Leases

12 Months Ended

Dec. 31, 2020

Note 8 – Leases

We have operating leases for retail stores, offices, warehouses, and certain equipment. Our leases have remaining lease terms of between 1 year and 14 years, some of which include options to extend the leases for up to 20 years. We determine if an arrangement is or contains a lease at lease inception. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by lessors. We have lease agreements for real estate with lease and non-lease components, which are accounted for separately.

In April 2020, the Financial Accounting Standards Board issued guidance allowing entities to make a policy election to account for lease concessions related to the COVID-19 pandemic as though enforceable rights and obligations for those concessions existed. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the year ended December 31, 2020, we received concessions from certain landlords in the form of rent deferrals of approximately $4.5 million and abatements of approximately $1.8 million. We have elected to account for these rent concessions as though enforceable rights and obligations for those concessions existed in the original lease agreements and have recorded a non-interest bearing payable for the deferred rent payments.

On May 18, 2020, we completed a sale and leaseback transaction of three facilities which we initiated in April 2020 as part of our business continuity plan. The Coppell, TX location has approximately 394,000 distribution square feet used to serve our western stores, 44,000 retail square feet, and 20,000 square feet of office space used for a call center and general management purposes. The Lakeland, FL  property is a distribution center with approximately 335,000 square feet and the Colonial Heights propert  is a distribution facility with 129,000 square feet. The facilities were leased back to Havertys via 15-year operating lease agreements with renewal options.  The total sales price for these properties, excluding costs and taxes, was $70.0 million and their net book value was approximately $37.9 million. The gain of approximately $31.6 million was recognized in the second quarter of 2020 and is included in other income.  

As of December 31, 2020, we have entered into one lease for an additional retail location which has not yet commenced and is under construction.

The table below presents the operating lease assets and liabilities recognized on the consolidated balance sheets as of December 31:

(in thousands)	2020		2019
Operating Lease Assets:
Right-of use lease assets	$	228,749	$	175,474
Operating Lease Liabilities:
Current lease liabilities	$	33,466	$	29,411
Non-current lease liabilities		200,200		149,594
Total operating lease liabilities	$	233,666	$	179,005

Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.

The weighted-average remaining lease term and weighted-average discount rate for operating leases as of December 31 are:

	2020	2019
Weighted-average remaining lease term	8.8 years	7.2 years
Weighted-average discount rate	6.07%	6.61%

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheet as of December 31, 2020:

(in thousands)	Operating Leases
2021	$	46,398
2022		41,993
2023		35,423
2024		31,467
2025		26,209
Thereafter		123,753
Total undiscounted future minimum lease payments		305,243
Less: difference between undiscounted lease payments and discounted operating lease liabilities		(71,577	)
Total operating lease liabilities	$	233,666

Certain of our lease agreements for retail stores include variable lease payments, generally based on sales volume. The variable portion of payments are not included in the initial measurement of the right‑of-use asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. Certain of our equipment lease agreements include variable lease costs, generally based on usage of the underlying asset (mileage, fuel, etc.). The variable portion of payments are not included in the initial measurement of the right-of-use asset or lease liability due to uncertainty of the payment amount and are

recorded as lease expense in the period incurred.

Components of lease expense which are included in selling, general, and administrative expenses within our consolidated statements of comprehensive income were as follows:

	Year ended December 31,
(in thousands)	2020		2019
Operating lease cost	$	44,854	$	41,681
Short-term lease cost		—		90
Variable lease cost		5,827		5,653
Total lease expense	$	50,681	$	47,424

Supplemental cash flow information related to leases is as follows:

	Year ended December 31,
(In thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	39,341	$	40,403
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	89,082	$	31,888

For leases accounted for under ASC 840, step rent and other lease concessions (free rent periods) are taken into account in computing lease expense on a straight-line basis. Landlord allowances for capital improvements have not been significant but are recorded as a reduction of expense over the term of the lease. Net rental expense applicable to operating leases which are included in selling, general, and administrative expenses within our consolidated statements of comprehensive income were as follows:

(In thousands)	2018
Property
Minimum	$	27,124
Additional rentals based on sales		22
Sublease income		(130	)
		27,016
Equipment		3,029
	$	30,045