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Leases

12 Months Ended

Dec. 31, 2020

Note 10. Leases

Operating leases

Our operating leases primarily relate to preferred berthing arrangements, real estate and shipboard equipment and are included within Operating lease right-of-use assets, and Long-term operating lease liabilities with the current portion of the liability included within Current portion of operating lease liabilities in our consolidated balance sheet as of December 31, 2020. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. During the first quarter of 2020, we determined that the lease for Silver Explorer, operated by Silversea Cruises and previously classified as a finance lease, was an operating lease based on modification of the terms of the lease. The operating lease for Silver Explorer will expire in 2023.

In June 2019, the Company entered into a new master lease agreement (“Master Lease”) with Miami-Dade County relating to the buildings and surrounding land located at its Miami headquarters, which are classified as finance leases in accordance with ASC 842. Prior to entering into the Master Lease, the buildings were classified as operating lease assets. The finance lease for the buildings and land will expire in 2072, which includes an initial 43 years lease term and two five-year options to extend the lease. We consider the possibility of exercising the two five-year options reasonably certain.

For some of our real estate leases and berthing agreements, we do have the option to extend our current lease term. For those lease agreements with renewal options, the renewal periods for real estate leases range from one to 10 years and the renewal periods for berthing agreements range from one year to 20 years. Generally, we do not include renewal options as a component of our present value calculation for berthing agreements. However, for certain real estate leases, we include them.

We have a residual value guarantee associated with our Port of Miami Terminal "A" operating lease agreement ("Port of Miami terminal lease") that approximates a percentage of the cost of the asset as of the inception of the lease. We consider the possibility of incurring costs associated with the residual value guarantee to be remote.

Also in connection with the Port of Miami terminal lease, we are required to deliver on or before July 18, 2021, cash collateral in an amount equal to the lesser of our residual value guarantee or the aggregate balance of the lenders' terminal

construction debt, estimated at $181.1 million as of December 31, 2020. The collateral is to be returned when all amounts due by us under the lease have been paid in full.

During the second quarter of 2020, we amended our Port of Miami terminal lease to increase the lien basket in line with our debt facilities. We further amended this lease in the first quarter of 2021 to and obtain a financial covenant waiver through the third quarter of 2022. This obligation is prepayable at any time without penalty. As of December 31, 2020, we were in compliance with the amended covenants under the lease agreement.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. We estimate our incremental borrowing rates based on LIBOR and U.S. Treasury note rates corresponding to lease terms increased by the Company’s credit risk spread and reduced by the estimated impact of collateral. We used the incremental borrowing rate as of the adoption date for operating leases that commenced prior to that date. In addition, we have lease agreements with lease and non-lease components, which are generally accounted for separately. However, for berthing agreements, we account for the lease and non-lease components as a single lease component.

Commencing in 2016 when we sold our 51% interest in the Pullmantur brand to Pullmantur Holdings, and continuing through the quarter ended June 30, 2020, we bareboat chartered to Pullmantur Holdings the vessels operated by the Pullmantur brand. On June 22, 2020, Pullmantur S.A., a subsidiary of Pullmantur Holdings, filed for reorganization in Spain, at which time we terminated these bareboat charters. See Note 8. Other Assets for further discussion of Pullmantur Holdings. We accounted for the bareboat charters of these vessels as operating leases for which we were the lessor.

Finance Leases

Silversea Cruises operates the Silver Whisper, under a finance lease. The finance lease for the Silver Whisper will expire in 2022, subject to an option to purchase the ship. The total aggregate amount of the finance lease liabilities recorded for this ship was $31.5 million and $55.6 million at December 31, 2020 and December 31, 2019, respectively. The lease payments on the Silver Whisper are subject to adjustments based on the LIBOR rate.

Supplemental balance sheet information for leases was as follows (in thousands):


	As of December 31, 2020		As of December 31, 2019
Lease assets:
Finance lease right-of-use assets, net:
Property and equipment, gross	$	364,910	$	376,159
Accumulated depreciation	(71,288)		(57,955)
Property and equipment, net	293,622		318,204
Operating lease right-of-use assets	599,985		687,555
Total lease assets	$	893,607	$	1,005,759
Lease liabilities:
Finance lease liabilities:
Current portion of debt	51,856		33,561
Long-term debt	161,509		196,697
Total finance lease liabilities	213,365		230,258
Operating lease liabilities:
Current portion of operating lease liabilities	102,677		96,976
Long-term operating lease liabilities	563,876		601,641
Total operating lease liabilities	666,553		698,617
Total lease liabilities	$	879,918	$	928,875

The components of lease expense were as follows (in thousands):


	Consolidated Statement of Comprehensive Income (Loss) Classification	Year ended December 31, 2020		Year ended December 31, 2019
Lease costs:
Operating lease costs	Commission, transportation and other	$	38,349	$	76,226
Operating lease costs	Other operating expenses	30,955		27,868
Operating lease costs	Marketing, selling and administrative expenses	21,971		18,837
Finance lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	6,901		22,044
Interest on lease liabilities	Interest expense, net of interest capitalized	4,429		8,355
Total lease costs		$	102,605	$	153,330

In addition, certain of our berth agreements include variable lease costs based on the number of passengers berthed. During the twelve months ended December 31, 2020, we had $24.3 million of variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive income (loss).

Weighted average of the remaining lease terms and weighted average discount rates are as follows:


	As of December 31, 2020		As of December 31, 2019
Weighted average of the remaining lease term
Operating leases	7.8		10.3
Finance leases	41.2		30.22
Weighted average discount rate
Operating leases	4.59	%	4.65	%
Finance leases	6.89	%	4.47	%

Supplemental cash flow information related to leases is as follows (in thousands):


	Year ended December 31, 2020		Year ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	89,179	$	125,307
Operating cash flows from finance leases	$	4,429	$	8,355
Financing cash flows from finance leases	$	19,778	$	32,090

As of December 31, 2020, maturities related to lease liabilities were as follows (in thousands):


Years	Operating Leases		Finance Leases

2021	$	124,108	$	62,501
2022	117,698		23,822
2023	109,125		12,789
2024	81,696		12,529
2025	72,123		12,566
Thereafter	368,666		395,007
Total lease payments	873,416		519,214
Less: Interest	(206,863)		(305,849)
Present value of lease liabilities	$	666,553	$	213,365

Operating lease payments do not include any costs related to options to extend lease terms as none are reasonably certain of being exercised.

Under ASC 840, Leases, future minimum lease payments under noncancelable operating leases, primarily for offices, warehouses and motor vehicles, as of December 31, 2018 were as follows (in thousands):


Year
2019	$	67,682
2020	64,237
2021	56,142
2022	52,759
2023	52,522
Thereafter	383,974
	$	677,316

Total expense for operating leases, primarily for offices, warehouses and motor vehicles amounted to $32.2 million for the year ended December 31, 2018.

In July 2016, we executed an agreement with Miami Dade County (“MDC”), which was simultaneously assigned to Sumitomo Banking Corporation (“SMBC”), to lease land from MDC and construct a new cruise terminal of approximately 170,000 square feet at PortMiami in Miami, Florida, which was completed during the fourth quarter of 2018 and serves as a homeport. During the construction period, SMBC funded the costs of the terminal’s construction and land lease. Once the terminal was substantially completed, we commenced operating and leasing the terminal from SMBC for a five-year term. We determined that the lease arrangement between SMBC and us should be accounted for as an operating lease.

Right-of-use assets impairments

During the year ended December 31, 2020, we identified that the undiscounted cash flows for certain right-of-use assets were less than their carrying values due to the negative impact of COVID-19. We evaluated these assets pursuant to our long-lived asset impairment test, resulting in an impairment charge of $65.9 million to write down these assets to their estimated fair values during the year ended December 31, 2020.

Leases