Leases

6 Months Ended

Jun. 30, 2019

Lessee, Operating and Financing Leases [Abstract]

Lessee, Operating and Financing Leases [Text Block]

9.  Leases           

The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of June 30, 2019, the Company had 13 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately four to 86 years. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years.

The Company adopted ASU No. 2016-02, Leases (Topic 842), as discussed further in Note 1 in the section titled “Accounting Standards Recently Adopted”, effective January 1, 2019, which requires leases with durations greater than twelve months to be recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities. Prior year financial statements were not restated under the new standard and, therefore, those amounts are not presented below.

Under the new standard, the Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed schedule rent increases) and renewal options that are factored into the determination of lease payments when appropriate and the present value of the remaining lease payments is adjusted accordingly. The Company utilizes interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, to determine the present value of the lease payments. At transition to the new standard, the Company used information available at that time to determine the incremental borrowing rates on its existing leases at January 1, 2019 based on estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.

Twelve of the Company’s hotel and parking lot ground leases as well as all of its hotel equipment leases and office space leases are classified as operating leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are included in other assets, net and the lease liabilities are included in accounts payable and other liabilities in the Company’s consolidated balance sheet. In addition, at adoption of the new standard, the Company reclassified its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the Company’s consolidated balance sheet, respectively, as well as accrued straight-line lease liabilities related to these leases from accounts payable and other liabilities in the Company’s consolidated balance sheet to the beginning ROU assets. Lease expense is recognized on a straight-line basis over the term of the respective lease and the value of each lease intangible is amortized over the term of the respective lease. Costs related to operating ground leases are included in operating ground lease expense, while costs related to hotel equipment leases are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases are included in general and administrative expense in the Company’s consolidated statements of operations.

Four of the Company’s hotel ground leases are classified as finance leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are recorded as finance ground lease assets within investment in real estate, net and the lease liabilities are recorded as finance lease liabilities in the Company’s consolidated balance sheet. In addition, at adoption of the new standard, the Company reclassified its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the Company’s consolidated balance sheet, respectively, to the beginning ROU assets. At adoption of the new standard, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million, which included the derecognition of accrued straight-line lease liabilities related to the finance leases, to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The ROU asset and value of each lease intangible is amortized over the term of the respective lease. Costs related to finance ground leases are included in depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statement of operations.

Lease Position as of June 30, 2019

The following table sets forth the lease-related assets and liabilities included in the Company’s consolidated balance sheet as of June 30, 2019. All dollar amounts are in thousands.

	Consolidated Balance Sheet Classification	June 30, 2019
Assets
Operating lease assets, net	Other assets, net	$	28,941
Finance ground lease assets, net (1)	Investment in real estate, net		142,661
Total lease assets		$	171,602
Liabilities
Operating lease liabilities	Accounts payable and other liabilities	$	12,470
Finance lease liabilities	Finance lease liabilities		163,508
Total lease liabilities		$	175,978
Weighted-average remaining lease term
Operating leases		36 years
Finance leases		32 years
Weighted-average discount rate
Operating leases			5.43	%
Finance leases			5.28	%

⁽¹⁾ Finance ground lease assets are net of accumulated amortization of approximately $2.1 million as of June 30, 2019.

Lease Costs for the Three and Six Months Ended June 30, 2019

The following table sets forth the lease costs related to the Company’s operating and finance ground leases included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2019 (in thousands):

	Consolidated Statements of Operations Classification	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease costs (1)	Operating ground lease expense	$	423	$	828
Finance lease costs:
Amortization of lease assets	Depreciation and amortization expense		1,149		2,190
Interest on lease liabilities	Interest and other expense, net		2,133		3,959
Total lease costs		$	3,705	$	6,977

⁽¹⁾ Represents costs related to ground leases, including variable lease costs. Excludes costs related to hotel equipment leases, which are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases, which are included in general and administrative expense in the Company's consolidated statements of operations.

Undiscounted Cash Flows

The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the operating lease liabilities and finance lease liabilities included in the Company’s consolidated balance sheet as of June 30, 2019 (in thousands):

	Operating leases		Finance leases
2019 (July - December)	$	697	$	4,126
2020		1,231		7,385
2021		1,015		7,552
2022		851		7,702
2023		777		8,051
Thereafter		33,187		363,171
Total minimum lease payments		37,758		397,987
Less: amount of lease payments representing interest		25,288		234,479
Present value of lease liabilities	$	12,470	$	163,508

Other Information

The following table sets forth supplemental cash flow information related to the Company’s operating and finance leases for the six months ended June 30, 2019 (in thousands):

	Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	727
Operating cash flows for finance leases		2,885