LEASES

6 Months Ended

Jun. 30, 2020

Operating Leases

The Company is committed under various operating lease agreements primarily related to submerged tidelands, property and equipment.

Hard Rock Biloxi has an agreement with the State of Mississippi for the lease and use of approximately five acres of submerged tidelands for a primary term of thirty years, expiring September 30, 2037. Upon expiration of the primary term, Hard Rock Biloxi will have an option to extend the lease for a renewal term of thirty years. The renewal option has not been included in the calculation of the lease liability or right of use asset as the Company is not reasonably certain to exercise the option. Annual rent for the lease, as of June 30, 2020, is approximately $1.2 million and adjusts annually by the increase in the consumer price index (“CPI”). Future changes to the CPI are treated as variable lease payments and are recognized in the period in which the obligation for those payments is incurred.

Hard Rock Biloxi also has a Lease and Air Space agreement with the City of Biloxi. The agreement grants the Company rights to a parking area, and to the airspace above two defined parcels of land along with certain support structure rights for the construction of a parking garage. The arrangement has a 40-year term expiring November 18, 2043 and provides the Company one 25-year renewal option. The renewal option has not been included in the calculation of the lease liability or right of use asset as the Company is not reasonably certain to exercise the option. Monthly rent escalates every 5 years based on CPI, and we are responsible for property taxes. Future changes to the CPI are treated as variable lease payments and are recognized in the period in which the obligation for those payments is incurred.

Certain of the Company’s subsidiaries lease office space, parking space, memorabilia and equipment under agreements classified as operating leases that expire on various dates through 2027. Certain of the Company’s leases include renewal options and escalation clauses. Renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Discount rates used to determine the present value of the lease payments are based on a credit-adjusted secured borrowing rate commensurate with the term of the lease.

Variable expenses generally represent the Company’s share of the landlord’s operating expenses and CPI increases. The Company does not have any leases classified as financing leases.

During the six months ended June 30, 2019, three equipment leases were terminated via purchase of the underlying assets.

The Company had operating lease liabilities of approximately $16.8 million and $17.2 million as of June 30, 2020 and December 31, 2019, respectively, and right of use assets of approximately $16.8 million and $17.2 million as of June 30, 2020 and December 31, 2019, respectively, which were included in the condensed consolidated balance sheet.

The following summarizes quantitative information about the Company’s operating leases:


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019
Operating leases:
Operating lease cost	$	551	$	544	$	1,100	$	1,341
Variable lease cost	12		7		24		36
Operating lease expense	563		551		1,124		1,377
Short-term lease expense	421		450		855		883
Total lease expense	$	984	$	1,001	$	1,979	$	2,260

Supplemental cash flow and other information for the three and six months ended June 30, 2020, related to operating leases was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Cash paid for amounts included in the lease liability - operating cash flows from operating leases	$	551	$	544	$	1,099	$	1,353
Right of use assets obtained in exchange for operating lease liabilities	$	—	$	—	$	116	$	18,771


	June 30, 2020		December 31, 2019
Weighted average remaining lease term	16.3		16.7
Weighted average discount rate	6.8	%	6.8	%

As of June 30, 2020, future minimum rental commitments under noncancelable operating leases are as follows:


(in thousands)	June 30, 2020
Remaining 2020	$	1,082
2021	2,157
2022	1,873
2023	1,830
2024	1,780
Thereafter	19,505
Total	28,227
Less: present value discount	(11,400)
Operating lease obligations	$	16,827

In connection with the acquisition of Casino KC, we are party to a sublease with the Port Authority of Kansas City, Missouri, which has leased the property from the City of Kansas City. Our sublease expires on October 18, 2021, but on that date will automatically renew for five additional periods of five years each. The lease agreement provides for minimum annual rent paid in advance and subject to increases in the CPI every five years. Current minimum annual rent payments are $3.1 million per year. In addition, the agreement calls for quarterly percentage rent payments equal to 3.25% of gross revenues, less the minimum annual rent payment. Casino KC is obligated to operate Casino KC at all times. If Casino KC fails to do so, it must pay the Port Authority, in lieu of percentage rent, a sum equal to 50% of the then-applicable base rent during the time Casino KC is not operating. The Company also has leasing arrangements with third-party lessees at its properties. Leasing arrangements for which the Company acts as a lessor are not deemed material as of June 30, 2020 and December 31, 2019.