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Leases

12 Months Ended

Dec. 31, 2019

LEASES

Lessor Information

Refer to Note 1 to these consolidated financial statements for further information about the Company's revenue generating activities as a lessor. All of the Company's customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.

Lessee Information

As a lessee, the Company leases retail store and warehouse space for most of its Aaron's Business store-based operations, call center space and customer service centers for its Progressive Leasing segment, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. To the extent that a leased retail store or warehouse space is vacated prior to the termination of the lease, the Company may sublease these spaces to third parties while maintaining its primary obligation as the lessee in the head lease. The Company leases transportation vehicles under operating and finance leases, most of which generally expire during the next three years. The vehicle leases generally include a residual value that is guaranteed to the lessor, which ensures that the vehicles will be returned to the lessor in reasonable working condition. The Company also leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which the Company is a lessee, the Company has elected to include both the lease and non-lease components as a single component and account for it as a lease.

Rental charges incurred, net of sublease receipts, was $111.7 million, $112.8 million, and $104.3 million in the years ended December 31, 2019, 2018, and 2017, respectively, which are primarily classified within operating expenses in the consolidated statements of earnings, and to a lesser extent capitalized into the cost of lease merchandise and subsequently depreciated. The Company also incurred right-of-use asset impairment and contractual lease obligation charges, net of estimated sublease receipts and early lease buyout discounts, of $28.4 million, $2.1 million and $13.4 million in the years ended December 31, 2019, 2018, and 2017 respectively, related to the closure of Company-operated stores which are reported within restructuring expenses in the consolidated statements of earnings.

Finance lease costs are comprised of the amortization of right-of-use assets and the interest accretion on discounted lease liabilities, which are recorded within operating expenses and interest expense, respectively, in the Company’s consolidated statements of earnings. Operating lease costs are recorded on a straight-line basis within operating expenses. For stores that are related to the Company's restructuring programs as described in Note 11, operating lease costs recorded subsequent to any necessary operating lease right-of-use asset impairment charges are recognized in a pattern that is generally accelerated within restructuring expenses, net in the Company’s consolidated statements of earnings. The Company’s total lease expense is comprised of the following:



	Year Ended December 31,
(In Thousands)	2019
Finance Lease cost:
Amortization of Right-of-Use Assets	$	1,542
Interest on Lease Liabilities	363
Total Finance Lease cost:	1,905

Operating Lease cost:
Operating Lease cost classified within Operating Expenses¹	112,092
Operating Lease cost classified within Restructuring Expenses, Net	3,339
Sublease Receipts²	(3,044		)
Total Operating Lease cost:	112,387

Total Lease cost	$	114,292

¹ Includes short-term and variable lease costs, which are not significant. Short-term lease expense is defined as leases with a lease term of greater than one month, but not greater than 12 months.

² The Company has anticipated future sublease receipts from executed sublease agreements of $2.7 million in 2020, $2.4 million in 2021, $1.5 million in 2022, $1.0 million in 2023, $0.5 million in 2024 and $0.3 million thereafter through 2025.

Additional information regarding the Company’s leasing activities as a lessee is as follows:



	Year Ended December 31,
(In Thousands)	2019
Cash Paid for amounts included in measurement of Lease Liabilities:
Operating Cash Flows for Finance Leases	$	411
Operating Cash Flows for Operating Leases	126,361
Financing Cash Flows for Finance Leases	2,493
Total Cash paid for amounts included in measurement of Lease Liabilities	129,265
Right-of-Use Assets obtained in exchange for new Finance Lease Liabilities	—
Right-of-Use Assets obtained in exchange for new Operating Lease Liabilities	$	53,883

Supplemental balance sheet information related to leases is as follows:



(In Thousands)	Balance Sheet Classification	December 31, 2019
Assets
Operating Lease Assets	Operating Lease Right-of-Use Assets	$	329,211
Finance Lease Assets	Property, Plant and Equipment, Net	768
Total Lease Assets		$	329,979

Liabilities
Operating Lease Liabilities	Operating Lease Liabilities	$	369,386
Finance Lease Liabilities	Debt	2,670
Total Lease Liabilities		$	372,056

Most of the Company’s real estate leases contain renewal options for additional periods ranging from one to 20 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. The Company currently does not have any real estate leases in which it considers the renewal options to be reasonably certain of exercise, as the Company's historical experience indicates that renewal options are not reasonably certain to be exercised. Additionally, the Company's leases contain contractual renewal rental rates that are considered to be in line with market rental rates, and there are not significant economic penalties or business disruptions incurred by not exercising any renewal options.

The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s finance and operating leases:



	Weighted Average Discount Rate¹		Weighted Average Remaining Lease Term (in years)
Finance Leases	5.7	%	1.5
Operating Leases	3.6	%	4.9

¹Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019.

Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of December 31, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the consolidated balance sheets.



(In Thousands)	Operating Leases		Finance Leases		Total
2020	$	108,089	$	2,006	$	110,095
2021	91,376		801		92,177
2022	70,208		80		70,288
2023	48,773		—		48,773
2024	32,345		—		32,345
Thereafter	53,439		—		53,439
Total Undiscounted Cash Flows	404,230		2,887		407,117
Less: Interest	34,844		217		35,061
Present Value of Lease Liabilities	$	369,386	$	2,670	$	372,056

Sale-Leaseback Transactions

In addition to the leasing activities described above, the Company entered into two separate sale and leaseback transactions related to a fulfillment and distribution center and three Company-operated store properties during the fourth quarter of 2019. The Company received net proceeds of $8.1 million and recorded gains of $5.6 million related to the sale and leaseback transactions, which were classified within other operating income in the consolidated statements of earnings.

Leases