Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-31458

Drive Shack Inc.

(Exact name of registrant as specified in its charter)



Maryland		81-0559116
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)



1345 Avenue of the Americas, New York, NY		10105
(Address of principal executive offices)		(Zip Code)

(212) 798-6100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

S Yes No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer S Non-accelerated filer £ (Do not check if a smaller reporting company)

Smaller reporting company £ Emerging growth company £

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No S

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 66,963,566 shares outstanding as of October 25, 2017.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:


•	the ability to retain and attract members to our golf properties;


•	changes in global, national and local economic conditions, including, but not limited to, changes in consumer spending patterns, a prolonged economic slowdown and a downturn in the real estate market;


•	effects of unusual weather patterns and extreme weather events, geographical concentrations with respect to our operations and seasonality of our business;


•	competition within the industries in which we operate or may pursue additional investments, including competition for sites for our Entertainment Golf venues;


•	material increases in our expenses, including but not limited to unanticipated labor issues or costs with respect to our workforce, and costs of goods, utilities and supplies;


•	our inability to sell or exit certain properties, and unforeseen changes to our ability to develop, redevelop or renovate certain properties;


•	our ability to further invest in our business and implement our strategies;


•	difficulty monetizing our real estate debt investments;


•	liabilities with respect to inadequate insurance coverage, accidents or injuries on our properties, adverse litigation judgments or settlements, or membership deposits;


•	changes to and failure to comply with relevant regulations and legislation, including in order to maintain certain licenses and permits, and environmental regulations in connection with our operations;


•	inability to execute on our growth and development strategy by successfully developing, opening and operating new venues;


•	impacts of failures of our information technology and cybersecurity systems;


•	the impact of any current or further legal proceedings and regulatory investigations and inquiries;


•	the impact of any material transactions with FIG LLC (the “Manager”) or one of its affiliates, including the impact of any actual, potential or predicted conflicts of interest;


•	effects of the pending merger of Fortress Investment Group LLC with affiliates of SoftBank Group Corp.; and


•	other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Drive Shack Inc. (the “Company”) or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:


•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;


•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;


•	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and


•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.

DRIVE SHACK INC.

FORM 10-Q

INDEX



		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	1

	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016	2

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2017 and 2016	3

	Consolidated Statement of Equity (unaudited) for the nine months ended September 30, 2017	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016	5

	Notes to Consolidated Financial Statements (unaudited)	6

	Note 1 Organization	6
	Note 2 Summary of Significant Accounting Policies	6
	Note 3 Segment Reporting	14
	Note 4 Property and Equipment, Net of Accumulated Depreciation	18
	Note 5 Intangibles, Net of Accumulated Amortization	18
	Note 6 Debt Obligations	19
	Note 7 Real Estate Securities	20
	Note 8 Real Estate Related and Other Loans and Residential Mortgage Loans	21
	Note 9 Derivatives	23
	Note 10 Fair Value of Financial Instruments	23
	Note 11 Equity and Earnings per Share	27
	Note 12 Transactions with Affiliates and Affiliated Entities	28
	Note 13 Commitments and Contingencies	30
	Note 14 Income Taxes	31
	Note 15 Subsequent Events	32

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	General	33
	Market Considerations	34
	Application of Critical Accounting Policies	35
	Results of Operations	39
	Liquidity and Capital Resources	47
	Contractual Obligations	51

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78




Item 3.	Defaults upon Senior Securities	78

Item 4.	Mine Safety Disclosures	78

Item 5.	Other Information	78

Item 6.	Exhibits	79

SIGNATURES		81

DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



	September 30, 2017
	(Unaudited)			December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	182,371		$	140,140
Restricted cash	4,629			4,992
Accounts receivable, net	8,540			8,047
Real estate securities, available-for-sale	2,236			629,254
Other current assets	22,540			78,687
Total Current Assets	220,316			861,120
Restricted cash, noncurrent	1,407			1,412
Property and equipment, net of accumulated depreciation	226,049			217,611
Intangibles, net of accumulated amortization	59,309			65,112
Other investments	20,601			19,256
Other assets	8,433			7,447
Total Assets	$	536,115		$	1,171,958

Liabilities and Equity
Current Liabilities
Obligations under capital leases	$	4,484		$	3,699
Membership deposit liabilities	8,830			8,491
Repurchase agreements	—			600,964
Accounts payable and accrued expenses	33,672			26,249
Deferred revenue	9,955			29,851
Other current liabilities	21,753			28,968
Total Current Liabilities	78,694			698,222
Credit facilities and obligations under capital leases	112,383			111,585
Junior subordinated notes payable	51,210			51,217
Membership deposit liabilities, noncurrent	84,896			80,549
Deferred revenue, noncurrent	6,900			6,256
Other liabilities	5,724			6,062
Total Liabilities	$	339,807		$	953,891

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 September 30, 2017 and December 31, 2016	$	61,583		$	61,583
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,932,744 and 66,824,304 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	669			668
Additional paid-in capital	3,173,095			3,172,720
Accumulated deficit	(3,040,386		)	(3,018,072		)
Accumulated other comprehensive income	1,347			1,168
Total Equity	$	196,308		$	218,067

Total Liabilities and Equity	$	536,115		$	1,171,958

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues
Golf course operations	$	62,034		$	63,249		$	168,969		$	174,718
Sales of food and beverages	19,657			19,913			53,223			55,086
Total revenues	81,691			83,162			222,192			229,804

Operating costs
Operating expenses	67,385			69,251			187,730			195,670
Cost of sales - food and beverages	5,721			6,026			15,762			17,139
General and administrative expense	4,328			3,688			11,115			10,348
Management fee to affiliate	2,678			2,676			8,032			8,027
Depreciation and amortization	6,187			6,735			17,952			19,250
Impairment	28			611			60			3,564
Realized and unrealized (gain) loss on investments	(315		)	(6,605		)	6,361			(3,136		)
Total operating costs	86,012			82,382			247,012			250,862
Operating (loss) income	(4,321		)	780			(24,820		)	(21,058		)

Other income (expenses)
Interest and investment income	8,418			32,310			22,701			73,770
Interest expense, net	(4,770		)	(13,138		)	(15,335		)	(39,089		)
Gain on deconsolidation	—			—			—			82,130
Other income, net	202			505			372			1,339
Total other income (expenses)	3,850			19,677			7,738			118,150
(Loss) Income before income tax	(471		)	20,457			(17,082		)	97,092
Income tax (benefit) expense	(2		)	(38		)	1,047			144
Net (Loss) Income	(469		)	20,495			(18,129		)	96,948
Preferred dividends	(1,395		)	(1,395		)	(4,185		)	(4,185		)
Net income attributable to noncontrolling interest	—			(177		)	—			(165		)
(Loss) Income Applicable to Common Stockholders	$	(1,864	)	$	18,923		$	(22,314	)	$	92,598

(Loss) Income Applicable to Common Stock, per share
Basic	$	(0.03	)	$	0.28		$	(0.33	)	$	1.39
Diluted	$	(0.03	)	$	0.27		$	(0.33	)	$	1.35

Weighted Average Number of Shares of Common Stock Outstanding
Basic	66,932,744			66,730,583			66,883,291			66,688,962
Diluted	66,932,744			69,072,676			66,883,291			68,753,532
Dividends Declared per Share of Common Stock	$	—		$	0.12		$	—		$	0.24

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net (loss) income	$	(469	)	$	20,495		$	(18,129	)	$	96,948
Other comprehensive income (loss):
Net unrealized gain on available-for-sale securities	1,257			894			2,524			8,696
Reclassification of net realized gain on securities into earnings	(2,345		)	(10,080		)	(2,345		)	(18,506		)
Reclassification of net realized gain on deconsolidation of CDO VI	—			—			—			(20,682		)
Reclassification of net realized gain on derivatives designated as cash flow hedges into earnings	—			—			—			(20		)
Other comprehensive (loss) income	(1,088		)	(9,186		)	179			(30,512		)
Total comprehensive (loss) income	$	(1,557	)	$	11,309		$	(17,950	)	$	66,436
Comprehensive (loss) income attributable to Drive Shack Inc. stockholders’ equity	$	(1,557	)	$	11,132		$	(17,950	)	$	66,271
Comprehensive income attributable to noncontrolling interest	$	—		$	177		$	—		$	165

See notes to Consolidated Financial Statements.

DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(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 (Loss)		Total Equity (Deficit)
Equity (deficit) - December 31, 2016	2,463,321	$	61,583	66,824,304	$	668	$	3,172,720	$	(3,018,072	)	$	1,168	$	218,067

Dividends declared	—	—		—	—		—		(4,185		)	—		(4,185		)

Issuance of common stock (directors)	—	—		108,440	1		375		—			—		376

Comprehensive income (loss)

Net loss	—	—		—	—		—		(18,129		)	—		(18,129		)

Other comprehensive income	—	—		—	—		—		—			179		179

Total comprehensive loss														(17,950		)

Equity (deficit) - September 30, 2017	2,463,321	$	61,583	66,932,744	$	669	$	3,173,095	$	(3,040,386	)	$	1,347	$	196,308

See notes to Consolidated Financial Statements.

DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands, except share data)



	Nine Months Ended September 30,
	2017			2016
Cash Flows From Operating Activities
Net (loss) income	$	(18,129	)	$	96,948
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization	17,952			19,250
Amortization of discount and premium	(3,856		)	(8,156		)
Other amortization	7,889			7,998
Net interest income on investments accrued to principal balance	(8,458		)	(25,570		)
Amortization of revenue on golf membership deposit liabilities	(963		)	(646		)
Amortization of prepaid golf membership dues	(20,017		)	(20,951		)
Non-cash directors’ compensation	376			351
Impairment	60			3,564
Equity in earnings from equity method investments, net of distributions	(1,149		)	(1,129		)
Gain on deconsolidation	—			(82,130		)
Loss (Gain) on settlement of investments, net	5,368			(5,146		)
Unrealized loss on securities, intent-to-sell	558			—
Unrealized loss on non-hedge derivatives	688			1,702
Loss on extinguishment of debt	327			607
Change in:
Restricted cash	368			(2,487		)
Accounts receivable, net, other current assets and other assets - noncurrent	(1,053		)	(4,307		)
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrrent	5,405			5,405
Net cash used in operating activities	(14,634		)	(14,697		)
Cash Flows From Investing Activities
Principal repayments from investments	100,020			133,756
Purchase of real estate securities	—			(1,618,090		)
Proceeds from sale of securities and loans	595,850			1,128,906
Net payments for settlement of TBAs	(4,669		)	(13,675		)
Acquisition and additions of property and equipment and intangibles	(16,905		)	(9,147		)
Deposits paid on property and equipment	(1,486		)	—
Contributions to equity method investees	(196		)	—
Net cash provided by (used in) investing activities	672,614			(378,250		)
Cash Flows From Financing Activities
Borrowings under debt obligations	1,651			1,670,481
Repayments of debt obligations	(605,469		)	(1,158,754		)
Margin deposits under repurchase agreements and derivatives	(89,692		)	(41,131		)
Return of margin deposits under repurchase agreements and derivatives	87,785			40,442
Golf membership deposits received	2,706			3,117
Common stock dividends paid	(8,019		)	(24,006		)
Preferred stock dividends paid	(4,185		)	(4,185		)
Payment of deferred financing costs	(22		)	(3,670		)
Other financing activities	(504		)	(709		)
Net cash (used in) provided by financing activities	(615,749		)	481,585
Net Increase in Cash and Cash Equivalents	42,231			88,638
Cash and Cash Equivalents, Beginning of Period	140,140			45,651
Cash and Cash Equivalents, End of Period	$	182,371		$	134,289

Supplemental Schedule of Non-Cash Investing and Financing Activities
Preferred stock dividends declared but not paid	$	930		$	—
Financing costs accrued but not paid	$	—		$	600
Additions to capital lease assets and liabilities	$	3,601		$	7,018
Additions to property and equipment and accounts payable	$	4,135		$	—

See notes to Consolidated Financial Statements.

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

1. ORGANIZATION

Drive Shack Inc. (and with its subsidiaries, “Drive Shack Inc.” or the “Company”) is a leading owner and operator of golf-related leisure and entertainment businesses. On December 28, 2016, the Company changed its name from Newcastle Investment Corp. to Drive Shack Inc. in connection with its transformation to a leisure and entertainment company. 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) Traditional Golf properties, (ii) Entertainment Golf venues, (iii) Debt Investments and (iv) corporate. For a further discussion of the reportable segments, see Note 3.

The Company’s Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of September 30, 2017, the Company owned, leased or managed 77 properties across 13 states. Additionally, the Company plans to open a chain of next-generation Entertainment Golf venues across the United States and internationally which combine golf, competition, dining and fun. As of September 30, 2017, the Company has substantially monetized the remaining loans and securities in its Debt Investments segment (see Notes 7 and 8).

On February 23, 2017, the Company revoked its election to be treated as a real estate investment trust (“REIT”), effective January 1, 2017. The Company operated in a manner intended to qualify as a REIT for federal income tax purposes through December 31, 2016.

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, 2016 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2017. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2016.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. In connection with the Company’s continued transformation from a financial services company to a leisure and entertainment company, including the announcement of the new management team in September 2016, the revocation of its REIT election effective January 1, 2017, as well as the monetization and planned exit of its real estate related debt positions, the Company’s Consolidated Statements of Operations were changed to reflect an operating company presentation in the fourth quarter of 2016. The Company has reclassified driving range revenue, including the monthly membership program offered at most of its public properties (“The Players Club’’) and miscellaneous revenue associated with operations from “Other revenue” to “Golf course operations.” The Company has reclassified expenses associated with the cost of merchandise sold from “Cost of sales - golf” to “Operating expenses.” The Company has added “Loan and security servicing expense” to “General and administrative expense.” The gains and losses associated with derivative instruments have been reclassified from “Other income (loss), net” to “Realized and unrealized (gain) loss on investments” to include balances as part of its operating income (loss).

As of September 30, 2017, the Company monetized and exited its significant real estate related debt positions, including the agency Fannie Mae/Freddie Mac (“FNMA/FHLMC’’) securities and received the final pay down on a corporate loan (“the resorts-related loan”). As such, the Company's Consolidated Balance Sheets have been revised to a classified balance sheet presentation, consistent with an operating company presentation, and certain prior period amounts have been reclassified to conform to the current period’s presentation. The Company has reclassified assets reasonably expected to be realized in cash during the normal operating cycle of the business as current assets and current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets. The Company has reclassified “Real estate securities, available-for-sale - pledged as collateral’’ to “Real estate securities, available-for-sale’’ given the substantial monetization of the available-for-sale

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

securities. The Company reclassified “Real estate related and other loans, held-for-sale, net’’ and “Receivables from brokers, dealers and clearing organizations’’ to “Other current assets.” “Investments in real estate, net of accumulated depreciation” was renamed as “Property and equipment, net of accumulated depreciation” under the operating company presentation. The Company has reclassified “Dividends payable” to be included in “Other current liabilities.” The change to a classified balance sheet and the related aforementioned reclassifications have been made to simplify financial reporting as the Company has substantially exited its real estate related debt positions.

As of September 30, 2017, 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, 2016.

REVENUE RECOGNITION

Golf Course Operations — Revenue from green fees, cart rentals, merchandise sales and other operating activities (consisting primarily of range income, banquets and club amenities) are generally recognized at the time of sale, when services are rendered and collection is reasonably assured.

Revenue from membership dues is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less. The membership dues are generally structured to cover the club operating costs and membership services.

Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

Realized and Unrealized (Gain) Loss on Investments and Other Income, Net — These items are comprised of the following:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
(Gain) on settlement of real estate securities	$	(2,345	)	$	(10,080	)	$	(2,345	)	$	(18,560	)
Loss on settlement of real estate securities	—			—			2,803			—
Unrealized loss on securities, intent-to-sell	—			—			558			—
(Gain) loss on settlement of loans held-for-sale	—			—			(12		)	47
Realized loss on settlement of TBAs, net	228			3,730			4,669			13,675
Unrealized loss (gain) on non-hedge derivative instruments	1,802			(255		)	688			1,702
Realized and unrealized (gain) loss on investments	$	(315	)	$	(6,605	)	$	6,361		$	(3,136	)

(Loss) gain on lease modifications and terminations	$	(1	)	$	2		$	(161	)	$	(75	)
Loss on extinguishment of debt, net	(145		)	(227		)	(327		)	(607		)
Collateral management fee income, net	92			119			341			481
Equity in earnings of equity method investees	387			384			1,149			1,129
(Loss) gain on disposal of long-lived assets	(3		)	—			23			24
Other (loss) income	(128		)	227			(653		)	387
Other income, net	$	202		$	505		$	372		$	1,339

Reclassification From Accumulated Other Comprehensive Income Into Net Income — The following table summarizes the amounts reclassified out of accumulated other comprehensive income into net income:



		Three Months Ended September 30,						Nine Months Ended September 30,
Accumulated Other Comprehensive Income ("AOCI") Components	Income Statement Location	2017			2016			2017			2016
Net realized (gain) loss on securities:
Impairment	Impairment	$	—		$	—		$	—		$	54
(Gain) on settlement of real estate securities	Realized and unrealized (gain) loss on investments	(2,345		)	(10,080		)	(2,345		)	(18,560		)
Realized (gain) on deconsolidation of CDO VI	Gain on deconsolidation	—			—			—			(20,682		)
		$	(2,345	)	$	(10,080	)	$	(2,345	)	$	(39,188	)

Net realized (gain) on derivatives designated as cash flow hedges:
Amortization of deferred hedge (gain)	Interest expense, net	$	—		$	—		$	—		$	(20	)
		$	—		$	—		$	—		$	(20	)

Total reclassifications		$	(2,345	)	$	(10,080	)	$	(2,345	)	$	(39,208	)

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

EXPENSE RECOGNITION

Operating Expenses — Operating expenses for Traditional Golf consist primarily of payroll, equipment and cart leases, utilities, repairs and maintenance, supplies, seed, soil and fertilizer, marketing and operating lease rent expense. Many of the Traditional Golf properties and related facilities are leased under long-term operating leases. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of lease terms range from 10 to 20 years, and typically, the leases contain renewal options. Certain leases include scheduled increases or decreases in minimum rental payments at various times during the term of the lease. These scheduled rent increases or decreases are recognized on a straight-line basis over the term of the lease. Increases result in an accrual, which is included in accounts payable and accrued expenses and other liabilities, and decreases result in a receivable, which is included in other current assets and other assets, for the amount by which the cumulative straight-line rent differs from the contractual cash rent.

Derivatives and Hedging Activities — All derivatives are recognized as either assets or liabilities on the balance sheet and measured at fair value. The Company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements and fair value is reflected on a net counterparty basis when the Company believes a legal right of offset exists under an enforceable netting agreement. Changes in fair value are recorded in net income. Derivative transactions are entered into by the Company solely for risk management purposes in the ordinary course of business. As of September 30, 2017, the Company has one interest rate cap with a fair value of $0.2 million which is not designated as a hedge.

The Company transacts in the To Be Announced mortgage backed securities (“TBA”) market. TBA contracts are forward contracts to purchase mortgage-backed securities that will be issued by a U.S. government sponsored enterprise in the future. The Company primarily engages in TBA transactions for purposes of managing interest rate risk and market risk associated with the Agency residential mortgage backed securities (“RMBS”) investments which have exposure to interest rate and market risk volatility. The Company accounts for its TBA transactions as non-hedge instruments, with changes in market value recorded in the Consolidated Statements of Operations. As of September 30, 2017, the Company did not hold TBA contracts following the sale of the remaining Agency RMBS (see Note 7). As of both September 30, 2017 and December 31, 2016, the Company did not post margin related to TBA contracts.

The Company’s derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. The Company seeks to reduce such risk by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored. Management does not expect any material losses as a result of default by other parties.

BALANCE SHEET MEASUREMENT

Property and Equipment, Net — Real estate and related improvements are recorded at cost less accumulated depreciation. Costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized. With respect to golf course improvements (included in buildings and improvements), costs associated with original construction, significant replacements, permanent landscaping, sand traps, fairways, tee boxes or greens are capitalized. All other asset-related costs that do not meet these criteria, such as minor repairs and routine maintenance, are expensed as incurred.

The Company capitalizes certain costs related to properties under development. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for use. Capitalized costs include development, construction-related costs and interest expense.

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. Real estate held-for-sale is recorded in other current assets on the Consolidated Balance Sheets. A disposal of a component of an entity or a group of components of an entity are reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results. Discontinued operations are retroactively reclassified to income (loss) from discontinued operations for all periods presented.

Traditional Golf leases certain golf carts and other equipment that are classified as capital leases. The value of capital leases is recorded as an asset on the balance sheet, along with a liability related to the associated payments. Depreciation of capital lease

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

assets is calculated using the straight-line method over the shorter of the estimated useful lives and the expected lease terms. The cost of equipment under capital leases is included in property and equipment in the Consolidated Balance Sheets. Payments under the leases are treated as reductions of the liability, with a portion being recorded as interest expense under the effective interest method.

Depreciation is calculated using the straight-line method based on the following estimated useful lives:



Buildings and improvements	10-30 years
Capital leases - equipment	3-7 years
Furniture, fixtures and equipment	3-7 years

Intangibles, Net — Intangible assets and liabilities relating to Traditional Golf consist primarily of leasehold advantages (disadvantages), management contracts and membership base. A leasehold advantage (disadvantage) exists to the Company when it pays a contracted rent that is below (above) market rents at the date of the transaction. The value of a leasehold advantage (disadvantage) is calculated based on the differential between market and contracted rent, which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each golf property and is amortized over the term of the underlying lease agreement. The management contract intangible represents the Company’s golf course management contracts for both leased and managed properties. The management contract intangible for leased and managed properties is valued utilizing a discounted cash flow methodology under the income approach and is amortized over the term of the underlying lease or management agreements, respectively. The membership base intangible represents the Company’s relationship with its private country club members. The membership base intangible is valued using the multi-period excess earnings method under the income approach, and is amortized over the expected life of an active membership.

Amortization of leasehold intangible assets and liabilities is included within operating expenses and amortization of all other intangible assets is included within depreciation and amortization in the Consolidated Statements of Operations. Amortization of all intangible assets is calculated using the straight-line method based on the following estimated useful lives:



Trade name	30 years
Leasehold intangibles	1-26 years
Management contracts	1-26 years
Internally-developed software	5 years
Membership base	7 years

Membership Deposit Liabilities — Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into Golf course operations revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.

Other Investments — 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 September 30, 2017 and December 31, 2016, the carrying value of this investment was $20.6 million and $19.3 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 and finite-lived intangible assets, to determine whether current events or circumstances

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.

Investments in CDO Servicing Rights — In February 2011, the Company, through one of its subsidiaries, purchased the management rights with respect to certain C-BASS Investment Management LLC (“C-BASS”) Collateralized Debt Obligations (“CDOs”) pursuant to a bankruptcy proceeding. The Company initially recorded the cost of acquiring the collateral management rights as a servicing asset and subsequently amortizes this asset in proportion to, and over the period of, estimated net servicing income.

Variable Interest Entities (“VIEs”) - There are no assets or liabilities of consolidated VIEs included in the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016. The Company sold its remaining variable interests in Newcastle CDO V and Newcastle CDO VI during 2016 but continues to receive servicing fees as collateral manager, which are not considered variable interests.

Other Current Assets

The following table summarizes the Company's other current assets:



	September 30, 2017		December 31, 2016
Real estate related and other loans, held-for-sale, net	$	147	$	55,612
Prepaid expenses	3,428		3,580
Interest receivable	—		1,697
Deposits	3,002		1,314
Inventory	5,003		4,496
Derivative assets	—		371
Residential mortgage loans, held-for-sale, net	—		231
Receivables from brokers, dealers and clearing organizations	—		552
Miscellaneous assets, net ^(A)	10,960		10,834
	$	22,540	$	78,687


(A)	Includes one owned property in Annandale, New Jersey in the Traditional Golf segment classified as held-for-sale. The Company expects to close on this property within the next 12 months.

Other Assets

The following table summarizes the Company's other assets:



	September 30, 2017		December 31, 2016
Prepaid expenses	$	28	$	74
Deposits	2,353		2,791
Derivative assets	167		485
Miscellaneous assets, net	5,885		4,097
	$	8,433	$	7,447

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

Other Current Liabilities

The following table summarizes the Company's other current liabilities:



	September 30, 2017		December 31, 2016
Security deposits payable	$	7,939	$	5,978
Accrued rent	2,289		1,930
Due to affiliates	893		892
Dividends payable	930		8,949
Miscellaneous liabilities	9,702		11,219
	$	21,753	$	28,968

Other Liabilities

The following table summarizes the Company's other liabilities:



	September 30, 2017		December 31, 2016
Security deposits payable	$	196	$	95
Unfavorable leasehold interests	3,587		4,225
Accrued rent	1,004		683
Miscellaneous liabilities	937		1,059
	$	5,724	$	6,062

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year. The standard will be effective for annual and interim periods beginning after December 15, 2017; however, all entities are allowed to adopt the standard as early as the original effective date (annual periods beginning after December 15, 2016). Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how to apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies when a promised good or service is separately identifiable. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which amends the new revenue recognition guidance on performance obligations and 12 additional technical corrections and improvements. The Company is continuing to evaluate the potential impact of adopting this standard, and is in the process of reviewing customer contracts and revenue streams, identifying contractual provisions that may result in a change in the timing or the amount of revenue recognized. There are also certain considerations related to internal control over financial reporting that are associated with implementing the new guidance under Topic 606. The Company is currently evaluating its control framework for revenue recognition and identifying any changes that may need to be made in response to the new guidance. The Company expects to adopt the requirements of the new standard in the first quarter of 2018, and anticipates using the modified retrospective transition method.

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with an option to use certain relief. The Company is evaluating potential impacts of adopting the standard. Upon initial qualitative evaluation, a key change upon adoption will be the balance sheet recognition of all leased assets and liabilities. The Company leases certain of its golf properties and equipment through operating leases which are not recognized on the balance sheet. The Company anticipates a right to use asset and a related lease liability will be recognized for these leases.

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. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard provides specific guidance over eight identified cash flow issues in order to reduce diversity in practice over the presentation and classification of certain types of cash receipts and cash payments. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. Entities should apply the standard using a retrospective transition method to each period presented. The Company does not anticipate that the adoption of this standard will result in a material impact to the presentation of the Consolidated Statements of Cash Flows.

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. The standard requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows and provide a reconciliation to the related line items in the balance sheet. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. Entities will be required to apply the guidance retrospectively when adopted and provide the relevant disclosures in ASC 250 in the first interim and annual periods in which the guidance is adopted. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets of businesses. The effective date of the standard will be for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. Entities will be required to apply the guidance on a prospective basis. The Company is currently evaluating the impact that this update will have on its Consolidated Financial Statements and related disclosures.

The FASB has recently issued or discussed a number of proposed standards on topics such as financial statement presentation and financial instruments. Some of the proposed changes are significant and could have a material impact on the Company’s reporting. The Company has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

3. SEGMENT REPORTING

The Company currently has four reportable segments: (i) Traditional Golf properties, (ii) Entertainment Golf venues, (iii) Debt Investments, and (iv) corporate. The Company's Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of September 30, 2017, the Company owned, leased or managed 77 Traditional Golf properties across 13 states. Additionally, the Company plans to open a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun.

The Debt Investment segment consists primarily of loans and securities which the Company has substantially monetized as part of its transformation to a leisure and entertainment company. The corporate segment consists primarily of interest income on short-term investments, general and administrative expenses, interest expense on the junior subordinated notes payable (Note 6), management fees pursuant to the Management Agreement (Note 12) and income tax expense (Note 14). Segment information for previously reported periods has been reclassified to conform to the change to the reportable segments in the fourth quarter of 2016.

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:



	Traditional Golf			Entertainment Golf			Debt Investments			Corporate			Total
Nine Months Ended September 30, 2017
Revenues
Golf course operations	$	168,969		$	—		$	—		$	—		$	168,969
Sales of food and beverages	53,223			—			—			—			53,223
Total revenues	222,192			—			—			—			222,192
Operating costs
Operating expenses (A)	187,539			191			—			—			187,730
Cost of sales - food and beverages	15,762			—			—			—			15,762
General and administrative expense	2,152			203			10			3,899			6,264
General and administrative expense - acquisition and transaction expenses (B)	558			4,122			—			171			4,851
Management fee to affiliate	—			—			—			8,032			8,032
Depreciation and amortization	17,936			16			—			—			17,952
Impairment	—			—			60			—			60
Realized and unrealized loss on investments	317			—			6,044			—			6,361
Total operating costs	224,264			4,532			6,114			12,102			247,012
Operating loss	(2,072		)	(4,532		)	(6,114		)	(12,102		)	(24,820		)
Other income (expenses)
Interest and investment income	114			—			22,137			450			22,701
Interest expense, net (C)	(11,500		)	—			(2,532		)	(1,303		)	(15,335		)
Other (loss) income, net	(1,044		)	—			1,416			—			372
Total other income (expenses)	(12,430		)	—			21,021			(853		)	7,738
Income tax expense (D)	—			—			—			1,047			1,047
Net (loss) income	(14,502		)	(4,532		)	14,907			(14,002		)	(18,129		)
Preferred dividends	—			—			—			(4,185		)	(4,185		)
(Loss) income applicable to common stockholders	$	(14,502	)	$	(4,532	)	$	14,907		$	(18,187	)	$	(22,314	)

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

Summary segment financial data (continued).



	Traditional Golf			Entertainment Golf			Debt Investments			Corporate			Total
Three Months Ended September 30, 2017
Revenues
Golf course operations	$	62,034		$	—		$	—		$	—		$	62,034
Sales of food and beverages	19,657			—			—			—			19,657
Total revenues	81,691			—			—			—			81,691
Operating costs
Operating expenses (A)	67,244			141			—			—			67,385
Cost of sales - food and beverages	5,721			—			—			—			5,721
General and administrative expense	708			60			10			1,619			2,397
General and administrative expense - acquisition and transaction expenses (B)	72			1,804			—			55			1,931
Management fee to affiliate	—			—			—			2,678			2,678
Depreciation and amortization	6,171			16			—			—			6,187
Impairment	—			—			28			—			28
Realized and unrealized loss (gain) on investments	32			—			(347		)	—			(315		)
Total operating costs	79,948			2,021			(309		)	4,352			86,012
Operating income (loss)	1,743			(2,021		)	309			(4,352		)	(4,321		)
Other income (expenses)
Interest and investment income	42			—			8,085			291			8,418
Interest expense, net (C)	(3,830		)	—			(482		)	(458		)	(4,770		)
Other (loss) income, net	(211		)	—			413			—			202
Total other income (expenses)	(3,999		)	—			8,016			(167		)	3,850
Income tax benefit (D)	—			—			—			(2		)	(2		)
Net (loss) income	(2,256		)	(2,021		)	8,325			(4,517		)	(469		)
Preferred dividends	—			—			—			(1,395		)	(1,395		)
(Loss) Income applicable to common stockholders	$	(2,256	)	$	(2,021	)	$	8,325		$	(5,912	)	$	(1,864	)



	Traditional Golf		Entertainment Golf		Debt Investments (E)		Corporate		Total
September 30, 2017
Total assets	319,356		19,882		23,514		173,363		536,115
Total liabilities	278,352		5,384		170		55,901		339,807
Preferred stock	—		—		—		61,583		61,583
Equity attributable to common stockholders	$	41,004	$	14,498	$	23,344	$	55,879	$	134,725

Additions to property and equipment (including capital leases) during the nine months ended September 30, 2017	$	15,178	$	8,647	$	—	$	—	$	23,825

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

Summary segment financial data (continued).



	Traditional Golf			Entertainment Golf			Debt Investments			Corporate			Total
Nine Months Ended September 30, 2016
Revenues
Golf course operations	$	174,718		$	—		$	—		$	—		$	174,718
Sales of food and beverages	55,086			—			—			—			55,086
Total revenues	229,804			—			—			—			229,804
Operating costs
Operating expenses (A)	195,670			—			—			—			195,670
Cost of sales - food and beverages	17,139			—			—			—			17,139
General and administrative expense	2,207			5			70			5,602			7,884
General and administrative expense - acquisition and transaction expenses (B)	1,182			911			—			371			2,464
Management fee to affiliate	—			—			—			8,027			8,027
Depreciation and amortization	19,250			—			—			—			19,250
Impairment	—			—			3,564			—			3,564
Realized and unrealized loss (gain) on investments	35			—			(3,171		)	—			(3,136		)
Total operating costs	235,483			916			463			14,000			250,862
Operating loss	(5,679		)	(916		)	(463		)	(14,000		)	(21,058		)
Other income (expenses)
Interest and investment income	94			—			73,661			15			73,770
Interest expense, net (C)	(8,703		)	—			(28,482		)	(1,904		)	(39,089		)
Gain on deconsolidation	—			—			82,130			—			82,130
Other (loss) income, net	(272		)	—			1,611			—			1,339
Total other income (expenses)	(8,881		)	—			128,920			(1,889		)	118,150
Income tax expense	144			—			—			—			144
Net (loss) income	(14,704		)	(916		)	128,457			(15,889		)	96,948
Preferred dividends	—			—			—			(4,185		)	(4,185		)
Net income attributable to noncontrolling interest	(165		)	—			—			—			(165		)
(Loss) income applicable to common stockholders	$	(14,869	)	$	(916	)	$	128,457		$	(20,074	)	$	92,598

DRIVE SHACK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2017

(dollars in tables in thousands, except share data)

Summary segment financial data (continued).



	Traditional Golf			Entertainment Golf			Debt Investments			Corporate			Total
Three Months Ended September 30, 2016
Revenues
Golf course operations	$	63,249		$	—		$	—		$	—		$	63,249
Sales of food and beverages	19,913			—			—			—			19,913
Total revenues	83,162			—			—			—			83,162
Operating costs
Operating expenses (A)	69,251			—			—			—			69,251
Cost of sales - food and beverages	6,026			—			—			—			6,026
General and administrative expense	662			3			32			1,936			2,633
General and administrative expense - acquisition and transaction expenses (B)	173			682			—			200			1,055
Management fee to affiliate	—			—			—			2,676			2,676
Depreciation and amortization	6,735			—			—			—			6,735
Impairment	—			—			611			—			611
Realized and unrealized loss (gain) on investments	15			—			(6,620		)	—			(6,605		)
Total operating costs	82,862			685			(5,977		)	4,812			82,382
Operating income (loss)	300			(685		)	5,977			(4,812		)	780
Other income (expenses)
Interest and investment income	17			—			32,286			7			32,310
Interest expense, net (C)	(3,340		)	—			(9,405		)	(393		)	(13,138		)
Other income, net	—			—			505			—			505
Total other income (expenses)	(3,323		)	—			23,386			(386		)	19,677
Income tax benefit	(38		)	—			—