Lease Assets and Lease Liabilities Lease Assets and Lease Liabilities

9 Months Ended

Sep. 30, 2021

Lease Assets

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. These ground leases may include fixed rent, as well as variable rent based upon an individual property’s performance or changes in an index such as the consumer price index ("CPI"), and have maturity dates ranging from 2028 to 2108, when considering all renewal options. For certain of these ground leases, the Company’s tenants 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):


	September 30, 2021		December 31, 2020
Right-of use assets - operating leases (1)	$	185,410	$	151,339
Land rights, net	675,128		617,858
Right-of-use assets and land rights, net	$	860,538	$	769,197

(1) The increase in right-of use assets - operating leases relates to a ground lease acquired in connection with the Tropicana Evansville transaction which closed on June 3, 2021. In addition, there is $28 thousand and $0.3 million of operating lease right-of-use assets included in assets held for sale at September 30, 2021 and December 31, 2020, respectively.

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:


	September 30, 2021		December 31, 2020
	(in thousands)
Land rights	$	734,192	$	667,751
Less accumulated amortization	(59,064)		(49,893)
Land rights, net	$	675,128	$	617,858

The increase from December 31, 2020 relates to land rights recorded in connection with the Tropicana Evansville acquisition which closed on June 3, 2021.

As of September 30, 2021, estimated future amortization expense related to the Company’s land rights by fiscal year is as follows (in thousands):


Year ending December 31,
2021 (remainder of year)	$	3,325
2022	13,298
2023	13,298
2024	13,298
2025	13,298
Thereafter	618,611
Total	$	675,128

Lease Liabilities

At September 30, 2021, maturities of the Company's operating lease liabilities were as follows (in thousands):


Year ending December 31,
2021 (remainder of year)	$	3,417
2022	13,666
2023	13,664
2024	13,617
2025	13,567
Thereafter	630,492
Total lease payments	$	688,423
Less: interest	(501,942)
Present value of lease liabilities (1)	$	186,481

(1) In addition, there is $28 thousand of lease liabilities included in other liabilities related to liabilities held for sale.

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 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Operating lease cost	$	3,425	$	3,458	$	9,581	$	10,625
Variable lease cost (1)	2,688		1,651		5,827		2,461
Short-term lease cost	185		203		813		425
Amortization of land right assets	3,322		3,021		9,171		9,061
Total lease cost	$	9,620	$	8,333	$	25,392	$	22,572

(1) Variable lease costs for the nine months ended September 30, 2020 included a true up of the monthly rental payments paid by our tenants on certain ground leases that are based on estimated current year annual performance which were impacted by casino closures due to COVID-19. As discussed previously, under ASC 842, the Company is required to gross up its financial statements by recording both expense and revenue (recorded within rental income on the condensed consolidated statements of income) for these payments since the Company is considered the primary obligor.

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 as well as a small portion of operating lease costs are recorded in

both gaming, food, beverage and other expense and general and administrative expense in the condensed consolidated statements of income.

Supplemental Disclosures Related to Leases

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


			September 30, 2021
Weighted average remaining lease term - operating leases			51.78 years
Weighted average discount rate - operating leases			6.56%

In addition, the weighted average remaining lease term and the weighted average discount rate for those operating

leases included in assets held for sale and other liabilities is 0.8 years and 5.16%, respectively.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)				(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1) (2)	$	405	$	436	$	1,212	$	1,373

Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	—	$	12	$	35,372	$	197

(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.

(2) In addition, there is $9 thousand and $27 thousand related to assets held for sale and other liabilities for operating cash flows from cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2021, respectively.