Quarterly report pursuant to Section 13 or 15(d)

LEASES

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LEASES
 6 Months Ended
Jun. 30, 2024
Leases [Abstract]  
LEASES LEASES
Leases as Lessor

The Retail Properties are leased pursuant to a single retail master lease (as amended, modified or supplemented from time to time, the “Retail Master Lease”) and the Warehouses were leased pursuant to a single distribution center master lease (as amended, modified or supplemented from time to time, the “DC Master Lease”; together with the Retail Master Lease, the “Master Leases” and individually, each a “Master Lease”). On the Effective Date, Penney Intermediate Holdings LLC assigned all of its right, title and interest as lessor under the Master Leases to the applicable PropCo. Each of the Master Leases has an initial term of 20 years that commenced on December 7, 2020 and is classified as an operating lease. The Trust receives monthly base rent pursuant to the Master Leases, which was 50% abated through December 31, 2021 for each of the Retail Properties. At the beginning of the third lease year, base rent under the Retail Master Lease increases based on changes in the consumer price index (subject to a maximum 2% increase per year). Pursuant to the Retail Master Lease, lease payments increased in December 2023 based on changes in the consumer price index ("CPI"). Upon the sale of the Warehouses in December 2021, the Trust assigned all of its right, title and interest as lessor in the DC Master Lease to the purchaser.

The Master Lease requires direct payment of all operating expenses, real estate taxes, ground lease payments (where applicable), capital expenditures and common area maintenance costs by Penney Intermediate Holdings LLC and allows for lessor reimbursement if amounts are not directly paid. Expenses paid directly by Penney Intermediate Holdings LLC are not included in the accompanying consolidated statements of operations, except for ground lease payments made by Penney Intermediate Holdings LLC, since recording cash payments made by Penney Intermediate Holdings LLC is necessary to relieve amounts due to the ground lessor included in the ground lease liabilities. Ground lease payments made by Penney Intermediate Holdings LLC of $2,062 and $2,016 for the six months ended June 30, 2024 and 2023, respectively, were paid directly to the ground lessor by Penney Intermediate Holdings LLC and were included in “Lease income” in the accompanying consolidated statements of operations.

As of June 30, 2024, lease payments of $8,385 received in advance under the terms of the Master Leases are included in "Other liabilities" in the accompanying consolidated balance sheet and will be recognized as lease income in July 2024. As of December 31, 2023, lease payments of $8,583 received in advance under the terms of the Master Leases are included in "Other liabilities" in the accompanying consolidated balance sheet and were recognized as lease income in January 2024. The Trust records all changes in uncollectible lease income as an adjustment to “Lease income” in the accompanying consolidated statements of operations. During the Reporting Periods, there was no uncollectible lease income.

In certain municipalities, the Trust is required to remit sales and use taxes to governmental authorities based upon the rental income received from Properties. These taxes are required to be reimbursed by Penney Intermediate Holdings LLC to the Trust in accordance with the terms of the Master Lease, and are presented net of reimbursement from Penney Intermediate Holdings LLC on the consolidated statements of operations. During the six months ended June 30, 2024 and 2023, the Trust remitted sales and use taxes of $301 and $373, respectively, which were fully reimbursed by Penney Intermediate Holdings LLC as of the end of each corresponding Reporting Period.

From time to time, the Trust may have leasing activity with replacement tenants other than Penney Intermediate Holdings LLC but has had none to date.
The disaggregation of the Trust’s lease income as either fixed or variable lease income based on the criteria specified in Financial Accounting Standards Board (“FASB”) Accounting Standard Codification ("ASC") Topic 842 is as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Fixed lease income $ 24,854  $ 25,555  $ 50,038  $ 51,209 
Variable lease income (a) 497  —  1,001  — 
Straight-line rental income, net (b) (572) (588) (1,151) (1,179)
Ground lease reimbursement income (c) 1,027  1,004  2,062  2,016 
Other
Amortization of above and below market lease intangibles (d) (582) (569) (1,143) (1,120)
Lease income $ 25,224  $ 25,402  $ 50,807  $ 50,926 
(a)Variable lease income consists of lease payments based on either an index or a rate.
(b)Represents the impact of straight-line rent (contractual rent exceeds straight-line rent).
(c)Ground lease reimbursement income consists of lease payments due from the tenant for land leased under non-cancellable operating leases.
(d)Represents above and below market lease amortization recognized straight-line over the lease term.

As of June 30, 2024, undiscounted lease payments to be received under operating leases, excluding amounts resulting from CPI adjustments, for the next five years and thereafter are as follows:

Lease Payments
Period from July 1 to December 31, 2024 $ 49,324 
2025 98,649 
2026 98,649 
2027 98,649 
2028 98,649 
Thereafter 1,183,785 
Total $ 1,627,705 

The weighted average remaining lease term was approximately 16.5 years as of June 30, 2024.
Leases as Lessee

The Trust was assigned an interest as lessee of land under 23 non-cancellable ground leases with third party landlords which were classified as operating leases on the Effective Date. As of June 30, 2024, the Trust held an interest as lessee of land under 21 non-cancellable ground leases. The Trust leases land under operating ground leases at certain of its Properties, which expire in various years from 2038 to 2096, including any available option periods that are reasonably certain to be exercised. All option terms were considered to be reasonably certain of being exercised through the initial term of the Master Lease as of June 30, 2024.

The components of ground lease rent expense, which are included within “Operating expenses” in the accompanying consolidated statements of operations for the three and six months ended June 30, 2024 and 2023, were as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Amortization of:
Above market ground lease intangibles $ (160) $ (160) $ (320) $ (320)
Below market ground lease intangibles 365  365  730  730 
Right-of-use assets
 252  253  504  508 
Interest expense 1,038  1,037  2,077  2,073 
Ground lease rent expense $ 1,495  $ 1,495  $ 2,991  $ 2,991 

There were no cash payments for ground lease rent expense as these payments are made by the tenant.

As of June 30, 2024, undiscounted future rental obligations to be paid under the long-term ground leases by Penney Intermediate Holdings LLC under the terms of the Master Lease on behalf of the Trust, including fixed rental increases, for the next five years and thereafter, are as follows:
Lease Obligations
Period from July 1 to December 31, 2024 $ 2,062 
2025 4,116 
2026 4,138 
2027 4,197 
2028 4,257 
Thereafter 215,902 
Less imputed interest (196,893)
Lease liabilities as of June 30, 2024 $ 37,779 

The Trust’s long-term ground leases had a weighted average remaining lease term of 42.9 years and a weighted average discount rate of 11.0% as of June 30, 2024.
LEASES LEASES
Leases as Lessor

The Retail Properties are leased pursuant to a single retail master lease (as amended, modified or supplemented from time to time, the “Retail Master Lease”) and the Warehouses were leased pursuant to a single distribution center master lease (as amended, modified or supplemented from time to time, the “DC Master Lease”; together with the Retail Master Lease, the “Master Leases” and individually, each a “Master Lease”). On the Effective Date, Penney Intermediate Holdings LLC assigned all of its right, title and interest as lessor under the Master Leases to the applicable PropCo. Each of the Master Leases has an initial term of 20 years that commenced on December 7, 2020 and is classified as an operating lease. The Trust receives monthly base rent pursuant to the Master Leases, which was 50% abated through December 31, 2021 for each of the Retail Properties. At the beginning of the third lease year, base rent under the Retail Master Lease increases based on changes in the consumer price index (subject to a maximum 2% increase per year). Pursuant to the Retail Master Lease, lease payments increased in December 2023 based on changes in the consumer price index ("CPI"). Upon the sale of the Warehouses in December 2021, the Trust assigned all of its right, title and interest as lessor in the DC Master Lease to the purchaser.

The Master Lease requires direct payment of all operating expenses, real estate taxes, ground lease payments (where applicable), capital expenditures and common area maintenance costs by Penney Intermediate Holdings LLC and allows for lessor reimbursement if amounts are not directly paid. Expenses paid directly by Penney Intermediate Holdings LLC are not included in the accompanying consolidated statements of operations, except for ground lease payments made by Penney Intermediate Holdings LLC, since recording cash payments made by Penney Intermediate Holdings LLC is necessary to relieve amounts due to the ground lessor included in the ground lease liabilities. Ground lease payments made by Penney Intermediate Holdings LLC of $2,062 and $2,016 for the six months ended June 30, 2024 and 2023, respectively, were paid directly to the ground lessor by Penney Intermediate Holdings LLC and were included in “Lease income” in the accompanying consolidated statements of operations.

As of June 30, 2024, lease payments of $8,385 received in advance under the terms of the Master Leases are included in "Other liabilities" in the accompanying consolidated balance sheet and will be recognized as lease income in July 2024. As of December 31, 2023, lease payments of $8,583 received in advance under the terms of the Master Leases are included in "Other liabilities" in the accompanying consolidated balance sheet and were recognized as lease income in January 2024. The Trust records all changes in uncollectible lease income as an adjustment to “Lease income” in the accompanying consolidated statements of operations. During the Reporting Periods, there was no uncollectible lease income.

In certain municipalities, the Trust is required to remit sales and use taxes to governmental authorities based upon the rental income received from Properties. These taxes are required to be reimbursed by Penney Intermediate Holdings LLC to the Trust in accordance with the terms of the Master Lease, and are presented net of reimbursement from Penney Intermediate Holdings LLC on the consolidated statements of operations. During the six months ended June 30, 2024 and 2023, the Trust remitted sales and use taxes of $301 and $373, respectively, which were fully reimbursed by Penney Intermediate Holdings LLC as of the end of each corresponding Reporting Period.

From time to time, the Trust may have leasing activity with replacement tenants other than Penney Intermediate Holdings LLC but has had none to date.
The disaggregation of the Trust’s lease income as either fixed or variable lease income based on the criteria specified in Financial Accounting Standards Board (“FASB”) Accounting Standard Codification ("ASC") Topic 842 is as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Fixed lease income $ 24,854  $ 25,555  $ 50,038  $ 51,209 
Variable lease income (a) 497  —  1,001  — 
Straight-line rental income, net (b) (572) (588) (1,151) (1,179)
Ground lease reimbursement income (c) 1,027  1,004  2,062  2,016 
Other
Amortization of above and below market lease intangibles (d) (582) (569) (1,143) (1,120)
Lease income $ 25,224  $ 25,402  $ 50,807  $ 50,926 
(a)Variable lease income consists of lease payments based on either an index or a rate.
(b)Represents the impact of straight-line rent (contractual rent exceeds straight-line rent).
(c)Ground lease reimbursement income consists of lease payments due from the tenant for land leased under non-cancellable operating leases.
(d)Represents above and below market lease amortization recognized straight-line over the lease term.

As of June 30, 2024, undiscounted lease payments to be received under operating leases, excluding amounts resulting from CPI adjustments, for the next five years and thereafter are as follows:

Lease Payments
Period from July 1 to December 31, 2024 $ 49,324 
2025 98,649 
2026 98,649 
2027 98,649 
2028 98,649 
Thereafter 1,183,785 
Total $ 1,627,705 

The weighted average remaining lease term was approximately 16.5 years as of June 30, 2024.
Leases as Lessee

The Trust was assigned an interest as lessee of land under 23 non-cancellable ground leases with third party landlords which were classified as operating leases on the Effective Date. As of June 30, 2024, the Trust held an interest as lessee of land under 21 non-cancellable ground leases. The Trust leases land under operating ground leases at certain of its Properties, which expire in various years from 2038 to 2096, including any available option periods that are reasonably certain to be exercised. All option terms were considered to be reasonably certain of being exercised through the initial term of the Master Lease as of June 30, 2024.

The components of ground lease rent expense, which are included within “Operating expenses” in the accompanying consolidated statements of operations for the three and six months ended June 30, 2024 and 2023, were as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Amortization of:
Above market ground lease intangibles $ (160) $ (160) $ (320) $ (320)
Below market ground lease intangibles 365  365  730  730 
Right-of-use assets
 252  253  504  508 
Interest expense 1,038  1,037  2,077  2,073 
Ground lease rent expense $ 1,495  $ 1,495  $ 2,991  $ 2,991 

There were no cash payments for ground lease rent expense as these payments are made by the tenant.

As of June 30, 2024, undiscounted future rental obligations to be paid under the long-term ground leases by Penney Intermediate Holdings LLC under the terms of the Master Lease on behalf of the Trust, including fixed rental increases, for the next five years and thereafter, are as follows:
Lease Obligations
Period from July 1 to December 31, 2024 $ 2,062 
2025 4,116 
2026 4,138 
2027 4,197 
2028 4,257 
Thereafter 215,902 
Less imputed interest (196,893)
Lease liabilities as of June 30, 2024 $ 37,779 

The Trust’s long-term ground leases had a weighted average remaining lease term of 42.9 years and a weighted average discount rate of 11.0% as of June 30, 2024.