Lease Assets and Lease Liabilities Lease Assets and Lease Liabilities

6 Months Ended

Jun. 30, 2019

Lease Assets

The Company determines whether a contract is or contains a lease at its inception. A lease is defined as the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Right-of-use assets and lease liabilities are recorded on the Company's condensed consolidated balance sheet at the lease commencement date for operating leases in which the Company acts as lessee. Right-of-use assets represent the Company's rights to use underlying assets for the term of the lease and lease liabilities represent the Company's future obligations under the lease agreement. Right-of-use assets and lease liabilities are recognized at the lease commencement date based upon the estimated present value of the lease payments. As the rate implicit in the Company's leases cannot readily be determined, the Company utilizes its estimated incremental borrowing rate to determine the present value of its lease payments. Consideration is also given to the Company's recent debt issuances, as well as publicly available data for instruments with similar characteristics when determining the incremental borrowing rates of the Company's leases.

The Company includes options to extend the lease in its lease term, when it is reasonably certain that the Company will exercise those renewal options. In the instance of the Company's ground leases associated with leased properties, the Company has included all available renewal options in the lease term, as it intends to renew these leases indefinitely. The Company accounts for the lease and nonlease components of these triple-net tenant leases as a single lease component. Leases with a term of 12 months or less are not recorded on the Company's condensed consolidated balance sheet.

Right-of-use assets and land rights are monitored for potential impairment in much the same way as the Company's real estate assets, using the impairment model in ASC 360 - Property, Plant and Equipment. If the Company determines the carrying amount of a right-of-use asset or land right is not recoverable, it would recognize an impairment charge equivalent to the amount required to reduce the carrying value of the asset to its estimated fair value, calculated in accordance with GAAP.

The Company is subject to various operating leases as lessee for both real estate and equipment, the majority of which are ground leases related to properties the Company leases to its tenants under triple-net operating leases. Details of the Company's significant ground leases can be found in the Form 10-K for the year ended December 31, 2018. For certain of these ground leases, the Company subleases the underlying assets to its tenants who are responsible for payment directly to the third-party landlord. Under ASC 842, the Company is required to gross-up its condensed consolidated financial statements for these ground leases as the Company is considered the primary obligor. In conjunction with the adoption of ASU 2016-02 on January 1, 2019, the Company recorded right-of-use assets and related lease liabilities on its condensed consolidated balance sheet to represent its rights to use the underlying leased assets and its future lease obligations, respectively, including for those ground leases paid directly by our tenants. Because the right-of-use asset relates, in part, to the same leases which resulted in the land right assets the Company recorded on its condensed consolidated balance sheet in conjunction with the Company's assumption of below market leases at the time it acquired the related land and building assets, the Company is required to report the right-of-use assets and land rights in the aggregate on the condensed consolidated balance sheet.

Land rights, net represent the Company's rights to land subject to long-term ground leases. The Company obtained ground lease rights through the acquisition of several of its rental properties and immediately subleased the land to its tenants. These land rights represent the below market value of the related ground leases. The Company assessed the acquired ground leases to determine if the lease terms were favorable or unfavorable, given market conditions at the acquisition date. Because the market rents to be received under the Company's triple-net tenant leases were greater than the rents to be paid under the acquired ground leases, the Company concluded that the ground leases were below market and were therefore required to be recorded as a definite lived asset (land rights) on its books.

Components of the Company's right-of use assets and land rights, net are detailed below (in thousands):



	June 30, 2019
Right-of use assets - operating leases	$	202,215
Land rights, net	660,712
Right-of-use assets and land rights, net	$	862,927

Land Rights

The land rights are amortized over the individual lease term of the related ground lease, including all renewal options, which ranged from 10 years to 92 years at their respective acquisition dates. Land rights net, consist of the following:



	June 30, 2019			December 31, 2018
	(in thousands)
Land rights	$	694,077		$	700,997
Less accumulated amortization	(33,365		)	(27,790		)
Land rights, net	$	660,712		$	673,207

On June 30, 2019, the Resorts Casino Tunica property was closed by the Company's tenant, resulting in the acceleration of $6.3 million of land right amortization expense related to the ground lease at this property and bringing the net book value of this land right to zero at June 30, 2019.

As of June 30, 2019, estimated future amortization expense related to the Company’s land rights by fiscal year is as follows (in thousands):



Year ending December 31,
2019 (remainder of year)	$	6,040
2020	12,081
2021	12,081
2022	12,081
2023	12,081
Thereafter	606,348
Total	$	660,712

Lease Liabilities

At June 30, 2019, maturities of the Company's operating lease liabilities were as follows (in thousands):



Year ending December 31,
2019 (remainder of year)	$	7,800
2020	15,282
2021	15,133
2022	15,026
2023	15,005
Thereafter	685,974
Total lease payments	$	754,220
Less: interest	(552,122		)
Present value of lease liabilities	$	202,098

As a result of transitioning from the guidance in ASC 840 to ASC 842, the Company's annual minimum lease payments did not change.

Lease Expense

Operating lease costs represent the entire amount of expense recognized for operating leases that are recorded on the condensed consolidated balance sheet. Variable lease costs are not included in the measurement of the lease liability and include both lease payments tied to a property's performance and changes in an index such as the CPI that are not determinable at lease commencement, while short-term lease costs are costs for those operating leases with a term of 12 months or less.

The components of lease expense were as follows:



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(in thousands)
Operating lease cost	$	3,920	$	7,813
Variable lease cost	2,068		4,504
Short-term lease cost	273		511
Amortization of land right assets	9,406		12,496
Total lease cost	$	15,667	$	25,324

Amortization expense related to the land right intangibles, as well as variable lease costs and the majority of the Company's operating lease costs are recorded within land rights and ground lease expense in the condensed consolidated statements of income. The Company's short-term lease costs are recorded in both gaming, food, beverage and other expense and general and administrative expense in the condensed consolidated statements of income, while a small portion of operating lease costs is also recorded in both gaming, food, beverage and other expense and general and administrative expense in the condensed consolidated statements of income. Amortization expense related to the land right intangibles totaled $2.7 million and $5.5 million for the three and six months ended June 30, 2018, respectively, while other lease costs totaled $4.2 million and $8.5 million, respectively for the same periods.

Supplemental Disclosures Related to Leases

Supplemental balance sheet information related to the Company's operating leases was as follows:



	June 30, 2019
Weighted average remaining lease term - operating leases	51.39 years
Weighted average discount rate - operating leases	6.7%

Supplemental cash flow information related to the Company's operating leases was as follows:



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of leases liabilities:
Operating cash flows from operating leases ⁽¹⁾	$	555	$	1,111

Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	287	$	287

⁽¹⁾ The Company's cash paid for operating leases is significantly less than the lease cost for the same period due to the majority of the Company's ground lease rent being paid directly to the landlords by the Company's tenants. Although GLPI expends no cash related to these leases, they are required to be grossed up in the Company's financial statements under ASC 842.