Leases
Taxable REIT Subsidiaries Leases. We lease substantially all our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to the U.S. federal income tax prohibition on the ability of a REIT to derive revenues directly from the operations of a hotel.
Ground Leases. As of December 31, 2025, all or a portion of 18 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 72% of our 2025 minimum lease payments and 96% 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 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. Such increases 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 4.4% to 7.0%.
Office Leases and Other. We have an office lease for our headquarters office in Bethesda, which expires in 2036, with no renewal options. Our leasing activity also includes leases on facilities used in our former restaurant business, all of which we subsequently subleased, and leases entered into by our hotels for various types of equipment.
The following table presents lease cost and other information (in millions):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2025 | | 2024 | | 2023 |
| Lease cost | | | | | |
| Operating lease cost | $ | 44 | | | $ | 43 | | | $ | 42 | |
| Variable lease cost | 35 | | | 36 | | | 35 | |
| Sublease income | (1) | | | (1) | | | (1) | |
| Total lease cost | $ | 78 | | | $ | 78 | | | $ | 76 | |
| | | | | |
| Other information | | | | | |
| Operating cash flows used for operating leases | $ | 44 | | | $ | 43 | | | $ | 42 | |
| Weighted-average remaining lease term - operating leases | 44 years | | 46 years | | 46 years |
| Weighted-average discount rate - operating leases | 5.3 | % | | 5.3 | % | | 5.3 | % |
The following table presents a reconciliation of the total amount of minimum lease payments, on an undiscounted basis, to the lease liability on the balance sheet as of December 31, 2025 (in millions):
| | | | | | | | | | | | | | | | | |
| As of December 31, 2025 |
| Ground Leases | | Office Leases and Other | | Total |
| Weighted-average discount rate - operating leases | 5.4 | % | | 3.7 | % | | 5.3 | % |
| 2026 | $ | 32 | | | $ | 8 | | | $ | 40 | |
| 2027 | 32 | | | 7 | | | 39 | |
| 2028 | 32 | | | 6 | | | 38 | |
| 2029 | 32 | | | 6 | | | 38 | |
| 2030 | 32 | | | 5 | | | 37 | |
| Thereafter | 1,311 | | | 28 | | | 1,339 | |
| Total undiscounted cash flows | $ | 1,471 | | | $ | 60 | | | $ | 1,531 | |
| | | | | |
| Present values | | | | | |
| Long-term lease liabilities | $ | 518 | | | $ | 45 | | | $ | 563 | |
| Total lease liabilities | $ | 518 | | | $ | 45 | | | $ | 563 | |
| Difference between undiscounted cash flows and discounted cash flows | $ | 953 | | | $ | 15 | | | $ | 968 | |