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Leases

12 Months Ended

Dec. 31, 2019

8. LEASES

General description

The significant majority of leases that we enter into are for real estate. We lease numerous facilities relating to our operations, including primarily for automobile showrooms, display lots, service facilities, collision repair centers, supply facilities, automobile storage lots, parking lots, offices, and our corporate headquarters. Leases for real property have terms ranging from one to twenty-five years. We also lease various types of equipment, including security cameras, diagnostic equipment, copiers, key-cutting machines, and postage machines, among others. Equipment leases generally have terms ranging from one to five years. In addition, we lease certain vehicles from vehicle manufacturers to provide our service customers with the use of a vehicle while their vehicles are being serviced at our dealerships. These service loaner vehicle leases generally have terms ranging from six to eighteen months, and we typically purchase the service loaner vehicles at the end of the lease.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not have any significant leases that have not yet commenced but that create significant rights and obligations for us. We have elected the practical expedient under ASC Topic 842 to not separate lease and nonlease components for the following classes of underlying assets: real estate, office equipment, service loaner vehicles, and marketing-related assets (e.g., billboards).

Our real estate and equipment leases often require that we pay maintenance in addition to rent. Additionally, our real estate leases generally require payment of real estate taxes and insurance. Maintenance, real estate taxes, and insurance payments are generally variable and based on actual costs incurred by the lessor. Therefore, these amounts are not included in the consideration of the contract when determining the right-of-use (“ROU”) asset and lease liability, but are reflected as variable lease expenses for those classes of underlying assets for which we have elected the practical expedient to not separate lease and nonlease components.

Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We rent or sublease certain real estate to third parties, which are primarily operating leases.

Variable lease payments

A majority of our lease agreements include fixed rental payments. Certain of our lease agreements include fixed rental payments that are adjusted periodically for changes in the Consumer Price Index (“CPI”). Payments based on a change in an index or a rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments are incurred.

Options to extend or terminate leases

Most of our real estate leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at our sole discretion. If it is reasonably certain that we will exercise such options, the periods covered by such options are included in the lease term and are recognized as part

of our ROU assets and lease liabilities. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Discount rate

For our incremental borrowing rate, we generally use a portfolio approach to determine the discount rate for leases with similar characteristics. We determine discount rates based on current market prices of instruments similar to our unsecured borrowings with maturities that align with the relevant lease term, and such rates are then adjusted for our credit spread and the effects of full collateralization.



Leases	Classification	2019
Assets
Operating	Operating Lease Assets	$	333.1
Finance	Property and Equipment, Net and Other Assets	82.5
Total right-of-use assets		$	415.6

Liabilities
Current
Operating	Other Current Liabilities	$	41.0
Finance	Current Maturities of Long-Term Debt and Vehicle Floorplan Payable - Trade	26.2
Noncurrent
Operating	Noncurrent Operating Lease Liabilities	305.0
Finance	Long-Term Debt, Net of Current Maturities	87.3
Total lease liabilities		$	459.5



Lease Term and Discount Rate	2019
Weighted average remaining lease term
Operating	11 years
Finance	13 years
Weighted-average discount rate
Operating	5.27	%
Finance	9.09	%



Lease cost	Classification	2019
Operating lease cost	Selling, general, and administrative expenses	$	60.5
Finance lease cost:
Amortization of ROU assets	Depreciation and amortization	10.8
Interest on lease liabilities	Other interest expense and floorplan interest expense	8.8
Short-term lease cost ⁽¹⁾	Selling, general, and administrative expenses	9.6
Variable lease cost	Selling, general, and administrative expenses	6.6
Sublease income	Selling, general, and administrative expenses	(1.2		)
Net lease cost		$	95.1

⁽¹⁾Includes leases with a term of one month or less.



Other Information	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	60.0
Operating cash flows from finance leases ⁽¹⁾	$	50.8
Financing cash flows from finance leases	$	28.9
Right-of-use assets obtained in exchange for new:
Operating lease liabilities	$	31.9
Finance lease liabilities	$	46.3

⁽¹⁾Includes the interest component of payments made on finance leases as well as principal payments on vehicle floorplan payables with trade lenders for certain service loaner vehicle leases.



Maturity of Lease Liabilities	Operating Leases			Finance Leases
Twelve months ending December 31,
2020	$	58.1		$	32.9
2021	52.2			11.1
2022	45.9			10.9
2023	39.7			10.7
2024	34.0			11.0
Thereafter	238.1			100.8
Total lease payments	468.0			177.4
Less: interest	(122.0		)	(63.9		)
Present value of lease liabilities	$	346.0		$	113.5

Under ASC Topic 840, expenses under real property, equipment, and software leases were $66.2 million in 2018 and $56.3 million in 2017. The following table provides the future minimum lease obligations for leases with initial terms in excess of one year as for the year ended December 31, 2018 in accordance with ASC Topic 840:



Maturity of Lease Liabilities	Operating Leases⁽¹⁾		Capital Leases
Twelve months ending December 31,
2019	$	61.2	$	35.7
2020	51.0		10.4
2021	46.1		10.1
2022	42.1		10.2
2023	36.6		10.1
Thereafter	258.4		108.7
Total minimum lease payments	$	495.4	$	185.2
Less: amounts representing interest			(69.5		)
			$	115.7

⁽¹⁾

Future minimum operating lease payments do not reflect future minimum sublease income of $2.2 million. Additionally, operating leases that are on a month-to-month basis are not included.

Leases