Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

6. Leases

Leases as Lessee

We determine if an arrangement is a lease at inception. If the contract is considered a lease, we evaluate leased property to determine whether the lease should be classified as a finance or operating lease in accordance with U.S. GAAP. We periodically enter into finance leases for certain data center facilities, equipment, and fiber optic transmission cabling. In addition, we lease 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 our right to use an underlying asset for the lease term and lease liabilities represent our 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 our leases as lessee typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We assess 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 our lease agreements include options to extend the lease, which we do not include in our 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.

We use leasing as a source of financing for certain data center facilities and related equipment. We currently operate 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 two to nineteen years. Our finance lease associated with the data center includes multiple extension option periods, some of which were included in the lease term as we are reasonably certain to exercise those extension options. Our 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.

We currently lease six other facilities under operating lease agreements for various data centers and office space. Our leases have remaining lease terms ranging from five to seven years. We have options to extend the initial lease term on nearly all of these leases. Additionally, we have one ground lease that is considered an operating lease which is scheduled to expire in 2052.

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

	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Operating lease cost	$	2,479	$	7,502
Finance lease cost:
Amortization of assets		1,091		2,496
Interest on lease liabilities		505		1,204
Sublease income		(46)		(139)
Total lease costs	$	4,029	$	11,063

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

	September 30,
	2019
Operating leases:
Operating lease right-of-use assets	$	58,551
Operating lease liabilities		65,949
Finance leases:
Property and equipment, at cost		50,437
Accumulated amortization		(3,791)
Property and equipment, net	$	46,646
Finance lease liabilities	$	45,753
Weighted average remaining lease term (in years):
Operating leases		13.7
Finance leases		11.7
Weighted average discount rate:
Operating leases		5.1%
Finance leases		4.3%

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

	Nine months ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	7,446
Operating cash flows for finance leases	$	1,180
Financing cash flows for finance leases	$	2,243

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

	September 30, 2019
	Operating Leases		Finance Leases
2019 (October - December)	$	2,374	$	1,108
2020		9,589		4,493
2021		9,818		4,514
2022		10,266		4,639
2023		10,393		4,776
Thereafter		57,225		39,908
Total Lease Payments	$	99,665	$	59,438
Less: Imputed Interest		33,716		13,685
Total Lease Obligations	$	65,949	$	45,753

Leases as lessor

Our lease revenue contains both minimum lease payments as well as variable lease payments. See Note 2 for further details of our revenue streams and associated accounting treatment. The components of our lease revenue were as follows (unaudited and in thousands):

	Three months ended				Nine months ended
	September 30,		September 30,		September 30,
	2019		2018		2019		2018
Lease revenue:
Minimum lease revenue	$	103,623	$	92,812	$	304,166	$	271,342
Variable lease revenue (primarily recoveries from customers)		17,852		11,948		41,675		34,432
Total lease revenue	$	121,475	$	104,760	$	345,841	$	305,774