Leases

12 Months Ended

Dec. 31, 2020

On January 1, 2019, we adopted ASC 842 on a modified retrospective basis. We elected the practical expedients which allowed us to apply the new guidance at its effective date on January 1, 2019 without adjusting the comparative prior period financial statements. The package of practical expedients also allowed us to carry forward the historical lease classification. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record short-term leases on the balance sheet across all existing asset classes.

The adoption of this standard has resulted in the recognition of operating lease ROU assets and lease liabilities primarily related to our ground lease arrangements for which we are the lessee. As of January 1, 2019, we recorded operating lease liabilities of $60.6 million as well as a corresponding operating lease ROU asset of $82.5 million, which includes, among other things, the reclassified intangible assets of $22.3 million. The standard did not have a material impact on our consolidated statements of operations and statements of cash flows.

The majority of our leases are operating ground leases. We also have operating equipment leases, such as copier and vehicle leases, at our hotel properties. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years. The exercise of lease renewal options is at our sole discretion. Some leases have variable payments, however, if variable payments are contingent, they are not included in the ROU assets and liabilities. We have no finance leases as of December 31, 2020.

The discount rate used to calculate the lease liability and ROU asset related to our ground leases is based on our incremental borrowing rate (“IBR”), as the rate implicit in each lease is not readily determinable. The IBR is determined at commencement of the lease, or upon modification of the lease, as the interest rate a lessee would have to pay to borrow on a fully collateralized basis over a similar term and at an amount equal to the lease payments in a similar economic environment.

As of December 31, 2020 and 2019, our leased assets and liabilities consisted of the following (in thousands):


	December 31, 2020		December 31, 2019
Assets
Operating lease right-of-use assets	$	81,260	$	82,596

Liabilities
Operating lease liabilities	$	60,917	$	61,118

We incurred the following lease costs related to our operating leases (in thousands):



		Year Ended December 31,
	Classification	2020		2019
Operating lease cost (1)	Hotel operating expenses - other	$	4,373	$	5,834

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(1) For the years ended December 31, 2020 and 2019, operating lease cost includes approximately $(305,000) and $1.4 million, respectively, of variable lease cost associated with the ground leases, with the credit in 2020 primarily caused by the ground lease percentage rent true-up for fiscal year 2019-2020 at Hilton La Jolla Torrey Pines. Additionally, we recorded $834,000 and $651,000, respectively, of amortization costs related to the intangible assets that were reclassified to “operating lease right-of-use assets” upon adoption of ASC 842. Short-term lease costs in aggregate are immaterial.

Other information related to leases is as follows:


	Year Ended December 31,
	2020			2019

Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (in thousands)	$	3,261		$	3,223





Weighted Average Remaining Lease Term
Operating leases (1)	47 years			47 years

Weighted Average Discount Rate
Operating leases (1)	4.98		%	4.98		%

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(1) Calculated using the lease term, excluding extension options, and discount rates of the ground leases.

Future minimum lease payments due under non-cancellable leases as of December 31, 2020 were as follows (in thousands):


	Operating Leases
2021	3,283
2022	3,241
2023	3,243
2024	3,244
2025	3,258
Thereafter	146,008
Total future minimum lease payments (1)	162,277
Less: interest	(101,360)
Present value of operating lease liabilities	$	60,917

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(1) Based on payment amounts as of December 31, 2020.