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Leases

9 Months Ended

Sep. 30, 2019

Finance Leases

The Company’s finance lease assets and liabilities primarily relate to its corporate headquarters in Boston and research site in San Diego (the “Buildings”). These Buildings are classified as finance leases because the present value of the sum of the lease payments associated with the Buildings exceeds substantially all of the fair value of the Buildings. The Company also has outstanding finance leases for equipment.

Prior to the adoption of ASC 842 on January 1, 2019, the Company was deemed for accounting purposes to be the owner of the Buildings during their construction periods and recorded project construction costs incurred by its landlords. Upon completion of the Buildings, the Company determined that the underlying leases did not meet the criteria for “sale-leaseback” treatment. Accordingly, the Company depreciated the Buildings over 40 years and recorded interest expense associated with the financing obligations for the Buildings. The Company bifurcated the lease payments pursuant to the Buildings into (i) a portion that was allocated to the buildings and (ii) a portion that is allocated to the land on which the buildings were constructed. The portion of the lease obligations allocated to the land was treated as an operating lease.

Pursuant to ASC 842, the Company adjusted the amounts recorded on its condensed consolidated balance sheet as of January 1, 2019 for the Buildings to reflect the present value of the lease payments over the remaining lease term related to the Buildings. The finance lease assets associated with the Buildings are amortized to depreciation expense using the straight-line method over the remaining lease term, which is significantly shorter than the Buildings’ useful lives. The Company continues to record interest expense associated with the finance lease liabilities for the Buildings.

Corporate Headquarters

In 2011, the Company entered into two lease agreements, pursuant to which the Company leases approximately 1.1 million square feet of office and laboratory space in two buildings in Boston, Massachusetts for a term of 15 years. Base rent payments commenced in December 2013, and will continue through December 2028. The Company utilizes this initial period as its lease term. The Company has an option to extend the lease terms for an additional ten years.

San Diego Lease

In 2015, the Company entered into a lease agreement pursuant to which the Company leases approximately 170,000 square feet of office and laboratory space in San Diego, California for a term of 16 years. Base rent payments commenced in the second quarter of 2019, and will continue through May 2034. The Company utilizes this initial period as its lease term. The Company has an option to extend the lease term for up to two additional five-year terms. The Company placed this building in service in the second quarter of 2018.

Operating Leases

The Company’s operating leases relate to its real estate leases that are not classified as finance leases.

Aggregate Lease Information Related to the Application of ASC 842

The following information is disclosed in accordance with ASC 842, which became effective January 1, 2019. The components of lease cost recorded in the Company’s condensed consolidated statement of operations were as follows:



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
	(in thousands)
Operating lease cost	$	2,796		$	8,064
Finance lease cost
Amortization of leased assets	12,217			36,645
Interest on lease liabilities	13,093			39,917
Variable lease cost	7,427			20,225
Sublease income	(1,702		)	(4,873		)
Net lease cost	$	33,831		$	99,978

The Company’s variable lease cost during the three and nine months ended September 30, 2019 primarily related to operating expenses, taxes and insurance associated with its finance leases. The Company’s sublease income during the three and nine months ended September 30, 2019 primarily related to subleases for an insignificant portion of the Company’s corporate headquarters.

The Company’s leases are included on its condensed consolidated balance sheets as follows:



	As of September 30, 2019		As of December 31, 2018 ^
	(in thousands)
Finance leases
Property and equipment, net	$	449,350	$	640,952
Total finance lease assets	$	449,350	$	640,952

Capital lease obligations, current portion	$	—	$	9,817
Other current liabilities	37,063		5,271
Capital lease obligations, excluding current portion	—		19,658
Construction financing lease obligation, excluding current portion	—		561,892
Long-term finance lease liabilities	541,561		—
Total finance lease liabilities	$	578,624	$	596,638

Operating leases
Operating lease assets	$	60,929	$	—
Total operating lease assets	$	60,929	$	—

Other current liabilities	$	8,199	$	—
Long-term operating lease liabilities	62,978		—
Total operating lease liabilities	$	71,177	$	—
^ As reported in the Company’s 2018 Annual Report on Form 10-K.

Maturities of the Company’s finance and operating lease liabilities in accordance with ASC 842 as of September 30, 2019 were as follows:



Year	Finance Leases			Operating Leases			Total
	(in thousands)
Remainder of 2019	$	16,172		$	2,299		$	18,471
2020	89,159			11,033			100,192
2021	87,525			9,372			96,897
2022	85,177			8,994			94,171
2023	84,253			8,920			93,173
Thereafter	513,206			47,405			560,611
Total lease payments	875,492			88,023			963,515
Less: amount representing interest	(296,868		)	(16,846		)	(313,714		)
Present value of lease liabilities	$	578,624		$	71,177		$	649,801

The weighted-average remaining lease terms and discount rates related to the Company’s leases were as follows:



	As of September 30, 2019
Weighted-average remaining lease term (in years)
Finance leases	10.02
Operating leases	10.41

Weighted-average discount rate
Finance leases	9.11	%
Operating leases	4.01	%

Please refer to Note O, “Additional Cash Flow Information,” for cash flow impact of the Company’s leases.

Additional Lease Information Related to the Application of ASC 840

The following information is disclosed in accordance with ASC 840, Leases (Topic 840) (“ASC 840”), which was applicable until December 31, 2018. As of December 31, 2018, future minimum commitments under the Company’s real estate leases with initial terms of more than one year were as follows:



Year	Fan Pier Leases		San Diego Lease		Other Leases		Total Lease Commitments
	(in thousands)
2019	$	66,540	$	5,324	$	13,207	$	85,071
2020	72,589		9,127		14,270		95,986
2021	72,589		9,127		12,529		94,245
2022	72,589		9,127		12,045		93,761
2023	72,589		9,530		11,952		94,071
Thereafter	389,855		119,864		65,472		575,191
Total minimum lease payments	$	746,751	$	162,099	$	129,475	$	1,038,325

As of December 31, 2018, the Company’s total sublease income to be received related to its facility leases was $6.2 million. During the three and nine months ended September 30, 2018, rental expenses were $4.5 million and $13.3 million, respectively.

As of December 31, 2018, the Company had capital leases for property and equipment of $94.8 million, related to which it had recorded $34.0 million of accumulated depreciation. The capital leases, which were related to equipment and leasehold improvements, bore interest at rates ranging from less than 1% to 6% per year. The Company’s capital lease amortization was included in depreciation expense during the three and nine months ended September 30, 2018. The following table set forth the Company’s future minimum payments due under capital leases as of December 31, 2018:



Year	(in thousands)
2019	$	10,770
2020	7,282
2021	5,649
2022	3,300
2023	1,974
Thereafter	3,085
Total payments	32,060
Less: amount representing interest	(2,585		)
Present value of payments	$	29,475

Leases