ITEM 1. FINANCIAL STATEMENTS
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
49,599
|
|
|
$
|
79,235
|
|
Restricted cash
|
3,365
|
|
|
3,326
|
|
Accounts receivable, net
|
5,635
|
|
|
7,518
|
|
Real estate assets, held-for-sale, net
|
51,931
|
|
|
75,862
|
|
Real estate securities, available-for-sale
|
3,007
|
|
|
2,953
|
|
Other current assets
|
20,331
|
|
|
20,505
|
|
Total current assets
|
133,868
|
|
|
189,399
|
|
Restricted cash, noncurrent
|
258
|
|
|
258
|
|
Property and equipment, net of accumulated depreciation
|
157,636
|
|
|
132,605
|
|
Operating lease right-of-use assets
|
223,278
|
|
|
—
|
|
Intangibles, net of accumulated amortization
|
20,952
|
|
|
48,388
|
|
Other investments
|
22,956
|
|
|
22,613
|
|
Other assets
|
5,043
|
|
|
8,684
|
|
Total assets
|
$
|
563,991
|
|
|
$
|
401,947
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Current liabilities
|
|
|
|
Obligations under finance leases
|
$
|
6,790
|
|
|
$
|
5,489
|
|
Membership deposit liabilities
|
8,834
|
|
|
8,861
|
|
Accounts payable and accrued expenses
|
37,740
|
|
|
45,284
|
|
Deferred revenue
|
14,738
|
|
|
18,793
|
|
Real estate liabilities, held-for-sale
|
813
|
|
|
2,947
|
|
Other current liabilities
|
29,277
|
|
|
22,285
|
|
Total current liabilities
|
98,192
|
|
|
103,659
|
|
Credit facilities and obligations under finance leases - noncurrent
|
13,185
|
|
|
10,489
|
|
Operating lease liabilities - noncurrent
|
190,229
|
|
|
—
|
|
Junior subordinated notes payable
|
51,198
|
|
|
51,200
|
|
Membership deposit liabilities, noncurrent
|
92,603
|
|
|
90,684
|
|
Deferred revenue, noncurrent
|
5,445
|
|
|
6,016
|
|
Other liabilities
|
3,076
|
|
|
5,232
|
|
Total liabilities
|
$
|
453,928
|
|
|
$
|
267,280
|
|
|
|
|
|
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 March 31, 2019 and December 31, 2018
|
$
|
61,583
|
|
|
$
|
61,583
|
|
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,027,104 and 67,027,104 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
670
|
|
|
670
|
|
Additional paid-in capital
|
3,177,065
|
|
|
3,175,843
|
|
Accumulated deficit
|
(3,131,133
|
)
|
|
(3,105,307
|
)
|
Accumulated other comprehensive income
|
1,878
|
|
|
1,878
|
|
Total equity
|
$
|
110,063
|
|
|
$
|
134,667
|
|
|
|
|
|
Total liabilities and equity
|
$
|
563,991
|
|
|
$
|
401,947
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
Golf operations
|
$
|
44,706
|
|
|
$
|
53,554
|
|
Sales of food and beverages
|
9,246
|
|
|
13,106
|
|
Total revenues
|
53,952
|
|
|
66,660
|
|
|
|
|
|
Operating costs
|
|
|
|
Operating expenses
|
47,723
|
|
|
57,379
|
|
Cost of sales - food and beverages
|
2,698
|
|
|
4,040
|
|
General and administrative expense
|
11,619
|
|
|
9,192
|
|
Depreciation and amortization
|
4,924
|
|
|
5,548
|
|
Pre-opening costs
|
1,179
|
|
|
1,556
|
|
Impairment
|
4,088
|
|
|
1,473
|
|
Realized and unrealized (gain) on investments
|
—
|
|
|
(242
|
)
|
Total operating costs
|
72,231
|
|
|
78,946
|
|
Operating loss
|
(18,279
|
)
|
|
(12,286
|
)
|
|
|
|
|
Other income (expenses)
|
|
|
|
Interest and investment income
|
344
|
|
|
446
|
|
Interest expense, net
|
(2,153
|
)
|
|
(4,049
|
)
|
Other income (loss), net
|
5,488
|
|
|
(406
|
)
|
Total other income (expenses)
|
3,679
|
|
|
(4,009
|
)
|
Loss before income tax
|
(14,600
|
)
|
|
(16,295
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
Net Loss
|
(14,600
|
)
|
|
(16,295
|
)
|
Preferred dividends
|
(1,395
|
)
|
|
(1,395
|
)
|
Loss Applicable to Common Stockholders
|
$
|
(15,995
|
)
|
|
$
|
(17,690
|
)
|
|
|
|
|
Loss Applicable to Common Stock, per share
|
|
|
|
|
|
Basic
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Diluted
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
Weighted Average Number of Shares of Common Stock Outstanding
|
|
|
|
|
|
Basic
|
67,027,104
|
|
|
66,977,104
|
|
Diluted
|
67,027,104
|
|
|
66,977,104
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Net loss
|
|
$
|
(14,600
|
)
|
|
$
|
(16,295
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Net unrealized gain on available-for-sale securities
|
|
—
|
|
|
33
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
33
|
|
Total comprehensive loss
|
|
$
|
(14,600
|
)
|
|
$
|
(16,262
|
)
|
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity
|
|
$
|
(14,600
|
)
|
|
$
|
(16,262
|
)
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drive Shack Inc. Stockholders
|
|
Preferred Stock
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional Paid-
in Capital
|
|
Accumulated
Deficit
|
|
Accumulated Other Comp.
Income
|
|
Total Equity (Deficit)
|
Equity (deficit) - December 31, 2017
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,977,104
|
|
|
$
|
670
|
|
|
$
|
3,173,281
|
|
|
$
|
(3,065,853
|
)
|
|
$
|
1,370
|
|
|
$
|
171,051
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,395
|
)
|
|
—
|
|
|
(1,395
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
278
|
|
Adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,809
|
|
|
—
|
|
|
4,809
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,295
|
)
|
|
—
|
|
|
(16,295
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
33
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,262
|
)
|
Equity (deficit) - March 31, 2018
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,977,104
|
|
|
$
|
670
|
|
|
$
|
3,173,559
|
|
|
$
|
(3,078,734
|
)
|
|
$
|
1,403
|
|
|
$
|
158,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit) - December 31, 2018
|
2,463,321
|
|
|
$
|
61,583
|
|
|
67,027,104
|
|
|
$
|
670
|
|
|
$
|
3,175,843
|
|
|
$
|
(3,105,307
|
)
|
|
$
|
1,878
|
|
|
$
|
134,667
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,395
|
)
|
|
—
|
|
|
(1,395
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,222
|
|
|
—
|
|
|
—
|
|
|
1,222
|
|
Adoption of ASC 842
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,831
|
)
|
|
|
|
(9,831
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,600
|
)
|
|
—
|
|
|
(14,600
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,600
|
)
|
Equity (deficit) - March 31, 2019
|
2,463,321
|
|
|
$
|
61,583
|
|
|
67,027,104
|
|
|
$
|
670
|
|
|
$
|
3,177,065
|
|
|
$
|
(3,131,133
|
)
|
|
$
|
1,878
|
|
|
$
|
110,063
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Cash Flows From Operating Activities
|
|
|
|
Net loss
|
$
|
(14,600
|
)
|
|
$
|
(16,295
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
4,924
|
|
|
5,548
|
|
Amortization of discount and premium
|
(56
|
)
|
|
288
|
|
Other amortization
|
3,566
|
|
|
2,711
|
|
Amortization of revenue on golf membership deposit liabilities
|
(379
|
)
|
|
(349
|
)
|
Amortization of prepaid golf membership dues
|
(3,323
|
)
|
|
(6,270
|
)
|
Stock-based compensation
|
1,222
|
|
|
278
|
|
Impairment
|
4,088
|
|
|
1,473
|
|
Equity in earnings from equity method investments, net of distributions
|
(341
|
)
|
|
(379
|
)
|
Other (gains) losses, net
|
(5,022
|
)
|
|
2
|
|
Unrealized (gain) on investments
|
—
|
|
|
(242
|
)
|
Loss on extinguishment of debt
|
16
|
|
|
52
|
|
Change in:
|
|
|
|
|
|
Accounts receivable, net, other current assets and other assets - noncurrent
|
(1,052
|
)
|
|
(1,983
|
)
|
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
|
(11,234
|
)
|
|
(353
|
)
|
Net cash used in operating activities
|
(22,191
|
)
|
|
(15,519
|
)
|
Cash Flows From Investing Activities
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
17,749
|
|
|
—
|
|
Acquisition and additions of property and equipment and intangibles
|
(22,717
|
)
|
|
(15,378
|
)
|
Net cash used in investing activities
|
(4,968
|
)
|
|
(15,378
|
)
|
Cash Flows From Financing Activities
|
|
|
|
Repayments of debt obligations
|
(1,397
|
)
|
|
(1,141
|
)
|
Golf membership deposits received
|
357
|
|
|
861
|
|
Preferred stock dividends paid
|
(1,395
|
)
|
|
(1,395
|
)
|
Other financing activities
|
(3
|
)
|
|
(105
|
)
|
Net cash used in financing activities
|
(2,438
|
)
|
|
(1,780
|
)
|
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
|
(29,597
|
)
|
|
(32,677
|
)
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
|
82,819
|
|
|
173,688
|
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
|
$
|
53,222
|
|
|
$
|
141,011
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
Preferred stock dividends declared but not paid
|
$
|
930
|
|
|
$
|
930
|
|
Additions to finance lease assets and liabilities
|
$
|
6,352
|
|
|
$
|
1,170
|
|
Additions to property and equipment and accounts payable
|
$
|
2,258
|
|
|
$
|
6,599
|
|
Additions for operating lease right-of-use assets and operating lease liabilities
|
$
|
200,368
|
|
|
$
|
—
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
1. ORGANIZATION
Drive Shack Inc., which is referred to, together with its subsidiaries, as “Drive Shack Inc.” or the “Company” is a leading owner and operator of golf-related leisure 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 opened its first Entertainment Golf 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 operators of golf properties in the United States. As of
March 31, 2019
, the Company owned, leased or managed
64
properties across
11
states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
—
The accompanying Consolidated Financial Statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended
December 31, 2018
and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended
December 31, 2018
.
As of
March 31, 2019
, the Company’s significant accounting policies for these financial statements are summarized below and should be read in conjunction with the Summary of Significant Accounting Policies detailed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net
—
These items are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Unrealized (gain) on non-hedge derivative instruments
|
—
|
|
|
(242
|
)
|
Realized and unrealized (gain) loss on investments
|
$
|
—
|
|
|
$
|
(242
|
)
|
|
|
|
|
Loss on lease modifications and terminations
|
$
|
—
|
|
|
$
|
(771
|
)
|
Loss on extinguishment of debt, net
|
(16
|
)
|
|
(52
|
)
|
Collateral management fee income, net
|
128
|
|
|
154
|
|
Equity in earnings of equity method investments
|
341
|
|
|
379
|
|
Gain (loss) on sale of long-lived assets and intangibles
|
5,029
|
|
|
(206
|
)
|
Other income
|
6
|
|
|
90
|
|
Other income (loss), net
|
$
|
5,488
|
|
|
$
|
(406
|
)
|
Property and Equipment, Net
—
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.
Leasing Arrangements
—
The Company evaluates at lease inception whether an arrangement is or contains a lease by providing the Company with the right to control an asset. Operating leases are accounted for on balance sheet with the Right of Use (“ROU”) assets and lease liabilities recognized in "Operating lease right-of-use assets," "Other current liabilities" and "Operating lease liabilities - noncurrent" in the Consolidated Balance Sheets. Finance lease ROU assets, current lease liabilities and noncurrent lease liabilities are recognized in "Property and equipment, net of accumulated depreciation", and "Obligations under finance leases" and "Credit facilities and obligations under finance leases - noncurrent" in the Consolidated Balance Sheets, respectively.
All lease liabilities are measured at the present value of the associated payments, discounted using the Company’s incremental borrowing rate determined using a portfolio approach based on the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for similar term and in a similar economic environment on a collateralized basis. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid rent, and lease incentives received. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in "Depreciation and amortization" on the Consolidated Statements of Operations.
In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, which are payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments as well as payment of taxes assessed against the leased property. The leases generally also require the payment for the cost of insurance and maintenance. Variable lease payments are recognized when the associated activity occurs and contingency is resolved.
The Company has elected to combine lease and non-lease components for all lease contracts. Additionally, the Company does not recognize ROU assets and lease liabilities for arrangements with lease terms of 12 months or less and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred.
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
March 31, 2019
and
December 31, 2018
, the carrying value of this investment was
$23.0 million
and
$22.6
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
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.
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 by sale are recorded at the lower of carrying amount or fair value less costs to sell.
Other Current Assets
The following table summarizes the Company's other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Prepaid expenses
|
|
$
|
2,310
|
|
|
$
|
2,651
|
|
Deposits
|
|
2,606
|
|
|
2,494
|
|
Inventory
|
|
3,025
|
|
|
2,855
|
|
Miscellaneous current assets, net
|
|
12,390
|
|
|
12,505
|
|
Other current assets
|
|
$
|
20,331
|
|
|
$
|
20,505
|
|
Other Assets
The following table summarizes the Company's other assets:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Prepaid expenses
|
|
$
|
334
|
|
|
$
|
277
|
|
Deposits
|
|
2,127
|
|
|
2,140
|
|
Miscellaneous assets, net
|
|
2,582
|
|
|
6,267
|
|
Other assets
|
|
$
|
5,043
|
|
|
$
|
8,684
|
|
Other Current Liabilities
The following table summarizes the Company's other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Security deposits payable
|
|
$
|
6,435
|
|
|
$
|
14,188
|
|
Operating lease liabilities
|
|
16,924
|
|
|
—
|
|
Accrued rent
|
|
1,707
|
|
|
2,885
|
|
Dividends payable
|
|
930
|
|
|
930
|
|
Miscellaneous current liabilities
|
|
3,281
|
|
|
4,282
|
|
Other current liabilities
|
|
$
|
29,277
|
|
|
$
|
22,285
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
Other Liabilities
The following table summarized the Company's other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Security deposits payable
|
|
$
|
271
|
|
|
$
|
91
|
|
Service obligation intangible
|
|
2,043
|
|
|
2,759
|
|
Accrued rent
|
|
—
|
|
|
1,617
|
|
Miscellaneous liabilities
|
|
762
|
|
|
765
|
|
Other liabilities
|
|
$
|
3,076
|
|
|
$
|
5,232
|
|
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. The Company has utilized the effective date transition method and accordingly is not required to adjust its comparative period financial information for effects of ASU 2016-02. The Company has elected to adopt practical expedients which permits it to not reassess its prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company elected to combine lease and non-lease components for all lease contracts and also elected not to recognize ROU assets and lease liabilities for leases with terms of 12 months or less. The Company has also elected to adopt the practical expedient for land easements which permits it not to evaluate existing and expired land easements under the new standard. The adoption of ASU 2016-02 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition of operating lease right-of-use assets and operating lease liabilities of
$225.6 million
and
$205.9 million
, respectively, with the difference primarily due to reclassifications of leasehold intangibles and an adjustment to accumulated deficit. There was no material impact on the Consolidated Statements of Operations.
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 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 timing for adoption and the impact it may have on its Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
3. REVENUES
The majority of the Company’s revenue is 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Three Months Ended March 31, 2018
|
|
|
Ent. golf venues
|
|
Public golf properties
|
|
Private golf properties
|
|
Managed golf properties
|
|
Total
|
|
Ent. golf venues
|
|
Public golf properties
|
|
Private golf properties
|
|
Managed golf properties
|
|
Total
|
Golf operations
|
|
$
|
681
|
|
|
$
|
17,464
|
|
|
$
|
15,454
|
|
|
$
|
11,107
|
|
|
$
|
44,706
|
|
|
$
|
—
|
|
|
$
|
22,370
|
|
|
$
|
25,949
|
|
|
$
|
5,235
|
|
|
$
|
53,554
|
|
Sales of food and beverages
|
|
1,040
|
|
|
5,476
|
|
|
2,730
|
|
|
—
|
|
|
9,246
|
|
|
—
|
|
|
7,207
|
|
|
5,899
|
|
|
—
|
|
|
13,106
|
|
Total revenues
|
|
$
|
1,721
|
|
|
$
|
22,940
|
|
|
$
|
18,184
|
|
|
$
|
11,107
|
|
|
$
|
53,952
|
|
|
$
|
—
|
|
|
$
|
29,577
|
|
|
$
|
31,848
|
|
|
$
|
5,235
|
|
|
$
|
66,660
|
|
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 operators of golf properties in the United States. As of
March 31, 2019
, the Company owned, leased or managed
64
Traditional Golf 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 8) 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 (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
Summary financial data on the Company’s segments is given below, together with a reconciliation to the same data for the Company as a whole:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate
|
|
Total
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations
|
|
$
|
681
|
|
|
$
|
44,025
|
|
|
$
|
—
|
|
|
$
|
44,706
|
|
Sales of food and beverages
|
|
1,040
|
|
|
8,206
|
|
|
—
|
|
|
9,246
|
|
Total revenues
|
|
1,721
|
|
|
52,231
|
|
|
—
|
|
|
53,952
|
|
Operating costs
|
|
|
|
|
|
|
|
|
Operating expenses (A)
|
|
1,747
|
|
|
45,976
|
|
|
—
|
|
|
47,723
|
|
Cost of sales - food and beverages
|
|
251
|
|
|
2,447
|
|
|
—
|
|
|
2,698
|
|
General and administrative expense
|
|
3,379
|
|
|
3,897
|
|
|
3,944
|
|
|
11,220
|
|
General and administrative expense - acquisition and transaction expenses (B)
|
|
157
|
|
|
153
|
|
|
89
|
|
|
399
|
|
Depreciation and amortization
|
|
709
|
|
|
4,217
|
|
|
(2
|
)
|
|
4,924
|
|
Pre-opening costs (C)
|
|
1,179
|
|
|
—
|
|
|
—
|
|
|
1,179
|
|
Impairment
|
|
—
|
|
|
4,088
|
|
|
—
|
|
|
4,088
|
|
Realized and unrealized (gain) on investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operating costs
|
|
7,422
|
|
|
60,778
|
|
|
4,031
|
|
|
72,231
|
|
Operating loss
|
|
(5,701
|
)
|
|
(8,547
|
)
|
|
(4,031
|
)
|
|
(18,279
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
132
|
|
|
38
|
|
|
174
|
|
|
344
|
|
Interest expense (D)
|
|
(3
|
)
|
|
(2,190
|
)
|
|
(626
|
)
|
|
(2,819
|
)
|
Capitalized interest (D)
|
|
—
|
|
|
188
|
|
|
478
|
|
|
666
|
|
Other (loss) income, net
|
|
(7
|
)
|
|
5,030
|
|
|
465
|
|
|
5,488
|
|
Total other income (expenses)
|
|
122
|
|
|
3,066
|
|
|
491
|
|
|
3,679
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
(5,579
|
)
|
|
(5,481
|
)
|
|
(3,540
|
)
|
|
(14,600
|
)
|
Preferred dividends
|
|
—
|
|
|
—
|
|
|
(1,395
|
)
|
|
(1,395
|
)
|
Loss applicable to common stockholders
|
|
$
|
(5,579
|
)
|
|
$
|
(5,481
|
)
|
|
$
|
(4,935
|
)
|
|
$
|
(15,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (E)
|
|
Total
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Total assets
|
|
164,907
|
|
|
351,877
|
|
|
47,207
|
|
|
563,991
|
|
Total liabilities
|
|
42,054
|
|
|
349,987
|
|
|
61,887
|
|
|
453,928
|
|
Preferred stock
|
|
—
|
|
|
—
|
|
|
61,583
|
|
|
61,583
|
|
Noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity attributable to common stockholders
|
|
$
|
122,853
|
|
|
$
|
1,890
|
|
|
$
|
(76,263
|
)
|
|
$
|
48,480
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including finance leases) during the three months ended March 31, 2019
|
|
$
|
28,037
|
|
|
$
|
2,106
|
|
|
$
|
800
|
|
|
$
|
30,943
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
Summary segment financial data (continued).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (F)
|
|
Total
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations
|
|
$
|
—
|
|
|
$
|
53,554
|
|
|
$
|
—
|
|
|
$
|
53,554
|
|
Sales of food and beverages
|
|
—
|
|
|
13,106
|
|
|
—
|
|
|
13,106
|
|
Total revenues
|
|
—
|
|
|
66,660
|
|
|
—
|
|
|
66,660
|
|
Operating costs
|
|
|
|
|
|
|
|
|
Operating expenses (A)
|
|
—
|
|
|
57,379
|
|
|
—
|
|
|
57,379
|
|
Cost of sales - food and beverages
|
|
—
|
|
|
4,040
|
|
|
—
|
|
|
4,040
|
|
General and administrative expense
|
|
1,102
|
|
|
4,153
|
|
|
2,080
|
|
|
7,335
|
|
General and administrative expense - acquisition and transaction expenses (B)
|
|
1,253
|
|
|
307
|
|
|
297
|
|
|
1,857
|
|
Depreciation and amortization
|
|
30
|
|
|
5,513
|
|
|
5
|
|
|
5,548
|
|
Pre-opening costs (C)
|
|
1,556
|
|
|
—
|
|
|
—
|
|
|
1,556
|
|
Impairment
|
|
—
|
|
|
1,326
|
|
|
147
|
|
|
1,473
|
|
Realized and unrealized (gain) on investments
|
|
—
|
|
|
(242
|
)
|
|
—
|
|
|
(242
|
)
|
Total operating costs
|
|
3,941
|
|
|
72,476
|
|
|
2,529
|
|
|
78,946
|
|
Operating loss
|
|
(3,941
|
)
|
|
(5,816
|
)
|
|
(2,529
|
)
|
|
(12,286
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
28
|
|
|
51
|
|
|
367
|
|
|
446
|
|
Interest expense (D)
|
|
—
|
|
|
(3,938
|
)
|
|
(494
|
)
|
|
(4,432
|
)
|
Capitalized interest (D)
|
|
—
|
|
|
383
|
|
|
—
|
|
|
383
|
|
Other (loss) income, net
|
|
—
|
|
|
(938
|
)
|
|
532
|
|
|
(406
|
)
|
Total other income (expenses)
|
|
28
|
|
|
(4,442
|
)
|
|
405
|
|
|
(4,009
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
(3,913
|
)
|
|
(10,258
|
)
|
|
(2,124
|
)
|
|
(16,295
|
)
|
Preferred dividends
|
|
—
|
|
|
—
|
|
|
(1,395
|
)
|
|
(1,395
|
)
|
Loss applicable to common stockholders
|
|
$
|
(3,913
|
)
|
|
$
|
(10,258
|
)
|
|
$
|
(3,519
|
)
|
|
$
|
(17,690
|
)
|
|
|
(A)
|
Operating expenses include rental expenses recorded under operating leases for carts and equipment in the amount of
$0.3 million
and
$0.6 million
for the
three months ended March 31, 2019
and
2018
, respectively.
|
|
|
(B)
|
Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions, which may include advisory, legal, accounting 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
$1.9 million
and
$1.7 million
for the
three months ended March 31, 2019
and
2018
, respectively. Interest expense and capitalized interest total to interest expense, net on the Consolidated Statements of Operations.
|
|
|
(E)
|
Total assets in the corporate segment include an equity method investment in the amount of
$23.0 million
as of
March 31, 2019
recorded in other investments on the Consolidated Balance Sheets.
|
|
|
(F)
|
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 (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
5. PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
The following table summarizes the Company’s property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
Land
|
$
|
6,747
|
|
|
$
|
—
|
|
|
$
|
6,747
|
|
|
$
|
6,747
|
|
|
$
|
—
|
|
|
$
|
6,747
|
|
Buildings and improvements
|
77,055
|
|
|
(30,315
|
)
|
|
46,740
|
|
|
78,833
|
|
|
(30,540
|
)
|
|
48,293
|
|
Furniture, fixtures and equipment
|
27,179
|
|
|
(17,396
|
)
|
|
9,783
|
|
|
26,726
|
|
|
(16,729
|
)
|
|
9,997
|
|
Finance leases - equipment
|
33,359
|
|
|
(13,566
|
)
|
|
19,793
|
|
|
28,745
|
|
|
(12,843
|
)
|
|
15,902
|
|
Construction in progress
|
74,573
|
|
|
—
|
|
|
74,573
|
|
|
51,666
|
|
|
—
|
|
|
51,666
|
|
Total Property and Equipment
|
$
|
218,913
|
|
|
$
|
(61,277
|
)
|
|
$
|
157,636
|
|
|
$
|
192,717
|
|
|
$
|
(60,112
|
)
|
|
$
|
132,605
|
|
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. As of
March 31, 2019
, the Company continues to present nine golf properties as held-for-sale. 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.
The real estate assets, held-for-sale, net are reported at a carrying value of $
51.9 million
and include $
34.8 million
of land, $
17.3 million
of buildings and improvements, $
1.1 million
of furniture, fixtures and equipment, and $
0.5 million
of other related assets, partially offset by accumulated impairment. The real estate liabilities, held-for-sale, are reported at a carrying value of $
0.8 million
and include property liabilities to be assumed, primarily prepaid membership dues. In March 2019, the Company reassessed the real estate assets, held-for-sale, net and determined that the carrying value of
two
properties exceeded the fair value less anticipated costs to sell. As a result, the Company recognized an impairment loss and recorded accumulated impairment totaling approximately
$1.0 million
. The fair value measurements were based on expected selling prices, less costs to sell. The significant inputs used to value these real estate investments fall within Level 3 for fair value reporting.
During the
three months ended March 31, 2019
, the Company sold two public golf properties in Georgia and a private golf property in California for an aggregate sale price of
$28.7 million
, resulting in net proceeds of
$25.5 million
, inclusive of transaction costs of
$0.5 million
. The Company received sale proceeds of
$17.7 million
during the
three months ended March 31, 2019
, consisting of
$18.2 million
for the golf properties sold during the
three months ended March 31, 2019
, and
$2.2 million
for golf properties that were sold during December 2018, less
$2.7 million
that was remitted to buyers for golf properties that were sold during December 2018. The Company previously received a
$9.4 million
cash deposit in 2018 related to a golf property that was sold in 2019. 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, including
$2.1 million
payable to the buyer of a golf property sold during the
three months ended March 31, 2019
. The golf properties had a carrying value of
$20.3 million
and resulted in a gain on sale of
$5.2 million
. The gain on sale is recorded in other income (loss), net on the Consolidated Statement of Operations. The Company entered into a management agreement on the California golf property.
In March 2019, the Company evaluated the recoverability of the carrying value of a Traditional Golf leased golf property in California, using the income approach based on future assumptions of cash flows. Based on the analysis, the Company recorded an impairment charge of
$3.1 million
. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this property falls within Level 3 for fair value reporting.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
6. LEASES
The Company's commitments under lease arrangements are primarily ground leases for Entertainment Golf venues and Traditional Golf properties and related facilities, office leases and leases for equipment and golf carts. The majority of lease terms for our Entertainment Golf venues and Traditional Golf properties and related facilities initially range from 10 to 20 years, and include up to
eight
5-year renewal options (see Note 13 for additional detail). Equipment and golf cart leases initially range between
2
to
6 years
and typically contain renewal options which may be on a month-to-month basis. An option to renew a lease is included in the determination of the ROU asset and lease liability when it is reasonably certain that the renewal option will be exercised.
Lease related costs recognized in the Consolidated Statements of Operations for the
three months ended March 31, 2019
are as follows:
|
|
|
|
|
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,517
|
|
Interest on lease liabilities
|
|
246
|
|
Total finance lease cost
|
|
1,763
|
|
|
|
|
Operating lease cost
|
|
|
Operating lease cost
|
|
8,890
|
|
Short-term lease cost
|
|
751
|
|
Variable lease cost
|
|
2,750
|
|
Total operating lease cost
|
|
12,391
|
|
|
|
|
Total lease cost
|
|
$
|
14,154
|
|
Other information related to leases included on the Consolidated Balance Sheet as of and the
three months ended March 31, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
Right-of-use assets
|
|
223,278
|
|
|
19,793
|
|
Lease liabilities
|
|
207,153
|
|
|
19,775
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows
|
|
7,484
|
|
|
189
|
|
Financing cash flows
|
|
N/A
|
|
|
1,355
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
4,305
|
|
|
6,352
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
13.1 years
|
|
|
3.5 years
|
|
Weighted average discount rate
|
|
8.7
|
%
|
|
5.1
|
%
|
Future minimum lease payments under non-cancellable leases as of
March 31, 2019
are as follows:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
April 1, 2019 - December 31, 2019
|
|
22,899
|
|
|
6,009
|
|
2020
|
|
33,680
|
|
|
6,013
|
|
2021
|
|
30,739
|
|
|
4,509
|
|
2022
|
|
29,034
|
|
|
2,874
|
|
2023
|
|
28,862
|
|
|
1,803
|
|
Thereafter
|
|
225,126
|
|
|
258
|
|
Total minimum lease payments
|
|
370,340
|
|
|
21,466
|
|
Less: imputed interest
|
|
163,187
|
|
|
1,691
|
|
Total lease liabilities
|
|
$
|
207,153
|
|
|
$
|
19,775
|
|
7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
The following table summarizes the Company’s intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Trade name
|
$
|
700
|
|
|
$
|
(122
|
)
|
|
$
|
578
|
|
|
$
|
700
|
|
|
$
|
(117
|
)
|
|
$
|
583
|
|
Leasehold intangibles (A) (B)
|
—
|
|
|
—
|
|
|
—
|
|
|
46,581
|
|
|
(20,270
|
)
|
|
26,311
|
|
Management contracts
|
32,331
|
|
|
(15,582
|
)
|
|
16,749
|
|
|
32,932
|
|
|
(15,174
|
)
|
|
17,758
|
|
Internally-developed software
|
2,327
|
|
|
(1,048
|
)
|
|
1,279
|
|
|
2,314
|
|
|
(967
|
)
|
|
1,347
|
|
Membership base
|
5,236
|
|
|
(3,927
|
)
|
|
1,309
|
|
|
5,236
|
|
|
(3,740
|
)
|
|
1,496
|
|
Nonamortizable liquor licenses
|
1,037
|
|
|
—
|
|
|
1,037
|
|
|
893
|
|
|
—
|
|
|
893
|
|
Total Intangibles
|
$
|
41,631
|
|
|
$
|
(20,679
|
)
|
|
$
|
20,952
|
|
|
$
|
88,656
|
|
|
$
|
(40,268
|
)
|
|
$
|
48,388
|
|
|
|
(A)
|
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.
|
|
|
(B)
|
As of January 1, 2019, leasehold intangibles were reclassified from "Intangibles, net of accumulated amortization" to "Operating lease right-of-use assets" in the Consolidated Balance Sheet as part of the adoption of ASU 2016-02.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
8. DEBT OBLIGATIONS
The following table presents certain information regarding the Company’s debt obligations at
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
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 Finance Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vineyard II
|
|
Dec 1993
|
|
$
|
200
|
|
|
$
|
200
|
|
|
Dec 2043
|
|
2.80%
|
|
2.80
|
%
|
|
24.7
|
|
$
|
200
|
|
|
$
|
200
|
|
|
$
|
200
|
|
Finance leases (Equipment)
|
|
Jun 2014 - Mar 2019
|
|
19,775
|
|
|
19,775
|
|
|
May 2019 - Oct 2024
|
|
3.00% to 15.00%
|
|
5.13
|
%
|
|
3.5
|
|
—
|
|
|
15,778
|
|
|
15,778
|
|
|
|
|
|
19,975
|
|
|
19,975
|
|
|
|
|
|
|
5.11
|
%
|
|
3.7
|
|
200
|
|
|
15,978
|
|
|
15,978
|
|
Less current portion of obligations under finance leases
|
|
|
|
6,790
|
|
|
6,790
|
|
|
|
|
|
|
|
|
|
|
|
|
5,489
|
|
|
5,489
|
|
Credit facilities and obligations under finance leases - noncurrent
|
|
|
|
13,185
|
|
|
13,185
|
|
|
|
|
|
|
|
|
|
|
|
|
10,489
|
|
|
10,489
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes payable (C)
|
|
Mar 2006
|
|
51,004
|
|
|
51,198
|
|
|
Apr 2035
|
|
LIBOR+2.25%
|
|
4.74
|
%
|
|
16.1
|
|
51,004
|
|
|
51,004
|
|
|
51,200
|
|
Total debt obligations
|
|
|
|
$
|
70,979
|
|
|
$
|
71,173
|
|
|
|
|
|
|
4.84
|
%
|
|
12.6
|
|
$
|
51,204
|
|
|
$
|
66,982
|
|
|
$
|
67,178
|
|
|
|
(A)
|
Weighted average, including floating and fixed rate classes.
|
|
|
(B)
|
Including the effect of deferred financing costs.
|
|
|
(C)
|
Interest rate based on 3 month LIBOR plus
2.25%
.
|
The Company leases certain golf carts and other equipment under finance lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from
24
to
66
months. Certain leases include bargain purchase options at lease expiration.
9. REAL ESTATE SECURITIES
The following is a summary of the Company’s real estate securities at
March 31, 2019
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
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)
|
ABS - Non-Agency RMBS
|
|
$
|
4,000
|
|
|
$
|
2,650
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,129
|
|
|
$
|
1,878
|
|
|
$
|
—
|
|
|
$
|
3,007
|
|
|
1
|
|
|
CCC
|
|
2.88
|
%
|
|
32.00
|
%
|
|
4.7
|
|
38.7
|
%
|
Total Securities, Available for Sale (E)
|
|
$
|
4,000
|
|
|
$
|
2,650
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,129
|
|
|
$
|
1,878
|
|
|
$
|
—
|
|
|
$
|
3,007
|
|
|
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)
|
The total outstanding face amount was
$4.0 million
for floating rate securities. The collateral securing the ABS - Non-Agency RMBS is located in various geographical regions in the U.S. The Company does not have significant investments in any geographic region.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
The Company had
no
securities in an unrealized loss position as of
March 31, 2019
. The Company has no activity related to credit losses on debt securities for the
three months ended
March 31, 2019
.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Summary Table
The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Fair Value Method (A)
|
Assets
|
|
|
|
|
|
|
|
Real estate securities, available-for-sale
|
$
|
3,007
|
|
|
$
|
3,007
|
|
|
Pricing models - Level 3
|
Cash and cash equivalents
|
49,599
|
|
|
49,599
|
|
|
|
Restricted cash, current and noncurrent
|
3,623
|
|
|
3,623
|
|
|
|
Liabilities
|
|
|
|
|
|
Junior subordinated notes payable
|
51,198
|
|
|
29,383
|
|
|
Pricing models - Level 3
|
|
|
(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.
|
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
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
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
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Significant Input
|
Asset Type
|
|
Amortized Cost Basis
|
|
Fair Value
|
|
Discount
Rate
|
|
Prepayment
Speed
|
|
Cumulative Default Rate
|
|
Loss
Severity
|
ABS - Non-Agency RMBS
|
|
$
|
1,129
|
|
|
$
|
3,007
|
|
|
10.0
|
%
|
|
8.0
|
%
|
|
2.9
|
%
|
|
43.3
|
%
|
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.
Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed during the
three months ended
March 31, 2019
as follows:
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS
|
Balance at December 31, 2018
|
|
$
|
2,953
|
|
Total gains (losses) (A)
|
|
|
|
Included in other comprehensive income (loss)
|
|
—
|
|
Amortization included in interest income
|
|
82
|
|
Purchases, sales and repayments (A)
|
|
|
|
Proceeds
|
|
(28
|
)
|
Balance at March 31, 2019
|
|
$
|
3,007
|
|
|
|
(A)
|
None of the gains (losses) recorded in earnings during the period are 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
three months ended March 31, 2019
. There were
no
transfers into or out of Level 3 during the
three months ended March 31, 2019
.
|
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
|
Junior subordinated notes payable
|
|
Level 3
|
|
Valuation technique is based on discounted cash flows. Significant inputs include:
|
|
|
|
|
l
|
Amount and timing of expected future cash flows
|
|
|
|
|
l
|
Interest rates
|
|
|
|
|
l
|
Market yields and the credit spread of the Company
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
11. EQUITY AND EARNINGS PER SHARE
A. Stock Options
The following is a summary of the changes in the Company’s outstanding options for the
three months ended March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average Strike Price
|
|
Weighted Average Life Remaining (in years)
|
Balance at December 31, 2018
|
8,436,931
|
|
|
$
|
3.72
|
|
|
|
Balance at March 31, 2019
|
8,436,931
|
|
|
$
|
3.72
|
|
|
7.47
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
2,705,586
|
|
|
$
|
2.64
|
|
|
4.39
|
As of
March 31, 2019
, the Company’s outstanding options were summarized as follows:
|
|
|
|
|
|
|
|
Number of Options
|
Held by the former Manager
|
|
2,705,253
|
|
Issued to the former Manager and subsequently transferred to certain of the Manager’s employees (A)
|
|
2,304,990
|
|
Issued to the independent directors
|
|
333
|
|
Issued to Drive Shack employees (B)
|
|
3,426,355
|
|
Total
|
|
8,436,931
|
|
Weighted average strike price
|
|
$
|
3.72
|
|
|
|
(A)
|
The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager would not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options 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.
|
|
|
(B)
|
In November 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.
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
$1.2 million
and
$0.3 million
during the
three months ended March 31, 2019
and
2018
, respectively, 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
$12.0 million
as of
March 31, 2019
and will be expensed over a weighted average of
2.1 years
.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
B. Restricted Stock Units ("RSUs")
The following is a summary of the changes in the Company’s RSUs for the
three months ended March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted Average Grant Date Fair Value (per unit)
|
Balance at December 31, 2018
|
|
54,641
|
|
|
$
|
5.02
|
|
Balance at March 31, 2019
|
|
54,641
|
|
|
$
|
5.02
|
|
The Company granted RSUs to the non-employee directors as part of their 2018 annual compensation. The RSUs are subject to a
one year
vesting period and begin to vest in August 2019. 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 less than
$0.1 million
and
zero
during the
three months ended March 31, 2019
and
2018
, respectively 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
$0.1 million
as of
March 31, 2019
and will be expensed over a weighted average of
0.5 years
.
C. Dividends
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
were paid on
April 29, 2019
.
D. Earnings Per Share
The following table shows the Company's basic and diluted earnings per share (“EPS”):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
Loss from continuing operations after preferred dividends and noncontrolling interests
|
|
$
|
(15,995
|
)
|
|
$
|
(17,690
|
)
|
Loss Applicable to Common Stockholders
|
|
$
|
(15,995
|
)
|
|
$
|
(17,690
|
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
|
67,027,104
|
|
|
66,977,104
|
|
Effect of dilutive securities
|
|
|
|
|
Options
|
|
—
|
|
|
—
|
|
RSUs
|
|
—
|
|
|
—
|
|
Denominator for diluted earnings per share - adjusted weighted average shares
|
|
67,027,104
|
|
|
66,977,104
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
Loss Applicable to Common Stock, per share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
Loss Applicable to Common Stock, per share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
The Company’s dilutive securities are its outstanding stock options and RSUs. During the
three months ended March 31, 2019
and
2018
, the Company had
706,694
and
zero
antidilutive options, respectively. During the
three months ended March 31, 2019
and
2018
based on the treasury stock method, the Company had
2,233,692
and
2,509,765
potentially dilutive securities, respectively, which were excluded due to the Company's loss position.
12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
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 $
0.1 million
and
$0.2 million
in costs for Transition Services during the
three months ended March 31, 2019
and
2018
, respectively, and these costs are reported in general and administrative expense on the Consolidated Statements of Operations.
At
March 31, 2019
, 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).
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.
The Company leased corporate office space from an affiliate of a member of our Board of Directors. The Company has accrued
$0.2 million
in rent expense for the
three months ended March 31, 2019
, 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
$1.1 million
of the quarterly installments as of
March 31, 2019
, and the final payment is due in December 2019.
On February 19, 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, including New York Labor Law Section 190 et seq. and Section 196-d and 12 New York Codes, Rules and Regulations Part 146, and seeking monetary damages under these 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.
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, personal injury 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
March 31, 2019
, 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.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
Commitments
- In 2016, the Company entered into a ground lease in Orlando, Florida. During June 2017, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is
20
years and includes
three
5
-year renewal options.
In March 2017, the Company entered into a ground lease in Richmond, Virginia. During December 2017, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is
20
years and includes
three
5
-year renewal options.
In July 2017, the Company entered into a ground lease in West Palm Beach, Florida. During August 2018, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is
20 years
and includes
five
5
-year renewal options.
In February 2018, the Company entered into a ground lease in New Orleans, Louisiana. During December 2018, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is
20 years
and includes
eight
5
-year renewal options.
As of
March 31, 2019
, the Company has additional operating leases that have not yet commenced of
$115.4 million
. The leases are expected to commence over the next
12
-
24 months
with lease terms of
2
to
20 years
. These leases are primarily real estate leases for future Entertainment Golf venues and the commencement of these leases is contingent on completion of due diligence and satisfaction of certain contingencies prior to construction.
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
$5.7 million
in property repair costs related to Hurricane Irma of which
$0.2 million
was incurred in 2019. As of
March 31, 2019
, all hurricane property repairs are complete. The Company was reimbursed
$2.0 million
and
$3.0 million
by the insurer in 2017 and 2018, respectively. Property repair costs and insurance reimbursement are recorded in operating expenses on the Consolidated Statements of Operations.
14. INCOME TAXES
The Company's income tax provision (benefit) for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.
The Company's income tax provision was
zero
for both the
three months ended March 31, 2019
and
2018
.
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.
The Company recorded a valuation allowance against its deferred tax assets as of
March 31, 2019
as management does not believe that it is more likely than not that the deferred tax assets will be realized.
15. SUBSEQUENT EVENTS
These Consolidated Financial Statements include a discussion of material events, if any, that have occurred subsequent to
March 31, 2019
through the issuance of these Consolidated Financial Statements.
In April 2019, the Company consummated the sale of a private golf property in Tennessee for a sale price of
$4.8 million
.
On April 11, 2019, the Company issued
695,652
options at a strike price of
$4.66
. The options fully vest and are exercisable in equal annual installments on each of the first three anniversaries of the grant date.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
On May 7, 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 May 1, 2019 and ending July 31, 2019. Dividends totaling
$1.4 million
will be paid on July 31, 2019 to stockholders of record on July 1, 2019.
On May 9, 2019, the Company consummated the sale of a private golf property in Washington for a sale price of
$8.9 million
.
ITEM 2. MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of Drive Shack Inc. (and with its subsidiaries, “Drive Shack Inc.” or the “Company”). The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included herein, and with Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
GENERAL
The Company is a leading owner and operator of golf-related leisure and entertainment businesses. The Company was formed in 2002 and its common stock is traded on the NYSE under the symbol “DS.” We conduct our business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate.
Business Overview
Entertainment Golf |
Drive Shack
Drive Shack is an entertainment company that combines golf, competition, dining and fun. In April 2018, we opened our inaugural venue in Orlando, Florida. Drive Shack expects to open a chain of next-generation entertainment golf venues across the United States and internationally, with each venue featuring multiple stories of hitting suites where friends, family, co-workers or complete strangers can compete in a technologically-enhanced golf games. Consumers who are seeking a good time, and not looking to participate in the game, are able to spectate from one of Drive Shack’s restaurant or lounge areas.
Traditional Golf |
American Golf
American Golf (as defined below) is one of the largest operators of golf properties in the United States. As of
March 31, 2019
, we owned, leased or managed 64 properties across 11 states. American Golf and its dedicated employees are focused on delivering lasting experiences for our customers, including our more than 40,000 members, who played over 500,000 rounds at our properties during the
three months ended March 31, 2019
.
American Golf was acquired by the Company in December 2013, when the Company restructured an existing mezzanine debt investment related to NGP Realty Sub, L.P. and American Golf Corporation (together, “American Golf”). As part of the restructuring, the Company acquired the equity of American Golf’s indirect parent, AGC Mezzanine Pledge LLC.
Traditional Golf operations are organized into three principal categories: (1) public properties, (2) private properties and (3) managed properties.
Public Properties
. Our 39 public properties generate revenues principally through daily green fees, golf cart rentals and food, beverage and merchandise sales. Amenities at these properties generally include practice facilities and pro shops with food and beverage facilities. In some cases, our public properties have small clubhouses with banquet facilities. In addition, The Players Club is a monthly membership program offered at most of our public properties, with membership benefits ranging from daily range access to ability to participate in golf clinics, in return for a monthly membership fee.
Private Properties
. Our seven private properties are open to members only and generate revenues principally through initiation fees, membership dues, guest fees, and food, beverage and merchandise sales. Amenities at these properties typically include practice facilities, full service clubhouses with a pro shop, locker room facilities and multiple food and beverage outlets, including grills, restaurants and banquet facilities.
Managed Properties
. Our 18 managed properties are properties that American Golf manages pursuant to a management agreement with the owner of each property. We recognize revenue from these properties in amounts equal to the respective management fees and the reimbursements of certain operating costs.
The following summarizes the American Golf properties and holes as of
March 31, 2019
:
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 in April 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 (“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 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 to materially change in the future. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for those made in connection with the adoption of ASU 2016-02. See Note 2 in Part I, Item 1 “Financial Statements” for additional information.
Recent Accounting Pronouncements
See Note 2 in Part I, Item 1. “Financial Statements” for information about recent accounting pronouncements.
RESULTS OF OPERATIONS
The following table summarize the changes in our results of operations for the
three months ended March 31, 2019
and
2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Increase (Decrease)
|
|
|
2019
|
|
2018
|
|
Amount
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations (A)
|
|
$
|
44,706
|
|
|
$
|
53,554
|
|
|
$
|
(8,848
|
)
|
|
(16.5
|
)%
|
Sales of food and beverages
|
|
9,246
|
|
|
13,106
|
|
|
(3,860
|
)
|
|
(29.5
|
)%
|
Total revenues
|
|
53,952
|
|
|
66,660
|
|
|
(12,708
|
)
|
|
(19.1
|
)%
|
Operating costs
|
|
|
|
|
|
|
|
|
Operating expenses (A)
|
|
47,723
|
|
|
57,379
|
|
|
(9,656
|
)
|
|
(16.8
|
)%
|
Cost of sales - food and beverages
|
|
2,698
|
|
|
4,040
|
|
|
(1,342
|
)
|
|
(33.2
|
)%
|
General and administrative expense
|
|
11,619
|
|
|
9,192
|
|
|
2,427
|
|
|
26.4
|
%
|
Depreciation and amortization
|
|
4,924
|
|
|
5,548
|
|
|
(624
|
)
|
|
(11.2
|
)%
|
Pre-opening costs
|
|
1,179
|
|
|
1,556
|
|
|
(377
|
)
|
|
(24.2
|
)%
|
Impairment
|
|
4,088
|
|
|
1,473
|
|
|
2,615
|
|
|
177.5
|
%
|
Realized and unrealized (gain) on investments
|
|
—
|
|
|
(242
|
)
|
|
242
|
|
|
(100.0
|
)%
|
Total operating costs
|
|
72,231
|
|
|
78,946
|
|
|
(6,715
|
)
|
|
(8.5
|
)%
|
Operating loss
|
|
(18,279
|
)
|
|
(12,286
|
)
|
|
5,993
|
|
|
48.8
|
%
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
344
|
|
|
446
|
|
|
(102
|
)
|
|
(22.9
|
)%
|
Interest expense, net
|
|
(2,153
|
)
|
|
(4,049
|
)
|
|
(1,896
|
)
|
|
(46.8
|
)%
|
Other income (loss), net
|
|
5,488
|
|
|
(406
|
)
|
|
5,894
|
|
|
N.M.
|
|
Total other income (expenses)
|
|
3,679
|
|
|
(4,009
|
)
|
|
7,688
|
|
|
(191.8
|
)%
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(14,600
|
)
|
|
$
|
(16,295
|
)
|
|
$
|
(1,695
|
)
|
|
(10.4
|
)%
|
|
|
(A)
|
Includes $9.8 million and $4.7 million for the
three months ended March 31, 2019
and
2018
, respectively, due to management contract reimbursements reported under the new revenue standard.
|
Revenues from Golf Operations
Revenues from golf operations decreased by
$8.8 million
primarily due to decreases of: (i) $13.9 million related to fewer Traditional Golf properties owned or operated in 2019, (ii) $1.8 million due to fewer rounds played related to unfavorable weather, partially offset by an increase of (iii) $5.9 million in revenues from management contracts and (iv) $0.7 million related to our Entertainment Golf venue that opened in Orlando, Florida in April 2018.
Sales of Food and Beverages
Sales of food and beverages decreased by
$3.9 million
primarily due to decreases of: (i) $4.4 million due to fewer Traditional Golf properties owned or operated in 2019 and (ii) $0.5 million due to lower traffic in our Traditional Golf properties, partially offset by an increase of $1.0 million related to our Entertainment Golf venue that opened in Orlando, Florida in April 2018.
Operating Expenses
Operating expenses decreased by
$9.7 million
primarily due to decreases of: (i) $16.1 million due to fewer Traditional Golf properties owned or operated in 2019, partially offset by increases of: (ii) $5.1 million in reimbursed expenses revenues from
management contracts due to more courses managed in 2019 and (iii) $1.7 million related to our Entertainment Golf venue that opened in Orlando, Florida in April 2018.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages decreased by
$1.3 million
primarily due to fewer Traditional Golf properties owned or operated in 2019 partially offset by our Entertainment Golf venue that opened in Orlando, Florida in April 2018.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by
$2.4 million
primarily due to higher payroll expense related to the hiring of employees in our Entertainment Golf and corporate segments, including an increase of $0.9 million in stock-based compensation expense.
Depreciation and Amortization
Depreciation and amortization decreased by
$0.6 million
primarily due to fewer Traditional Golf properties owned or operated in 2019 as well as a decrease due to courses that remain classified as held-for-sale as of March 31, 2019, partially offset by depreciation on assets placed into service in April 2018 at our Entertainment Golf venue in Orlando, Florida.
Pre-Opening Costs
There was no significant change in pre-opening costs.
Impairment
During the
three months ended March 31, 2019
, we recorded impairment of $1.0 million on two Traditional Golf properties that were classified as held-for-sale and $3.1 million on a leased Traditional Golf property. During the
three months ended March 31, 2018
, we recorded impairment of $1.3 million on a Traditional Golf property that was reclassified as held-for-sale in March 2018.
Realized and Unrealized (Gain) on Investments
During the
three months ended March 31, 2018
, we recorded an unrealized gain of $0.2 million on the mark-to-market on the value of a derivative, which was unwound in December 2018.
Interest and Investment Income
There was no significant change in interest and investment income.
Interest Expense, Net
Interest expense, net decreased by
$1.9 million
primarily due to a decrease in interest expense related to the Traditional Golf term loan which was prepaid in December 2018.
Other Income (Loss), Net
Other income (loss), net increased by
$5.9 million
primarily due to a $5.2 million gain on the sale of three Traditional Golf properties during the
three months ended March 31, 2019
, compared to a $1.0 million loss due to golf properties exited during the
three months ended March 31, 2018
.
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 capital 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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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 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), (ii) accretion of the golf membership deposit liabilities in interest expense, (iii) recognition of deferred revenue from initiation fee deposits, (iv) amortization of prepaid golf membership dues, (v) gains and losses from sales of assets, (vi) other-than-temporary impairment on our investments, as well as impairments of Traditional Golf properties, (vii) unrealized gains or losses on our investments, (viii) non-cash gains or losses associated with our early extinguishment of debt, (ix) non-cash gains on deconsolidation, and (x) 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
$1.4 million
thus far in fiscal year
2019
, and our board of directors elected not to declare common stock dividends in the first three months of fiscal year 2019 to retain capital for growth. For the
three months ended March 31, 2019
, the Company reported net cash used in operating activities of
$22.2 million
, net cash used in investing activities of
$5.0 million
, net cash used in financing activities of
$2.4 million
, and cash and cash equivalents of
$49.6 million
as of
March 31, 2019
. 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
March 31, 2019
, we had
$49.6 million
of available cash, including $6.8 million of working capital for the Traditional Golf business. On
March 13, 2019
, we declared a quarterly preferred dividend of $1.4 million which was paid on
April 29, 2019
.
Short-term liquidity requirements
– As of
March 31, 2019
, we expect our short-term liquidity requirements to include a total of approximately $85.0 to $95.0 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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
|
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
Our debt obligations including finance lease obligations, as summarized in Note 8 to our Consolidated Financial Statements included herein, existing at
March 31, 2019
had contractual maturities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
Recourse
|
|
Total
|
Period from April 1, 2019 through December 31, 2019
|
$
|
5,366
|
|
|
$
|
—
|
|
|
$
|
5,366
|
|
2020
|
5,437
|
|
|
—
|
|
|
5,437
|
|
2021
|
4,201
|
|
|
—
|
|
|
4,201
|
|
2022
|
2,747
|
|
|
—
|
|
|
2,747
|
|
2023
|
1,770
|
|
|
—
|
|
|
1,770
|
|
2024
|
254
|
|
|
—
|
|
|
254
|
|
Thereafter
|
200
|
|
|
51,004
|
|
|
51,204
|
|
Total
|
$
|
19,975
|
|
|
$
|
51,004
|
|
|
$
|
70,979
|
|
Equity
Preferred Stock Dividends Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Per Share
|
Declared for the three months ended
|
|
Paid
|
|
Series B
|
|
Series C
|
|
Series D
|
January 31, 2019
|
|
January 2019
|
|
$
|
0.609
|
|
|
$
|
0.503
|
|
|
$
|
0.523
|
|
April 30, 2019
|
|
April 2019
|
|
$
|
0.609
|
|
|
$
|
0.503
|
|
|
$
|
0.523
|
|
Cash Flow
Operating Activities
Net cash used in operating activities was
$22.2 million
for the
three months ended March 31, 2019
and
$15.5 million
for the
three months ended March 31, 2018
. Changes in operating cash flow activities are described below:
|
|
•
|
Operating cash flows increased by:
|
|
|
◦
|
$1.8 million due to management fees paid in 2018 that were incurred in 2017 when the Company was externally managed.
|
|
|
•
|
Operating cash flows decreased by:
|
|
|
◦
|
$4.6 million in lower operating cash flows from Traditional Golf, primarily related to golf properties sold in December 2018; and
|
|
|
◦
|
$3.9 million of payroll costs primarily due to increased headcount and bonuses paid in 2019 that were incurred in 2018.
|
Investing Activities
Investing activities used
$5.0 million
and
$15.4 million
during the
three months ended March 31, 2019
and
2018
, respectively. Uses of cash flow from investing activities consisted primarily of investments made in Entertainment Golf venues and Traditional Golf properties. Proceeds received from cash flows from investing activities consisted primarily of sale of property and equipment.
Financing Activities
Financing activities used
$2.4 million
and
$1.8 million
during the
three months ended March 31, 2019
and
2018
, respectively. Proceeds received from cash flow from financing activities consisted primarily of deposits received on golf memberships. Uses of cash flow from financing activities included the repayment of debt obligations and the payment of preferred dividends.
Off-Balance Sheet Arrangements
There have been no significant changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
.
CONTRACTUAL OBLIGATIONS
During the
three months ended March 31, 2019
, we had all of the material contractual obligations referred to in our annual report on Form 10-K for the year ended
December 31, 2018
. In addition, we had the following material contractual obligations:
|
|
•
|
In March 2019, we executed a lease for office space in New York, New York for a term of seven years.
|