Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data,” and Part I, Item 1A. “Risk Factors.”
General
The Company is a leading owner and operator of golf-related leisure and dining and entertainment businesses. Our common stock is traded on the NYSE under the symbol “DS.” Through January 1, 2018, we were externally managed and advised by an affiliate of Fortress Investment Group LLC, or Fortress (the former “Manager”). On December 21, 2017, we entered into definitive agreements with the Manager to internalize our management (the “Internalization”), effective January 1, 2018.
For further information relating to our business, see “Item 1. Business.”
We report our business through the following segments: (i) Entertainment Golf, (ii) Traditional Golf and (iii) corporate.
Market Considerations
Our ability to execute our business strategy, particularly the development of our Entertainment Golf business, depends to a degree on our ability to monetize our remaining investments, optimize our Traditional Golf business, including sales of certain owned properties, and obtain additional capital. We have substantially monetized the remaining loans and securities. We last raised capital through the equity markets in 2014, and rising interest rates or stock market volatility could impair our ability to raise equity capital on attractive terms.
Our ability to generate income is dependent on, among other factors, our ability to raise capital and finance properties on favorable terms, deploy capital on a timely basis at attractive returns, and exit properties at favorable yields. Market conditions outside of our control, such as interest rates, inflation, consumer discretionary spending and stock market volatility affect these objectives in a variety of ways.
Entertainment Golf Business
We opened our inaugural venue in Orlando, Florida on April 7, 2018 and are in the construction and development phase for six additional sites, as well as in the process of exploring sites for additional Entertainment Golf venues. There is competition within the bid process, and land development and construction are subject to obtaining the necessary regulatory approvals. Delays in these processes could impact our business. In addition, similar to our Traditional Golf business, trends in consumer spending, as well as climate and weather patterns, could have an impact on the markets in which we currently or will in the future operate.
Traditional Golf Business
With respect to our Traditional Golf business, trends in consumer discretionary spending, as well as climate and weather patterns, have a significant impact on the markets in which we operate. Traditional Golf is subject to seasonal fluctuations caused by significant reductions in golf activities due to shorter days and colder temperatures in the first and fourth quarters of each year. Consequently, a significantly larger portion of our revenue from our Traditional Golf operations is earned in the second and third quarters of our fiscal year. In addition, severe weather patterns can also negatively impact our results of operations.
While consumer spending in the Traditional Golf industry has not grown in recent years, we believe improving economic conditions and improvements in local housing markets have helped and will continue to help drive membership growth and increase the number of golf rounds played. In addition, we believe growth in related industries, including leisure, fitness and entertainment, may positively impact our Traditional Golf business.
Application of Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles or GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Our estimates are based on information available to management at the time of preparation of the Consolidated Financial Statements, including the result of historical analysis, our understanding and experience of the Company’s operations, our knowledge of the industry and market-participant data available to us.
Actual results have historically been in line with management’s estimates and judgments used in applying each of the accounting policies described below and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our Consolidated Financial Statements. However, the Company does not expect our assessments and assumptions below to materially change in the future.
A summary of our significant accounting policies is presented in Note 2 to our Consolidated Financial Statements, which appear in Part II, Item 8. “Financial Statements and Supplementary Data.” The following is a summary of our accounting policies that are most affected by judgments, estimates and assumptions.
Impairment of Property and Equipment and Intangible Assets
Real estate and long-lived assets are tested for potential impairment when changes in circumstances indicate the carrying amount of the assets, or other appropriate grouping of assets, may not be fully recoverable. Indicators of impairment include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. An impairment is determined to have occurred if the future net undiscounted cash flows expected to be generated is less than the carrying value of an asset. The impairment is measured as the difference between the carrying value and the fair value. Significant judgment is required both in determining impairment and in estimating the fair value. We may use assumptions and estimates derived from a review of our operating results, business projections, expected growth rates, discount rates, and tax rates. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in these assumptions and estimates are outside the control of management, and can change in future periods.
We assess the potential impairment of our intangible assets with definite lives, when changes in circumstances indicate the carrying amount of the assets, or other appropriate grouping of assets, may not be fully recoverable. The assessment of recoverability is based on comparing management’s estimates of the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. Factors leading to impairment include significant under-performance relative to historical or projected results, significant changes in the manner of use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends.
Membership Deposit Liabilities
In our Traditional Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the their country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active
membership, which is estimated to be seven years. The determination of the estimated average expected life of an active membership is based on company-specific historical data and involves judgment and estimation. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense, net in the Consolidated Statements of Operations.
Valuation of Securities
Fair value of securities is based on an internal model and involves significant judgement. The inputs to our model includes discount rates, prepayment speeds, default rates and severity assumptions.
See Note 10 to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” for information regarding the fair value of our investments, and respective estimation methodologies, as of
December 31, 2018
.
Impairment of Securities and Other Investments
Temporary declines in value generally result from changes in market factors, such as market interest rates and credit spreads, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. We continually evaluate the credit status of each of our securities and the collateral supporting our securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security, the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. These factors include loan default expectations and loss severities, which are analyzed in connection with a particular security’s credit support, as well as prepayment rates. These factors are also analyzed in relation to the amount of the unrealized loss and the period elapsed since it was incurred. The result of this evaluation is considered when determining management’s estimate of cash flows, particularly with respect to developing the necessary inputs and assumptions. Each security is impacted by different factors and in different ways; generally the more negative factors which are identified with respect to a given security, the more likely we are to determine that we do not expect to receive all contractual payments when due with respect to that security. Significant judgment is required in this analysis.
We evaluate our other investments for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future.
Stock-based Compensation
We account for stock-based compensation for options in accordance with the fair value recognition provisions, under which we use the Black-Scholes option valuation model, which requires the input of subjective assumptions. These assumptions include expected volatility, expected dividend yield of our stock, expected term of the awards and the risk-free interest rate.
Recent Accounting Pronouncements
See Note 2 in Part II, Item 8. “Financial Statements and Supplementary Data” for information about recent accounting pronouncements.
Results of Operations
The following tables summarize the changes in our consolidated results of operations from year-to-year (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Results of Operations for the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
2018
|
|
2017
|
|
Amount
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations
|
$
|
244,646
|
|
|
$
|
221,737
|
|
|
$
|
22,909
|
|
|
10.3
|
%
|
Sales of food and beverages
|
69,723
|
|
|
70,857
|
|
|
(1,134
|
)
|
|
(1.6
|
)%
|
Total revenues
|
314,369
|
|
|
292,594
|
|
|
21,775
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
251,794
|
|
|
232,796
|
|
|
18,998
|
|
|
8.2
|
%
|
Cost of sales - food and beverages
|
20,153
|
|
|
20,959
|
|
|
(806
|
)
|
|
(3.8
|
)%
|
General and administrative expense
|
38,560
|
|
|
31,413
|
|
|
7,147
|
|
|
22.8
|
%
|
Management fee and termination payment to affiliate
|
—
|
|
|
21,410
|
|
|
(21,410
|
)
|
|
(100.0
|
)%
|
Depreciation and amortization
|
19,704
|
|
|
24,304
|
|
|
(4,600
|
)
|
|
(18.9
|
)%
|
Pre-opening costs
|
2,483
|
|
|
320
|
|
|
2,163
|
|
|
N.M.
|
|
Impairment
|
8,240
|
|
|
60
|
|
|
8,180
|
|
|
N.M.
|
|
Realized and unrealized (gain) loss on investments
|
(131
|
)
|
|
6,243
|
|
|
(6,374
|
)
|
|
(102.1
|
)%
|
Total operating costs
|
340,803
|
|
|
337,505
|
|
|
3,298
|
|
|
1.0
|
%
|
Operating loss
|
(26,434
|
)
|
|
(44,911
|
)
|
|
(18,477
|
)
|
|
(41.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest and investment income
|
1,794
|
|
|
23,162
|
|
|
(21,368
|
)
|
|
(92.3
|
)%
|
Interest expense, net
|
(16,639
|
)
|
|
(19,581
|
)
|
|
(2,942
|
)
|
|
(15.0
|
)%
|
Other income, net
|
2,880
|
|
|
94
|
|
|
2,786
|
|
|
N.M
|
|
Total other income (loss)
|
(11,965
|
)
|
|
3,675
|
|
|
(15,640
|
)
|
|
(425.6
|
)%
|
|
|
|
|
|
|
|
|
Loss before income tax
|
$
|
(38,399
|
)
|
|
$
|
(41,236
|
)
|
|
$
|
2,837
|
|
|
(6.9
|
)%
|
N.M. – Not meaningful
Revenues from Golf Operations
Revenues from golf operations increased by
$22.9 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to increases of: (i) $22.1 million due to management contract reimbursements reported on a gross basis under the new revenue standard adopted prospectively on January 1, 2018, (ii) $6.6 million of improvements in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017 including growth in members and in rounds played, and (iii) $2.2 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by a decrease of $7.9 million as a result of fewer Traditional Golf properties owned or operated in 2018.
Sales of Food and Beverages
Sales of food and beverages decreased by
$1.1 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to a decrease of $4.1 million as a result of fewer Traditional Golf properties owned or operated in 2018, partially offset by an increase of $2.7 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018 and a $0.3 million increase in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017
Operating Expenses
Operating expenses increased by
$19.0 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to increases of: (i) $22.1 million in management contract expenses reported under the new revenue standard adopted on January 1, 2018, (ii) $5.4 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by (iii) a decrease of $8.5 million due to fewer Traditional Golf properties owned or operated in 2018.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages decreased by
$0.8 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to a $1.4 million decrease in the Traditional Golf business for properties no longer owned or operated as of December 31, 2018, partially offset by $0.6 million of food and beverage costs incurred at our Entertainment Golf venue opened in Orlando, Florida in 2018.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by
$7.1 million
during
the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to payroll-related expenses in our Entertainment Golf and corporate segments as a result of the Internalization effective January 1, 2018.
Management Fee and Termination Payment to Affiliate
Management fee and termination payment to affiliate decreased by
$21.4 million
during
the year ended
December 31, 2018
compared to the year ended
December 31, 2017
due to the Internalization effective January 1, 2018.
Depreciation and Amortization
Depreciation and amortization decreased by
$4.6 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to discontinuation of depreciation on the Traditional Golf real estate assets classified as held-for-sale in March 2018, partially offset by depreciation on assets placed into service at our Entertainment Golf venue in Orlando, Florida.
Pre-Opening Costs
Pre-opening costs were
$2.5 million
during the year ended
December 31, 2018
compared to
$0.3 million
during the year ended
December 31, 2017
. Pre-opening costs in 2018 were primarily due to: (i) payroll-related expenses incurred in connection with the opening of our Entertainment Golf venue in Orlando, Florida in April 2018 and (ii) pre-opening rent expense for three additional Entertainment Golf venues under construction as of December 31. 2018.
Impairment
Impairment increased by
$8.2 million
during the year ended
December 31, 2018
compared to a loss during the year ended
December 31, 2017
. Impairment in 2018 consisted primarily of $7.0 million due to impairment on five Traditional Golf properties that were held-for-sale in March 2018 and on three under-performing Traditional Golf properties.
Realized and Unrealized (Gain) Loss on Investments
Realized and unrealized (gain) loss on investments increased by
$6.4 million
to a gain during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
. During the year ended
December 31, 2018
, we recorded a net realized gain on the mark-to-market value of derivatives. During the year ended
December 31, 2017
, we recorded a net realized loss of $0.4 million on the sale of agency RMBS, an unrealized loss of $0.6 million on the mark-to-market of agency RMBS, a realized loss of $4.7 million on the sale of derivatives and an unrealized loss of $0.7 million on the mark-to-market on the value of derivatives.
Interest and Investment Income
Interest and investment income decreased by
$21.4 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to decreases of: (i) $8.0 million in interest income earned from agency RMBS which were sold in August 2017, (ii) $5.5 million on the accretion of discount recognized on a resorts-related loan, (iii) $8.5 million of paid-in-kind interest earned on a resorts-related loan due to the full repayment in August 2017, partially offset by (iii) $0.6 million in interest earned on overnight cash deposits.
Interest Expense, net
Interest expense, net decreased by
$2.9 million
during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
primarily due to a decrease in interest expense related to repurchase agreements on agency RMBS which were repaid in August 2017.
Other Income, Net
Other income, net increased by
$2.8 million
from $0.1 million for the year ended
December 31, 2017
to $2.9 million for the year ended
December 31, 2018
primarily due to:
(i) a $9.0 million increase primarily due to gain on sales of long-lived assets and intangibles partially offset by (ii) $0.8 million in higher losses on Traditional Golf lease modifications and terminations, (iii) $1.2 million in higher losses on debt extinguishment and (iii) $4.3 million of higher losses primarily due to the settlement of a legal dispute and related discharge of liabilities assumed by the counterparty to the settlement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Results of Operations for the years ended December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
Golf operations
|
$
|
221,737
|
|
|
$
|
226,255
|
|
|
$
|
(4,518
|
)
|
|
(2.0
|
)%
|
Sales of food and beverages
|
70,857
|
|
|
72,625
|
|
|
(1,768
|
)
|
|
(2.4
|
)%
|
Total revenues
|
292,594
|
|
|
298,880
|
|
|
(6,286
|
)
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses
|
232,796
|
|
|
239,021
|
|
|
(6,225
|
)
|
|
(2.6
|
)%
|
Cost of sales - food and beverages
|
20,959
|
|
|
21,593
|
|
|
(634
|
)
|
|
(2.9
|
)%
|
General and administrative expense
|
31,413
|
|
|
29,174
|
|
|
2,239
|
|
|
7.7
|
%
|
Management fee and termination payment to affiliate
|
21,410
|
|
|
10,704
|
|
|
10,706
|
|
|
100.0
|
%
|
Depreciation and amortization
|
24,304
|
|
|
26,496
|
|
|
(2,192
|
)
|
|
(8.3
|
)%
|
Pre-opening costs
|
320
|
|
|
—
|
|
|
320
|
|
|
N.M.
|
|
Impairment
|
60
|
|
|
10,381
|
|
|
(10,321
|
)
|
|
(99.4
|
)%
|
Realized and unrealized loss on investments
|
6,243
|
|
|
685
|
|
|
5,558
|
|
|
N.M
|
|
Total operating costs
|
337,505
|
|
|
338,054
|
|
|
(549
|
)
|
|
(0.2
|
)%
|
Operating loss
|
(44,911
|
)
|
|
(39,174
|
)
|
|
5,737
|
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
23,162
|
|
|
91,291
|
|
|
(68,129
|
)
|
|
(74.6
|
)%
|
Interest expense, net
|
(19,581
|
)
|
|
(52,868
|
)
|
|
(33,287
|
)
|
|
(63.0
|
)%
|
Gain on deconsolidation
|
—
|
|
|
82,130
|
|
|
(82,130
|
)
|
|
N.M.
|
|
Other income (loss), net
|
94
|
|
|
(3,854
|
)
|
|
(3,948
|
)
|
|
(102.4
|
)%
|
Total other income
|
3,675
|
|
|
116,699
|
|
|
(113,024
|
)
|
|
(96.9
|
)%
|
|
|
|
|
|
|
|
|
(Loss) income before income tax
|
$
|
(41,236
|
)
|
|
$
|
77,525
|
|
|
$
|
(118,761
|
)
|
|
(153.2
|
)%
|
N.M. – Not meaningful
Revenues from Golf Operations
Revenues from golf operations decreased by
$4.5 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to: (i) a $7.5 million decrease from properties that were exited in 2016 and (ii) a $3.3 million decrease in green fee and cart rental revenue primarily as a result of unfavorable weather conditions, especially in California, partially offset by (iii) a $4.0 million increase due to additional initiation fees from new member sales and higher membership dues rates and (iv) a $2.3 million increase in net driving range revenues at public golf properties as a result of the continued member growth of The Players Club program.
Sales of Food and Beverages
Sales of food and beverages decreased by
$1.8 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily
due to a decrease from properties that were exited in 2016.
Operating Expenses
Operating expenses decreased by
$6.2 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to: (i) a $9.0 million decrease from properties that were exited in 2016, partially offset by (ii) a $2.2 million increase in course cleanup, repairs and maintenance primarily due to hurricane-related damage and (iii) a $0.4 million increase in legal costs.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages decreased by
$0.6 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to a decrease from properties that were exited in 2016.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by
$2.2 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to an increase of $5.7 million related to the development of the Entertainment Golf business, offset by decreases of $2.2 million in corporate professional fees and $0.7 million in Traditional Golf transaction expenses.
Management Fee and Termination Payment to Affiliate
Management fee and termination payment to affiliate increased
$10.7 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
due to the payment in connection with the termination of the Management Agreement.
Depreciation and Amortization
Depreciation and amortization expense decreased by
$2.2 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to certain assets being fully depreciated in 2016 from scheduled lease expirations partially offset by an increase in depreciation from additional capital leases.
Impairment
The impairment of
$0.1 million
during the year ended
December 31, 2017
is due to valuation allowance recorded on a residential mortgage loan. The impairment of
$10.4 million
during the year ended
December 31, 2016
is primarily due to: (i) a $3.9 million valuation allowance on a corporate loan, (ii) a $0.2 million valuation allowance on two residential mortgage loans, (iii) a $0.1 million other-than-temporary impairment charge on a CMBS security, (iv) a $3.6 million impairment on one golf property when we reclassified the property to held-for-sale and (v) a $2.6 million impairment charge related to two golf properties.
Realized and Unrealized (Gain) Loss on Investments
The realized and unrealized (gain) loss on investments increased by
$5.6 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
. During the year ended
December 31, 2017
, we recorded: (i) a net realized loss of $0.4 million on the sale of Agency RMBS, (ii) an unrealized loss of $0.6 million on the mark-to-market value of Agency RMBS, (iii) a realized loss of $4.6 million on the settlement of derivatives and (iv) an unrealized loss of $0.6 million on the mark-to-market value of derivatives. During the year ended
December 31, 2016
, we recorded: (i) an $8.3 million loss on the sale of Agency RMBS, (ii)
a $10.7 million gain on the sale of CDO bonds, (iii) a $0.5 million gain on non-Agency RMBS, (iv) an $18.3 million gain associated with the settlement of derivatives, (v) a $1.2 million unrealized gain associated with derivatives and (vi) a $23.1 million unrealized loss on Agency RMBS due to a change to an intent to sell.
Interest and Investment Income
Interest and investment income decreased by
$68.1 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to: (i) a $33.2 million decrease related to our subprime mortgage loan call option, which was sold in the fourth quarter of 2016, (ii) a $20.5 million decrease of PIK interest earned on a resorts-related loan as a result of a pay down in the third quarter of 2016 and final pay down in the third quarter of 2017, (iii) a $5.0 million decrease on the accretion of discount recognized on a resorts-related loan and (iv) a $10.2 million decrease in real estate securities and loans, offset by an increase of $0.8 million in corporate bank interest.
Interest Expense, Net
Interest expense, net decreased by
$33.3 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
primarily due to: (i) a $33.2 million decrease related to our subprime mortgage loan call option which was sold in the fourth quarter of 2016, (ii) a $1.7 million decrease due to lower average balance of repurchase agreements on agency RMBS, (iii) a $0.6
million decrease as a result of a lower weighted average coupon on the junior subordinated notes payable, offset by (iv) an increase of $2.2 million on the financings related to the Traditional Golf business.
Gain on Deconsolidation
The gain on deconsolidation of
$82.1 million
during the year ended
December 31, 2016
is related to the deconsolidation of CDO VI. There were no deconsolidations during the year ended December 31, 2017.
Other Income (Loss), Net
Other income (loss), net increased by
$3.9 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
due in part to: (i) a $2.9 million writedown on our equity method investment during the year ended December 31, 2016; (ii) a decrease of $0.9 million in disposal related expenses in the Traditional Golf business during the year ended December 31, 2017 as compared to the year ended December 31, 2016 and (iii) a $0.5 million decrease in loss on extinguishment of debt due to fewer write-offs of Traditional Golf liabilities; partially offset by decreases in collateral management fee income and decreases from the disposal of legacy assets.
Liquidity and Capital Resources
Overview
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings and fund capital for our Entertainment and Traditional Golf businesses and other general business needs.
Our primary sources of funds for liquidity consist of cash on hand, sales or repayments of assets (including sales of our owned golf properties), and potential issuance of new debt or equity securities, when feasible. We have the ability to publicly or privately issue common stock, preferred stock, depository shares, debt securities and warrants, subject to market and other conditions.
Sources of Liquidity and Uses of Capital
As of the date of this filing, we believe we have sufficient assets, which include unrestricted cash, to satisfy all of our short-term recourse liabilities. Our junior subordinated notes payable are long-term obligations. With respect to the next 12 months, we expect that our cash on hand combined with our other primary sources of funds for liquidity will be sufficient to satisfy our anticipated liquidity needs with respect to our current portfolio, including related financings, capital expenditures for our Entertainment and Traditional Golf businesses, working capital needs and operating expenses. However, we may have additional cash requirements with respect to executing our strategic objectives for our Entertainment Golf business and incremental investments related to our Traditional Golf business. In addition to our available cash, we may elect to meet the cash requirements of these incremental investments through proceeds from the monetization of our assets or from additional borrowings, equity offerings or other means. While it is inherently more difficult to forecast beyond the next 12 months, we currently expect to meet our long-term liquidity requirements, specifically the repayment of our debt obligations and capital expenditures, through our cash on hand and, if needed, additional borrowings, proceeds from equity offerings and the sale or refinancing of our assets. We continually monitor market conditions for financing opportunities, and at any given time, we may enter into or pursue one or more of the transactions described above.
These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions, which are described below under “–Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations” as well as Part I, Item 1A. “Risk Factors.” If our assumptions about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.
Cash flows provided by operations constitute a critical component of our liquidity. Essentially, our cash flows provided by operations is equal to (i) net cash flows received from our Entertainment and Traditional Golf businesses, plus (ii) the net cash flows from our security investments, including principal and sales proceeds, less (iii) Entertainment Golf and Traditional Golf operating expenses, management fees, professional fees, insurance and other expenses, less (iv) employee wage and benefit expenses, less (v) interest on the junior subordinated notes payable and less (vi) preferred dividends.
Our cash flows provided by operations differs from our net income (loss) due to these primary factors: (i) accretion of discount on our real estate securities and loans (including the accrual of interest payable at maturity) and deferred financing costs, (ii) amortization of favorable and unfavorable leasehold intangibles from the acquisition of the Traditional Golf business in December 2013, (iii) accretion of the golf membership deposit liabilities in interest expense, (iv) recognition of deferred revenue from initiation fee deposits, (v) amortization of prepaid golf membership dues, (vi) gains and losses from sales of assets, (vii) other-than-temporary impairment on our investments, as well as impairments of Traditional Golf properties, (viii) unrealized gains or losses on our investments, (ix) non-cash gains or losses associated with our early extinguishment of debt, (x) non-cash gains on deconsolidation, and (xi) depreciation and amortization on our assets.
The sources of our distributions are net cash provided by operating activities, net cash provided by investing activities and cash equivalents as they represent the return on our real estate debt investments and golf-related real estate and operations. The Company has paid preferred dividends of
$5.6 million
in fiscal year 2018 and our board of directors elected not to declare common stock dividends for fiscal year 2018 to retain capital for growth. For the year ended
December 31, 2018
, the Company reported net cash used in operating activities of
$7.2 million
, net cash provided by investing activities of
$25.9 million
, net cash used in financing activities of
$109.6 million
and cash and cash equivalents of
$79.2 million
as of
December 31, 2018
. As a result of our revocation of REIT election, effective January 1, 2017, we are no longer subject to the distribution requirements applicable to REITs. The timing and amount of distributions are in the sole discretion of our board of directors, which considers our earnings, financial performance and condition, debt service obligations and applicable debt covenants, tax considerations, as well as capital expenditure requirements, business prospects and other factors that our board of directors may deem relevant from time to time.
Update on Liquidity, Capital Resources and Capital Obligations
Cash
– As of
December 31, 2018
, we had
$79.2 million
of available cash, including $16.9 million of working capital for the Traditional Golf business. On November 7, 2018, we declared a quarterly preferred dividend of $1.4 million which was paid on January 31, 2019.
Short-term liquidity requirements
- As of
December 31, 2018
, we expect our short-term liquidity requirements to include a total of approximately $75.0 to $85.0 million for both our Drive Shack venues and Traditional Golf properties.
Our liquidity, available capital resources and capital obligations could change rapidly due to a variety of factors, many of which are beyond our control. Set forth below is a discussion of some of the factors that could impact our liquidity, available capital resources and capital obligations.
Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations
We refer readers to our discussions in other sections of this report for the following information:
|
|
•
|
For a further discussion of recent trends and events affecting our liquidity, see “– Market Considerations” above;
|
|
|
•
|
As described above, under “– Sources of Liquidity and Uses of Capital,” we may be subject to capital obligations associated with our Entertainment and Traditional Golf businesses;
|
|
|
•
|
Our debt obligations are also subject to refinancing risk upon the maturity of the related debt. See “– Debt Obligations” below; and
|
|
|
•
|
For a further discussion of a number of risks that could affect our liquidity, access to capital resources and our capital obligations, see Part I, Item 1A. “Risk Factors” above.
|
In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and our capital obligations related to our Entertainment and Traditional Golf businesses. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively affect our liquidity.
|
|
•
|
Access to Financing from Counterparties
– Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit and derivative arrangements, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities.
|
|
|
•
|
Impact of Expected Repayment or Forecasted Sale on Cash Flows –
The timing of and proceeds from the sale of certain assets may be different than expected or may not occur as expected. Proceeds from sales of assets in the current illiquid market environment are unpredictable and may vary materially from their estimated fair value and their carrying value.
|
|
|
•
|
Impact of Unexpected Costs, Cost Increases and Delayed Opening of our Entertainment Golf Venues on Cash Flows –
There may be unforeseen or higher than expected construction and development costs and the opening of new venues may be later than expected. These additional expenses and timing of opening may vary materially from our estimates.
|
|
|
•
|
Performance of the Entertainment and Traditional Golf businesses
- Current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions and can fluctuate significantly from quarter to quarter as a result of seasonal factors and discretionary consumer spending. We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or wage rate increases are expected to be partially offset by selected price increases where competitively appropriate.
|
Debt Obligations
See Note 7 in Part II, Item 8. “Financial Statements and Supplementary Data” for further information related to our debt obligations and contractual maturities as of
December 31, 2018
.
Subordinated Notes Payable
The following table presents certain information regarding the junior subordinated notes (dollars in thousands).
|
|
|
|
|
|
Outstanding face amount
|
|
$51,004
|
|
|
Weighted average coupon
|
LIBOR + 2.25%
|
|
|
Maturity
|
April 2035
|
|
|
Collateral
|
General credit of Drive Shack Inc.
|
|
|
Traditional Golf Credit Facilities
See Note 7 in Part II, Item 8. “Financial Statements and Supplementary Data” for information about our Traditional Golf credit facilities.
Equity
Common Stock
See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for information on shares of our common stock issued since 2016.
Common Dividends Paid
|
|
|
|
|
|
Declared for the Period Ended
|
|
Paid
|
|
Amount Per Share
|
March 31, 2016
|
|
April 2016
|
|
$0.12
|
June 30, 2016
|
|
July 2016
|
|
$0.12
|
September 30, 2016
|
|
October 2016
|
|
$0.12
|
December 31, 2016
|
|
January 2017
|
|
$0.12
|
Our board of directors elected not to declare common stock dividends for 2017 and 2018 to retain capital for growth. See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for detailed information on our options, restricted stock units or RSUs outstanding and option plans.
Preferred Stock
To the extent we have unpaid accrued dividends on our preferred stock, we cannot pay any dividends on our common shares, pay any consideration to repurchase or otherwise acquire stock of our common stock or redeem any stock of any series of our preferred stock without redeeming all of our outstanding preferred stock in accordance with the governing documentation. Moreover, if we do not pay dividends on any series of preferred stock for six or more periods, then holders of each affected series obtain the right to call a special meeting and elect two members to our board of directors. Consequently, if we do not make a dividend payment on our preferred stock for six or more quarterly periods, it could restrict the actions that we may take with respect to our common stock and preferred stock and could affect the composition of our board of directors and, thus, the management of our business. No assurance can be given that we will pay any dividends on any series of our preferred stock in the future.
All accrued dividends on our preferred stock have been paid through January 31, 2019.
See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for additional information on our preferred stock.
Noncontrolling Interest
Noncontrolling interest represents the equity interest in certain consolidated subsidiaries not owned by us. Noncontrolling interest is reported as a component of equity. In addition, changes in the Company’s ownership interest while we retain its controlling interest are accounted for as equity transactions, and, upon a gain or loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. Our noncontrolling interest associated with a Traditional Golf property has a carrying value of zero.
Accumulated Other Comprehensive Income
Our accumulated other comprehensive income changes as our real estate security is marked to market each quarter. Net unrealized gains on our real estate security increased during the
year ended December 31, 2018
in accumulated other comprehensive income primarily due to higher variable interest rates and an increase in the prepayment speed assumption.
See “– Market Considerations” above for a further discussion of recent trends and events affecting our unrealized gains and losses as well as our liquidity.
Cash Flow
Operating Activities
Net cash flow (used in) provided by operating activities changed from
$(12.4) million
for the year ended
December 31, 2017
to
$(7.2) million
for the year ended
December 31, 2018
. It changed from
$9.4 million
for the year ended
December 31, 2016
to
$(12.4) million
for the year ended
December 31, 2017
. These changes resulted primarily from the factors described below:
2018
compared to
2017
|
|
•
|
Operating cash flows increased by:
|
|
|
◦
|
$18.7 million due to lower management fees paid during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, as a result of the Internalization;
|
|
|
◦
|
$4.1 million due to lower general and professional fees paid during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
;
|
|
|
◦
|
$1.7 million due to lower income taxes paid during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
; and
|
|
|
◦
|
$0.6 million due to higher interest earned on overnight cash deposits.
|
|
|
•
|
Operating cash flows decreased by:
|
|
|
◦
|
$5.0 million in lower operating cash flows from Traditional Golf, primarily related to the legal dispute settled in July 2018;
|
|
|
◦
|
$7.5 million of payroll costs primarily due to the Internalization and increased employee hiring associated with the Entertainment Golf business;
|
|
|
◦
|
$0.1 million due to cash flows from operations from the first Entertainment Golf venue in Orlando; and
|
|
|
◦
|
$7.9 million in lower net interest proceeds primarily due to the sale of agency RMBS in August 2017.
|
2017
compared to
2016
|
|
•
|
Operating cash flows increased by:
|
|
|
◦
|
$8.6 million in our Traditional Golf business primarily as a result of higher participation in The Players Club program at public golf properties and improving margins on golf operations;
|
|
|
◦
|
$1.0 million due to savings in interest paid as a result of lower average coupon rates associated with our junior subordinated notes payable for the
year ended December 31, 2017
compared to the
year ended December 31, 2016
; and
|
|
|
◦
|
$4.1 million due to savings in corporate professional fees.
|
|
|
•
|
Operating cash flows decreased by:
|
|
|
◦
|
$8.5 million of higher costs associated with the development of the Entertainment Golf business;
|
|
|
◦
|
$7.3 million of lower interest and other fees collected due to the sale of real estate securities;
|
|
|
◦
|
$1.7 million in estimated federal tax payments for fiscal year 2017 as the Company revoked its election to be treated as a REIT effective January 1, 2017; and
|
|
|
◦
|
$10.7 million of higher payments primarily due to the termination of the Management Agreement.
|
Investing Activities
Investing activities provided
$25.9 million
, provided
$656.6 million
, and used
$150.3 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively. Uses of cash flows from investing activities consisted primarily of the investments made in Entertainment Golf venues, Traditional Golf properties, real estate securities and payments for settlement of derivatives. Proceeds
from cash flows from investing activities consisted primarily of sale of investments, repayments from loans and securities, settlement of derivatives and sales of property and equipment.
Financing Activities
Financing activities used
$109.6 million
, used
$617.0 million
, and provided
$237.4 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively. Proceeds from cash flow from financing consisted primarily of borrowings under debt obligations, the return of margin deposits under repurchase agreements and derivatives, and deposits received on golf memberships. Uses of cash flow from financing activities included the repayment of debt obligations, deposits made on margin calls related to our repurchase agreements and derivatives, and the payment of financing costs, the payment of common and preferred dividends.
See the Consolidated Statements of Cash Flows in our Consolidated Financial Statements included in “Financial Statements and Supplementary Data” for a reconciliation of our cash position for the periods described herein.
Off-Balance Sheet Arrangements
As of
December 31, 2018
, we had the following material off-balance sheet arrangements. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets.
|
|
•
|
In April 2006, we securitized Subprime Portfolio I. The loans were sold to a securitization trust, of which 80% were treated as a sale, which is an off-balance sheet financing.
|
|
|
•
|
In July 2007, we securitized Subprime Portfolio II. The loans were sold to a securitization trust, of which 90% were treated as a sale, which is an off-balance sheet financing.
|
We have no obligation to repurchase any loans from either of our subprime securitizations. Therefore, it is expected that our exposure to loss is limited to the carrying amount of our retained interests in the securitization entities, in the amount of
$3.0 million
as of December 31, 2018. A subsidiary of ours gave limited representations and warranties with respect to the second securitization; however, it has no assets and does not have recourse to the general credit of the Company.
Contractual Obligations
As of
December 31, 2018
, we had the following material contractual obligations (payments in thousands):
|
|
|
Contract
|
Terms
|
Capital Leases - Equipment
|
Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
Junior Subordinated Notes Payable
|
Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
Operating Leases, Traditional Golf
|
Described under Notes 2 and 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
Membership Deposit Liabilities
|
Described under Notes 2 and 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
Operating Leases, Entertainment Golf
|
Described under Note 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
Credit Facilities, Traditional Golf
|
Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed and Determinable Payments Due by Period
|
Contract
|
|
2019
|
|
2020-2021
|
|
2022-2023
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases - Equipment
(A)
|
|
6,401
|
|
|
8,707
|
|
|
2,532
|
|
|
6
|
|
|
17,646
|
|
Junior subordinated notes payable
(A)
|
|
2,433
|
|
|
4,866
|
|
|
4,866
|
|
|
78,579
|
|
|
90,744
|
|
Operating lease obligations - Traditional Golf
(B)
|
|
29,379
|
|
|
51,524
|
|
|
41,652
|
|
|
127,298
|
|
|
249,853
|
|
Membership deposit liabilities
(C)
|
|
8,873
|
|
|
6,039
|
|
|
8,329
|
|
|
222,876
|
|
|
246,117
|
|
Operating lease obligations - Entertainment Golf
(D)
|
|
576
|
|
|
3,194
|
|
|
4,935
|
|
|
44,350
|
|
|
53,055
|
|
Credit facilities, Traditional Golf
(A)
|
|
5
|
|
|
9
|
|
|
9
|
|
|
294
|
|
|
317
|
|
Total
|
|
$
|
47,667
|
|
|
$
|
74,339
|
|
|
$
|
62,323
|
|
|
$
|
473,403
|
|
|
$
|
657,732
|
|
|
|
(A)
|
Includes interest based on rates existing at
December 31, 2018
and assumes no prepayments. Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity dates.
|
|
|
(B)
|
Includes leases of golf courses and related facilities, carts and equipment. Excludes escalation charges which per our lease agreements are not fixed and determinable payments. Also excludes four month-to-month property leases which are cancellable by the parties with 30 days written notice and various month-to-month operating leases for carts and equipment. The aggregate monthly expense of these leases was $0.4 million.
|
|
|
(C)
|
Amounts represent gross initiation fee deposits refundable 30 years after the date of acceptance of a member.
|
|
|
(D)
|
Includes primarily ground leases for Entertainment Golf venue development.
|
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm.
Report on Internal Control Over Financial Reporting of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of
December 31, 2018
and
December 31, 2017
.
Consolidated Statements of Operations for the years ended
December 31, 2018
,
2017
and
2016
.
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2018
,
2017
and
2016
.
Consolidated Statements of Equity for the years ended
December 31, 2018
,
2017
and
2016
.
Consolidated Statements of Cash Flows for the years ended
December 31, 2018
,
2017
and
2016
.
Notes to Consolidated Financial Statements.
All schedules have been omitted because either the required information is included in our Consolidated Financial Statements and notes thereto or it is not applicable.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Drive Shack Inc. and Subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.
New York, New York
March 15, 2019
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Drive Shack Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Drive Shack Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated March 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
March 15, 2019
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(
dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Assets
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
79,235
|
|
|
$
|
167,692
|
|
Restricted cash
|
3,326
|
|
|
5,178
|
|
Accounts receivable, net
|
7,518
|
|
|
8,780
|
|
Real estate assets, held-for-sale, net
|
75,862
|
|
|
2,000
|
|
Real estate securities, available-for-sale
|
2,953
|
|
|
2,294
|
|
Other current assets
|
20,505
|
|
|
21,568
|
|
Total Current Assets
|
189,399
|
|
|
207,512
|
|
Restricted cash, noncurrent
|
258
|
|
|
818
|
|
Property and equipment, net of accumulated depreciation
|
132,605
|
|
|
241,258
|
|
Intangibles, net of accumulated amortization
|
48,388
|
|
|
57,276
|
|
Other investments
|
22,613
|
|
|
21,135
|
|
Other assets
|
8,684
|
|
|
8,649
|
|
Total Assets
|
$
|
401,947
|
|
|
$
|
536,648
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Current Liabilities
|
|
|
|
Obligations under capital leases
|
$
|
5,489
|
|
|
$
|
4,652
|
|
Membership deposit liabilities
|
8,861
|
|
|
8,733
|
|
Accounts payable and accrued expenses
|
45,284
|
|
|
36,797
|
|
Deferred revenue
|
18,793
|
|
|
31,207
|
|
Real estate liabilities, held-for-sale
|
2,947
|
|
|
—
|
|
Other current liabilities
|
22,285
|
|
|
22,596
|
|
Total Current Liabilities
|
103,659
|
|
|
103,985
|
|
Credit facilities and obligations under capital leases
|
10,489
|
|
|
112,105
|
|
Junior subordinated notes payable
|
51,200
|
|
|
51,208
|
|
Membership deposit liabilities, noncurrent
|
90,684
|
|
|
86,523
|
|
Deferred revenue, noncurrent
|
6,016
|
|
|
6,930
|
|
Other liabilities
|
5,232
|
|
|
4,846
|
|
Total Liabilities
|
$
|
267,280
|
|
|
$
|
365,597
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized,
1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock,
496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and
620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of December 31, 2018 and 2017
|
$
|
61,583
|
|
|
$
|
61,583
|
|
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,027,104 and 66,977,104 shares issued and outstanding at December 31, 2018 and 2017, respectively
|
670
|
|
|
670
|
|
Additional paid-in capital
|
3,175,843
|
|
|
3,173,281
|
|
Accumulated deficit
|
(3,105,307
|
)
|
|
(3,065,853
|
)
|
Accumulated other comprehensive income
|
1,878
|
|
|
1,370
|
|
Total Equity
|
$
|
134,667
|
|
|
$
|
171,051
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
401,947
|
|
|
$
|
536,648
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
Golf operations
|
$
|
244,646
|
|
|
$
|
221,737
|
|
|
$
|
226,255
|
|
Sales of food and beverages
|
69,723
|
|
|
70,857
|
|
|
72,625
|
|
Total revenues
|
314,369
|
|
|
292,594
|
|
|
298,880
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
Operating expenses
|
251,794
|
|
|
232,796
|
|
|
239,021
|
|
Cost of sales - food and beverages
|
20,153
|
|
|
20,959
|
|
|
21,593
|
|
General and administrative expense
|
38,560
|
|
|
31,413
|
|
|
29,174
|
|
Management fee and termination payment to affiliate
|
—
|
|
|
21,410
|
|
|
10,704
|
|
Depreciation and amortization
|
19,704
|
|
|
24,304
|
|
|
26,496
|
|
Pre-opening costs
|
2,483
|
|
|
320
|
|
|
—
|
|
Impairment
|
8,240
|
|
|
60
|
|
|
10,381
|
|
Realized and unrealized (gain) loss on investments
|
(131
|
)
|
|
6,243
|
|
|
685
|
|
Total operating costs
|
340,803
|
|
|
337,505
|
|
|
338,054
|
|
Operating loss
|
(26,434
|
)
|
|
(44,911
|
)
|
|
(39,174
|
)
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
Interest and investment income
|
1,794
|
|
|
23,162
|
|
|
91,291
|
|
Interest expense, net
|
(16,639
|
)
|
|
(19,581
|
)
|
|
(52,868
|
)
|
Gain on deconsolidation
|
—
|
|
|
—
|
|
|
82,130
|
|
Other income (loss), net
|
2,880
|
|
|
94
|
|
|
(3,854
|
)
|
Total other income (loss)
|
(11,965
|
)
|
|
3,675
|
|
|
116,699
|
|
(Loss) Income before income tax
|
(38,399
|
)
|
|
(41,236
|
)
|
|
77,525
|
|
Income tax expense
|
284
|
|
|
965
|
|
|
189
|
|
Net (Loss) Income
|
(38,683
|
)
|
|
(42,201
|
)
|
|
77,336
|
|
Preferred dividends
|
(5,580
|
)
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Net (income) attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
(257
|
)
|
(Loss) Income Applicable To Common Stockholders
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
|
$
|
71,499
|
|
|
|
|
|
|
|
(Loss) Income Applicable to Common Stock, per share
|
|
|
|
|
|
Basic
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.07
|
|
Diluted
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.04
|
|
|
|
|
|
|
|
Weighted Average Number of Shares of Common Stock Outstanding
|
|
|
|
|
|
Basic
|
66,993,543
|
|
|
66,903,457
|
|
|
66,709,925
|
|
Diluted
|
66,993,543
|
|
|
66,903,457
|
|
|
68,788,440
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net (loss) income
|
$
|
(38,683
|
)
|
|
$
|
(42,201
|
)
|
|
$
|
77,336
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Net unrealized gain (loss) on available-for-sale securities
|
508
|
|
|
2,547
|
|
|
(31,658
|
)
|
Reclassification of net realized (gain) loss on securities into earnings
|
—
|
|
|
(2,345
|
)
|
|
20,231
|
|
Reclassification of net realized gain on deconsolidation of CDO VI
|
—
|
|
|
—
|
|
|
(20,682
|
)
|
Reclassification of net realized gain on derivatives designated as cash flow hedges into earnings
|
—
|
|
|
—
|
|
|
(20
|
)
|
Other comprehensive income (loss)
|
508
|
|
|
202
|
|
|
(32,129
|
)
|
Total comprehensive (loss) income
|
$
|
(38,175
|
)
|
|
$
|
(41,999
|
)
|
|
$
|
45,207
|
|
Comprehensive (loss) income attributable to Drive Shack Inc. stockholders' equity
|
$
|
(38,175
|
)
|
|
$
|
(41,999
|
)
|
|
$
|
44,950
|
|
Comprehensive income attributable to noncontrolling interest
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drive Shack Inc. Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comp.
Income
(Loss)
|
|
Total Drive Shack Inc. Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid in
Capital
|
|
|
|
|
|
|
|
Total
Equity
(Deficit)
|
|
Preferred Stock
|
|
Common Stock
|
|
|
Accumulated
Deficit
|
|
|
|
Noncontrolling
Interest
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Equity (deficit) - December 31, 2015
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,654,598
|
|
|
$
|
667
|
|
|
$
|
3,172,370
|
|
|
$
|
(3,057,538
|
)
|
|
$
|
33,297
|
|
|
$
|
210,379
|
|
|
$
|
(257
|
)
|
|
210,122
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,613
|
)
|
|
—
|
|
|
(37,613
|
)
|
|
—
|
|
|
(37,613
|
)
|
Issuance of common stock
|
—
|
|
|
—
|
|
|
169,706
|
|
|
1
|
|
|
350
|
|
|
—
|
|
|
—
|
|
|
351
|
|
|
—
|
|
|
351
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,079
|
|
|
—
|
|
|
77,079
|
|
|
257
|
|
|
77,336
|
|
Deconsolidation of net unrealized gain on securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,682
|
)
|
|
(20,682
|
)
|
|
|
|
(20,682
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,447
|
)
|
|
(11,447
|
)
|
|
—
|
|
|
(11,447
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,950
|
|
|
257
|
|
|
45,207
|
|
Equity (deficit) - December 31, 2016
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,824,304
|
|
|
$
|
668
|
|
|
$
|
3,172,720
|
|
|
$
|
(3,018,072
|
)
|
|
$
|
1,168
|
|
|
$
|
218,067
|
|
|
$
|
—
|
|
|
$
|
218,067
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
Issuance of common stock
|
—
|
|
|
—
|
|
|
152,800
|
|
|
2
|
|
|
561
|
|
|
—
|
|
|
—
|
|
|
563
|
|
|
—
|
|
|
563
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,201
|
)
|
|
—
|
|
|
(42,201
|
)
|
|
—
|
|
|
(42,201
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
202
|
|
|
202
|
|
|
—
|
|
|
202
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,999
|
)
|
|
—
|
|
|
(41,999
|
)
|
Equity (deficit) - December 31, 2017
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,977,104
|
|
|
$
|
670
|
|
|
$
|
3,173,281
|
|
|
$
|
(3,065,853
|
)
|
|
$
|
1,370
|
|
|
$
|
171,051
|
|
|
$
|
—
|
|
|
$
|
171,051
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,252
|
|
|
—
|
|
|
—
|
|
|
2,252
|
|
|
—
|
|
|
2,252
|
|
Purchase of common stock (directors)
|
—
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
310
|
|
|
—
|
|
|
—
|
|
|
310
|
|
|
—
|
|
|
310
|
|
Adoption of ASC 606 (Note 3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,809
|
|
|
—
|
|
|
4,809
|
|
|
—
|
|
|
4,809
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38,683
|
)
|
|
—
|
|
|
(38,683
|
)
|
|
—
|
|
|
(38,683
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
508
|
|
|
508
|
|
|
—
|
|
|
508
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,175
|
)
|
|
—
|
|
|
(38,175
|
)
|
Equity (deficit) - December 31, 2018
|
2,463,321
|
|
|
$
|
61,583
|
|
|
67,027,104
|
|
|
$
|
670
|
|
|
$
|
3,175,843
|
|
|
$
|
(3,105,307
|
)
|
|
$
|
1,878
|
|
|
$
|
134,667
|
|
|
$
|
—
|
|
|
$
|
134,667
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cash Flows From Operating Activities
|
|
|
|
|
|
Net (loss) income
|
$
|
(38,683
|
)
|
|
$
|
(42,201
|
)
|
|
$
|
77,336
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
19,704
|
|
|
24,304
|
|
|
26,496
|
|
Amortization of discount and premium
|
1,159
|
|
|
(3,457
|
)
|
|
(6,445
|
)
|
Other amortization
|
10,965
|
|
|
10,564
|
|
|
10,254
|
|
Net interest income on investments accrued to principal balance
|
—
|
|
|
(8,458
|
)
|
|
(28,886
|
)
|
Amortization of revenue on golf membership deposit liabilities
|
(1,549
|
)
|
|
(1,264
|
)
|
|
(884
|
)
|
Amortization of prepaid golf member dues
|
(26,545
|
)
|
|
(28,919
|
)
|
|
(28,902
|
)
|
Stock based compensation
|
2,304
|
|
|
563
|
|
|
351
|
|
Impairment
|
8,240
|
|
|
60
|
|
|
10,381
|
|
Equity in (earnings) loss from equity method investment, net of distributions
|
(1,471
|
)
|
|
(1,536
|
)
|
|
1,338
|
|
Gain on deconsolidation
|
—
|
|
|
—
|
|
|
(82,196
|
)
|
Other (gains) losses, net
|
(9,651
|
)
|
|
5,429
|
|
|
(20,629
|
)
|
Realized and unrealized (gain) loss on investments
|
(131
|
)
|
|
1,128
|
|
|
21,906
|
|
Loss on extinguishment of debt, net
|
1,542
|
|
|
294
|
|
|
780
|
|
Change in:
|
|
|
|
|
|
Accounts receivable, net, other current assets and other assets - noncurrent
|
3,075
|
|
|
(2,159
|
)
|
|
595
|
|
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
|
23,839
|
|
|
33,277
|
|
|
27,868
|
|
Net cash (used in) provided by operating activities
|
(7,202
|
)
|
|
(12,375
|
)
|
|
9,363
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
Principal repayments from investments
|
—
|
|
|
100,020
|
|
|
152,769
|
|
Proceeds from sale of property and equipment
|
78,888
|
|
|
—
|
|
|
—
|
|
Purchase of real estate securities
|
—
|
|
|
—
|
|
|
(3,086,654
|
)
|
Proceeds from sale of securities and loans
|
—
|
|
|
595,850
|
|
|
2,777,808
|
|
Net (payments for) proceeds from settlement of TBAs
|
—
|
|
|
(4,669
|
)
|
|
18,318
|
|
Acquisition and additions of property and equipment and intangibles
|
(62,352
|
)
|
|
(34,292
|
)
|
|
(12,571
|
)
|
Deposits paid on property and equipment
|
|
|
|
—
|
|
|
—
|
|
Deposits received on real estate held-for-sale
|
9,400
|
|
|
—
|
|
|
—
|
|
Contributions to equity method investment
|
(7
|
)
|
|
(343
|
)
|
|
—
|
|
Net cash provided by (used in) investing activities
|
25,929
|
|
|
656,566
|
|
|
(150,330
|
)
|
Continued on next page.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cash Flows From Financing Activities
|
|
|
|
|
|
Borrowings under debt obligations
|
—
|
|
|
1,651
|
|
|
3,068,280
|
|
Repayments of debt obligations
|
(107,790
|
)
|
|
(606,568
|
)
|
|
(2,790,931
|
)
|
Margin deposits under repurchase agreements and derivatives
|
—
|
|
|
(89,692
|
)
|
|
(135,758
|
)
|
Return of margin deposits under repurchase agreements and derivatives
|
—
|
|
|
87,785
|
|
|
133,991
|
|
Golf membership deposits received
|
3,143
|
|
|
3,431
|
|
|
3,865
|
|
Issuance of common stock
|
258
|
|
|
—
|
|
|
—
|
|
Common stock dividends paid
|
—
|
|
|
(8,019
|
)
|
|
(32,011
|
)
|
Preferred stock dividends paid
|
(5,580
|
)
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Payment of deferred financing costs
|
—
|
|
|
(22
|
)
|
|
(4,248
|
)
|
Proceeds from settlement of derivative instruments
|
417
|
|
|
—
|
|
|
—
|
|
Other financing activities
|
(44
|
)
|
|
(33
|
)
|
|
(217
|
)
|
Net cash (used in) provided by financing activities
|
(109,596
|
)
|
|
(617,047
|
)
|
|
237,391
|
|
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
|
(90,869
|
)
|
|
27,144
|
|
|
96,424
|
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
|
173,688
|
|
|
146,544
|
|
|
50,120
|
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
|
$
|
82,819
|
|
|
$
|
173,688
|
|
|
$
|
146,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid during the period for interest expense
|
$
|
10,607
|
|
|
$
|
12,414
|
|
|
$
|
12,316
|
|
Cash paid during the period for income taxes
|
$
|
225
|
|
|
$
|
1,700
|
|
|
$
|
386
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
Common stock dividends declared but not paid
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,019
|
|
Preferred stock dividends declared but not paid
|
$
|
930
|
|
|
$
|
930
|
|
|
$
|
930
|
|
Financing costs accrued but not paid
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
Additions to capital lease assets and liabilities
|
$
|
4,442
|
|
|
$
|
4,265
|
|
|
$
|
8,240
|
|
Changes in property and equipment not yet paid for
|
$
|
3,174
|
|
|
$
|
8,557
|
|
|
$
|
—
|
|
Option exercise
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
410
|
|
Property and equipment sold but not settled
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
—
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
1. ORGANIZATION
Drive Shack Inc., which is referred to in this Annual Report on Form 10-K, together as Drive Shack Inc. or the Company, is a leading owner and operator of golf-related leisure and dining and entertainment businesses. The Company, a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
The Company's Entertainment Golf business opened its first venue in Orlando, Florida on April 7, 2018. The Company expects to open a chain of next-generation Entertainment Golf venues across the United States and internationally which combine golf, competition, dining and fun. The Company's Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of
December 31, 2018
, the Company owned, leased or managed
66
properties across
11
states. The corporate segment consists primarily of investments in loans and securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Basis of Accounting —
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles or GAAP. The Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company consolidates those entities in which it has an investment of
50%
or more and has control over significant operating, financial and investing decisions of the entity.
For entities over which the Company exercises significant influence, but which do not meet the requirements for consolidation, the Company uses the equity method of accounting whereby it records its share of the underlying income of such entities.
Noncontrolling interest represents the equity interest in certain consolidated subsidiaries not owned by the Company. This is related to our Traditional Golf business, a portion of which the Company does not own. In October 2016, the Company exited certain golf properties in which the Company had a noncontrolling interest. The noncontrolling interest associated with the remaining golf property has a carrying value of
zero
. See Note 11 for additional information.
Prior Period Reclassifications —
Certain prior period amounts have been reclassified to conform to the current period's presentation. Effective January 1, 2018, the Company internalized management (as discussed in Note 12) and records corporate overhead, including corporate payroll and related expenses, in "General and administrative expense" on the Consolidated Statements of Operations. Prior to January 1, 2018, the Company reported corporate overhead, including corporate payroll and related expenses, related to the Traditional Golf business in "Operating expenses" on the Consolidated Statements of Operations. The Company reclassified
$14.8 million
and
$15.3 million
from "Operating expenses" to "General and administrative expense" for the years ended
December 31, 2017
and
2016
, respectively.
The Company adopted ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
effective January 1, 2018, which requires retrospective adjustment to all periods. For the years ended
December 31, 2017
and
2016
, the adjustment resulted in an increase of
$0.8 million
and
$0.7 million
in “Other financing activities”, respectively, and a decrease of
$0.8 million
and
$0.7 million
, respectively, in “Change in Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent.”
The Company adopted ASU 2016-18
Statement of Cash Flows (Topic 230), Restricted Cash
effective January 1, 2018, which requires retrospective adjustment to all periods. The addition of the reconciliation of restricted cash for the years ended
December 31, 2016
included an increase of
$4.3 million
in "Margin deposits under repurchase agreements and derivatives", an increase of
$2.3 million
in “Principal repayments from investments”, a decrease of
$2.7 million
in “Repayment of debt obligations”, a decrease of
$0.1 million
in "Gain on deconsolidation" and a decrease of
$0.1 million
in "Other (gains) losses, net." There were no adjustments for the year ended December 31, 2017 related to the addition of the reconciliation of restricted cash.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Risks and Uncertainties —
We plan to develop and construct our Entertainment Golf business through long term land leases, land acquisition and redevelopment of existing golf courses and other similar customary real estate agreements. Developing new entertainment golf venues requires a significant amount of time and resources and poses a number of risks. Construction of new venues may result in cost overruns, delays or unanticipated expenses related to zoning or tax laws. We face competition for potential venue locations. Desirable venues may be unavailable or expensive, and the markets in which new venues are located may deteriorate over time. Additionally, the market potential of venues cannot be precisely determined, and our venues may face competition in new markets from unexpected sources. Constructed venues may not perform up to our expectations. For additional information, see Part I, Item 1A. “Risk Factors - Risk Related to Our Business.”
Use of Estimates —
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income
—
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company's purposes, comprehensive income represents primarily net income, as presented in the Consolidated Statements of Operations, adjusted for unrealized gains or losses on securities available-for-sale.
The following table summarizes the Company’s accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Net unrealized gain on securities
|
$
|
1,878
|
|
|
$
|
1,370
|
|
Accumulated other comprehensive income
|
$
|
1,878
|
|
|
$
|
1,370
|
|
REVENUE RECOGNITION
Golf Operations
Entertainment Golf
—
Revenue from bay play, events, and other operating activities (consisting primarily of instruction and merchandise sales) is generally recognized at a point in time which is at the time of sale, when services are rendered and collection is reasonably assured.
Revenue from general memberships is recognized at the time of sale. Dues from other membership programs are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less.
Traditional Golf
—
Revenue from green fees, cart rentals, merchandise sales and other operating activities (consisting primarily of range income, banquets and club amenities) is generally recognized at a point in time which is at the time of sale, when services are rendered and collection is reasonably assured.
Revenue from membership dues for private club members and The Players Club members is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less for private club members and the following month for The Players Club members. The membership dues are generally structured to cover the club operating costs and membership services.
Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable
30 years
after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be
seven years
. The determination of the estimated average expected life of an active membership is a significant judgment based on company-specific historical membership addition and attrition data. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a
30
-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Revenue from the reimbursement of certain operating costs incurred at the Company’s managed Traditional Golf properties is recognized at the time the associated operating costs are incurred as collection is reasonably assured per the terms of the management contracts and the repayment histories of the property owners.
Sales of Food and Beverages —
Revenue from food and beverage sales are recorded at the time of sale, net of discounts.
Real Estate Securities —
The Company invested in securities, including real estate related asset backed securities. Income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are subject to uncertainties and contingencies. Upon settlement of the sale of securities, the excess (or deficiency) of net proceeds over the net carrying value of such security was recognized as a gain (or loss) in the period of settlement.
Impairment of Securities —
The Company continually evaluates securities for impairment. Securities are considered to be other-than-temporarily impaired, for financial reporting purposes, whenever there has been a probable adverse change in the timing or amounts of expected cash flows. The evaluation of a security’s estimated cash flows includes the following, as applicable: (i) review of the credit of the issuer or the borrower, (ii) review of the credit rating of the security, (iii) review of the key terms of the security (iv) analysis of the effect of local, industry and broader economic factors, and (v) analysis of historical and anticipated trends in defaults and loss severities for similar securities. The Company must record a write-down if it has the intent to sell a given security in an unrealized loss position, or if it is more likely than not that it will be required to sell such a security. Upon determination of impairment, the Company records a direct write-down for securities based on the estimated fair value of the security or underlying collateral using a discounted cash flow analysis or based on an observable market value. Actual losses may differ from the Company’s estimates.
Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net
—
These items are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
(Gain) on settlement of real estate securities
|
$
|
—
|
|
|
$
|
(2,345
|
)
|
|
$
|
(19,129
|
)
|
Loss on settlement of real estate securities
|
—
|
|
|
2,803
|
|
|
16,178
|
|
Realized (gain) loss on settlement of non-hedge derivatives, net
|
(227
|
)
|
|
4,669
|
|
|
(18,318
|
)
|
(Gain) loss on settlement of loans held-for-sale
|
—
|
|
|
(12
|
)
|
|
48
|
|
Unrealized loss on securities, intent-to-sell
|
—
|
|
|
558
|
|
|
23,128
|
|
Unrealized loss (gain) on non-hedge derivative instruments
|
96
|
|
|
570
|
|
|
(1,222
|
)
|
Realized and unrealized loss (gain) on investments
|
$
|
(131
|
)
|
|
$
|
6,243
|
|
|
$
|
685
|
|
|
|
|
|
|
|
(Loss) on lease modifications and terminations
|
$
|
(939
|
)
|
|
$
|
(161
|
)
|
|
$
|
(62
|
)
|
(Loss) on extinguishment of debt, net
|
(1,542
|
)
|
|
(294
|
)
|
|
(780
|
)
|
Collateral management fee income, net
|
575
|
|
|
387
|
|
|
592
|
|
Equity in earnings (losses) of equity method investments
|
1,471
|
|
|
1,536
|
|
|
(1,338
|
)
|
Gain (loss) on disposal of long-lived assets and intangibles
|
8,704
|
|
|
(295
|
)
|
|
(22
|
)
|
Other (loss) (A)
|
(5,389
|
)
|
|
(1,079
|
)
|
|
(2,244
|
)
|
Other income (loss), net
|
$
|
2,880
|
|
|
$
|
94
|
|
|
$
|
(3,854
|
)
|
|
|
(A)
|
During the year ended
December 31, 2018
, the Company recorded a net loss of approximately
$4.9 million
related to the settlement of a legal dispute and a related discharge of liabilities assumed by the counterparty to the settlement. See Note 13 for additional information.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Reclassification From Accumulated Other Comprehensive Income Into Net Income
— The following table summarizes the amounts reclassified out of accumulated other comprehensive income into net income. There were no reclassifications from AOCI into net income during the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Accumulated Other Comprehensive
Income or AOCI Components
|
|
Income Statement
Location
|
|
2017
|
|
2016
|
Net realized (gain) loss on securities
|
|
|
|
|
|
|
Impairment
|
|
Impairment
|
|
$
|
—
|
|
|
$
|
54
|
|
(Gain) on settlement of real estate securities
|
|
Realized and unrealized (gain) loss on investments
|
|
(2,345
|
)
|
|
(19,129
|
)
|
Loss on settlement of real estate securities
|
|
Realized and unrealized (gain) loss on investments
|
|
—
|
|
|
16,178
|
|
Realized (gain) on deconsolidation of CDO VI
|
|
Gain on deconsolidation
|
|
—
|
|
|
(20,682
|
)
|
Unrealized loss on real estate securities, intent-to-sell, reclassified from AOCI into income
|
|
Realized and unrealized (gain) loss on investments
|
|
—
|
|
|
23,128
|
|
|
|
|
|
$
|
(2,345
|
)
|
|
$
|
(451
|
)
|
|
|
|
|
|
|
|
Net realized (gain) on derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Amortization of deferred hedge (gain)
|
|
Interest expense, net
|
|
—
|
|
|
(20
|
)
|
|
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
|
|
|
|
|
|
Total reclassifications
|
|
|
|
$
|
(2,345
|
)
|
|
$
|
(471
|
)
|
EXPENSE RECOGNITION
Operating Expenses —
Operating expenses consist primarily of payroll (Entertainment Golf venue level and Traditional Golf property level), utilities, repairs and maintenance, supplies, marketing and operating lease rent expense.
Entertainment Golf
Operating expenses for Entertainment Golf also include information technology-related support and maintenance.
Traditional Golf
Operating expenses for Traditional Golf also include equipment and cart leases, seed, soil and fertilizer, and certain operating costs incurred at managed Traditional Golf properties. Many of the Traditional Golf properties and related facilities are leased under long-term operating leases. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of lease terms initially range from
10
to
20
years, and typically, the leases contain renewal options. Certain leases include scheduled increases or decreases in minimum rental payments at various times during the term of the lease. These scheduled rent increases or decreases are recognized on a straight-line basis over the term of the lease. Increases result in an accrual, which is included in other current liabilities and other liabilities, and decreases result in a receivable, which is included in other current assets and other assets, for the amount by which the cumulative straight-line rent differs from the contractual cash rent.
General and Administrative Expense —
General and administrative expense consists of costs associated with corporate and administrative functions that support development and operations.
Pre-Opening Costs —
Pre-opening costs are expensed as incurred and consist primarily of marketing expenses, rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Deferred Costs —
Deferred costs consist primarily of costs incurred in obtaining financing which are amortized into interest expense over the term of such financing using either the straight-line basis or the interest method. Deferred financing costs are presented as a direct deduction from the carrying amount of the related debt liability.
Interest
Expense, Net —
The Company financed Traditional Golf and Corporate using both fixed and floating rate debt, including mortgage loans and other financing vehicles. Certain of this debt has been issued at a discount. Discounts are accreted into interest expense on the effective yield or interest method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the financing. See Note 10 for additional information.
Derivatives and Hedging Activities —
All derivatives are recognized as either assets or liabilities on the balance sheet and measured
at fair value. The Company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements and fair value is reflected on a net counterparty basis when the Company believes a legal right of offset exists under an enforceable netting agreement.
Changes in fair value are recorded in net income. Derivative transactions are entered into by the Company solely for risk management purposes in the ordinary course of business. Subsequent to the prepayment of the Traditional Golf term loan in December 2018, the Company unwound the interest rate cap. At
December 31, 2018
, the Company had
no
derivatives or hedging activities.
Stock-Based Compensation
Expense —
The Company maintains an equity incentive plan under which non-qualified stock options, incentive stock options, and restricted stock units or RSUs are granted to employees and non-employee directors. Stock-based compensation expense for stock options is recognized on a straight-line basis through the vesting date of the option. RSUs are expensed based on the fair value on the date of grant and amortized on a straight-line basis through the vesting date. The fair value of RSUs is estimated using the stock price on the date of grant. All stock-based compensation expense is recorded as general and administrative expense in the Consolidated Statement of Operations. See Note 11 for additional information.
Management Fee and Termination Payment to Affiliate —
These represent amounts due or paid to the former Manager pursuant to the Management Agreement or the termination of the existing Management Agreement. For further information, see Note 12.
BALANCE SHEET MEASUREMENT
Property and Equipment, Net
—
Real estate and related improvements are recorded at cost less accumulated depreciation. Costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized.
The Company capitalizes to construction in progress, certain costs related to properties under construction. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for use. Capitalized costs include development, construction-related costs and interest expense.
Depreciation is calculated using the straight-line method based on the lesser of the following estimated useful lives or the lease term:
|
|
|
Buildings and improvements
|
10-30 years
|
Capital leases - equipment
|
3-7 years
|
Furniture, fixtures, and equipment
|
2-7 years
|
Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale. The Company suspends depreciation and amortization for assets held-for-sale. Subsequent changes to the estimated fair value less costs to sell could impact the measurement of assets held-for-sale. Decreases are recognized as an impairment loss and recorded in "Impairment" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed. Real estate held-for-sale is recorded in “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale” on the Consolidated Balance Sheets.
Entertainment Golf
Entertainment Golf includes land, buildings, furniture, fixtures and equipment and leasehold improvements including building and land improvements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Traditional Golf
With respect to Traditional Golf course improvements (included in buildings and improvements), costs associated with construction, significant replacements, permanent landscaping, sand traps, fairways, tee boxes or greens are capitalized. All other asset-related costs that do not meet these criteria, such as minor repairs and routine maintenance, are expensed as incurred.
The Company leases certain golf carts and other equipment that are classified as capital leases. The value of capital leases is recorded as an asset on the balance sheet, along with a liability related to the present value of associated payments. Depreciation of capital lease assets is calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms. The cost of equipment under capital leases is recorded in "Property and equipment, net of accumulated depreciation" on the Consolidated Balance Sheets. Payments under the leases are treated as reductions of the obligations under capital leases, with a portion being recorded as interest expense under the effective interest method.
Intangibles, Net
—
Intangible assets and liabilities consist primarily of leasehold advantages (disadvantages), management contracts, membership base and internally-developed software. A leasehold advantage (disadvantage) exists to the Company when it pays a contracted rent that is below (above) market rents at the date of an acquisition transaction. The value of a leasehold advantage (disadvantage) is calculated based on the differential between market and contracted rent, which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each property, and is amortized over the term of the underlying lease agreement. The management contract intangible represents the Company’s golf course management contracts for both leased and managed properties. The management contract intangible for leased and managed properties is valued using the discounted cash flow method under the income approach and is amortized over the term of the underlying lease or management agreements, respectively. The membership base intangible represents the Company’s relationship with its private country club members. The membership base intangible is valued using the multi-period excess earnings method under the income approach, and is amortized over the expected life of an active membership. The internally-developed software intangible represents proprietary software developed for the Company’s exclusive use. For Entertainment Golf, the internally-developed software intangible is composed of costs incurred to develop the software. The internally-developed software intangible is amortized over the expected useful life of the software.
Amortization of leasehold intangible assets and liabilities is included within operating expenses and amortization of all other intangible assets is included within depreciation and amortization in the Consolidated Statements of Operations. Amortization of all intangible assets is calculated using the straight-line method based on the following estimated useful lives:
|
|
|
Trade name
|
30 years
|
Leasehold intangibles
|
2 - 26 years
|
Management contracts
|
2 - 26 years
|
Internally-developed software
|
3 - 5 years
|
Membership base
|
7 years
|
Liquor licenses
|
Nonamortizable
|
Impairment of Real Estate and Finite-lived Intangible Assets
—
The Company periodically reviews the carrying amounts of its long-lived assets, including real estate held-for-use and held-for-sale, as well as finite-lived intangible assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Assets to be disposed of are carried at the lower of carrying amount or fair value less costs to sell.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Membership Deposit Liabilities
—
Private country club members in our Traditional Golf business generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable
30
years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into Golf operations revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be
seven
years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a
30
-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Investment in Real Estate Securities —
The Company has classified its investments in securities as available-for-sale. Securities available-for-sale are carried at market value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income, to the extent impairment losses are considered temporary. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if there is an intent to sell or if they reflect a decline in value that is other-than-temporary, as described above.
Other Investment
—
The Company owns an approximately
22%
economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. The Company accounts for this investment as an equity method investment. As of
December 31, 2018
and
2017
, the carrying value of this investment was
$22.6 million
and
$21.1 million
, respectively. The Company evaluates its equity method investment for other than temporary impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future. Based on changes in estimates of project costs and timeline, the Company recorded an other than temporary impairment of
$2.9 million
during the year ended
December 31, 2016
. There was
no
other than temporary impairment recorded during the years ended
December 31, 2018
and
2017
. The other than temporary impairment is recorded in the equity in earnings (loss) in equity method investments, net line item which is reported in the Consolidated Statements of Operations in “Other (loss) income, net.” As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this real estate investment falls within Level 3 for fair value reporting.
Cash and Cash Equivalents and Restricted Cash —
The Company considers all highly liquid short-term investments with maturities of
90
days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial institutions exceed insured limits. The Company has not experienced any losses in the accounts and believe that the Company is not exposed to significant credit risk because the accounts are at major financial institutions. Restricted cash consisted of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
CDO trustee accounts
|
$
|
127
|
|
|
$
|
170
|
|
Restricted cash for construction-in-progress
|
2,008
|
|
|
2,282
|
|
Restricted cash - Traditional Golf
|
1,266
|
|
|
3,362
|
|
Restricted cash - Entertainment Golf
|
183
|
|
|
182
|
|
Restricted cash, current and noncurrent
|
$
|
3,584
|
|
|
$
|
5,996
|
|
Accounts Receivable, Net
—
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts of
$1.0 million
and
$0.8 million
as of
December 31, 2018
and
2017
, respectively. The allowance for doubtful accounts is based upon several factors including the length of time the receivables are past due, historical payment trends and current economic factors. Collateral is generally not required. The allowance for doubtful accounts increased by
$0.2 million
and decreased by
$0.3 million
for the years ended
December 31, 2018
and
2017
, respectively.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Other Current Assets
The following table summarizes the Company's other current assets:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Loans, held-for-sale, net (A)
|
$
|
—
|
|
|
$
|
147
|
|
Prepaid expenses
|
2,651
|
|
|
3,081
|
|
Deposits
|
2,494
|
|
|
3,469
|
|
Inventory
|
2,855
|
|
|
4,722
|
|
Miscellaneous current assets, net
|
12,505
|
|
|
10,149
|
|
Other current assets
|
$
|
20,505
|
|
|
$
|
21,568
|
|
|
|
(A)
|
During the year ended
December 31, 2018
, the Company recorded an impairment of
$0.2 million
on a corporate loan.
|
Other Assets
The following table summarizes the Company's other assets:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Prepaid expenses
|
$
|
277
|
|
|
$
|
6
|
|
Deposits
|
2,140
|
|
|
2,213
|
|
Derivative assets
|
—
|
|
|
286
|
|
Miscellaneous assets, net
|
6,267
|
|
|
6,144
|
|
Other assets
|
$
|
8,684
|
|
|
$
|
8,649
|
|
Prepaid Expenses
–
Prepaid expenses consists primarily of prepaid insurance and prepaid rent and are expensed over the usage period of the goods or services.
Deposits –
Deposits consist primarily of property lease security deposits and deposits with vendors for property and equipment.
Inventory
– Inventory is valued at the lower of cost or market. Cost is determined on the first-in, first-out (“FIFO”) method. Inventories consist primarily of food, beverages and merchandise for sale.
Derivative Assets
– All derivative assets on the balance sheet are measured at fair value. We have
no
derivative assets as of December 31, 2018.
Accounts Payable and Accrued Expenses
—
Accounts payable reflect expenses related to goods and services received that have not yet been paid and accrued expenses reflect expenses related to goods and services received for which invoices have not yet been received.
Deferred Revenue
—
Payments received in advance of the performance of services are recorded as deferred revenue until the services are performed.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Other Current Liabilities
The following table summarizes the Company's other current liabilities:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Security deposits payable
|
$
|
14,188
|
|
|
$
|
6,602
|
|
Accrued rent
|
2,885
|
|
|
2,160
|
|
Due to affiliates
|
—
|
|
|
1,786
|
|
Dividends payable
|
930
|
|
|
930
|
|
Miscellaneous current liabilities
|
4,282
|
|
|
11,118
|
|
Other current liabilities
|
$
|
22,285
|
|
|
$
|
22,596
|
|
Other Liabilities
The following table summarizes the Company's other liabilities:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Security deposits payable
|
$
|
91
|
|
|
$
|
66
|
|
Unfavorable leasehold interests
|
2,759
|
|
|
3,374
|
|
Accrued rent
|
1,617
|
|
|
1,057
|
|
Miscellaneous liabilities
|
765
|
|
|
349
|
|
Other liabilities
|
$
|
5,232
|
|
|
$
|
4,846
|
|
Security Deposits Payable
–
Security deposits payable relate to deposits received for events and other activities at traditional golf properties.
Unfavorable Leasehold Interests
–
Unfavorable leasehold interests relates to leases acquired as part of Traditional Golf where the terms of the leasehold contracts are less favorable than the estimated market terms of the leases at the acquisition date.
Accrued Rent
–
Traditional golf properties pay rent on certain leased properties in arrears and scheduled rent increases are recognized on a straight-line basis over the term of the lease, resulting in an accrual.
Due to Affiliates –
Represents amounts due to the former Manager pursuant to the Management Agreement but not paid.
Dividends Payable
–
Represents dividends declared but not paid.
Stock Options
—
The fair value of the options issued as compensation to the former Manager for its successful efforts in raising capital for the Company was recorded as an increase in equity with an offsetting reduction of capital proceeds received. Stock options granted to the Company’s employees and non-employee directors were recorded as an increase in equity and accounted for using the fair value method. See Note 11 for additional information.
Restricted Stock Units or RSUs
—
The fair value of the RSUs issued to the Company's directors as part of annual compensation were recorded as an increase in equity. The fair value of the RSUs is based on the Company's stock price on the grant date. See Note 11 for additional information.
Preferred Stock
—
The Company’s accounting policy for its preferred stock is described in Note 11.
Income Taxes
–
The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the periods in which the temporary differences are expected to reverse. A valuation allowance is recognized if the Company determines it is more likely than not that all or a portion of a deferred tax asset will not be recognized.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
The Company recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in the Consolidated Statements of Operations. See Note 14 for additional information.
Amortization of Discount and Premium and Other Amortization
—
As reflected in the Consolidated Statements of Cash Flows, these items are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Accretion of net discount on securities, loans and other investments
|
$
|
(151
|
)
|
|
$
|
(4,698
|
)
|
|
$
|
(7,926
|
)
|
Amortization of net discount on debt obligations and deferred financing costs
|
1,310
|
|
|
1,241
|
|
|
1,501
|
|
Amortization of net deferred hedge gains
–
debt
|
—
|
|
|
—
|
|
|
(20
|
)
|
Amortization of discount and premium
|
$
|
1,159
|
|
|
$
|
(3,457
|
)
|
|
$
|
(6,445
|
)
|
|
|
|
|
|
|
Amortization of leasehold intangibles
|
$
|
4,093
|
|
|
$
|
4,111
|
|
|
$
|
4,451
|
|
Accretion of membership deposit liability
|
6,872
|
|
|
6,453
|
|
|
5,803
|
|
Other amortization
|
$
|
10,965
|
|
|
$
|
10,564
|
|
|
$
|
10,254
|
|
Recent Accounting Pronouncements
—
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09
Revenue from Contracts with Customers (Topic 606)
. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted the new guidance effective January 1, 2018 using the modified retrospective method. See Note 3 for additional information.
In January 2016, the FASB issued ASU 2016-01
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02
Leases (Topic 842)
. The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with an option to use certain relief. The Company currently has operating leases, including ground leases, for certain of its properties and leased equipment which are not recognized on the Consolidated Balance Sheets. In July 2018, the FASB issued ASU 2018-10
Codification Improvements to Topic 842 Leases,
which provides 16 narrow scope amendments to ASC 842, including the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification among other things. In July 2018, the FASB issued ASU 2018-11
Leases (Topic 842): Targeted Improvements,
which allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. In December 2018, the FASB issued ASU 2018-20
Leases (Topic 842), Narrow-Scope Improvements for Lessors,
which includes the requirement that a lessor (i) exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf from variable payments and (ii) include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense. The Company anticipates a significant increase to its non-current assets and non-current liabilities in order to record a right-of-use asset and a related lease liability, specifically as it relates to existing operating leases. There are also certain considerations related to internal control over financial reporting that are associated with implementing the new guidance under Topic 842. The Company is currently evaluating its control framework for lease accounting and identifying any changes that may need to be made in response to the new guidance. The Company has selected an information system application to centralize the tracking of and accounting for the Company’s leases and is currently in the process of implementing that application. The Company will adopt the requirements of the new standard on January 1, 2019. The Company is working to quantify the impact, but is currently unable to estimate the impact on the Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
In June 2016, the FASB issued ASU 2016-13
Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount under the other-than-temporary impairment model. In November 2018, the FASB issued ASU 2018-19
Codification Improvements to Topic 326, Financial Instruments - Credit Losses
which clarifies that operating lease receivables accounted for under ASC 842 are not in the scope of this guidance. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.
The standard provides specific guidance over eight identified cash flow issues in order to reduce diversity in practice over the presentation and classification of certain types of cash receipts and cash payments. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU 2016-18
Statement of Cash Flows (Topic 230), Restricted Cash.
The standard requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows and provide a reconciliation to the related line items in the balance sheet. The Company adopted the new guidance effective January 1, 2018 and has included changes in restricted cash in the Consolidated Statements of Cash Flows for all periods presented.
In January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805), Clarifying the Definition of a Business
. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets of businesses. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15
Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. The standard requires a customer in a cloud computing arrangement (i.e., a hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. That guidance requires certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The effective date of the standard will be for annual periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. Entities can either apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively.
The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.
3. REVENUES
On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) for all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as a decrease to the 2018 opening balance of accumulated deficit of
$4.8 million
. The adjustment was due to the recognition of breakage on gift cards and gift certificates offered at the Company's Traditional Golf properties that were not expected to be redeemed based on historical redemption rates. The recognition of breakage on gift cards and gift certificates on an ongoing basis is expected to have an immaterial impact to the Company’s net income (loss). Also in accordance with the new revenue standard, certain operating costs incurred at the Company’s managed Traditional Golf properties and the reimbursements of those operating costs will now be recognized in Operating expenses and Golf operations, respectively. The reimbursements do not include a profit margin and therefore this change will have no net impact to the Company’s operating income (loss).
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
The majority of the Company’s revenue continues to be recognized at a point in time which is at the time of sale to customers at the Company’s Entertainment Golf venues and Traditional Golf properties, including green fees, cart rentals, bay play, events and sales of food, beverages and merchandise.
Per the modified retrospective method, comparative information has not been restated to conform to these changes and continues to be reported under the accounting standards in effect for those periods. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Consolidated Statements of Operations was as follows:
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
As reported
|
|
Balances under prior accounting
|
|
Effect of Change (A)
|
Liabilities
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
22,285
|
|
|
$
|
27,094
|
|
|
$
|
(4,809
|
)
|
Equity
|
|
|
|
|
|
|
Accumulated Deficit
|
|
$
|
(3,105,307
|
)
|
|
$
|
(3,110,116
|
)
|
|
$
|
4,809
|
|
|
|
(A)
|
Represents the cumulative effect adjustment to the 2018 opening balance.
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
As reported
|
|
Balances under prior accounting
|
|
Effect of Change
|
Revenues
|
|
|
|
|
|
|
Golf operations
|
|
$
|
244,646
|
|
|
$
|
222,581
|
|
|
$
|
22,065
|
|
Operating Costs
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
251,794
|
|
|
$
|
229,729
|
|
|
$
|
22,065
|
|
The Company’s revenue is all generated within the Entertainment and Traditional Golf segments. The following table disaggregates revenue by category: Entertainment golf venues, public and private golf properties (owned and leased) and managed golf properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Entertainment golf venues
|
|
Public golf properties
|
|
Private golf properties
|
|
Managed golf properties
|
|
Total
|
Golf operations
|
|
2,191
|
|
|
116,009
|
|
|
101,669
|
|
|
24,777
|
|
|
244,646
|
|
Sales of food and beverages
|
|
2,713
|
|
|
39,280
|
|
|
27,730
|
|
|
—
|
|
|
69,723
|
|
Total revenues
|
|
$
|
4,904
|
|
|
$
|
155,289
|
|
|
$
|
129,399
|
|
|
$
|
24,777
|
|
|
$
|
314,369
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
4. SEGMENT REPORTING
The Company currently has
three
reportable segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties, and (iii) corporate. The chief operating decision maker (“CODM”) for each segment is our Chief Executive Officer, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.
The Company opened its inaugural Entertainment Golf venue in Orlando, Florida on April 7, 2018 and expects to continue opening a chain of next-generation Entertainment Golf venues across the United States and internationally which combine golf, competition, dining and fun.
Additionally, the Company’s Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of
December 31, 2018
, the Company owned, leased or managed
66
properties across
11
states.
The corporate segment consists primarily of investments in loans and securities, interest income on short-term investments, general and administrative expenses as a public company, interest expense on the junior subordinated notes payable (Note 7), management fees pursuant to the Management Agreement prior to the Internalization effective January 1, 2018 (Note 12) and income tax expense (Note 14).
Beginning as of the Company’s second fiscal quarter in 2018, the Company changed its reportable segments to reflect the manner in which our CODM manages our businesses, including resource allocation and performance assessment. As a result, the former Debt Investments segment was combined with the corporate segment, to reflect the ongoing reduction in size of the Debt Investments segment.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Summary financial data on the Company’s segments is given below, together with reconciliation to the same data for the Company as a whole:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations
|
$
|
2,191
|
|
|
$
|
242,455
|
|
|
$
|
—
|
|
|
$
|
244,646
|
|
Sales of food and beverages
|
2,713
|
|
|
67,010
|
|
|
—
|
|
|
69,723
|
|
Total revenues
|
4,904
|
|
|
309,465
|
|
|
—
|
|
|
314,369
|
|
Operating costs
|
|
|
|
|
|
|
—
|
|
Operating expenses (A)
|
5,398
|
|
|
246,396
|
|
|
—
|
|
|
251,794
|
|
Cost of sales - food and beverages
|
640
|
|
|
19,513
|
|
|
—
|
|
|
20,153
|
|
General and administrative expense
|
6,382
|
|
|
16,702
|
|
|
11,271
|
|
|
34,355
|
|
General and administrative expense - acquisition and transaction expenses (B)
|
2,679
|
|
|
1,024
|
|
|
502
|
|
|
4,205
|
|
Depreciation and amortization
|
1,886
|
|
|
17,814
|
|
|
4
|
|
|
19,704
|
|
Pre-opening costs (C)
|
2,483
|
|
|
—
|
|
|
—
|
|
|
2,483
|
|
Impairment
|
—
|
|
|
8,093
|
|
|
147
|
|
|
8,240
|
|
Realized and unrealized loss on investments
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
(131
|
)
|
Total operating costs
|
19,468
|
|
|
309,411
|
|
|
11,924
|
|
|
340,803
|
|
Operating income (loss)
|
(14,564
|
)
|
|
54
|
|
|
(11,924
|
)
|
|
(26,434
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
—
|
|
Interest and investment income
|
281
|
|
|
194
|
|
|
1,319
|
|
|
1,794
|
|
Interest expense (D)
|
—
|
|
|
(16,046
|
)
|
|
(2,274
|
)
|
|
(18,320
|
)
|
Capitalized interest (D)
|
—
|
|
|
1,121
|
|
|
560
|
|
|
1,681
|
|
Other income, net
|
—
|
|
|
846
|
|
|
2,034
|
|
|
2,880
|
|
Total other income (expenses)
|
281
|
|
|
(13,885
|
)
|
|
1,639
|
|
|
(11,965
|
)
|
Income tax expense (E)
|
—
|
|
|
—
|
|
|
284
|
|
|
284
|
|
Net loss
|
(14,283
|
)
|
|
(13,831
|
)
|
|
(10,569
|
)
|
|
(38,683
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(14,283
|
)
|
|
$
|
(13,831
|
)
|
|
$
|
(16,149
|
)
|
|
$
|
(44,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (F)
|
|
Total
|
December 31, 2018
|
|
|
|
|
|
|
|
Total assets
|
117,416
|
|
|
225,904
|
|
|
58,627
|
|
|
401,947
|
|
Total liabilities
|
13,561
|
|
|
196,836
|
|
|
56,883
|
|
|
267,280
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
61,583
|
|
|
61,583
|
|
Equity (loss) attributable to common stockholders
|
$
|
103,855
|
|
|
$
|
29,068
|
|
|
$
|
(59,839
|
)
|
|
$
|
73,084
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including capital leases) during the year ended December 31, 2018
|
$
|
55,924
|
|
|
$
|
14,042
|
|
|
$
|
—
|
|
|
$
|
69,966
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Summary segment financial data (continued).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (G)
|
|
Total
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Golf operations
|
$
|
—
|
|
|
$
|
221,737
|
|
|
$
|
—
|
|
|
$
|
221,737
|
|
Sales of food and beverages
|
—
|
|
|
70,857
|
|
|
—
|
|
|
70,857
|
|
Total revenues
|
—
|
|
|
292,594
|
|
|
—
|
|
|
292,594
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
—
|
|
|
232,796
|
|
|
—
|
|
|
232,796
|
|
Cost of sales - food and beverages
|
—
|
|
|
20,959
|
|
|
—
|
|
|
20,959
|
|
General and administrative expense
|
147
|
|
|
16,073
|
|
|
6,456
|
|
|
22,676
|
|
General and administrative expense - acquisition and transaction expenses (B)
|
7,139
|
|
|
677
|
|
|
921
|
|
|
8,737
|
|
Management fee and termination payment to affiliate
|
—
|
|
|
—
|
|
|
21,410
|
|
|
21,410
|
|
Depreciation and amortization
|
44
|
|
|
24,260
|
|
|
—
|
|
|
24,304
|
|
Pre-opening costs (C)
|
320
|
|
|
—
|
|
|
—
|
|
|
320
|
|
Impairment
|
—
|
|
|
—
|
|
|
60
|
|
|
60
|
|
Realized and unrealized loss on investments
|
—
|
|
|
199
|
|
|
6,044
|
|
|
6,243
|
|
Total operating costs
|
7,650
|
|
|
294,964
|
|
|
34,891
|
|
|
337,505
|
|
Operating loss
|
(7,650
|
)
|
|
(2,370
|
)
|
|
(34,891
|
)
|
|
(44,911
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
—
|
|
|
159
|
|
|
23,003
|
|
|
23,162
|
|
Interest expense (D)
|
—
|
|
|
(15,523
|
)
|
|
(4,304
|
)
|
|
(19,827
|
)
|
Capitalized interest (D)
|
—
|
|
|
246
|
|
|
—
|
|
|
246
|
|
Other (loss) income, net
|
—
|
|
|
(1,762
|
)
|
|
1,856
|
|
|
94
|
|
Total other income (expenses)
|
—
|
|
|
(16,880
|
)
|
|
20,555
|
|
|
3,675
|
|
Income tax expense (E)
|
—
|
|
|
—
|
|
|
965
|
|
|
965
|
|
Net loss
|
(7,650
|
)
|
|
(19,250
|
)
|
|
(15,301
|
)
|
|
(42,201
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(7,650
|
)
|
|
$
|
(19,250
|
)
|
|
$
|
(20,881
|
)
|
|
$
|
(47,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (F)(G)
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
Total assets
|
41,046
|
|
|
334,925
|
|
|
160,677
|
|
|
536,648
|
|
Total liabilities
|
9,328
|
|
|
300,176
|
|
|
56,093
|
|
|
365,597
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
61,583
|
|
|
61,583
|
|
Equity attributable to common stockholders
|
$
|
31,718
|
|
|
$
|
34,749
|
|
|
$
|
43,001
|
|
|
$
|
109,468
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including capital leases) during the year ended December 31, 2017
|
$
|
27,295
|
|
|
$
|
16,284
|
|
|
$
|
67
|
|
|
$
|
43,646
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Summary segment financial data (continued).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (G)
|
|
Total
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Golf operations
|
$
|
—
|
|
|
$
|
226,255
|
|
|
$
|
—
|
|
|
$
|
226,255
|
|
Sales of food and beverages
|
—
|
|
|
72,625
|
|
|
—
|
|
|
72,625
|
|
Total revenues
|
—
|
|
|
298,880
|
|
|
—
|
|
|
298,880
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
—
|
|
|
239,021
|
|
|
—
|
|
|
239,021
|
|
Cost of sales - food and beverages
|
—
|
|
|
21,593
|
|
|
—
|
|
|
21,593
|
|
General and administrative expense
|
12
|
|
|
16,556
|
|
|
8,252
|
|
|
24,820
|
|
General and administrative expense - acquisition and transaction expenses (B)
|
1,555
|
|
|
1,594
|
|
|
1,205
|
|
|
4,354
|
|
Management fee and termination payment to affiliate
|
—
|
|
|
—
|
|
|
10,704
|
|
|
10,704
|
|
Depreciation and amortization
|
—
|
|
|
26,496
|
|
|
—
|
|
|
26,496
|
|
Impairment
|
—
|
|
|
6,232
|
|
|
4,149
|
|
|
10,381
|
|
Realized and unrealized (gain) loss on investments
|
—
|
|
|
(294
|
)
|
|
979
|
|
|
685
|
|
Total operating costs
|
1,567
|
|
|
311,198
|
|
|
25,289
|
|
|
338,054
|
|
Operating loss
|
(1,567
|
)
|
|
(12,318
|
)
|
|
(25,289
|
)
|
|
(39,174
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
—
|
|
|
134
|
|
|
91,157
|
|
|
91,291
|
|
Interest expense (D)
|
—
|
|
|
(12,470
|
)
|
|
(40,398
|
)
|
|
(52,868
|
)
|
Gain on deconsolidation
|
—
|
|
|
—
|
|
|
82,130
|
|
|
82,130
|
|
Other loss, net
|
—
|
|
|
(3,159
|
)
|
|
(695
|
)
|
|
(3,854
|
)
|
Total other income (expenses)
|
—
|
|
|
(15,495
|
)
|
|
132,194
|
|
|
116,699
|
|
Income tax expense
|
1
|
|
|
188
|
|
|
—
|
|
|
189
|
|
Net (loss) income
|
(1,568
|
)
|
|
(28,001
|
)
|
|
106,905
|
|
|
77,336
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Net income attributable to noncontrolling interest
|
—
|
|
|
(257
|
)
|
|
—
|
|
|
(257
|
)
|
(Loss) income applicable to common stockholders
|
$
|
(1,568
|
)
|
|
$
|
(28,258
|
)
|
|
$
|
101,325
|
|
|
$
|
71,499
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including capital leases) during the year ended December 31, 2016
|
$
|
659
|
|
|
$
|
11,912
|
|
|
$
|
—
|
|
|
$
|
12,571
|
|
|
|
(A)
|
Operating expenses includes rental expenses recorded under operating leases for carts and equipment in the amount of
$1.9 million
,
$3.0 million
and
$3.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Operating expenses also includes amortization of favorable and unfavorable lease intangibles in the amount of
$4.1 million
,
$4.1 million
and
$4.5 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
|
|
(B)
|
Acquisition and transaction expense includes costs related to completed and potential acquisitions and transactions which may include advisory, legal, accounting, valuation and other professional or consulting fees.
|
|
|
(C)
|
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
|
|
|
(D)
|
Interest expense includes the accretion of membership deposit liabilities in the amount of
$6.9 million
,
$6.5 million
and
$5.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Interest expense and capitalized interest total to interest expense, net on the Consolidated Statements of Operations.
|
|
|
(E)
|
Effective January 1, 2017, the Company revoked its election to be treated as a REIT. As a result, the Company is subject to U.S. federal corporate income tax and the provision for income taxes is recorded in the corporate segment.
|
|
|
(F)
|
Total assets in the corporate segment includes an equity method investment in the amount of
$22.6 million
and
$21.1 million
as of
December 31, 2018
and
2017
, respectively, recorded in other investments on the Consolidated Balance Sheets. See Note 2 for additional information.
|
|
|
(G)
|
The Debt Investments segment and corporate segment as reported previously are combined to conform to the current period's presentation.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
5. PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
The following table summarizes the Company's property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
Land
|
$
|
6,747
|
|
|
$
|
—
|
|
|
$
|
6,747
|
|
|
$
|
88,251
|
|
|
$
|
—
|
|
|
$
|
88,251
|
|
Buildings and improvements
|
78,833
|
|
|
(30,540
|
)
|
|
48,293
|
|
|
154,769
|
|
|
(52,636
|
)
|
|
102,133
|
|
Furniture, fixtures and equipment
|
26,726
|
|
|
(16,729
|
)
|
|
9,997
|
|
|
33,109
|
|
|
(23,451
|
)
|
|
9,658
|
|
Capital leases - equipment
|
28,745
|
|
|
(12,843
|
)
|
|
15,902
|
|
|
24,949
|
|
|
(8,649
|
)
|
|
16,300
|
|
Construction in progress
|
51,666
|
|
|
—
|
|
|
51,666
|
|
|
24,916
|
|
|
—
|
|
|
24,916
|
|
Total Property and Equipment
|
$
|
192,717
|
|
|
$
|
(60,112
|
)
|
|
$
|
132,605
|
|
|
$
|
325,994
|
|
|
$
|
(84,736
|
)
|
|
$
|
241,258
|
|
Depreciation is calculated on a straight line basis using the estimated useful lives detailed in Note 2. Depreciation expense, which included amortization of assets recorded under capital leases, was
$16.0 million
,
$21.0 million
and
$23.4 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Below is a summary of the activity related to leased and managed Traditional Golf properties.
|
|
|
|
|
|
|
|
Date
|
|
Location
|
|
Leased or Managed Property
|
|
Description
|
May 2017
|
|
California
|
|
Managed
|
|
agreement expired
|
December 2017
|
|
Oklahoma
|
|
Leased
|
|
agreement expired
|
February 2018
|
|
Oklahoma
|
|
Leased
|
|
agreement terminated
|
June 2018
|
|
California
|
|
Leased
|
|
agreement terminated, 10 year management agreement executed
|
September 2018
|
|
Texas
|
|
Leased
|
|
agreement terminated
|
November 2018
|
|
California
|
|
Leased
|
|
agreement expired
|
December 2018
|
|
Michigan
|
|
Managed
|
|
agreement terminated, course closing
|
In December 2017, the Company closed on the sale of a golf property in Oregon for $
1.1 million
. We recognized a loss of $
0.5 million
on the sale which is included in other income (loss), net in the Consolidated Statements of Operations.
In December 2017, the Company closed on the purchase of land in Raleigh, North Carolina for
$5.0 million
for the construction of an Entertainment Golf venue.
On March 7, 2018, the Company announced it was actively pursuing the sale of
26
owned Traditional Golf properties in order to generate capital for reinvestment in the Entertainment Golf business. The assets and associated liabilities are reported on the Consolidated Balance Sheets as “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale,” respectively. See Note 15 for additional information.
The real estate assets, held-for-sale, net are reported at a carrying value of
$75.9 million
and include
$42.5 million
of land,
$31.8 million
of buildings and improvements,
$2.1 million
of furniture, fixtures and equipment, and
$1.0 million
of other related assets, partially offset by
$1.5 million
of accumulated impairment. The real estate liabilities, held-for-sale are reported at a carrying value of
$2.9 million
and include golf course liabilities to be assumed, primarily prepaid membership dues.
In July 2018, the Company sold
one
private golf property in Georgia for a sale price of
$3.5 million
resulting in net proceeds of
$3.2 million
after adjusting for liabilities assumed by the buyer, primarily related to prepaid dues. This resulted in a net loss on sale of
$0.1 million
based on the carrying value of net assets.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
In October 2018, we reclassified a golf property in New Mexico from held-for sale to held-and-used and recorded catch-up depreciation expense.
In December 2018, the Company completed sales on an additional
twelve
golf properties for a sale price of
$86.2 million
resulting in net proceeds of
$73.5 million
, inclusive of transaction costs of
$1.2 million
. The difference between the sales price and the net proceeds was primarily due to prepaid membership dues that we are obligated to remit to the buyer. The Company received proceeds of
$75.7 million
as of
December 31, 2018
and has recorded
$2.2 million
of net payables related to the sales, which is expected to be settled in the first quarter of 2019. The golf properties had a total carrying value of
$62.7 million
and resulted in a gain of
$10.8 million
. The gain is recorded in other income, net on the Consolidated Statement of Operations. The proceeds from the sale plus cash on hand were used to prepay the Traditional Golf term loan, see Note 7 for additional information. The Company entered into management agreements on
eight
of these golf properties.
6.
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
The following table summarizes the Company's intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Trade name
|
$
|
700
|
|
|
$
|
(117
|
)
|
|
$
|
583
|
|
|
$
|
700
|
|
|
$
|
(93
|
)
|
|
$
|
607
|
|
Leasehold intangibles (A)
|
46,581
|
|
|
(20,270
|
)
|
|
26,311
|
|
|
48,107
|
|
|
(16,716
|
)
|
|
31,391
|
|
Management contracts
|
32,932
|
|
|
(15,174
|
)
|
|
17,758
|
|
|
35,111
|
|
|
(13,468
|
)
|
|
21,643
|
|
Internally-developed software
|
2,314
|
|
|
(967
|
)
|
|
1,347
|
|
|
800
|
|
|
(640
|
)
|
|
160
|
|
Membership base
|
5,236
|
|
|
(3,740
|
)
|
|
1,496
|
|
|
5,236
|
|
|
(2,992
|
)
|
|
2,244
|
|
Nonamortizable liquor licenses
|
893
|
|
|
—
|
|
|
893
|
|
|
1,231
|
|
|
—
|
|
|
1,231
|
|
Total intangibles
|
$
|
88,656
|
|
|
$
|
(40,268
|
)
|
|
$
|
48,388
|
|
|
$
|
91,185
|
|
|
$
|
(33,909
|
)
|
|
$
|
57,276
|
|
|
|
(A)
|
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.
|
Amortization expense for the years ended
December 31, 2018
,
2017
, and
2016
was
$8.0 million
,
$8.2 million
and
$8.9 million
, respectively.
The unamortized balance of intangible assets at
December 31, 2018
is expected to be amortized as follows:
|
|
|
|
|
2019
|
$
|
7,412
|
|
2020
|
6,869
|
|
2021
|
4,929
|
|
2022
|
3,743
|
|
2023
|
3,573
|
|
Thereafter
|
20,969
|
|
Total amortizable intangible assets
|
47,495
|
|
Nonamortizable liquor licenses
|
893
|
|
Total intangible assets
|
$
|
48,388
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
7.
DEBT OBLIGATIONS
The following table presents certain information regarding the Company's debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligation/Collateral
|
Month Issued
|
|
Outstanding Face Amount
|
|
Carrying Value
|
|
Final Stated Maturity
|
|
Weighted Average Coupon (A)
|
|
Weighted Average Funding Cost (B)
|
|
Weighted Average Life (Years)
|
|
Face Amount of Floating Rate Debt
|
|
Outstanding Face Amount
|
|
Carrying Value
|
Credit Facilities and Capital Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Golf term loan (C)
|
Jun 2016
|
|
—
|
|
|
—
|
|
|
—%
|
|
—%
|
|
—
|
%
|
|
0
|
|
—
|
|
|
102,000
|
|
|
99,931
|
|
Vineyard II
|
Dec 1993
|
|
200
|
|
|
200
|
|
|
Dec 2043
|
|
2.36%
|
|
2.36
|
%
|
|
25.0
|
|
200
|
|
|
200
|
|
|
200
|
|
Capital Leases (Equipment)
|
June 2014 - Dec 2018
|
|
15,778
|
|
|
15,778
|
|
|
May 2019 - June 2024
|
|
3.00% to 16.16%
|
|
6.75
|
%
|
|
3.1
|
|
—
|
|
|
16,626
|
|
|
16,626
|
|
|
|
|
15,978
|
|
|
15,978
|
|
|
|
|
|
|
6.69
|
%
|
|
3.4
|
|
200
|
|
|
118,826
|
|
|
116,757
|
|
Less current portion of obligations under capital leases
|
|
|
5,489
|
|
|
5,489
|
|
|
|
|
|
|
|
|
|
|
|
|
4,652
|
|
|
4,652
|
|
Credit facilities and obligations under capital leases - noncurrent
|
|
|
10,489
|
|
|
10,489
|
|
|
|
|
|
|
|
|
|
|
|
|
114,174
|
|
|
112,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes payable (D)
|
Mar 2006
|
|
51,004
|
|
|
51,200
|
|
|
Apr 2035
|
|
LIBOR + 2.25%
|
|
4.73
|
%
|
|
16.3
|
|
51,004
|
|
|
51,004
|
|
|
51,208
|
|
Total debt obligations
|
|
|
$
|
66,982
|
|
|
$
|
67,178
|
|
|
|
|
|
|
5.20
|
%
|
|
13.2
|
|
$
|
51,204
|
|
|
$
|
169,830
|
|
|
$
|
167,965
|
|
See notes on next page.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
|
|
(A)
|
Weighted average, including floating and fixed rate classes.
|
|
|
(B)
|
Including the effect of deferred financing cost.
|
|
|
(C)
|
The Traditional Golf term loan was collateralized by
22
Traditional Golf properties. The carrying amount of the Traditional Golf term loan was reported net of deferred financing costs of
$2.1 million
as of
December 31, 2017
. The loan was prepaid in December 2018. See below for additional information.
|
|
|
(D)
|
Interest rate based on 3-month LIBOR plus
2.25%
.
|
Credit Facilities
In June 2016, the Company obtained third-party financing on
22
traditional golf properties for a total of
$102.0 million
at a floating rate of the greater of: (i) 30-day LIBOR +
4.70%
or (ii)
6.50%
. At the time of closing, the Company purchased a co-terminus LIBOR interest rate cap of
1.80%
. The financing was for a term of
three
years with the option for
two
one
-year extensions. In December 2018, the Company prepaid the financing subsequent to the sale of Traditional Golf properties as described in Note 5. The Company incurred prepayment penalties of
$0.7 million
and write-off of deferred financing costs of
$0.8 million
related to the loan prepayment. In December 2018, the Company also unwound the interest rate cap associated with the financing.
Traditional Golf is obligated under a
$0.2 million
loan with the City of Escondido, California (“Vineyard II”). The principal amount of the loan is payable in
five
equal installments upon reaching the "Achievement Date”, which is the date on which the previous
36
-month period equals or exceeds
240,000
rounds of golf played on the property. As of
December 31, 2018
,
240,000
rounds of golf have not been achieved within an applicable
36
-month period. The interest rate is adjusted annually and is equal to
1%
plus a short-term investment return, as defined in the loan agreement. As of
December 31, 2018
, the interest rate is
2.36%
.
Capital Leases - Equipment
The Company leases certain golf carts and other equipment under capital lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from
24
-
66
months. Certain leases include bargain purchase options at lease expiration.
The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of
December 31, 2018
are as follows:
|
|
|
|
|
2019
|
$
|
6,401
|
|
2020
|
5,126
|
|
2021
|
3,581
|
|
2022
|
1,831
|
|
2023
|
701
|
|
Thereafter
|
6
|
|
Total minimum lease payments
|
17,646
|
|
Less: imputed interest
|
1,868
|
|
Present value of net minimum lease payments
|
$
|
15,778
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Maturity Table
The Company’s debt obligations have contractual maturities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
Recourse
|
|
Total
|
2019
|
$
|
5,505
|
|
|
$
|
—
|
|
|
$
|
5,505
|
|
2020
|
4,569
|
|
|
—
|
|
|
4,569
|
|
2021
|
3,294
|
|
|
—
|
|
|
3,294
|
|
2022
|
1,724
|
|
|
—
|
|
|
1,724
|
|
2023
|
681
|
|
|
—
|
|
|
681
|
|
Thereafter
|
205
|
|
|
51,004
|
|
|
51,209
|
|
Total
|
$
|
15,978
|
|
|
$
|
51,004
|
|
|
$
|
66,982
|
|
8. REAL ESTATE SECURITIES
The following is a summary of the Company’s real estate securities at
December 31, 2018
and
2017
, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis
|
|
Gross Unrealized
|
|
|
|
|
|
Weighted Average
|
Asset Type
|
|
Outstanding
Face Amount
|
|
Before
Impairment
|
|
Other-Than-
Temporary-
Impairment
|
|
After
Impairment
|
|
Gains
|
|
Losses
|
|
Carrying Value
(A)
|
|
Number of
Securities
|
|
Rating
(B)
|
|
Coupon
|
|
Yield
|
|
Life
(Years)
(C)
|
|
Principal
Subordination
(D)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS
|
|
$
|
4,000
|
|
|
$
|
2,596
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,075
|
|
|
$
|
1,878
|
|
|
$
|
—
|
|
|
$
|
2,953
|
|
|
1
|
|
CCC
|
|
2.90
|
%
|
|
26.65
|
%
|
|
4.9
|
|
38.0
|
%
|
Total Securities, Available-for-Sale (E)
|
|
$
|
4,000
|
|
|
$
|
2,596
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,075
|
|
|
$
|
1,878
|
|
|
$
|
—
|
|
|
$
|
2,953
|
|
|
1
|
|
CCC
|
|
2.90
|
%
|
|
26.65
|
%
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS
|
|
4,000
|
|
|
2,445
|
|
|
(1,521
|
)
|
|
924
|
|
|
1,370
|
|
|
—
|
|
|
2,294
|
|
|
1
|
|
CCC
|
|
1.94
|
%
|
|
22.69
|
%
|
|
7.5
|
|
33.0
|
%
|
Total Securities, Available-for-Sale (E)
|
|
$
|
4,000
|
|
|
$
|
2,445
|
|
|
$
|
(1,521
|
)
|
|
$
|
924
|
|
|
$
|
1,370
|
|
|
$
|
—
|
|
|
$
|
2,294
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities.
|
|
|
(B)
|
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
|
|
|
(C)
|
The weighted average life is based on the timing of expected cash flows on the assets.
|
|
|
(D)
|
Percentage of the outstanding face amount of securities and residual interests that is subordinate to the Company’s investments.
|
|
|
(E)
|
As of
December 31, 2018
and
2017
, the total outstanding face amount of floating rate securities were
$4.0 million
for both years. The collateral securing the ABS - Non-Agency RMBS is located in various geographic regions in the U.S. The Company does not have significant investments in any one geographic region.
|
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the years ended
December 31, 2017
and
2016
, the Company recorded other-than-temporary impairment charges (“OTTI”) of
$0.6 million
and
$23.1 million
, respectively. The Company recorded
no
OTTI during the year ended
December 31, 2018
. Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, the Company noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. The Company had
no
securities in an unrealized loss position as of
December 31, 2018
. The Company had no activity related to credit losses on securities for the years ended
December 31, 2018
and
2017
.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
9.
DERIVATIVES
The Company has
no
derivative assets as of
December 31, 2018
as the remaining derivative instrument, an interest rate cap, was unwound upon the prepayment of the Traditional Golf term loan (see Note 7). This interest rate cap had a fair value of
$0.3 million
as of
December 31, 2017
which was recorded within other assets on the Consolidated Balance Sheets. The Company had
no
derivative liabilities as of both
December 31, 2018
and
2017
.
The following table summarizes (gains) losses recorded in relation to derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Location
|
|
Year Ended December 31,
|
Cash flow hedges
|
|
|
2018
|
|
2017
|
|
2016
|
Deferred hedge gain reclassified from AOCI into earnings
|
Interest expense, net
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
Non-hedge derivatives
|
|
|
|
|
|
|
|
Unrealized loss (gain) on interest rate derivatives
|
Realized and unrealized (gain) loss on investments
|
|
$
|
96
|
|
|
$
|
199
|
|
|
$
|
(294
|
)
|
Unrealized loss (gain) recognized related to TBAs
|
Realized and unrealized (gain) loss on investments
|
|
—
|
|
|
371
|
|
|
(928
|
)
|
Realized (gain) loss on settlement of non-hedge derivatives, net
|
Realized and unrealized (gain) loss on investments
|
|
(227
|
)
|
|
4,669
|
|
|
(18,318
|
)
|
10.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
December 31, 2017
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Fair Value Method (A)
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Real estate securities, available-for-sale
|
$
|
2,953
|
|
|
$
|
2,953
|
|
|
Pricing models - Level 3
|
|
$
|
2,294
|
|
|
$
|
2,294
|
|
Loans, held-for-sale, net (B)
|
—
|
|
|
—
|
|
|
Pricing models - Level 3
|
|
147
|
|
|
147
|
|
Cash and cash equivalents
|
79,235
|
|
|
79,235
|
|
|
|
|
167,692
|
|
|
167,692
|
|
Restricted cash - current and noncurrent
|
3,584
|
|
|
3,584
|
|
|
|
|
5,996
|
|
|
5,996
|
|
Non-hedge interest rate cap
|
—
|
|
|
—
|
|
|
Counterparty quotations - Level 2
|
|
286
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Credit facilities - Traditional Golf term loan
|
—
|
|
|
—
|
|
|
Pricing models _ Level 3
|
|
99,931
|
|
|
103,199
|
|
Junior subordinated notes payable
|
51,200
|
|
|
28,396
|
|
|
Pricing models - Level 3
|
|
51,208
|
|
|
27,531
|
|
|
|
(A)
|
Pricing models are used for (i) real estate securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) debt obligations which are private and untraded.
|
|
|
(B)
|
Loans held-for-sale, net are recorded in other current assets on the Consolidated Balance Sheets.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Fair Value Measurements
Valuation Hierarchy
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company follows this hierarchy for its financial instruments measured at fair value.
Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on observable market parameters, including:
•
quoted prices for similar assets or liabilities in active markets,
|
|
•
|
inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads), and
|
•
market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations determined using unobservable inputs that are supported by little or no market activity, and that are significant to the overall fair value measurement.
The Company’s real estate securities and loans, and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, the Company has estimated the fair value of these illiquid instruments based on internal pricing models subject to the Company's controls described below.
The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. With respect to broker and pricing service quotations, and in order to ensure these quotes represent a reasonable estimate of fair value, the Company’s quarterly procedures include a comparison of such quotations to quotations from different sources, outputs generated from its internal pricing models and transactions completed, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on the Company’s internal pricing models, the Company’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third-party market parameters and models, where available, for reasonableness. The Company believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real estate securities and loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities.
Significant Unobservable Inputs
The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Significant Input
|
Asset Type
|
|
Amortized
Cost
Basis
|
|
Fair
Value
|
|
Discount Rate
|
|
Prepayment Speed
|
|
Cumulative Default Rate
|
|
Loss Severity
|
ABS - Non-Agency RMBS
|
|
$
|
1,075
|
|
|
$
|
2,953
|
|
|
10.0
|
%
|
|
8.0
|
%
|
|
2.9
|
%
|
|
43.3
|
%
|
Total
|
|
$
|
1,075
|
|
|
$
|
2,953
|
|
|
|
|
|
|
|
|
|
All of the inputs used have some degree of market observability, based on the Company’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class but conform to industry conventions. The Company uses assumptions that generate its best estimate of future cash flows of each respective security.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed as follows:
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,950
|
|
Total gains (losses) (A)
|
|
|
Included in other comprehensive income (loss)
|
|
202
|
|
Amortization included in interest income
|
|
196
|
|
Purchases, sales and repayments (A)
|
|
|
Proceeds from repayments
|
|
(54
|
)
|
Balance at December 31, 2017
|
|
$
|
2,294
|
|
Total gains (losses) (A)
|
|
|
Included in other comprehensive income (loss)
|
|
508
|
|
Amortization included in interest income
|
|
246
|
|
Purchases, sales and repayments (A)
|
|
|
Proceeds
|
|
(95
|
)
|
Balance at December 31, 2018
|
|
$
|
2,953
|
|
|
|
(A)
|
None of the gains (losses) recorded in earnings during the periods is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. There were
no
purchases or sales during the years ended
December 31, 2018
and
2017
. There were
no
transfers into or out of Level 3 during the years ended
December 31, 2018
and
2017
.
|
Liabilities for Which Fair Value is Only Disclosed
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
|
|
|
|
|
|
|
Type of Liabilities
|
|
|
|
|
Not Measured At Fair
|
|
|
|
|
Value for Which
|
|
|
|
|
Fair Value Is Disclosed
|
|
Fair Value Hierarchy
|
|
Valuation Techniques and Significant Inputs
|
|
|
|
|
|
Credit facilities
|
|
Level 3
|
|
Valuation technique is based on discounted cash flows. Significant inputs include:
|
|
|
|
|
•
|
Amount and timing of expected future cash flows
|
|
|
|
|
•
|
Interest rates
|
|
|
|
|
•
|
Market yields
|
|
|
|
|
|
|
Junior subordinated notes payable
|
|
Level 3
|
|
Valuation technique is based on discounted cash flows. Significant inputs include:
|
|
|
|
|
•
|
Amount and timing of expected future cash flows
|
|
|
|
|
•
|
Interest rates
|
|
|
|
|
•
|
Market yields and the credit spread of the Company
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
11.
EQUITY AND EARNINGS PER SHARE
Earnings per Share
The Company is required to present both basic and diluted earnings per share (“EPS”). The following table shows the amounts used in computing basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
(Loss) income from continuing operations after preferred dividends and noncontrolling interest
|
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
|
$
|
71,499
|
|
(Loss) Income Applicable to Common Stockholders
|
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
|
$
|
71,499
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
|
66,993,543
|
|
|
66,903,457
|
|
|
66,709,925
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Options
|
|
—
|
|
|
—
|
|
|
2,078,515
|
|
RSUs
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for diluted earnings per share - adjusted weighted average shares
|
|
66,993,543
|
|
|
66,903,457
|
|
|
68,788,440
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
(Loss) income from continuing operations per share of common stock, after preferred dividends and noncontrolling interest
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.07
|
|
(Loss) Income Applicable to Common Stock, per share
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
(Loss) income from continuing operations per share of common stock, after preferred dividends and noncontrolling interest
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.04
|
|
(Loss) Income Applicable to Common Stock, per share
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
1.04
|
|
Basic EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of dilutive securities during each period. The Company’s dilutive securities are its options and RSUs. During
2018
and
2017
, based on the treasury stock method, the Company had
2,718,704
and
1,749,596
, potentially dilutive securities, respectively, which were excluded due to the Company's loss position. During
2016
, based on the treasury stock method, the Company had
2,078,515
dilutive securities resulting from its outstanding options. During
2018
,
2017
and
2016
, the Company had:
88,023
;
201,430
; and
309,024
antidilutive options, respectively. Net income (loss) applicable to common stockholders is equal to net income (loss) less preferred dividends.
Common Stock Issuances
In May 2016 and July 2016, the Company issued a total of
57,740
and
21,798
shares, respectively, of its common stock to its independent directors as a component of their annual compensation.
In January 2017, May 2017, October 2017 and December 2017, the Company issued a total of
18,074
;
90,366
;
30,822
and
13,538
shares, respectively, of its common stock to its independent directors as a component of their annual compensation.
In September 2018, the Company issued a total of
50,000
shares of its common stock to an independent director as part of the Director Stock Program described below.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Option Plans
On April 11, 2018, our board of directors adopted the Drive Shack Inc. 2018 Omnibus Incentive Plan (the "2018 Plan") which was approved by our shareholders. The 2018 Plan provides for the issuance of equity-based awards in various forms to eligible participants. The 2018 Plan allows for
6,697,710
shares of common stock to be available for grants of equity awards, subject to an annual limitation of
1,339,542
(with any shares not issued or granted in a specific year being added to such number in the subsequent year). As of December 31, 2018, the 2018 Plan has
1,146,422
shares available for grant through May 2019.
All outstanding options granted under prior option plans will continue to be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of respective option plan. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the strike price per share, unless advance approval is made to settle the option in shares of common stock.
As detailed in the 2018 Plan, the board of directors may permit a first time non-employee director to make a one-time election to participate in a stock purchase and matching grant program (the "Director Stock Program") which provides that if the non-employee director purchases shares of the Company's common stock at fair value within
30
days following the date the individual becomes a non-employee director, then the Company will issue a matching grant of fully vested shares of common stock equal to
20%
of the aggregate fair value of the purchased shares. In September 2018, a non-employee director purchased
41,667
shares and the Company issued
8,333
shares representing the matching grant.
Stock Options and Restricted Stock Units (RSUs)
The following is a summary of the changes in the Company's outstanding options for the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average Strike Price
|
|
Weighted Average Life Remaining (in years)
|
Balance at December 31, 2017
|
|
5,010,576
|
|
|
$
|
2.55
|
|
|
|
Granted
|
|
3,426,355
|
|
|
5.44
|
|
|
|
Balance at December 31, 2018 (A)
|
|
8,436,931
|
|
|
$
|
3.72
|
|
|
7.72 years
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
2,705,586
|
|
|
$
|
2.64
|
|
|
4.64 years
|
The Company's outstanding options were summarized as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Held by the former Manager
|
|
2,705,253
|
|
|
3,857,748
|
|
Issued to the former Manager and subsequently transferred to certain Manager’s employees (B)
|
|
2,304,990
|
|
|
1,152,495
|
|
Issued to the independent directors
|
|
333
|
|
|
333
|
|
Issued to Drive Shack employees (C)
|
|
3,426,355
|
|
|
—
|
|
Total (A)
|
|
8,436,931
|
|
|
5,010,576
|
|
|
|
(A)
|
The total at December 31, 2018 excludes
54,641
RSUs granted to certain non-employee directors as part of the annual compensation.
|
|
|
(B)
|
The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018. In both February 2017 and April 2018, the former Manager issued
1,152,495
options to certain employees formerly employed by the Manager as part of their compensation. The options fully vest and are exercisable
one
year prior to the option expiration date, beginning March 2020 through January 2024.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
|
|
(C)
|
On November 12, 2018, the Company issued options to certain employees as provided in their employment agreements. The options fully vest and are exercisable as follows:
3,351,355
options vest in equal annual installments on each of the first
three
anniversaries of the grant date; and
75,000
options fully vest on the
third
anniversary of the grant date.
|
The valuation of the employee options has been determined using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, expected dividend yield of the Company’s stock, expected term of the awards and the risk-free interest rate. The fair value of the options was determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Valuation Date
|
|
January 1, 2018
|
|
|
April 10, 2018
|
|
|
November 12, 2018
|
|
Expected Volatility
|
|
39.73
|
%
|
|
35.66
|
%
|
|
35.4 - 35.8%
|
|
Expected Dividend Yield
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected Remaining Term
|
|
3.0 - 6.6 years
|
|
|
2.7 - 6.3 years
|
|
|
6.0 - 6.5 years
|
|
Risk-Free Rate
|
|
2.16 - 2.29%
|
|
|
2.68 - 2.82%
|
|
|
3.09 - 3.11%
|
|
Fair Value at Valuation Date
|
|
$
|
4,272
|
|
|
$
|
3,558
|
|
|
$
|
7,478
|
|
Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the options. Stock-based compensation expense related to the employee options was
$2.2 million
during the year ended
December 31, 2018
and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested options was
$13.1 million
as of
December 31, 2018
and will be expensed over a weighted average of
2.3 years
.
The following table summarizes the Company’s outstanding options at
December 31, 2018
. Note that the last sales price on the New York Stock Exchange for the Company’s common stock in the year ended
December 31, 2018
was
$3.92
per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recipient
|
|
Date of Grant/Exercise
|
|
Number of Options
|
|
Options Exercisable at
December 31, 2018
|
|
Weighted Average
Strike Price
|
|
Fair Value At Grant
Date (millions) (A)
|
|
Intrinsic Value at
December 31, 2018
(millions)
|
Directors
|
|
Various
|
|
3,666
|
|
|
333
|
|
|
$
|
—
|
|
|
Not Material
|
|
—
|
|
Manager
(B)
|
|
2002 - 2008
|
|
587,277
|
|
|
—
|
|
|
$
|
0.00
|
|
|
$
|
6.4
|
|
|
—
|
|
Manager
(B)
|
|
Mar-11
|
|
311,853
|
|
|
82,141
|
|
|
$
|
1.00
|
|
|
$
|
7.0
|
|
|
$
|
0.6
|
|
Manager
(B)
|
|
Sep-11
|
|
524,212
|
|
|
166,582
|
|
|
$
|
1.00
|
|
|
$
|
5.6
|
|
|
$
|
1.1
|
|
Manager
(B)
|
|
Apr-12
|
|
348,352
|
|
|
140,112
|
|
|
$
|
1.00
|
|
|
$
|
5.6
|
|
|
$
|
0.8
|
|
Manager
(B)
|
|
May-12
|
|
396,316
|
|
|
158,345
|
|
|
$
|
1.00
|
|
|
$
|
7.6
|
|
|
$
|
0.9
|
|
Manager
(B)
|
|
Jul-12
|
|
437,991
|
|
|
178,478
|
|
|
$
|
1.00
|
|
|
$
|
8.3
|
|
|
$
|
1.0
|
|
Manager
(B)
|
|
Jan-13
|
|
958,331
|
|
|
489,196
|
|
|
$
|
2.32
|
|
|
$
|
18.0
|
|
|
$
|
1.4
|
|
Manager
(B)
|
|
Feb-13
|
|
383,331
|
|
|
195,679
|
|
|
$
|
2.95
|
|
|
$
|
8.4
|
|
|
$
|
0.3
|
|
Manager
(B)
|
|
Jun-13
|
|
670,829
|
|
|
342,438
|
|
|
$
|
3.23
|
|
|
$
|
3.8
|
|
|
$
|
0.4
|
|
Manager
(B)
|
|
Nov-13
|
|
965,847
|
|
|
493,032
|
|
|
$
|
3.57
|
|
|
$
|
6.0
|
|
|
$
|
0.3
|
|
Manager
(B)
|
|
Aug-14
|
|
765,416
|
|
|
459,250
|
|
|
$
|
4.01
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
Employees
|
|
Nov-18
|
|
3,426,355
|
|
|
—
|
|
|
$
|
5.44
|
|
|
$
|
7.5
|
|
|
$
|
—
|
|
Exercised
(C)
|
|
Prior to 2008
|
|
(173,853
|
)
|
|
N/A
|
|
|
$
|
14.09
|
|
|
N/A
|
|
|
N/A
|
|
Exercised
(D)
|
|
Oct-12
|
|
(15,972
|
)
|
|
N/A
|
|
|
$
|
1.48
|
|
|
N/A
|
|
|
N/A
|
|
Exercised
(E)
|
|
Sep-13
|
|
(51,306
|
)
|
|
N/A
|
|
|
$
|
1.67
|
|
|
N/A
|
|
|
N/A
|
|
Exercised
(F)
|
|
2014
|
|
(216,186
|
)
|
|
N/A
|
|
|
$
|
1.46
|
|
|
N/A
|
|
|
N/A
|
|
Exercised
(G)
|
|
2015
|
|
(202,446
|
)
|
|
N/A
|
|
|
1.00
|
|
|
N/A
|
|
|
N/A
|
|
Exercised
(H)
|
|
2016
|
|
(266,657
|
)
|
|
N/A
|
|
|
3.01
|
|
|
N/A
|
|
|
N/A
|
|
Expired unexercised
|
|
2002-2008
|
|
(416,425
|
)
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Outstanding
|
|
|
|
8,436,931
|
|
|
2,705,586
|
|
|
|
|
|
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
|
|
(A)
|
The fair value of the options was estimated using an option valuation model. Since the option plans have characteristics significantly different from those of traded options, and since the assumptions used in such model, particularly the volatility assumption, are subject to significant judgment and variability, the actual value of the options could vary materially from management’s estimate. The volatility assumption for these options was estimated based primarily on the historical volatility of the Company’s common stock and management’s expectations regarding future volatility. The expected life assumption for options issued prior to 2011 was estimated based on the simplified term method. This simplified method was used because the Company did not have sufficient historical data to conclude on the appropriate expected life of its options and because historical data to date was consistent with the simplified term method. The expected life assumption for options issued in 2011 and thereafter was estimated based primarily on the historical expected life of applicable previously issued options.
|
|
|
(B)
|
The former Manager assigned certain of its options to Fortress’s employees as follows:
|
|
|
|
|
|
|
Date of Grant
|
|
Strike Prices
|
|
Total Unexercised Inception to Date
|
Mar-11
|
|
$1.00
|
|
124,740
|
Sep-11
|
|
$1.00
|
|
209,686
|
Apr-12
|
|
$1.00
|
|
139,340
|
May-12
|
|
$1.00
|
|
158,526
|
Jul-12
|
|
$1.00
|
|
175,196
|
Jan-13
|
|
$2.32
|
|
383,332
|
Feb-13
|
|
$2.95
|
|
153,332
|
Jun-13
|
|
$3.23
|
|
268,332
|
Nov-13
|
|
$3.57
|
|
386,340
|
Aug-14
|
|
$4.01
|
|
306,166
|
|
|
Total
|
|
2,304,990
|
The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018.
|
|
(C)
|
111,770
of the total options exercised were by the former Manager.
61,417
of the total options exercised were by employees of Fortress subsequent to their assignment.
666
of the total options exercised were by directors.
|
|
|
(D)
|
Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of
$0.2 million
.
|
|
|
(E)
|
Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of
$0.9 million
.
|
|
|
(F)
|
215,853
options were exercised by employees of Fortress subsequent to their assignment with an intrinsic value of
$4.1 million
.
333
options were exercised by directors with a minimal intrinsic value.
|
|
|
(G)
|
Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of
$0.8 million
.
|
|
|
(H)
|
Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of
$0.4 million
. As a result of his resignation, the Company's former CEO forfeited
16,748
options and were transferred back to the former Manager.
|
The Company's non-employee directors were granted
54,641
RSUs during 2018 with a weighted average grant date fair value of
$5.02
, as part of the annual compensation.
The RSUs are subject to a
one
year vesting period. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. Stock-based compensation expense related to the RSUs was
$0.1 million
during the year ended
December 31, 2018
, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested RSUs was
$0.2 million
as of
December 31, 2018
and will be recognized over a weighted average of
0.7 years
.
Tax Benefits Preservation Plan
On December 5, 2018, our board of directors adopted a Tax Benefits Preservation Plan (the “2018 Tax Plan”) with American Stock Transfer and Trust Company, LLC as rights agent, and the disinterested members of the board of directors declared a dividend distribution of
one
right for each outstanding share of common stock to stockholders of record at the close of business on December 15, 2018. Each right is governed by the terms of the 2018 Tax Plan and entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series E Junior Participating Preferred Stock, par value
$0.01
per share at a purchase price of
$28.00
per unit, subject to adjustment. The Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets by deterring an “ownership change” as defined under the Code.
In connection with the adoption of the Tax Benefit Preservation Plan in 2016, our board of directors approved the Articles Supplementary of Series E Junior Participating Preferred Stock, which was filed with the State Department of Assessments and Taxation of Maryland on December 8, 2016.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
Preferred Stock
In March 2003, the Company issued
2.5 million
shares (
$62.5 million
face amount) of its
9.75%
Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred”). In October 2005, the Company issued
1.6 million
shares (
$40.0 million
face amount) of its
8.05%
Series C Cumulative Redeemable Preferred Stock (the “Series C Preferred”). In March 2007, the Company issued
2.0 million
shares (
$50.0 million
face amount) of its
8.375%
Series D Cumulative Redeemable Preferred Stock (the “Series D Preferred”). The Series B Preferred, Series C Preferred and Series D Preferred are non-voting, have a
$25
per share liquidation preference, no maturity date and no mandatory redemption. The Company has the option to redeem the Series B Preferred, the Series C Preferred and the Series D Preferred, at their liquidation preference. If the Series C Preferred or Series D Preferred cease to be listed on the NYSE or the AMEX, or quoted on the NASDAQ, and the Company is not subject to the reporting requirements of the Exchange Act, the Company has the option to redeem the Series C Preferred or Series D Preferred, as applicable, at their liquidation preference and, during such time any shares of Series C Preferred or Series D Preferred are outstanding, the dividend will increase to
9.05%
or
9.375%
per annum, respectively.
In connection with the issuance of the Series B Preferred, Series C Preferred and Series D Preferred, the Company incurred approximately
$2.4 million
,
$1.5 million
, and
$1.8 million
of costs, respectively, which were netted against the proceeds of such offerings. If any series of preferred stock were redeemed, the related costs would be recorded as an adjustment to income available for common stockholders at that time.
In March 2010, the Company settled its offer to exchange (the “Exchange Offer”) shares of its common stock and cash for shares of its preferred stock. After settlement of the Exchange Offer,
1,347,321
shares of Series B Preferred Stock,
496,000
shares of Series C Preferred Stock and
620,000
shares of Series D Preferred Stock remain outstanding for trading on the New York Stock Exchange.
As of January 31, 2019, Drive Shack Inc. had paid all current and accrued dividends on its preferred stock.
Noncontrolling Interest
The Company’s noncontrolling interest in
2017
and
2018
is related to our Traditional Golf business, a portion of which the Company does not own. In October 2016, the Company exited certain golf properties in which the Company had a noncontrolling interest. The noncontrolling interest associated with the remaining golf property has a carrying value of
zero
.
12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
On December 21, 2017, the Company entered into definitive agreements with the Manager to internalize the Company’s management (the “Internalization”). In connection with the termination of the existing Management Agreement, the Company made a payment of $
10.7 million
to the Manager in December 2017. The Internalization became effective on January 1, 2018.
On December 21, 2017, the Company entered into a Transition Services Agreement, effective as of January 1, 2018, with the former Manager. In order to facilitate the transition of the Company’s management of its operations and provide the Company sufficient time to develop such services in-house or to hire other third-party service providers for such services, under the Transition Services Agreement, the former Manager continues to provide to the Company certain services (“Transition Services”). The Transition Services primarily include information technology, legal, regulatory compliance, tax and accounting services. The Transition Services are provided for a fee intended to be equal to the former Manager’s cost of providing the Transition Services, including the allocated cost of, among other things, overhead, employee wages and compensation and out-of-pocket expenses, and will be invoiced on a monthly basis. The Company incurred
$0.4 million
in costs for Transition Services during the year ended
December 31, 2018
, and these costs are reported in general and administrative expense on the Consolidated Statements of Operations.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts incurred under the Management
Agreement
|
|
|
2017
|
|
2016
|
Management fee
|
|
$
|
10,210
|
|
|
$
|
10,204
|
|
Expense reimbursement to the former Manager
|
|
500
|
|
|
500
|
|
Termination payment
|
|
10,700
|
|
|
—
|
|
Incentive compensation
|
|
—
|
|
|
—
|
|
Total Management fee and termination payment to affiliate
|
|
$
|
21,410
|
|
|
$
|
10,704
|
|
At
December 31, 2018
, Fortress, through its affiliates, and principals of Fortress, owned
7.3 million
shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional
2.7 million
shares of the Company’s common stock (Note 11).
At
December 31, 2017
, due to affiliates was comprised of
$1.8 million
of management fees and expense reimbursements payable to the former Manager.
Other Affiliated Entities
A member of the Board of Directors owned or leased aircraft that the Company chartered from a third-party aircraft operator for business purposes in the course of operations. The Company paid the aircraft operator market rates for the charters. These amounts totaled less than
$0.1 million
for each of the three years ended
December 31, 2018
,
2017
and
2016
.
The Company leases corporate office space from an affiliate of a member of the Board of Directors. The Company incurred
$1.1 million
in rent expense for the year ended
December 31, 2018
, which represents market rates for the office space.
13.
COMMITMENTS AND CONTINGENCIES
Litigation
— The Company exited a leased property and accrued related lease exit costs of approximately
$0.8 million
in December 2016. The Company subsequently entered into a legal dispute related to this golf property. In June 2018, the Company accrued an additional
$6.6 million
for a total of
$7.4 million
to settle this legal dispute, which was recorded as accounts payable and accrued expenses in the Consolidated Balance Sheet. In July 2018, the Company settled the dispute for
$7.4 million
, with
$5.2 million
payable immediately and
$2.2 million
payable in
six
quarterly installments. The Company paid a total of
$0.7 million
of the quarterly installments as of
December 31, 2018
, and the final payment is due in December 2019.
The Company is and may become, from time to time, involved in legal actions in the ordinary course of business, including governmental and administrative investigations, inquiries and proceedings concerning employment, labor, environmental and other claims. Although management is unable to predict with certainty the eventual outcome of any legal action, management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at
December 31, 2018
, will not materially affect the Company’s consolidated results of operations, financial position or cash flow. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our financial results.
Environmental Costs
—
As a commercial real estate owner, the Company is subject to potential environmental costs. At
December 31, 2018
, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company’s consolidated financial position or results of operations.
Operating lease obligations, Entertainment and Traditional Golf
–
Entertainment Golf enters into ground leases for construction of new venues. Traditional Golf leases many of its golf courses and related facilities under long-term operating leases, including triple net leases. In addition to minimum payments, certain leases require the payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The triple net leases require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of the lease terms range from
10
to
20
years and, typically, the leases contain renewal options. Certain leases include minimum scheduled increases in rental payments at various times during the term of the lease. These scheduled rent increases are recognized on a straight-line basis over the term of the lease, resulting in an accrual, which is included in other current liabilities and other liabilities, for the amount by which the cumulative straight-line rent exceeds the contractual cash rent.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
The Company is required to maintain bonds under certain third-party agreements, as requested by certain utility providers, and under the rules and regulations of licensing authorities and other governmental agencies. The Company had bonds outstanding of approximately
$2.0 million
as of both
December 31, 2018
and
2017
.
Traditional Golf leases certain golf carts and equipment under operating leases that range from
one
to
three
years. Rental expenses recorded under operating leases for carts and equipment were
$1.9 million
,
$3.0 million
and
$3.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Traditional Golf has
four
month-to-month property leases which are cancellable by the parties with
30
days written notice. Traditional Golf also has various month-to-month operating leases for carts and equipment. The aggregate monthly expense of these leases was
$0.4 million
.
The future minimum rental commitments under non-cancellable leases, net of subleases, as of
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ending December 31:
|
|
Traditional Golf
|
|
Entertainment Golf
|
|
Total
|
2019
|
|
$
|
29,379
|
|
|
$
|
576
|
|
|
$
|
29,955
|
|
2020
|
|
28,446
|
|
|
1,235
|
|
|
29,681
|
|
2021
|
|
23,078
|
|
|
1,959
|
|
|
25,037
|
|
2022
|
|
20,945
|
|
|
2,414
|
|
|
23,359
|
|
2023
|
|
20,707
|
|
|
2,521
|
|
|
23,228
|
|
Thereafter
|
|
127,298
|
|
|
44,350
|
|
|
171,648
|
|
Total Minimum lease payments
|
|
$
|
249,853
|
|
|
$
|
53,055
|
|
|
$
|
302,908
|
|
Contingencies
- In September 2017, Hurricane Irma caused significant damage to a Traditional Golf property in Florida, including damage to trees, bunkers and other landscaping. The
three
golf courses at this property were closed immediately and reopened prior to December 31, 2017. The property is insured for property damage and business interruption losses related to such events, subject to deductibles and policy limits. The Company has incurred $
5.5 million
in property repair costs related to Hurricane Irma, of which
$1.3 million
was incurred in 2018. The Company was reimbursed
$2.0 million
and
$3.0 million
by the insurer in
2017
and
2018
, respectively. Property damage costs and insurance reimbursement are recorded in operating expenses on the Consolidated Statements of Operations.
Membership Deposit Liability
– In the Traditional Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable
30
years after the date of acceptance as a member. As of
December 31, 2018
, the total face amount of initiation fee deposits was approximately
$244.6 million
.
Restricted Cash
– Approximately
$3.3 million
of restricted cash at
December 31, 2018
is used as credit enhancement for Traditional Golf’s obligations related to the performance of lease and loan agreements and certain insurance claims.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
14.
INCOME TAXES
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
211
|
|
|
$
|
710
|
|
|
$
|
28
|
|
State and Local
|
73
|
|
|
255
|
|
|
64
|
|
Total Current Provision
|
$
|
284
|
|
|
$
|
965
|
|
|
$
|
92
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83
|
|
State and Local
|
—
|
|
|
—
|
|
|
14
|
|
Total Deferred Provision
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97
|
|
|
|
|
|
|
|
Total Provision for Income Taxes
|
$
|
284
|
|
|
$
|
965
|
|
|
$
|
189
|
|
On February 23, 2017, the Company revoked its election to be treated as a REIT effective January 1, 2017, and as a result, is subject to U.S federal and state corporate income tax. The Company operated in a manner intended to qualify as a REIT for federal income tax purposes through the tax year ending December 31, 2016.
As of
December 31, 2018
, the Company has a net operating loss carryforward of approximately
$331.3 million
that is available to offset future U.S. federal taxable income, if and when it arises. The net operating loss carryforward will begin to expire in 2029. A portion of the net operating loss carryforward may be limited in its use due to certain provisions of the Code, including, but not limited to Section 382, which imposes an annual limit on the amount of net operating loss and net capital loss carryforwards that the Company can use to offset future taxable income. The Company experienced an “ownership change” for purposes of Section 382 of the Code in January 2013.
As of December 31, 2018, the Company has a capital loss carryforward of approximately
$27.2 million
. The capital loss carryforward will begin to expire in 2022.
The Company and its subsidiaries file U.S. federal and state income tax returns in various jurisdictions. Generally, the Company is no longer subject to tax examinations by tax authorities for years prior to 2015. One of the Company’s subsidiaries is currently under IRS examination for the 2014 tax year. At this time, the Company cannot estimate when the examination will conclude or the impact such examination will have on its Consolidated Financial Statements, if any.
The Company has assessed its tax positions for all open years. As of December 31, 2018, the Company recorded
$0.7 million
of unrecognized tax benefits which, if recognized, would affect the Company’s effective tax rate. The Company does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
A reconciliation of the unrecognized tax benefits is as follows:
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
—
|
|
Increase due to tax positions of prior years
|
568
|
|
Increase due to tax positions of current year
|
153
|
|
Balance as of December 31, 2018
|
$
|
721
|
|
Generally, the Company’s effective tax rate differs from the federal statutory rate as a result of state and local taxes and changes in the valuation allowance.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
The difference between the Company's reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Provision at the statutory rate
|
21.00
|
%
|
|
35.00
|
%
|
|
35.00
|
%
|
Non-taxable REIT income
|
—
|
%
|
|
—
|
%
|
|
(51.97
|
)%
|
Permanent items
|
(1.12
|
)%
|
|
(0.36
|
)%
|
|
0.23
|
%
|
State and local taxes
|
(0.15
|
)%
|
|
(0.42
|
)%
|
|
0.07
|
%
|
Valuation allowance
|
(19.97
|
)%
|
|
64.46
|
%
|
|
15.56
|
%
|
Effects of change in tax rate
|
—
|
%
|
|
(101.31
|
)%
|
|
—
|
%
|
Unrecognized tax benefits
|
(1.84
|
)%
|
|
—
|
%
|
|
—
|
%
|
Tax credits
|
1.36
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
—
|
%
|
|
0.31
|
%
|
|
1.35
|
%
|
Total provision (benefit)
|
(0.72
|
)%
|
|
(2.32
|
)%
|
|
0.24
|
%
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2018
and
2017
are presented below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
292
|
|
|
$
|
242
|
|
Depreciation and amortization
|
8,964
|
|
|
26,038
|
|
Accrued expenses
|
2,701
|
|
|
1,936
|
|
Interest
|
3,445
|
|
|
4,538
|
|
Net operating losses
|
89,903
|
|
|
100,297
|
|
Capital losses
|
7,352
|
|
|
6,070
|
|
Deferred revenue
|
1,960
|
|
|
2,295
|
|
Other
|
5,306
|
|
|
2,225
|
|
Total deferred tax assets
|
119,923
|
|
|
143,641
|
|
Less valuation allowance
|
(104,705
|
)
|
|
(106,466
|
)
|
Net deferred tax assets
|
$
|
15,218
|
|
|
$
|
37,175
|
|
Deferred tax liabilities:
|
|
|
|
Leaseholds
|
7,025
|
|
|
8,568
|
|
Cancellation of debt
|
—
|
|
|
23,385
|
|
Membership deposit liabilities
|
8,193
|
|
|
5,222
|
|
Total deferred tax liabilities
|
$
|
15,218
|
|
|
$
|
37,175
|
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
As of
December 31, 2018
, the Company recorded a full valuation allowance against its net deferred tax assets as management does not believe that it is more likely than not that the net deferred tax assets will be realized.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
The following table summarizes the change in the deferred tax asset valuation allowance:
|
|
|
|
|
Valuation allowance at December 31, 2017
|
$
|
106,466
|
|
Decrease due to current year operations
|
(1,761
|
)
|
Valuation allowance at December 31, 2018
|
$
|
104,705
|
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates and eliminating the alternative minimum tax (“AMT”) for corporate taxpayers. The Company has accounted for the effects of the Tax Act for the year ended December 31, 2017 which relates to the re-measure of deferred tax assets and liabilities due to the reduction in the corporate income tax rate and has booked a non-recurring income tax receivable in the amount of
$0.6 million
due to refundable AMT credits. Due to the full valuation allowance, the re-measure of deferred tax assets and liabilities had no impact on the income tax provision for the year ended
December 31, 2017
.
15. IMPAIRMENT
The following table summarizes the amounts the Company recorded in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Traditional golf properties
|
|
$
|
8,093
|
|
|
$
|
—
|
|
|
$
|
6,232
|
|
Debt and equity securities
|
|
—
|
|
|
—
|
|
|
110
|
|
Valuation allowance on loans
|
|
147
|
|
|
60
|
|
|
4,039
|
|
Total impairment
|
|
$
|
8,240
|
|
|
$
|
60
|
|
|
$
|
10,381
|
|
Held for Use Impairment:
The Company reviews long-lived assets quarterly to determine whether triggering events have occurred that require a test to determine if the carrying amounts of the assets are recoverable.
As of December 31, 2016, the Company evaluated the recoverability of the carrying value of its Traditional Golf properties in Oregon and California based on estimates of undiscounted future cash flows. Based on the analysis, the Company recorded an impairment charge of
$2.7 million
at December 31, 2016 reducing the aggregate carrying values of these properties from
$4.1 million
to their estimated fair values of
$1.4 million
. The Company determined these impairments based on determination of fair value using internal cash flow models and sales data gathered from market participants. In December 2018, the Company recorded impairments of long-lived assets totaling
$0.9 million
on
three
golf properties within the Traditional Golf segment. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value these properties falls within Level 3 for fair value reporting.
Held-for-Sale Impairment:
On December 2, 2016, the Company entered into a letter of intent to sell a golf property located in New Jersey. As of December 31, 2016, the Company classified the property as held-for-sale in accordance with applicable accounting standards for long lived assets. The carrying value of the property exceeded the fair value less anticipated costs to sell. As a result, the Company recognized an impairment loss totaling approximately
$3.6 million
as of December 31, 2016. The fair value measurement was based on the pricing in the letter of intent as well as internal cash flow models and determined that the significant inputs used to value this property falls within Level 3 for fair value reporting.
Upon reclassification in March 2018 (see Note 5), the Company assessed the real estate assets, held-for-sale and determined that the carrying value of
one
property exceeded the fair value less anticipated costs to sell. In March 2018, the Company recognized an impairment loss totaling approximately
$1.3 million
. The fair value measurement was based on the pricing in a letter of intent and internal valuation models. The significant inputs used to value this property falls within Level 3 for fair value reporting.
In 2018, the Company reassessed the real estate assets, held-for-sale, net on a quarterly basis and determined that the carrying value of
four
golf properties exceeded the fair value less anticipated costs to sell. As a result, the Company recognized impairment loss and recorded accumulated impairment totaling approximately
$5.7 million
. The fair value measurements were based on executed purchase agreements or letters of intent that the Company intended to pursue. The significant inputs used to value these property falls within Level 3 for fair value reporting.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 and 2016
(dollars in tables in thousands, except per share data)
16.
SUBSEQUENT EVENTS
These financial statements include a discussion of material events which have occurred subsequent to
December 31, 2018
through the issuance of these Consolidated Financial Statements.
On March 13, 2019, the Company declared dividends of
$0.609375
,
$0.503125
, and
$0.523438
per share on the
9.750%
Series B,
8.050%
Series C and
8.375%
Series D preferred stock, respectively, for the period beginning February 1, 2019 and ending April 30, 2019. Dividends totaling
$1.4 million
will be paid on April 30, 2019 to shareholders of record on April 1, 2019.
In January 2019, the Company consummated on the sale of a private golf property in California and a public golf property in Georgia for a sale price of
$24.8 million
.
In 2019, a former employee filed a class action complaint against the Company alleging that our Traditional Golf properties in the State of New York did not comply with state wage and hour laws. The Company has not accrued additional losses in connection with this legal dispute because management does not believe there is a probable and reasonably estimable loss at this time. However, the ultimate outcome of the proceedings may have a material adverse effect on our business, financial position or results of operations.
17.
SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Quarter Ended
|
|
Year Ended
|
|
March 31 (A)(B)
|
|
June 30 (A)(B)
|
|
September 30 (A)(B)
|
|
December 31 (B)
|
|
December 31 (B)
|
Total revenues
|
$
|
66,660
|
|
|
$
|
91,004
|
|
|
$
|
87,419
|
|
|
$
|
69,286
|
|
|
$
|
314,369
|
|
Total operating costs
|
78,946
|
|
|
87,976
|
|
|
94,619
|
|
|
79,262
|
|
|
340,803
|
|
Operating loss (income)
|
(12,286
|
)
|
|
3,028
|
|
|
(7,200
|
)
|
|
(9,976
|
)
|
|
(26,434
|
)
|
Total other income (expenses)
|
(4,009
|
)
|
|
(7,831
|
)
|
|
(6,875
|
)
|
|
6,750
|
|
|
(11,965
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
284
|
|
|
284
|
|
Net loss
|
(16,295
|
)
|
|
(4,803
|
)
|
|
(14,075
|
)
|
|
(3,510
|
)
|
|
(38,683
|
)
|
Preferred dividends
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(17,690
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(15,470
|
)
|
|
$
|
(4,905
|
)
|
|
$
|
(44,263
|
)
|
Loss applicable to common stock, per share
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.66
|
)
|
Diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.66
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
66,977,104
|
|
|
66,977,104
|
|
|
66,992,322
|
|
|
67,027,104
|
|
|
66,993,543
|
|
Diluted
|
66,977,104
|
|
|
66,977,104
|
|
|
66,992,322
|
|
|
67,027,104
|
|
|
66,993,543
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Quarter Ended
|
|
Year Ended
|
|
March 31 (A)(B)
|
|
June 30 (A)(B)
|
|
September 30 (A)(B)
|
|
December 31 (B)
|
|
December 31
|
Total revenues
|
$
|
59,141
|
|
|
$
|
81,360
|
|
|
$
|
81,691
|
|
|
$
|
70,402
|
|
|
$
|
292,594
|
|
Total operating costs
|
73,887
|
|
|
87,113
|
|
|
86,012
|
|
|
90,493
|
|
|
337,505
|
|
Operating loss
|
(14,746
|
)
|
|
(5,753
|
)
|
|
(4,321
|
)
|
|
(20,091
|
)
|
|
(44,911
|
)
|
Total other income (expenses)
|
2,331
|
|
|
1,557
|
|
|
3,850
|
|
|
(4,063
|
)
|
|
3,675
|
|
Income tax expense (benefit)
|
539
|
|
|
510
|
|
|
(2
|
)
|
|
(82
|
)
|
|
965
|
|
Net loss
|
(12,954
|
)
|
|
(4,706
|
)
|
|
(469
|
)
|
|
(24,072
|
)
|
|
(42,201
|
)
|
Preferred dividends
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(14,349
|
)
|
|
$
|
(6,101
|
)
|
|
$
|
(1,864
|
)
|
|
$
|
(25,467
|
)
|
|
$
|
(47,781
|
)
|
Loss applicable to common stock, per share
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.21
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.71
|
)
|
Diluted
|
$
|
(0.21
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.71
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
66,841,977
|
|
|
66,874,155
|
|
|
66,932,744
|
|
|
66,963,297
|
|
|
66,903,457
|
|
Diluted
|
66,841,977
|
|
|
66,874,155
|
|
|
66,932,744
|
|
|
66,963,297
|
|
|
66,903,457
|
|
|
|
(A)
|
The Loss Applicable to Common Stockholders shown agrees with the Company’s quarterly report(s) on Form 10-Q as filed with the Securities and Exchange Commission.
|
|
|
(B)
|
The options and RSUs outstanding are excluded from the diluted share calculation as their effect would have been anti-dilutive.
|