Leases

9 Months Ended

Sep. 30, 2021

Leases [Abstract]

Leases

Note 8. 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 sheets as of September 30, 2021 and December 31, 2020. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Our operating leases include Silver Explorer, operated by Silversea Cruises. The operating lease for Silver Explorer will expire in 2023.

For some of our real estate leases and berthing agreements, we 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 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.

In June of 2021, we exercised our option under our operating lease with SMBC Leasing and Finance, Inc (the "Lessor") to purchase Terminal A at PortMiami in July 2021 for the pre-agreed purchase price of $220.0 million. Upon purchase of the terminal lease in July 2021, the underlying asset was recorded as a leasehold improvement within Property and equipment, net. Our July 2021 purchase of the Port of Miami terminal eliminated the residual value guarantee and a requirement under the lease to post $181.1 million of cash collateral on or before July 18, 2021.

Additionally, we remeasured the ground lease related to the Terminal A lease based on a reassessed lease term resulting from our purchase option exercise. We determined that the ground lease should remain as an operating lease with adjustments to the operating lease liability and the related right-of-use asset in our Consolidated Balance Sheet.

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. 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.

Finance Leases

Silversea Cruises operates the Silver Whisper under a finance lease. In May 2021, the finance lease for the Silver Whisper expiring in 2022 was amended to extend its expiration by 12 months and will now expire in 2023, subject to an option to purchase the ship. Additionally, certain scheduled payments have been deferred and are reflected in Long-term debt in our Consolidated Balance Sheet as of September 30, 2021. The total aggregate amount of the finance lease liabilities recorded for this ship was $31.5 million at September 30, 2021 and December 31, 2020. The lease payments on the Silver Whisper are subject to adjustments based on the LIBOR rate.

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

	Consolidated Statement of Comprehensive Loss Classification	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Lease costs:
Operating lease costs	Commission, transportation and other	$	1,626	$	1,626
Operating lease costs	Other operating expenses	5,424		15,365
Operating lease costs	Marketing, selling and administrative expenses	5,957		14,468
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	3,790		11,517
Interest on lease liabilities	Interest expense, net of interest capitalized	1,095		1,769
Total lease costs		$	17,892	$	44,745

	Consolidated Statement of Comprehensive Loss Classification	Quarter Ended September 30, 2020		Nine Months Ended September 30, 2020
Lease costs:
Operating lease costs	Commission, transportation and other	$	17,648	$	50,268
Operating lease costs	Other operating expenses	7,179		21,920
Operating lease costs	Marketing, selling and administrative expenses	5,686		16,716
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	946		2,941
Interest on lease liabilities	Interest expense, net of interest capitalized	557		3,754
Total lease costs		$	32,016	$	95,599

In addition, certain of our berthing agreements include variable lease costs based on the number of passengers berthed. During the quarter and nine months ended September 30, 2021, we had no variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive loss.

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

	As of September 30, 2021		As of December 31, 2020
Weighted average of the remaining lease term
Operating leases	17.9		7.8
Finance leases	42.7		41.2
Weighted average discount rate
Operating leases	6.48	%	4.59	%
Finance leases	6.54	%	6.89	%

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

	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	20,682	$	97,903
Operating cash flows from finance leases	$	1,769	$	3,754
Financing cash flows from finance leases	$	15,058	$	13,291

As of September 30, 2021, maturities related to lease liabilities were as follows (in thousands):

Year	Operating Leases		Finance Leases
Remainder of 2021	$	31,647	$	23,133
2022	96,341		31,732
2023	104,195		21,918
2024	85,064		12,529
2025	79,782		12,566
Thereafter	900,471		396,171
Total lease payments	1,297,500		498,049
Less: Interest	(677,060)		(300,642)
Present value of lease liabilities	$	620,440	$	197,407

Leases

Note 8. 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 sheets as of September 30, 2021 and December 31, 2020. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Our operating leases include Silver Explorer, operated by Silversea Cruises. The operating lease for Silver Explorer will expire in 2023.

For some of our real estate leases and berthing agreements, we 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 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.

In June of 2021, we exercised our option under our operating lease with SMBC Leasing and Finance, Inc (the "Lessor") to purchase Terminal A at PortMiami in July 2021 for the pre-agreed purchase price of $220.0 million. Upon purchase of the terminal lease in July 2021, the underlying asset was recorded as a leasehold improvement within Property and equipment, net. Our July 2021 purchase of the Port of Miami terminal eliminated the residual value guarantee and a requirement under the lease to post $181.1 million of cash collateral on or before July 18, 2021.

Additionally, we remeasured the ground lease related to the Terminal A lease based on a reassessed lease term resulting from our purchase option exercise. We determined that the ground lease should remain as an operating lease with adjustments to the operating lease liability and the related right-of-use asset in our Consolidated Balance Sheet.

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. 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.

Finance Leases

Silversea Cruises operates the Silver Whisper under a finance lease. In May 2021, the finance lease for the Silver Whisper expiring in 2022 was amended to extend its expiration by 12 months and will now expire in 2023, subject to an option to purchase the ship. Additionally, certain scheduled payments have been deferred and are reflected in Long-term debt in our Consolidated Balance Sheet as of September 30, 2021. The total aggregate amount of the finance lease liabilities recorded for this ship was $31.5 million at September 30, 2021 and December 31, 2020. The lease payments on the Silver Whisper are subject to adjustments based on the LIBOR rate.

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

	Consolidated Statement of Comprehensive Loss Classification	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Lease costs:
Operating lease costs	Commission, transportation and other	$	1,626	$	1,626
Operating lease costs	Other operating expenses	5,424		15,365
Operating lease costs	Marketing, selling and administrative expenses	5,957		14,468
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	3,790		11,517
Interest on lease liabilities	Interest expense, net of interest capitalized	1,095		1,769
Total lease costs		$	17,892	$	44,745

	Consolidated Statement of Comprehensive Loss Classification	Quarter Ended September 30, 2020		Nine Months Ended September 30, 2020
Lease costs:
Operating lease costs	Commission, transportation and other	$	17,648	$	50,268
Operating lease costs	Other operating expenses	7,179		21,920
Operating lease costs	Marketing, selling and administrative expenses	5,686		16,716
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	946		2,941
Interest on lease liabilities	Interest expense, net of interest capitalized	557		3,754
Total lease costs		$	32,016	$	95,599

In addition, certain of our berthing agreements include variable lease costs based on the number of passengers berthed. During the quarter and nine months ended September 30, 2021, we had no variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive loss.

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

	As of September 30, 2021		As of December 31, 2020
Weighted average of the remaining lease term
Operating leases	17.9		7.8
Finance leases	42.7		41.2
Weighted average discount rate
Operating leases	6.48	%	4.59	%
Finance leases	6.54	%	6.89	%

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

	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	20,682	$	97,903
Operating cash flows from finance leases	$	1,769	$	3,754
Financing cash flows from finance leases	$	15,058	$	13,291

As of September 30, 2021, maturities related to lease liabilities were as follows (in thousands):

Year	Operating Leases		Finance Leases
Remainder of 2021	$	31,647	$	23,133
2022	96,341		31,732
2023	104,195		21,918
2024	85,064		12,529
2025	79,782		12,566
Thereafter	900,471		396,171
Total lease payments	1,297,500		498,049
Less: Interest	(677,060)		(300,642)
Present value of lease liabilities	$	620,440	$	197,407