Leases

12 Months Ended

Dec. 31, 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 pursuant to the adoption of ASC Topic 842 effective January 1, 2019. See ‘Note 2’ for further details on recently adopted accounting standards.

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 one to eighteen 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, our corporate headquarters and additional office space. Our leases have remaining lease terms ranging from four to seven years. We have options to extend the initial lease term on nearly all of these leases. Additionally, we have one ground lease for our Santa Clara property that is considered an operating lease which is scheduled to expire in 2052.

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

	Year Ended
	December 31, 2019
Finance lease cost:
Amortization of assets	$	3,535
Interest on lease liabilities		1,693
Operating lease expense:
Operating lease cost		9,102
Variable lease cost		1,109
Sublease income		(187)
Total lease costs	$	15,252

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

	December 31,
	2019
Operating leases:
Operating lease right-of-use assets	$	57,141
Operating lease liabilities		64,416
Finance leases:
Property and equipment, at cost		50,437
Accumulated amortization		(4,830)
Property and equipment, net	$	45,607
Finance lease liabilities	$	45,141
Weighted average remaining lease term (in years):
Operating leases		13.7
Finance leases		11.4
Weighted average discount rate:
Operating leases		5.1%
Finance leases		4.3%

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

	Year Ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	9,834
Operating cash flows for finance leases	$	1,704
Financing cash flows for finance leases	$	2,855

Maturities of lease liabilities, which exclude variable rent payments, are as follows (in thousands):

	December 31, 2019
	Operating Leases		Finance Leases
2020	$	9,589	$	4,493
2021		9,818		4,514
2022		10,266		4,639
2023		10,393		4,776
2024		8,317		4,918
Thereafter		48,908		34,990
Total Lease Payments	$	97,291	$	58,330
Less: Imputed Interest		32,875		13,189
Total Lease Obligations	$	64,416	$	45,141

Leases as lessor

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

	Year Ended
	December 31,
	2019		2018
Lease revenue:
Minimum lease revenue	$	409,157	$	367,388
Variable lease revenue (primarily recoveries from customers)		55,966		46,232
Total lease revenue	$	465,123	$	413,620