Quarterly report pursuant to Section 13 or 15(d)


3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
5. Leases


On January 1, 2019, we adopted the ASU No. 2016-02, Leases (“Topic 842”)Topic 842 supersedes the lease accounting requirements in Accounting Standards Codification (“ASC”) 840—Leases. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, which included an option to apply the new leases standard at the adoption date using a modified retrospective approach, which the Company elected.


Nature of Leases


We have finance leases for certain ship equipment and a corporate office. We have operating leases for port facilities, corporate offices, warehouses, and certain equipment. Many of our leases include both lease and non-lease components. We have adopted the practical expedient which allows us to combine lease and non-lease components by class of asset. We have applied this expedient for office leases, port facilities, and certain equipment.


Significant Assumptions and Judgements in Applying Topic 842 and Practical Expedients Elected


Our leases contain both fixed and variable payments. Fixed payments and variable lease payments that depend on a rate or index are included in the calculation of the right-of-use asset. Other variable payments are excluded from the calculation unless there is an unavoidable fixed minimum cost related to those payments such as a minimum annual guarantee. Our lease assets are amortized on a straight-line basis except for our rights to use port facilities. The expenses related to port facilities are amortized based on passenger counts as this basis represents the pattern in which the economic benefit is derived from the right to use the underlying asset.


For non-consecutive lease terms, which relate to our rights to use certain port facilities, the term of the lease is based on the number of days on which we have the right to use a specified asset. We have adopted the practical expedient to exclude leases with terms of less than one year from being included on the balance sheet. Lease expense for agreements that are short-term are disclosed below and include both fixed and variable payments.


Certain leases include one or more options to extend or terminate and are primarily in five-year increments. Lease extensions and terminations, including auto-renewing lease terms, were only included in the calculation of the right-of-use asset to the extent that the right to renew or terminate was at the option of the lessor only or where there was a more than insignificant penalty for termination.


As our leases do not have a readily determinable implicit rate, we used our weighted average cost of debt to determine the net present value of the lease payments at the adoption date. Our weighted average cost of debt is similar to the incremental borrowing rate we would have obtained if we had borrowed collateralized debt over the lease term to purchase the asset and was adjusted for longer term leases.


We have also adopted the practical expedient which allows us, by class of asset, to not separate lease and non-lease components when we are the lessor in the underlying transaction, the transactions would otherwise be accounted for under ASC 606–Revenue Recognition and the non-lease components are the predominant components of the agreements. We have applied this practical expedient to transactions with cruise passengers and concession service providers related to the use of our ships. We refer you to Note 3 – “Revenue Recognition.”


Impacts on Financial Statements


As a result of the adoption of Topic 842 on January 1, 2019, we recorded operating lease right-of-use assets of $235.0 million and operating lease liabilities of $243.8 million. Another $8.8 million was reclassified to the operating right-of-use assets from other asset and liability accounts relating to the existing leases. The adoption of Topic 842 did not result in the identification of new finance leases. The adoption does not significantly change the timing, classification or amount of expense recognized in our consolidated financial statements nor does it change the timing, classification or amount of cash payments included within the consolidated statement of cash flows.


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



Three Months Ended

March 31, 2019

Operating lease expense   $ 8,359  
Variable lease expense   $ 2,705  
Short-term lease expense   $ 10,076  
Finance lease cost:        
Amortization of right-to-use assets   $ 244  
Interest on lease liabilities   $ 342  
Operating lease revenue   $ 165  
Sublease income   $ 404  


Lease balances were as follows (in thousands):


    Balance Sheet location   March 31, 2019  
Operating leases            
Right-of-use assets   Other long-term assets   $ 229,174  
Current operating lease liabilities   Accrued expenses and other liabilities   $ 21,975  
Non-current operating lease liabilities   Other long-term liabilities   $ 215,983  
Finance leases            
Right-of-use assets   Property and equipment, net   $ 14,544  
Current finance lease liabilities   Current portion of long-term debt   $ 5,349  
Non-current finance lease liabilities   Long-term debt   $ 11,440  


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



Three Months Ended

March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflows from operating leases   $ 8,305  
Operating cash outflows from finance leases   $ 275  
Financing cash outflows from finance leases   $ 503  
Right-of-use assets obtained in exchange for lease obligations:        
Operating leases   $ 770  


As of March 31, 2019, maturities of lease liabilities, weighted-average remaining lease terms and discount rates for our leases were as follows (in thousands, except lease terms and discount rates):


Remainder of 2019   $ 23,186     $ 3,903  
2020     31,903       4,769  
2021     31,606       4,821  
2022     31,462       3,896  
2023     30,874       730  
Thereafter     138,930       1,306  
Total     287,961       19,425  
Less: Present value discount     (50,003 )     (2,636 )
Present value of lease liabilities   $ 237,958     $ 16,789  
Weighted average remaining lease term (years)     8.90       4.56  
Weighted average discount rate     4.26 %     7.67 %


As previously disclosed in our Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancelable lease terms in excess of one year were as follows under ASC 840 (in thousands):


Year   December 31, 2018  
2019   $ 16,651  
2020     16,105  
2021     15,315  
2022     14,391  
2023     13,462  
Thereafter     52,626  
Total minimum annual rentals   $ 128,550  


Leases That Have Not Yet Commenced


We have multiple agreements that have been executed where the lease term has not commenced as of March 31, 2019. These are primarily related to our rights to use certain port facilities currently under construction. Although we may have provided design input, construction management services, or funding related to these assets, we have determined that we do not control these assets during the period of construction. These port facilities are expected to open for use during 2020 and include undiscounted minimum annual guarantees of approximately $806.7 million of passenger fees.