5. Leases

Leases as Lessee

The Company determines if an arrangement is a lease at inception. If the contract is considered a lease, the Company evaluates leased property to determine whether the lease should be classified as a finance or operating lease in accordance with U.S. GAAP. The Company periodically enters into finance leases for certain data center facilities, equipment, and fiber optic transmission cabling. In addition, the Company leases certain real estate (primarily land or real estate space) under operating lease agreements with such assets included within the “Operating lease right of use assets, net” line item of the consolidated balance sheets and the associated lease liabilities included within the “Operating lease liabilities” line item on the consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As the Company’s leases as lessee typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company assessed multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Many of the Company’s lease agreements include options to extend the lease, which the Company does not include in its expected lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

The Company uses leasing as a source of financing for certain data center facilities and related equipment. The Company currently operates one data center facility, along with various equipment and fiber optic transmission cabling, that are subject to finance leases. The remaining terms of our finance leases range from one to nineteen years. The Company’s finance lease associated with the data center includes multiple extension option periods, some of which were included in the lease term as the Company is reasonably certain to exercise those extension options. The Company’s other finance leases typically do not have options to extend the initial lease term. Finance lease assets are included within the “Buildings, improvements and equipment” line item of the consolidated balance sheets and finance lease liabilities are included within “Finance leases and mortgage notes payable” line item of the consolidated balance sheets.

The Company currently leases seven other facilities under operating lease agreements for various data centers and office space. The Company’s leases have remaining lease terms ranging from one to eight years. The Company has options to extend the initial lease term on nearly all of these leases. Additionally, the Company has two ground leases that are considered operating leases, only one of which is material that is scheduled to expire in 2052.

Components of lease expense were as follows (unaudited and in thousands):


	Three months ended
	March 31, 2019
Operating lease cost	$	3,543
Finance lease cost:
Amortization of assets		386
Interest on lease liabilities		245
Sublease income		(46)
Total lease costs	$	4,128

Supplemental balance sheet information related to leases was as follows (unaudited and in thousands, except lease term and discount rate):


	March 31,
	2019
Operating leases:
Operating lease right-of-use assets	$	61,585
Operating lease liabilities		69,346
Finance leases:
Property and equipment, at cost		48,233
Accumulated amortization		(1,477)
Property and equipment, net	$	46,756
Finance lease liabilities	$	47,196

Weighted average remaining lease term (in years):
Operating leases		14.0
Finance leases		12.1

Weighted average discount rate:
Operating leases		5.1%
Finance leases		4.6%

Supplemental cash flow and other information related to leases was as follows (unaudited and in thousands):


	Three months ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,523
Operating cash flows from finance leases	$	196
Financing cash flows from finance leases	$	799

Maturities of lease liabilities were as follows (unaudited and in thousands):


	March 31, 2019
	Operating Leases		Finance Leases
2019 (April - December)	$	7,281	$	3,561
2020		9,605		4,493
2021		9,834		4,514
2022		10,283		4,639
2023		10,409		4,776
Thereafter		57,889		39,908
Total Lease Payments	$	105,301	$	61,891
Less: Imputed Interest		35,955		14,695
Total Lease Obligations	$	69,346	$	47,196

Leases as lessor

The Company’s lease revenue contains both minimum lease payments as well as variable lease payments. See Note 2 for further details of the Company’s disaggregated revenue streams and associated accounting treatment. The components of the Company’s lease revenue were as follows (in thousands):


	Three months ended
	March 31,
	2019		2018
Lease revenue:
Minimum lease revenue	$	98,596	$	88,415
Variable lease revenue (recoveries from customers)		10,793		11,513
Total lease revenue	$	109,389	$	99,928