Leases

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

Leases

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 March 31, 2020 and December 31, 2019. 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.

During the first quarter ended March 31, 2020, we identified that the undiscounted cash flows of certain right-of-use assets, were less than their carrying values. Events surrounding the COVID-19 pandemic negatively impacted the expected undiscounted cash flows of these assets. As a result of this determination, we evaluated these assets pursuant to our long-lived asset impairment test, which resulted in an impairment charge of $45.9 million to write down these right-of-use assets to their estimated fair values during the quarter ended March 31, 2020.

Our finance leases include two ships, Silver Whisper and Silver Explorer, operated by Silversea Cruises. Finance leases are included within Property and equipment, net and Long-term debt, with the current portion of the debt reported within Current portion of debt, in our consolidated balance sheets. The finance lease for Silver Whisper will expire in 2022, subject to an option to purchase the ship, and the finance lease for Silver Explorer will expire in 2021, subject to an option to extend the lease for up to an additional six years.

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. Additionally, we do have a residual value guarantee associated with our lease of a terminal at Port of Miami in Miami, Florida that approximates a percentage of cost of the asset as of the inception of the lease. We consider the possibility of incurring costs associated with the residual value guarantee to be remote. As of March 31, 2020, we were not in compliance with one covenant in our Port of Miami Terminal "A" operating lease agreement, which we subsequently obtained a waiver for and amended our agreement with the lessor to increase the lien basket in line with our debt facilities.

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. We used the incremental borrowing rate as of the adoption date for operating leases that commenced prior to that date. 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.

Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings in 2016. We account for the bareboat charters of these vessels as operating leases for which we are the lessor.  The remaining payments and term of these leases are immaterial to our consolidated financial statements.

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

	Consolidated Statement of Comprehensive Income (Loss) Classification	Quarter Ended March 31, 2020		Quarter Ended March 31, 2019
Lease costs:
Operating lease costs	Commission, transportation and other	$	14,745	$	19,056
Operating lease costs	Other operating expenses	7,001		6,931
Operating lease costs	Marketing, selling and administrative expenses	5,368		5,679
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	4,881		3,195
Interest on lease liabilities	Interest expense, net of interest capitalized	1,933		596
Total lease costs		$	33,928	$	35,457

In addition, certain of our berth agreements include variable lease costs based on the number of passengers berthed. During the quarter ended March 31, 2020, we had $25.6 million of variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive income (loss).

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

	As of March 31, 2020
Weighted average of the remaining lease term
Operating leases	8.6 years
Finance leases	30.17 years
Weighted average discount rate
Operating leases	4.7	%
Finance leases	4.5	%

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

	Quarter Ended March 31, 2020		Quarter Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,841	$	31,981
Operating cash flows from finance leases	$	1,933	$	596
Financing cash flows from finance leases	$	3,823	$	3,606

As of March 31, 2020, maturities related to lease liabilities were as follows (in thousands):

Year	Operating Leases		Finance Leases
Remainder of 2020	$	97,082	$	37,905
2021	117,145		46,451
2022	106,714		23,480
2023	101,557		12,539
2024	75,509		12,528
Thereafter	417,122		406,088
Total lease payments	915,129		538,991
Less: Interest	(232,267)		(312,520)
Present value of lease liabilities	$	682,862	$	226,471

Leases

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 March 31, 2020 and December 31, 2019. 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.

During the first quarter ended March 31, 2020, we identified that the undiscounted cash flows of certain right-of-use assets, were less than their carrying values. Events surrounding the COVID-19 pandemic negatively impacted the expected undiscounted cash flows of these assets. As a result of this determination, we evaluated these assets pursuant to our long-lived asset impairment test, which resulted in an impairment charge of $45.9 million to write down these right-of-use assets to their estimated fair values during the quarter ended March 31, 2020.

Our finance leases include two ships, Silver Whisper and Silver Explorer, operated by Silversea Cruises. Finance leases are included within Property and equipment, net and Long-term debt, with the current portion of the debt reported within Current portion of debt, in our consolidated balance sheets. The finance lease for Silver Whisper will expire in 2022, subject to an option to purchase the ship, and the finance lease for Silver Explorer will expire in 2021, subject to an option to extend the lease for up to an additional six years.

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. Additionally, we do have a residual value guarantee associated with our lease of a terminal at Port of Miami in Miami, Florida that approximates a percentage of cost of the asset as of the inception of the lease. We consider the possibility of incurring costs associated with the residual value guarantee to be remote. As of March 31, 2020, we were not in compliance with one covenant in our Port of Miami Terminal "A" operating lease agreement, which we subsequently obtained a waiver for and amended our agreement with the lessor to increase the lien basket in line with our debt facilities.

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. We used the incremental borrowing rate as of the adoption date for operating leases that commenced prior to that date. 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.

Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings in 2016. We account for the bareboat charters of these vessels as operating leases for which we are the lessor.  The remaining payments and term of these leases are immaterial to our consolidated financial statements.

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

	Consolidated Statement of Comprehensive Income (Loss) Classification	Quarter Ended March 31, 2020		Quarter Ended March 31, 2019
Lease costs:
Operating lease costs	Commission, transportation and other	$	14,745	$	19,056
Operating lease costs	Other operating expenses	7,001		6,931
Operating lease costs	Marketing, selling and administrative expenses	5,368		5,679
Financial lease costs:
Amortization of right-of-use-assets	Depreciation and amortization expenses	4,881		3,195
Interest on lease liabilities	Interest expense, net of interest capitalized	1,933		596
Total lease costs		$	33,928	$	35,457

In addition, certain of our berth agreements include variable lease costs based on the number of passengers berthed. During the quarter ended March 31, 2020, we had $25.6 million of variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive income (loss).

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

	As of March 31, 2020
Weighted average of the remaining lease term
Operating leases	8.6 years
Finance leases	30.17 years
Weighted average discount rate
Operating leases	4.7	%
Finance leases	4.5	%

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

	Quarter Ended March 31, 2020		Quarter Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,841	$	31,981
Operating cash flows from finance leases	$	1,933	$	596
Financing cash flows from finance leases	$	3,823	$	3,606

As of March 31, 2020, maturities related to lease liabilities were as follows (in thousands):

Year	Operating Leases		Finance Leases
Remainder of 2020	$	97,082	$	37,905
2021	117,145		46,451
2022	106,714		23,480
2023	101,557		12,539
2024	75,509		12,528
Thereafter	417,122		406,088
Total lease payments	915,129		538,991
Less: Interest	(232,267)		(312,520)
Present value of lease liabilities	$	682,862	$	226,471