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Leases
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases

5.

Leases

Taxable REIT Subsidiaries Leases  

We lease substantially all of our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to the federal income tax prohibition on the ability of a REIT to derive revenue directly from the operations of a hotel.  

Ground Leases  

As of June 30, 2019, all or a portion of 24 of our hotels are subject to ground leases, generally with multiple renewal options, all of which are accounted for as operating leases. Payments for ground leases account for approximately 80% of our 2019 minimum lease payments and 99% of our total future minimum lease payments. For lease agreements with scheduled rent increases, we recognize the fixed portion of the lease expense ratably over the term of the lease. As the exercise of the renewal options were determined to be reasonably certain, the payments associated with the renewals have been included in the measurement of the lease liability and ROU asset. Contingent rental payments based on a percentage of sales in excess of stipulated amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. However, certain of these leases contain provisions that increase the minimum lease payments based on an average of the variable lease payments made over the previous years, for which we will reevaluate the lease liability and ROU asset, as these payments now represent an increase in the

minimum payments for the remainder of the lease term. Certain of these leases also contain provisions that increase the minimum lease payments based on an index such as the Consumer Price Index. Subsequent to the initial adoption of the new standard, such amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. The discount rate used to calculate the lease liability and ROU asset is based on our incremental borrowing rate (“IBR”), as the rate implicit in each lease is not readily determinable. To calculate our IBR, we obtained a forward curve using LIBOR swap rates, with terms ranging from one to fifty years, as well as corresponding bond spreads based on the terms of the leases and our credit risk. The resulting discount rates for our ground leases range from 4.3% to 5.7%.

Office Leases and Other

We have office leases for our headquarters office in Bethesda, which expires in 2022, as well as two satellite offices in Miami and San Diego, which expire in 2022 and 2021, respectively, with no renewal options. Our leasing activity also includes leases entered into by our hotels for various types of equipment that historically have been accounted for either as operating or capital leases, depending upon the characteristics of the particular lease arrangement. As we have elected to use the package of practical expedients, all existing capital leases now are classified as finance leases, which total $1 million at June 30, 2019. 

As disclosed in Note 2 – Summary of Significant Accounting Policies, we adopted ASU No. 2016-02, Leases (Topic 842), as amended, using the effective date transition method. As a result, disclosures required under the new standard will not be provided for dates or periods prior to January 1, 2019. For the comparative periods, we will provide disclosures required by ASC 840, Leases.

The following table presents lease cost and other information for the quarter and year-to-date ended June 30, 2019 (in millions): 

 

 

Quarter ended

June 30, 2019

 

 

Year-to-date ended

June 30, 2019

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

11

 

 

$

23

 

Variable lease cost

 

 

10

 

 

 

19

 

Total lease cost

 

$

21

 

 

$

42

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

Operating cash flows used for operating leases for the Year-to-date ended June 30, 2019

 

 

$

23

 

Weighted-average remaining lease term - operating leases

 

 

53 years

 

Weighted-average discount rate - operating leases

 

 

 

5.4

%

The following table presents a reconciliation of the total amount of lease payments, on an undiscounted basis, to the lease liability in the statement of financial position as of June 30, 2019 (in millions): 

 

 

As of June 30, 2019

 

 

 

Ground Leases

 

 

Office Leases and Other

 

 

Total

 

Weighted-average discount rate - operating leases

 

 

5.4

%

 

 

4.0

%

 

 

5.4

%

July 1, 2019 - December 31, 2019

 

$

17

 

 

$

4

 

 

$

21

 

2020

 

 

34

 

 

 

7

 

 

 

41

 

2021

 

 

34

 

 

 

6

 

 

 

40

 

2022

 

 

34

 

 

 

3

 

 

 

37

 

2023

 

 

34

 

 

 

 

 

 

34

 

Thereafter

 

 

1,673

 

 

 

 

 

 

1,673

 

Total undiscounted cash flows

 

$

1,826

 

 

$

20

 

 

$

1,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Present values

 

 

 

 

 

 

 

 

 

 

 

 

Long-term lease liabilities

 

$

580

 

 

$

19

 

 

$

599

 

Total lease liabilities

 

$

580

 

 

$

19

 

 

$

599

 

Difference between undiscounted cash flows and discounted cash flows

 

$

1,246

 

 

$

1

 

 

$

1,247

 

In addition, the $13 million lease liability associated with the ground lease at the Atlanta Marriott Suites Midtown is classified as held for sale at June 30, 2019. The undiscounted cash flows for this ground lease total $64 million.

The following table presents the future minimum annual rental commitments, excluding renewal periods, as of December 31, 2018, for which we are the lessee, required under non-cancelable operating leases in accordance with ASC 840, under which we report prior to January 1, 2019 (in millions):

 

 

As of December 31, 2018

 

2019

 

$

46

 

2020

 

 

44

 

2021

 

 

43

 

2022

 

 

40

 

2023

 

 

37

 

Thereafter

 

 

1,309

 

Total minimum lease payments

 

$

1,519