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Leases

12 Months Ended

Dec. 31, 2022

Note 9. 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 December 31, 2022 and 2021. 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. 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 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 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

in July 2021, the underlying asset was recorded as a leasehold improvement within Property and equipment, net. Our July 2021 purchase of PortMiami eliminated the residual value guarantee and a requirement under the lease to post $181.1 million of cash collateral.

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

Our finance leases primarily relate to buildings and surrounding land located at our Miami headquarters, and our Silver Dawn and Silver Whisper ships. Finance leases are included within Property, and Equipment, net, and Long-term debt with the current portion of the liability included within Current portion of long-term debt in our consolidated balance sheets as of December 31, 2022 and 2021.

The Company's master lease agreement (“Master Lease”) with Miami-Dade County related to the buildings and surrounding land located at our Miami headquarters, has been classified as a finance lease in accordance with ASC 842, Leases. In January 2022, we executed a modification to the Master Lease to extend the expiration of the lease from 2072 to 2074. Subsequently, in December 2022 we amended the lease to further extend its expiration from 2074 to 2076 after coming to an agreement with Miami-Dade County on the financing plans for the continued development of the buildings and surrounding land at our Miami headquarters. The Master Lease continues to include the two five-year options to extend the lease. We continue to consider the probability of exercising the two five-year options as reasonably certain. The modifications of the Master Lease did not change the classification of the lease. The total aggregate amount of the finance lease liabilities recorded for this Master Lease was $55.5 million and $127.0 million as of December 31, 2022 and December 31, 2021, respectively.

Silversea Cruises operates Silver Dawn under a sale-leaseback agreement with a bargain purchase option at the end of the 15 year lease term. Due to the bargain purchase option at the end of the lease term in 2036 whereby Silversea Cruises is reasonably certain of obtaining ownership of the ship, Silver Dawn is accounted for as a finance lease. The lease includes other purchase options beginning in year three, none of which are reasonably certain of being exercised at this time. The total aggregate amount of finance lease liabilities recorded for this ship was $264.8 million and $283.7 million as of December 31, 2022 and December 31, 2021, respectively. The lease payments on the Silver Dawn are subject to adjustments based on the LIBOR rate.

Silversea Cruises operates Silver Whisper under a finance lease. The finance lease for Silver Whisper will expire in 2023, subject to an option to purchase the ship, which we expect to exercise. The total aggregate amount of finance lease liabilities recorded for this ship was $8.9 million and $24.1 million at December 31, 2022 and December 31, 2021, 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, 2022		As of December 31, 2021
Lease assets:
Finance lease right-of-use assets, net:
Property and equipment, gross	$	668,801	$	737,444
Accumulated depreciation	(123,567)		(94,729)
Property and equipment, net	545,234		642,715
Operating lease right-of-use assets	537,559		542,128
Total lease assets	$	1,082,793	$	1,184,843
Lease liabilities:
Finance lease liabilities:
Current portion of debt	$	34,154	$	51,470
Long-term debt	317,178		420,805
Total finance lease liabilities	351,332		472,275
Operating lease liabilities:
Current portion of operating lease liabilities	79,760		68,922
Long-term operating lease liabilities	523,006		534,726
Total operating lease liabilities	602,766		603,648
Total lease liabilities	$	954,098	$	1,075,923

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


	Consolidated Statement of Comprehensive Income (Loss) Classification	Year ended December 31, 2022		Year ended December 31, 2021		Year ended December 31, 2020
Lease costs:
Operating lease costs	Commission, transportation and other	$	127,315	$	18,860	$	38,349
Operating lease costs	Other operating expenses	22,085		23,261		30,955
Operating lease costs	Marketing, selling and administrative expenses	18,646		18,027		21,971
Finance lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	24,428		16,814		6,901
Interest on lease liabilities	Interest expense, net of interest capitalized	21,550		2,593		4,429
Total lease costs		$	214,024	$	79,555	$	102,605

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, 2022, we had $66.2 million of variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive loss. During the twelve months ended December 31, 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 December 31, 2022		As of December 31, 2021
Weighted average of the remaining lease term
Operating leases	17.69		18.18
Finance leases	19.26		23.96
Weighted average discount rate
Operating leases	6.92	%	6.52	%
Finance leases	6.43	%	5.54	%

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


	Year ended December 31, 2022		Year ended December 31, 2021		Year ended December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	126,797	$	42,759	$	89,179
Operating cash flows from finance leases	$	21,550	$	2,593	$	4,429
Financing cash flows from finance leases	$	48,199	$	23,522	$	19,778

As of December 31, 2022, maturities related to lease liabilities were as follows (in thousands):


Years	Operating Leases		Finance Leases
2023	$	115,636	$	53,617
2024	101,801		44,465
2025	96,290		43,974
2026	90,178		38,412
2027	70,424		37,358
Thereafter	789,158		706,070
Total lease payments	1,263,487		923,896
Less: Interest	(660,721)		(572,564)
Present value of lease liabilities	$	602,766	$	351,332

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. For the years ended December 31, 2022 and December 31, 2021, there were no impairments to right-of-use assets.

Leases