Right-Of-Use Assets and Operating Lease Liabilities:
NNN is a lessee for three ground lease arrangements and for its headquarters office lease. NNN recognized a ROU asset (recorded in other assets on the Consolidated Balance Sheets) and an operating lease liability (recorded in other liabilities on the Consolidated Balance Sheets) for the present value of the minimum lease payments. ROU assets represent NNN’s right to use an underlying asset for the lease term and lease liabilities represent NNN’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options.
NNN estimates an incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of the lease payments. NNN gives consideration to the Company's debt issuances, as well as, publicly available data for secured instruments with similar characteristics when calculating its incremental borrowing rates. On an annual basis, NNN will evaluate its lessee portfolio and determine if its incremental borrowing rate should be reassessed.
NNN's lease agreements do not contain any residual value guarantees.
As of December 31, 2020, NNN has recorded the following (dollars in thousands):
| | | | | | | | | | | |
| Ground Leases | | Headquarters Office Lease |
Operating lease – ROU assets(1) | $ | 4,211 | | | $ | 2,471 | |
| Operating lease – lease liabilities | (5,859) | | | (3,021) | |
| | | |
| Weighted average remaining lease term (years) | 13.4 | | 4.3 |
| Weighted average discount rate | 4.1 | % | | 3.5 | % |
(1)ROU assets are shown net of accrued lease payments of $1,648 and $550, respectively.
The following is a schedule of the undiscounted cash flows to be paid as of December 31, 2020 (dollars in thousands):
| | | | | | | | | | | |
| Ground Leases | | Headquarters Office Lease |
| 2021 | $ | 573 | | | $ | 788 | |
| 2022 | 582 | | | 804 | |
| 2023 | 582 | | | 821 | |
| 2024 | 601 | | | 837 | |
| 2025 | 639 | | | 210 | |
| Thereafter | 4,905 | | | — | |
| $ | 7,882 | | | $ | 3,460 | |
About Leases Disclosures
Lease disclosures under ASC 842 provide a comprehensive view of a company's leased asset portfolio, including the split between operating and finance leases, discount rates used to present-value future payments, and the maturity schedule of lease obligations. This section reveals a significant source of off-balance-sheet commitments that were largely hidden before the current standard.
Key signals: the weighted-average discount rate affects the size of recorded lease liabilities — a higher rate reduces the reported obligation, so compare the chosen rate against the company's incremental borrowing rate. The operating versus finance lease mix affects both EBITDA and operating income presentation. Watch the maturity table for concentration risk: large payment cliffs in specific years may create cash flow pressure. Variable lease payments excluded from the liability measurement represent real obligations that do not appear on the balance sheet. Compare total lease costs against prior-year operating lease expense to assess the true economic burden.