Leases

3 Months Ended

Mar. 31, 2019

As disclosed in the Leases section of Note 2, “Basis of Presentation and Recently Issued Accounting Pronouncements” ("Note 2"), the Company adopted Topic 842 in accordance with the effective date on January 1, 2019. Note 2 includes disclosures regarding the Company’s method of adoption and the impact upon adoption to its financial position, results of operations and cash flows.

The Company enters into agreements as a lessor under which it rents vehicles and leases fleets to customers. The Company enters into agreements as a lessee to rent real estate, vehicles and other equipment and to conduct its vehicle rental operations under concession agreements. If any of the following criteria is met, the Company classifies the lease as a financing lease (as a lessee) or as a direct financing or sales-type lease (as a lessor):


•	The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;


•	The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;


•	The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date falls within the last 25% of the economic life of the underlying asset;


•	The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or


•	The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

Leases that do not meet any of the above criteria are accounted for as operating leases.

The Company combines lease and non-lease components in its contracts under Topic 842.

The following further describes the Company's leasing transactions.

Lessor

The Company's operating leases for vehicle rentals have rental periods that are typically short term in nature (e.g., daily or weekly) and can generally be extended for up to one month or terminated at the customer's discretion. Rental charges are computed on a limited or unlimited mileage rate, or on a time rate plus a mileage charge. In connection with the vehicle rental, the Company offers supplemental equipment rentals (e.g., child seats and ski racks) and issues loyalty points to customers enrolled in its Hertz Gold Plus Rewards program, which are deemed lease components. The Company also offers value-added services in connection with the vehicle rental, which are deemed non-lease components, such as loss or collision damage waiver, theft protection, liability and personal accident/effects insurance coverage, premium emergency roadside service and satellite radio. Additionally, the Company charges for variable services primarily consisting of charges for the fueling of vehicles and tolls incurred during the rental period, and for fees associated with the early or late termination of the vehicle lease. The Company mitigates residual value risk of its revenue earning vehicles by utilizing manufacturer repurchase and guaranteed depreciation programs, using sophisticated vehicle diagnostic and repair equipment to maintain the condition of its vehicles, and through periodic reviews of vehicle depreciation rates based on management's ongoing assessment of present and estimated future market conditions.

The Company's operating leases for fleets have lease periods that are typically for twelve months, after which the lease converts to a month-to-month lease, allowing the vehicle to be surrendered any time thereafter. The Company's fleet leases contain a terminal rental adjustment clause ("TRAC lease") where, upon sale of the vehicle following the termination of the lease, a TRAC adjustment may result through which the lessee is credited or charged with the gain or loss on the vehicle. Such TRAC adjustments are considered variable charges.

The following table summarizes the amount of operating lease income and other income included in total revenues in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2019:



(In millions)	Three Months Ended March 31, 2019
Operating lease income from vehicle rentals	$	1,800
Operating lease income from fleet leasing	158
Variable operating lease income	67
Revenue accounted for under Topic 842	2,025
Revenue accounted for under Topic 606	82
Total revenues	$	2,107

Lessee

As a lessee, the Company has the following types of operating leases:


•	Concession agreements which grant the Company the right to conduct its vehicle rental operations at airports, hotels and train stations and to use building space such as terminal counters and parking garages;


•	Real estate leases for its off airport vehicle rental locations and other premises;


•	Revenue earning vehicle leases; and


•	Other equipment leases.

The Company's lease terms generally range from one month to thirty-five years and a number of agreements contain escalation clauses, which increase the payment obligation based on a fixed or variable rate, and renewal options. The length of renewals vary and may result in different payment terms. Payment terms are based on fixed rates explicit in the lease, including guaranteed minimums, and/or variable rates based on:


•	Operating expenses, such as common area charges, real estate taxes and insurance;


•	A percentage of revenues or sales arising at the relevant premises; and/or


•	Periodic inflation adjustments.

The Company recognizes a ROU asset and lease liability in its condensed consolidated balance sheet for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the Company's ROU asset and lease liability when it is reasonably certain that such options will be exercised. The Company does not recognize ROU assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less) and recognizes lease expense on a straight-line basis over the lease term.

To determine the present value of its lease payments, the Company utilizes the interest rate implicit in the lease agreement. If the implicit interest rate was not provided in the lease agreement, the Company utilizes the Company's collateralized incremental borrowing rate as of the beginning of the reporting period or the commencement date of the lease, whichever is later.

The following table summarizes the amount of lease costs incurred by the Company:



(In millions)	Three Months Ended March 31, 2019		Year Ended December 31, 2018
Minimum fixed lease costs⁽¹⁾:
Short-term lease costs	$	30	N/A
Other operating lease costs	134		N/A
Total	$	164	$	577
Variable lease costs	63		438
Total lease costs	$	227	$	1,015

⁽¹⁾ Topic 842, which was adopted on January 1, 2019, requires the Company to disclose the short term portion of minimum fixed lease costs. For the year ended December 31, 2018, under the then existing guidance in Topic 840, the Company was only required to disclose minimum fixed costs in total.

The following summarizes the weighted average remaining lease term and weighted average discount rate for the Company's operating leases as a lessee:



	As of March 31, 2019
Weighted average remaining lease term (in years)	9
Weighted average discount rate	10.9	%

The following table summarizes the Company's minimum fixed lease obligations under existing agreements as a lessee, excluding variable concession obligations and short-term leases, as of March 31, 2019:



(In millions)
April 1, 2019 - March 31, 2020	$	465
April 1, 2020 - March 31, 2021	379
April 1, 2021 - March 31, 2022	305
April 1, 2022 - March 31, 2023	226
April 1, 2023 - March 31, 2024	166
After March 31, 2024	930
Total lease payments	2,471
Interest	(958		)
Operating lease liabilities at March 31, 2019	$	1,513

Lessor, Operating Leases

Leases


•	The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;


•	The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;


•	The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date falls within the last 25% of the economic life of the underlying asset;


•	The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or


•	The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.