated residual value was $31.6 million. As of December 31, 2023, total discounted cash flows were approximately $3,225 million and the discounted unguaranteed estimated residual value was $30.4 million.

The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the nine months ended September 30, 2024 and 2023 ($ in thousands):

	Net Investment in		Ground Lease
	Sales-type Leases		Receivables		Total
Nine Months Ended September 30, 2024
Beginning balance	$	3,255,195	$	1,622,298	$	4,877,493
Origination/acquisition/fundings(1)		145,144		137,490		282,634
Accretion		45,285		22,374		67,659
(Provision for) recovery of credit losses		(5,582)		(3,015)		(8,597)
Ending balance(2)	$	3,440,042	$	1,779,147	$	5,219,189

	Net Investment in		Ground Lease
	Sales-type Leases		Receivables		Total
Nine Months Ended September 30, 2023
Beginning balance	$	3,106,599	$	1,374,716	$	4,481,315
Impact from adoption of new accounting standard		(351)		(199)		(550)
Origination/acquisition/fundings(1)		33,400		170,194		203,594
Accretion		43,061		19,078		62,139
(Provision for) recovery of credit losses		(117)		(119)		(236)
Ending balance(2)	$	3,182,592	$	1,563,670	$	4,746,262

(1) The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed estimated residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement.

(2) As of September 30, 2024 and December 31, 2023, all of the Company’s net investment in sales-type leases and Ground Lease receivables were current in their payment status. As of September 30, 2024, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was 5.3% and 5.5%, respectively. As of September 30, 2024, the weighted average remaining life of the Company’s 40 Ground Lease receivables was 97.5 years.

Allowance for Credit Losses—Changes in the Company’s allowance for credit losses on net investment in sales-type leases for the three and nine months ended September 30, 2024 and 2023 were as follows ($ in thousands):

	Net investment in sales-type leases
	Stabilized		Development		Unfunded
Three Months Ended September 30, 2024	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	1,431	$	91	$	1	$	1,523
Provision for (recovery of) credit losses(1)		4,226		299		—		4,525
Allowance for credit losses at end of period(2)	$	5,657	$	390	$	1	$	6,048
Three Months Ended September 30, 2023
Allowance for credit losses at beginning of period	$	259	$	77	$	1	$	337
Provision for (recovery of) credit losses(1)		110		22		—		132
Allowance for credit losses at end of period(2)	$	369	$	99	$	1	$	469
Nine Months Ended September 30, 2024
Allowance for credit losses at beginning of period	$	387	$	78	$	—	$	465
Provision for (recovery of) credit losses(1)		5,270		312		1		5,583
Allowance for credit losses at end of period(2)	$	5,657	$	390	$	1	$	6,048
Nine Months Ended September 30, 2023
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard (3)		280		71		6		357
Provision for (recovery of) credit losses(1)		89		28		(5)		112
Allowance for credit losses at end of period(2)	$	369	$	99	$	1	$	469

(1) During the three and nine months ended September 30, 2024, the Company recorded a provision for credit losses on net investment in sales-type leases of $4.5 million and $5.6 million, respectively. The provision for credit losses for the three and nine months ended September 30, 2024 was due primarily to elective enhancements to the Company’s general provision for credit loss methodology (refer to Note 3), current market conditions and growth in the portfolio during the period. During the three and nine months ended September 30, 2023, the Company recorded a provision for credit losses on net investment in sales-type leases of $0.1 million and $0.1 million, respectively. The provision for credit losses for the three and nine months ended September 30, 2023 was due primarily to a declining macroeconomic forecast since June 30, 2023 and December 31, 2022, respectively.

(2) Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets.

(3) On January 1, 2023, the Company recorded an allowance for credit losses on net investment in sales-type leases of $0.4 million upon the adoption of ASU 2016-13, of which an aggregate of $6 thousand related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities."

Changes in the Company’s allowance for credit losses on Ground Lease receivables for the three and nine months ended September 30, 2024 and 2023 were as follows ($ in thousands):

	Ground Lease receivables
	Stabilized		Development		Unfunded
Three Months Ended September 30, 2024	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	471	$	302	$	13	$	786
Provision for (recovery of) credit losses(1)		2,016		595		42		2,653
Allowance for credit losses at end of period(2)	$	2,487	$	897	$	55	$	3,439
Three Months Ended September 30, 2023
Allowance for credit losses at beginning of period	$	94	$	127	$	60	$	281
Provision for (recovery of) credit losses(1)		40		57		(3)		94
Allowance for credit losses at end of period(2)	$	134	$	184	$	57	$	375
Nine Months Ended September 30, 2024
Allowance for credit losses at beginning of period	$	123	$	246	$	37	$	406
Provision for (recovery of) credit losses(1)		2,364		651		18		3,033
Allowance for credit losses at end of period(2)	$	2,487	$	897	$	55	$	3,439
Nine Months Ended September 30, 2023
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard(3)		102		97		84		283
Provision for (recovery of) credit losses(1)		32		87		(27)		92
Allowance for credit losses at end of period(2)	$	134	$	184	$	57	$	375

(1) During the three and nine months ended September 30, 2024, the Company recorded a provision for credit losses on Ground Lease receivables of $2.7 million and $3.0 million, respectively. The provision for credit losses for the three and nine months ended September 30, 2024 was due primarily to elective enhancements to the Company’s general provision for credit loss methodology (refer to Note 3), current market conditions and growth in the portfolio during the period. During the three and nine months ended September 30, 2023, the Company recorded a provision for credit losses on Ground Lease receivables of $0.1 million and $0.1 million, respectively. The provision for credit losses for the three and nine months ended September 30, 2023 was due primarily to a declining macroeconomic forecast since June 30, 2023 and December 31, 2022. respectively.

(2) Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets.

(3) On January 1, 2023, the Company recorded an allowance for credit losses on Ground Lease receivables of $0.3 million upon the adoption of ASU 2016-13, of which an aggregate of $0.1 million related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities."

The Company’s amortized cost basis in net investment in sales-type leases and Ground Lease receivables, presented by year of origination and by stabilized or development status, was as follows as of September 30, 2024 ($ in thousands):

	Year of Origination
	2024		2023		2022		2021		2020		Prior to 2020		Total
Net investment in sales-type leases
Stabilized properties	$	35,545	$	50,049	$	650,848	$	1,091,757	$	213,404	$	1,084,839	$	3,126,442
Development properties		110,622		21,953		38,311		120,853		—		27,908		319,647
Total	$	146,167	$	72,002	$	689,159	$	1,212,610	$	213,404	$	1,112,747	$	3,446,089

	Year of Origination
	2024		2023		2022		2021		2020		Prior to 2020		Total
Ground Lease receivables
Stabilized properties	$	—	$	19,420	$	155,181	$	199,895	$	183,233	$	456,735	$	1,014,464
Development properties		57,188		13,368		619,250		78,261		—		—		768,067
Total	$	57,188	$	32,788	$	774,431	$	278,156	$	183,233	$	456,735	$	1,782,531

The Company’s amortized cost basis in net investment in sales-type leases and Ground Lease receivables, presented by year of origination and by stabilized or development status, was as follows as of December 31, 2023 ($ in thousands):

	Year of Origination
	2023		2022		2021		2020		2019		Prior to 2019		Total
Net investment in sales-type leases
Stabilized properties	$	49,266	$	642,340	$	1,077,813	$	210,481	$	1,069,583	$	—	$	3,049,483
Development properties		21,634		37,793		119,191		—		27,559		—		206,177
Total	$	70,900	$	680,133	$	1,197,004	$	210,481	$	1,097,142	$	—	$	3,255,660

	Year of Origination
	2023		2022		2021		2020		2019		Prior to 2019		Total
Ground Lease receivables
Stabilized properties	$	19,106	$	152,966	$	171,664	$	180,739	$	450,123	$	—	$	974,598
Development properties		139		545,509		102,421		—		—		—		648,069
Total	$	19,245	$	698,475	$	274,085	$	180,739	$	450,123	$	—	$	1,622,667

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of September 30, 2024, are as follows by year ($ in thousands):

					Fixed Bumps
	Fixed Bumps				with
	with Inflation		Fixed		Percentage
	Adjustments		Bumps		Rent		Total
2024 (remaining three months)	$	33,636	$	1,288	$	146	$	35,070
2025		109,824		5,192		586		115,602
2026		111,909		5,696		586		118,191
2027		113,944		6,378		586		120,908
2028		115,980		6,595		637		123,212
Thereafter		30,234,155		2,118,764		99,032		32,451,951
Total undiscounted cash flows	$	30,719,448	$	2,143,913	$	101,573	$	32,964,934

During the three and nine months ended September 30, 2024 and 2023, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):

	Net Investment		Ground
	in Sales-type		Lease
Three Months Ended September 30, 2024	Leases		Receivables		Total
Cash	$	28,203	$	15,678	$	43,881
Non-cash		15,332		7,907		23,239
Total interest income from sales-type leases	$	43,535	$	23,585	$	67,120

	Net Investment		Ground
	in Sales-type		Lease
Three Months Ended September 30, 2023	Leases		Receivables		Total
Cash	$	25,309	$	12,767	$	38,076
Non-cash		14,482		6,572		21,054
Total interest income from sales-type leases	$	39,791	$	19,339	$	59,130

	Net Investment		Ground
	in Sales-type		Lease
Nine Months Ended September 30, 2024	Leases		Receivables		Total
Cash	$	83,318	$	44,596	$	127,914
Non-cash		45,284		22,375		67,659
Total interest income from sales-type leases	$	128,602	$	66,971	$	195,573

	Net Investment		Ground
	in Sales-type		Lease
Nine Months Ended September 30, 2023	Leases		Receivables		Total
Cash	$	75,355	$	36,856	$	112,211
Non-cash		43,061		19,078		62,139
Total interest income from sales-type leases	$	118,416	$	55,934	$	174,350