UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
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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
(Exact name of registrant as specified in its charter)
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Maryland | | 81-0559116 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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218 W. 18th Street, 3rd Floor, New York, NY | | 10011 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | DS | New York Stock Exchange (NYSE) |
9.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PB | New York Stock Exchange (NYSE) |
8.05% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PC | New York Stock Exchange (NYSE) |
8.375% Series D Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PD | New York Stock Exchange (NYSE) |
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 every Interactive Data File required to be submitted 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 such files). S Yes £ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer £ Accelerated filer S Non-accelerated filer £ 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: 67,070,513 shares outstanding as of May 1, 2020.
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, (i) the timing and conditions under which we may reopen some or all of our golf entertainment and traditional golf venues, (ii) the operation of our golf entertainment and traditional golf venues in light of the COVID-19 pandemic following their anticipated reopening, (iii) the adequacy of our cash flows from operations and available cash to meet our liquidity needs, including in the event of a prolonged closure of our venues, (iv) our ability to modify the timing of certain contractual payments owed, (v) our ability to obtain additional financing and (vi) our results of operations. 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,” “forecast,” “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:
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• | factors impacting attendance, such as local conditions, contagious diseases, including COVID-19, or the perceived threat of contagious diseases, disturbances, natural disasters, and terrorist activities; |
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• | regulations and guidance of federal, state and local governments and health officials regarding the response to COVID-19, including with respect to business operations, safety protocols and public gatherings; |
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• | our financial liquidity and ability to access capital; |
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• | the ability to retain and attract members and guests to our properties; |
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• | changes in global, national and local economic conditions, including, but not limited to, increases in unemployment levels, changes in consumer spending patterns, a prolonged economic slowdown and a downturn in the real estate market, particularly due to the COVID-19 pandemic; |
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• | effects of unusual weather patterns and extreme weather events, geographical concentrations with respect to our operations and seasonality of our business; |
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• | competition within the industries in which we operate or may pursue additional investments, including competition for sites for our Entertainment Golf venues; |
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• | material increases in our expenses, including, but not limited to, unanticipated labor issues, rent or costs with respect to our workforce, and costs of goods, utilities and supplies; |
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• | our inability to sell or exit certain properties, and unforeseen changes to our ability to develop, redevelop or renovate certain properties; |
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• | our ability to further invest in our business and implement our strategies; |
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• | difficulty monetizing our real estate debt investments; |
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• | liabilities with respect to inadequate insurance coverage, accidents or injuries on our properties, adverse litigation judgments or settlements, or membership deposits; |
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• | 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; |
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• | inability to execute on our growth and development strategy by successfully developing, opening and operating new venues; |
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• | impacts of any failures of our information technology and cybersecurity systems; |
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• | the impact of any current or further legal proceedings and regulatory investigations and inquiries; and |
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• | other risks detailed from time to time, particularly under the heading “Risk Factors” in this report and in our subsequent filings with 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 “Registrant”) 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:
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• | 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; |
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• | 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; |
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• | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
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• | 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data) |
| | | | | | | |
| (unaudited) | | |
| March 31, 2020 | | December 31, 2019 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 16,785 |
| | $ | 28,423 |
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Restricted cash | 3,041 |
| | 3,103 |
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Accounts receivable, net of allowance of $904 and $1,082, respectively | 4,190 |
| | 5,249 |
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Real estate assets, held-for-sale, net | 16,970 |
| | 16,948 |
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Real estate securities, available-for-sale | 3,103 |
| | 3,052 |
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Other current assets | 13,966 |
| | 17,521 |
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Total current assets | 58,055 |
| | 74,296 |
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Restricted cash, noncurrent | 513 |
| | 438 |
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Property and equipment, net of accumulated depreciation | 184,219 |
| | 179,641 |
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Operating lease right-of-use assets | 212,246 |
| | 215,308 |
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Intangibles, net of accumulated amortization | 16,780 |
| | 17,565 |
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Other investments | 24,365 |
| | 24,020 |
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Other assets | 5,245 |
| | 4,723 |
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Total assets | $ | 501,423 |
| | $ | 515,991 |
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Liabilities and Equity | | | |
Current liabilities | | | |
Obligations under finance leases | $ | 6,004 |
| | $ | 6,154 |
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Membership deposit liabilities | 10,784 |
| | 10,791 |
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Accounts payable and accrued expenses | 31,242 |
| | 25,877 |
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Deferred revenue | 25,118 |
| | 26,268 |
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Real estate liabilities, held-for-sale | 4 |
| | 4 |
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Other current liabilities | 23,367 |
| | 23,964 |
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Total current liabilities | 96,519 |
| | 93,058 |
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Credit facilities and obligations under finance leases - noncurrent | 12,468 |
| | 13,125 |
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Operating lease liabilities - noncurrent | 185,802 |
| | 187,675 |
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Junior subordinated notes payable | 51,190 |
| | 51,192 |
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Membership deposit liabilities, noncurrent | 97,648 |
| | 95,805 |
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Deferred revenue, noncurrent | 6,389 |
| | 6,283 |
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Other liabilities | 3,496 |
| | 3,278 |
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Total liabilities | $ | 453,512 |
| | $ | 450,416 |
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Commitments and contingencies |
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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, 2020 and December 31, 2019 | $ | 61,583 |
| | $ | 61,583 |
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Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,070,513 and 67,068,751 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 671 |
| | 671 |
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Additional paid-in capital | 3,177,384 |
| | 3,177,183 |
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Accumulated deficit | (3,193,399 | ) | | (3,175,572 | ) |
Accumulated other comprehensive income | 1,672 |
| | 1,710 |
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Total equity | $ | 47,911 |
| | $ | 65,575 |
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Total liabilities and equity | $ | 501,423 |
| | $ | 515,991 |
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See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except share data)
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| Three Months Ended March 31, |
| 2020 | | 2019 |
Revenues | |
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Golf operations | $ | 48,625 |
| | $ | 44,706 |
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Sales of food and beverages | 12,510 |
| | 9,246 |
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Total revenues | 61,135 |
| | 53,952 |
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Operating costs | | | |
Operating expenses | 54,367 |
| | 47,723 |
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Cost of sales - food and beverages | 3,655 |
| | 2,698 |
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General and administrative expense | 9,818 |
| | 11,619 |
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Depreciation and amortization | 6,794 |
| | 4,924 |
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Pre-opening costs | 552 |
| | 1,179 |
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Impairment and other losses | 792 |
| | 4,088 |
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Total operating costs | 75,978 |
| | 72,231 |
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Operating loss | (14,843 | ) | | (18,279 | ) |
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Other income (expenses) | | | |
Interest and investment income | 130 |
| | 344 |
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Interest expense, net | (2,745 | ) | | (2,153 | ) |
Other income, net | 367 |
| | 5,488 |
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Total other income (expenses) | (2,248 | ) | | 3,679 |
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Loss before income tax | (17,091 | ) | | (14,600 | ) |
Income tax expense | 271 |
| | — |
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Net Loss | (17,362 | ) | | (14,600 | ) |
Preferred dividends | (1,395 | ) | | (1,395 | ) |
Loss Applicable to Common Stockholders | $ | (18,757 | ) | | $ | (15,995 | ) |
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Loss Applicable to Common Stock, per share | |
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Basic | $ | (0.28 | ) | | $ | (0.24 | ) |
Diluted | $ | (0.28 | ) | | $ | (0.24 | ) |
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Weighted Average Number of Shares of Common Stock Outstanding | |
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Basic | 67,069,534 |
| | 67,027,104 |
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Diluted | 67,069,534 |
| | 67,027,104 |
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See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
(dollars in thousands, except share data)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net loss | $ | (17,362 | ) | | $ | (14,600 | ) |
Other comprehensive loss: | |
| | |
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Net unrealized loss on available-for-sale securities | (38 | ) | | — |
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Other comprehensive loss | (38 | ) | | — |
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Total comprehensive loss | $ | (17,400 | ) | | $ | (14,600 | ) |
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity | $ | (17,400 | ) | | $ | (14,600 | ) |
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, 2020 AND 2019
(dollars in thousands, except share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Drive Shack Inc. Stockholders |
| Preferred Stock | | Common Stock | |
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| Shares | | Amount | | Shares | | Amount | | Additional Paid- in Capital | | Accumulated Deficit | | Accumulated Other Comp. Income | | Total Equity (Deficit) |
Equity (deficit) - December 31, 2019 | 2,463,321 |
| | $ | 61,583 |
| | 67,068,751 |
| | $ | 671 |
| | $ | 3,177,183 |
| | $ | (3,175,572 | ) | | $ | 1,710 |
| | $ | 65,575 |
|
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (465 | ) | | — |
| | (465 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 201 |
| | — |
| | — |
| | 201 |
|
Shares issued from restricted stock units | — |
| | — |
| | 1,762 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (17,362 | ) | | — |
| | (17,362 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38 | ) | | (38 | ) |
Total comprehensive loss | | | | | | | | | | | | | | | (17,400 | ) |
Equity (deficit) - March 31, 2020 | 2,463,321 |
| | $ | 61,583 |
| | 67,070,513 |
| | $ | 671 |
| | $ | 3,177,384 |
| | $ | (3,193,399 | ) | | $ | 1,672 |
| | $ | 47,911 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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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, |
| 2020 | | 2019 |
Cash Flows From Operating Activities | | | |
Net loss | $ | (17,362 | ) | | $ | (14,600 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | |
|
Depreciation and amortization | 6,794 |
| | 4,924 |
|
Amortization of discount and premium | (91 | ) | | (56 | ) |
Other amortization | 1,904 |
| | 1,938 |
|
Amortization of revenue on golf membership deposit liabilities | (364 | ) | | (379 | ) |
Amortization of prepaid golf membership dues | (4,076 | ) | | (3,323 | ) |
Non-cash operating lease expense | 958 |
| | 1,628 |
|
Stock-based compensation | 201 |
| | 1,222 |
|
Impairment and other losses | 792 |
| | 4,088 |
|
Equity in earnings from equity method investments, net of distributions | (344 | ) | | (341 | ) |
Other (gains) losses, net | 46 |
| | (5,006 | ) |
Change in: | |
| | |
|
Accounts receivable, net, other current assets and other assets - noncurrent | 3,913 |
| | (1,052 | ) |
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent | 5,052 |
| | (11,234 | ) |
Net cash used in operating activities | (2,577 | ) | | (22,191 | ) |
Cash Flows From Investing Activities | |
| | |
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Proceeds from sale of property and equipment | 91 |
| | 17,749 |
|
Acquisition and additions of property and equipment and intangibles | (6,573 | ) | | (22,717 | ) |
Net cash used in investing activities | (6,482 | ) | | (4,968 | ) |
Cash Flows From Financing Activities | | | |
Repayments of debt obligations | (1,484 | ) | | (1,397 | ) |
Golf membership deposits received | 489 |
| | 357 |
|
Preferred stock dividends paid | (1,395 | ) | | (1,395 | ) |
Other financing activities | (176 | ) | | (3 | ) |
Net cash used in financing activities | (2,566 | ) | | (2,438 | ) |
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent | (11,625 | ) | | (29,597 | ) |
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period | 31,964 |
| | 82,819 |
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period | $ | 20,339 |
| | $ | 53,222 |
|
| | | |
Supplemental Schedule of Non-Cash Investing and Financing Activities | | | |
Preferred stock dividends declared but not paid | $ | — |
| | $ | 930 |
|
Additions to finance lease assets and liabilities | $ | 1,028 |
| | $ | 6,352 |
|
Increases in accounts payable and accrued expenses related to the purchase of property and equipment | $ | 3,771 |
| | $ | 2,258 |
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2020
(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 an owner and operator of golf-related leisure and "eatertainment" venues focused on bringing people together through competitive socializing. 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.
As of March 31, 2020, the Company owned or leased 4 Entertainment Golf venues across 3 states. We opened our first Entertainment Golf venue in Orlando, Florida, in April 2018, which has largely served as our research and development and testing venue. During the second half of 2019, we opened three Generation 2.0 core Drive Shack venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida.
The Company’s Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2020, the Company owned, leased or managed 61 traditional golf properties across 9 states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COVID-19 — In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). In response to the rapid spread of COVID-19, authorities around the world have implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. Many jurisdictions in which we operate required mandatory store closures or imposed capacity limitations and other restrictions affecting our operations. As a result, between March 19 and March 20, 2020, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues, and furloughed a substantial majority of our employees. We continue to monitor government guidelines and requirements in each geographic region in which we operate and we will resume operations on a case-by-case basis as soon as possible based on local conditions. In response to the uncertainty caused by the pandemic, we took several actions after we suspended operations to preserve our liquidity position and to prepare for multiple contingencies. We are generating minimal revenue from our venues as of the date of this report.
The COVID-19 pandemic remains a rapidly evolving situation and the extended length of the outbreak and related government response may cause prolonged periods of venue closures and modified operating schedules and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending. These may lead to increased asset recovery and valuation risks, such as impairment of long-lived and other assets. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including additional actions taken to contain COVID-19 or treat its impact, among others. The Company currently expects these developments to result in a material adverse impact on its revenues, results of operations and cash flows.
Going Concern — The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
However, as noted above, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues, eliminating substantially all of the Company's revenue sources. The loss of revenues and uncertainty related to the COVID-19 pandemic discussed above raises substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue operations is dependent on the degree of success of management's plans to manage existing cash balances during the closure and to obtain additional financing to fund its short-term liquidity requirements. In order to manage existing cash balances, management reduced spending broadly, including furloughing a substantial majority of our employees, pausing construction on future planned venues to reduce capital spending, and suspending declaration of dividends on our preferred stock, and also deferred payment of certain operating and corporate expenditures. The Company is actively seeking to sell its remaining Traditional Golf property that is held-for-sale and believes that a sale is probable and would mitigate the substantial doubt raised by the COVID-19 pandemic and satisfy the Company's estimated liquidity needs through 12 months from the issuance of the financial statements. The Company is also exploring additional debt financing, including potential financing options made
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
available under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, public or private equity issuances, and additional ways to strategically monetize our remaining real estate securities and other investments. However, there is no assurance that the Company will be successful in raising additional capital or that such additional funds will be available on acceptable terms, if at all.
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, or 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, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2020. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2019.
The Company’s significant accounting policies for these financial statements as of March 31, 2020 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, 2019.
Other Income (Loss), Net — These items are comprised of the following: |
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Collateral management fee income, net | 72 |
| | 128 |
|
Equity in earnings of equity method investments | 344 |
| | 341 |
|
Gain (loss) on sale of long-lived assets and intangibles | 48 |
| | 5,029 |
|
Other (loss) income | (97 | ) | | (10 | ) |
Other income, net | $ | 367 |
| | $ | 5,488 |
|
Real Estate, Held-for-Sale — 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 to sell. 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 below carrying value are recognized as an impairment loss and recorded in "Impairment and other losses" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed to the extent of the impairment taken. 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 an amount equal to the lease payments for a 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. Operating leases are subsequently amortized into lease cost on a straight-line basis. Depreciation of the finance lease ROU assets is 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.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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.
Other Investments — The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity in a commercial real estate project. The Company accounts for this investment as an equity method investment. As of March 31, 2020, and December 31, 2019, the carrying value of this investment was $24.4 million and $24.0 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 results. 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. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this real estate investment fall within Level 3 for fair value reporting.
Impairment of Long-lived 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 and right-of-use 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 is greater than the expected undiscounted cash flows, the asset is considered impaired and 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.
Other Current Assets
The following table summarizes the Company's other current assets:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Managed course receivables | | $ | 3,434 |
| | $ | 5,426 |
|
Prepaid expenses | | 3,097 |
| | 3,608 |
|
Deposits | | 962 |
| | 1,374 |
|
Inventory | | 3,014 |
| | 2,762 |
|
Miscellaneous current assets, net | | 3,459 |
| | 4,351 |
|
Other current assets | | $ | 13,966 |
| | $ | 17,521 |
|
Other Assets
The following table summarizes the Company's other assets:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Prepaid expenses | | $ | 604 |
| | $ | 317 |
|
Deposits | | 2,455 |
| | 2,123 |
|
Miscellaneous assets, net | | 2,186 |
| | 2,283 |
|
Other assets | | $ | 5,245 |
| | $ | 4,723 |
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
Other Current Liabilities
The following table summarizes the Company's other current liabilities:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Operating lease liabilities | | 17,186 |
| | 16,922 |
|
Accrued rent | | 2,586 |
| | 2,769 |
|
Dividends payable | | — |
| | 930 |
|
Miscellaneous current liabilities | | 3,595 |
| | 3,343 |
|
Other current liabilities | | $ | 23,367 |
| | $ | 23,964 |
|
Other Liabilities
The following table summarized the Company's other liabilities:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Service obligation intangible | | 1,687 |
| | 1,776 |
|
Miscellaneous liabilities | | 1,809 |
| | 1,502 |
|
Other liabilities | | $ | 3,496 |
| | $ | 3,278 |
|
Membership Deposit Liabilities - Private country club members in our Traditional Golf business generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into Golf operations revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("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. In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which addresses certain fair value disclosure requirements, the measurement basis under the measurement alternative and which equity securities have to be remeasured at historical exchange rates. In May 2019, the FASB issued Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief, which allows entities to elect to measure assets in the scope of ASC 326-20, using the fair value option when ASU 2016-13 is adopted. The effective date of the standards will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the standard on January 1, 2020. The adoption did not impact the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(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. 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 for private club members and the following month for The Players Club members.
The Company’s revenue is all generated within the Entertainment and Traditional Golf segments. The following tables disaggregate revenue by category: Entertainment golf venues, public and private golf properties (owned and leased) and managed golf properties.
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 3,910 |
| | $ | 16,023 |
| | $ | 13,655 |
| | $ | 15,037 |
| | $ | 48,625 |
|
Sales of food and beverages | | 6,207 |
| | 4,285 |
| | 2,018 |
| | — |
| | 12,510 |
|
Total revenues | | $ | 10,117 |
| | $ | 20,308 |
| | $ | 15,673 |
| | $ | 15,037 |
| | $ | 61,135 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 681 |
| | $ | 17,464 |
| | $ | 15,454 |
| | $ | 11,107 |
| | $ | 44,706 |
|
Sales of food and beverages | | 1,040 |
| | 5,476 |
| | 2,730 |
| | — |
| | 9,246 |
|
Total revenues | | $ | 1,721 |
| | $ | 22,940 |
| | $ | 18,184 |
| | $ | 11,107 |
| | $ | 53,952 |
|
| |
(A) | Includes $13.3 million for the three months ended March 31, 2020, and $9.8 million for the three months ended March 31, 2019, due to management contract reimbursements reported under ASC 606. |
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 and President, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.
The Company opened its first Entertainment Golf venue in Orlando, Florida, in April 2018. During the second half of 2019, the Company opened three Generation 2.0 core Entertainment Golf venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida.
Additionally, the Company's Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2020, the Company owned, leased or managed 61 Traditional Golf properties across 9 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).
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(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, 2020 | | | | | | | | |
Revenues | | | | | | | | |
Golf operations | | $ | 3,910 |
| | $ | 44,715 |
| | $ | — |
| | $ | 48,625 |
|
Sales of food and beverages | | 6,207 |
| | 6,303 |
| | — |
| | 12,510 |
|
Total revenues | | 10,117 |
| | 51,018 |
| | — |
| | 61,135 |
|
Operating costs | | | | | | | | |
Operating expenses | | 8,172 |
| | 46,195 |
| | — |
| | 54,367 |
|
Cost of sales - food and beverages | | 1,610 |
| | 2,045 |
| | — |
| | 3,655 |
|
General and administrative expense (A) | | 3,169 |
| | 3,093 |
| | 2,378 |
| | 8,640 |
|
General and administrative expense - acquisition and transaction expenses (B) | | 34 |
| | 122 |
| | 1,022 |
| | 1,178 |
|
Depreciation and amortization | | 3,020 |
| | 3,703 |
| | 71 |
| | 6,794 |
|
Pre-opening costs (C) | | 552 |
| | — |
| | — |
| | 552 |
|
Impairment and other losses | | — |
| | 792 |
| | — |
| | 792 |
|
Total operating costs | | 16,557 |
| | 55,950 |
| | 3,471 |
| | 75,978 |
|
Operating loss | | (6,440 | ) | | (4,932 | ) | | (3,471 | ) | | (14,843 | ) |
Other income (expenses) | | | | | | | | |
Interest and investment income | | 1 |
| | 15 |
| | 114 |
| | 130 |
|
Interest expense (D) | | (105 | ) | | (2,147 | ) | | (526 | ) | | (2,778 | ) |
Capitalized interest (D) | | — |
| | 9 |
| | 24 |
| | 33 |
|
Other (loss) income, net | | — |
| | (46 | ) | | 413 |
| | 367 |
|
Total other income (expenses) | | (104 | ) | | (2,169 | ) | | 25 |
| | (2,248 | ) |
Income tax expense | | — |
| | — |
| | 271 |
| | 271 |
|
Net (loss) income | | (6,544 | ) | | (7,101 | ) | | (3,717 | ) | | (17,362 | ) |
Preferred dividends | | — |
| | — |
| | (1,395 | ) | | (1,395 | ) |
(Loss) income applicable to common stockholders | | $ | (6,544 | ) | | $ | (7,101 | ) | | $ | (5,112 | ) | | $ | (18,757 | ) |
|
| | | | | | | | | | | | | | | | |
| | Entertainment Golf | | Traditional Golf | | Corporate (E) | | Total |
March 31, 2020 | | | | | | | | |
Total assets | | 164,212 |
| | 299,573 |
| | 37,638 |
| | 501,423 |
|
Total liabilities | | 41,182 |
| | 349,105 |
| | 63,225 |
| | 453,512 |
|
Preferred stock | | — |
| | — |
| | 61,583 |
| | 61,583 |
|
Equity attributable to common stockholders | | $ | 123,030 |
| | $ | (49,532 | ) | | $ | (87,170 | ) | | $ | (13,672 | ) |
| | | | | | | | |
Additions to property and equipment (including finance leases) during the three months ended March 31, 2020 | | $ | 4,240 |
| | $ | 1,894 |
| | $ | 403 |
| | $ | 6,537 |
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
Summary segment financial data (continued). |
| | | | | | | | | | | | | | | | |
| | 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 | | 1,747 |
| | 45,976 |
| | — |
| | 47,723 |
|
Cost of sales - food and beverages | | 251 |
| | 2,447 |
| | — |
| | 2,698 |
|
General and administrative expense (A) | | 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 and other losses | | — |
| | 4,088 |
| | — |
| | 4,088 |
|
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 | ) |
| |
(A) | General and administrative expenses include severance expense in the amount of $0.7 million for the three months ended March 31, 2020, and $0.4 million for the three months ended March 31, 2019. |
| |
(B) | Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions and strategic initiatives 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, lease expense, employee payroll, travel and related expenses, training costs, food, beverage and other 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 for the three months ended March 31, 2020, and $1.9 million for the three months ended March 31, 2019. Interest expense and capitalized interest are combined in 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 $24.4 million as of March 31, 2020 recorded in other investments on the Consolidated Balance Sheets. |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(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, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Depreciation | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Depreciation | | Net Carrying Value |
Land | $ | 6,770 |
| | $ | — |
| | $ | 6,770 |
| | $ | 6,770 |
| | $ | — |
| | $ | 6,770 |
|
Buildings and improvements | 146,474 |
| | (38,359 | ) | | 108,115 |
| | 147,146 |
| | (36,349 | ) | | 110,797 |
|
Furniture, fixtures and equipment | 53,459 |
| | (21,317 | ) | | 32,142 |
| | 52,327 |
| | (19,484 | ) | | 32,843 |
|
Finance leases - equipment | 34,107 |
| | (14,893 | ) | | 19,214 |
| | 36,166 |
| | (16,047 | ) | | 20,119 |
|
Construction in progress | 17,978 |
| | — |
| | 17,978 |
| | 9,112 |
| | — |
| | 9,112 |
|
Total Property and Equipment | $ | 258,788 |
| | $ | (74,569 | ) | | $ | 184,219 |
| | $ | 251,521 |
| | $ | (71,880 | ) | | $ | 179,641 |
|
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, 2020, the Company continues to present one golf property 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 $17.0 million and include $12.6 million of land, $4.0 million of buildings and improvements, $0.2 million of furniture, fixtures and equipment, and $0.2 million of other related assets, partially offset by accumulated impairment.
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. Subsequent to the completion of the sale, the Company entered into a management agreement on the California golf property.
No golf properties were sold during the three months ended March 31, 2020.
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 golf carts and equipment. 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 24 to 66 months 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, 2020 are as follows:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | |
| | Three Months Ended March 31, 2020 |
Finance lease cost | | |
Amortization of right-of-use assets | | $ | 1,532 |
|
Interest on lease liabilities | | 341 |
|
Total finance lease cost | | 1,873 |
|
| | |
Operating lease cost | | |
Operating lease cost | | 9,267 |
|
Short-term lease cost | | 428 |
|
Variable lease cost | | 2,788 |
|
Total operating lease cost | | 12,483 |
|
Total lease cost | | $ | 14,356 |
|
Other information related to leases included on the Consolidated Balance Sheet as of and for the three months ended March 31, 2020 are as follows:
|
| | | | | | |
| | Operating Leases | | Financing Leases |
Right-of-use assets | | 212,246 |
| | 19,214 |
|
Lease liabilities | | 202,988 |
| | 18,272 |
|
| | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows | | 8,303 |
| | 340 |
|
Financing cash flows | | N/A |
| | 1,484 |
|
| | | | |
Right-of-use assets obtained in exchange for lease liabilities | | 2,459 |
| | 1,028 |
|
| | | | |
Weighted average remaining lease term | | 12.6 years |
| | 3.4 years |
|
Weighted average discount rate | | 8.3 | % | | 7.3 | % |
Future minimum lease payments under non-cancellable leases as of March 31, 2020 are as follows:
|
| | | | | | | | |
| | Operating Leases | | Financing Leases |
April 1, 2020 - December 31, 2020 | | 24,277 |
| | 5,508 |
|
2021 | | 31,944 |
| | 6,018 |
|
2022 | | 30,673 |
| | 4,454 |
|
2023 | | 30,511 |
| | 3,434 |
|
2024 | | 24,659 |
| | 1,284 |
|
Thereafter | | 202,618 |
| | 90 |
|
Total minimum lease payments | | 344,682 |
| | 20,788 |
|
Less: imputed interest | | 141,694 |
| | 2,516 |
|
Total lease liabilities | | $ | 202,988 |
| | $ | 18,272 |
|
7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
The following table summarizes the Company’s intangible assets:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Trade name | $ | 700 |
| | $ | (146 | ) | | $ | 554 |
| | $ | 700 |
| | $ | (140 | ) | | $ | 560 |
|
Management contracts | 31,830 |
| | (17,435 | ) | | 14,395 |
| | 32,331 |
| | (17,342 | ) | | 14,989 |
|
Internally-developed software | 258 |
| | (40 | ) | | 218 |
| | 252 |
| | (27 | ) | | 225 |
|
Membership base | 5,236 |
| | (4,675 | ) | | 561 |
| | 5,236 |
| | (4,488 | ) | | 748 |
|
Nonamortizable liquor licenses | 1,052 |
| | — |
| | 1,052 |
| | 1,043 |
| | — |
| | 1,043 |
|
Total Intangibles | $ | 39,076 |
| | $ | (22,296 | ) | | $ | 16,780 |
| | $ | 39,562 |
| | $ | (21,997 | ) | | $ | 17,565 |
|
8. DEBT OBLIGATIONS
The following table presents certain information regarding the Company’s debt obligations at March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2020 | | December 31, 2019 |
Debt Obligation/Collateral | | Month Issued | | Outstanding Face Amount | | Carrying Value | | Final Stated Maturity | | Weighted Average Coupon | | Weighted Average Funding Cost (A) | | 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 | | 3.09% | | 3.09 | % | | 23.7 | | $ | 200 |
| | $ | 200 |
| | $ | 200 |
|
Finance leases (Equipment) | | Jul 2014 - Mar 2020 | | 18,272 |
| | 18,272 |
| | Apr 2020 - Sep 2025 | | 3.00% to 15.00% | | 7.33 | % | | 3.4 | | — |
| | 19,079 |
| | 19,079 |
|
| | | | 18,472 |
| | 18,472 |
| | | | | | 7.28 | % | | 3.6 | | 200 |
| | 19,279 |
| | 19,279 |
|
Less current portion of obligations under finance leases | | | | 6,004 |
| | 6,004 |
| | | | | | | | | | | | 6,154 |
| | 6,154 |
|
Credit facilities and obligations under finance leases - noncurrent | | | | 12,468 |
| | 12,468 |
| | | | | | | | | | | | 13,125 |
| | 13,125 |
|
Corporate | | | | |
| | |
| | | | | | |
| | | | |
| | | | |
Junior subordinated notes payable (B) | | Mar 2006 | | 51,004 |
| | 51,190 |
| | Apr 2035 | | LIBOR+2.25% | | 3.99 | % | | 15.1 | | 51,004 |
| | 51,004 |
| | 51,192 |
|
Total debt obligations | | | | $ | 69,476 |
| | $ | 69,662 |
| | | | | | 4.86 | % | | 12.0 | | $ | 51,204 |
| | $ | 70,283 |
| | $ | 70,471 |
|
| |
(A) | Including the effect of deferred financing costs. |
| |
(B) | Interest rate based on 3 month LIBOR plus 2.25%. Collateral for this obligation is the Company's general credit. |
9. REAL ESTATE SECURITIES
The following is a summary of the Company’s real estate securities at March 31, 2020, 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, 2020 |
| | | | 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 |
| | $ | 2,952 |
| | $ | (1,521 | ) | | $ | 1,431 |
| | $ | 1,672 |
| | $ | — |
| | $ | 3,103 |
| | 1 |
| | CCC | | 1.53 | % | | 30.37 | % | | 3.9 | | 45.6 | % |
Total Securities, Available for Sale (E) | | $ | 4,000 |
| | $ | 2,952 |
| | $ | (1,521 | ) | | $ | 1,431 |
| | $ | 1,672 |
| | $ | — |
| | $ | 3,103 |
| | 1 |
| | | | | | | | | | |
| |
(A) | See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities. |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
| |
(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. |
The Company had no securities in an unrealized loss position as of March 31, 2020.
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, 2020:
|
| | | | | | | | | |
| Carrying Value | | Estimated Fair Value | | Fair Value Method (A) |
Assets | |
| | |
| | |
Real estate securities, available-for-sale | $ | 3,103 |
| | $ | 3,103 |
| | Pricing models - Level 3 |
Cash and cash equivalents | 16,785 |
| | 16,785 |
| | |
Restricted cash, current and noncurrent | 3,554 |
| | 3,554 |
| | |
Liabilities | | | | | |
Junior subordinated notes payable | 51,190 |
| | 5,459 |
| | Pricing models - Level 3 |
| |
(A) | Pricing models are used for (i) real estate securities 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 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
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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 methodologies used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real estate securities 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, 2020:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted Average Significant Input |
Asset Type | | Amortized Cost Basis | | Fair Value | | Discount Rate | | Prepayment Speed | | Cumulative Default Rate | | Loss Severity |
ABS - Non-Agency RMBS | | $ | 1,431 |
| | $ | 3,103 |
| | 10.0 | % | | 8.0 | % | | 2.6 | % | | 70.0 | % |
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, 2020 as follows:
|
| | | | |
| | ABS - Non-Agency RMBS |
Balance at December 31, 2019 | | $ | 3,052 |
|
Total gains (losses) (A) | | |
|
Included in other comprehensive income (loss) | | (38 | ) |
Amortization included in interest income | | 109 |
|
Purchases, sales and repayments (A) | | |
|
Proceeds | | (20 | ) |
Balance at March 31, 2020 | | $ | 3,103 |
|
| |
(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, 2020. There were no transfers into or out of Level 3 during the three months ended March 31, 2020. |
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, 2020
(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, 2020:
|
| | | | | | | | | |
| | Number of Options | | Weighted Average Strike Price | | Weighted Average Life Remaining (in years) |
Balance at December 31, 2019 | | 6,898,346 |
| | $ | 3.26 |
| | |
Expired | | (1,117,118 | ) | | 5.44 |
| | |
Forfeited | | (770,652 | ) | | 4.74 |
| | |
Balance at March 31, 2020 | | 5,010,576 |
| | $ | 2.55 |
| | 2.92 |
| | | | | | |
Exercisable at March 31, 2020 | | 3,702,422 |
| | $ | 2.56 |
| | 2.94 |
As of March 31, 2020, the Company’s outstanding options were summarized as follows:
|
| | | | |
| | Number of Options |
Held by the former Manager | | 3,627,245 |
|
Issued to the former Manager and subsequently transferred to certain of the Manager’s employees (A) | | 1,382,998 |
|
Issued to the independent directors | | 333 |
|
Issued to Drive Shack employees | | — |
|
Total | | 5,010,576 |
|
Weighted average strike price | | $ | 2.55 |
|
| |
(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. In July 2019, a certain employee was terminated by the Company and 921,992 options reverted back to the former Manager. |
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 $(0.1) million during the three months ended March 31, 2020, and $1.2 million during the three months ended March 31, 2019, 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 $2.0 million as of March 31, 2020 and will be expensed over a weighted average of 2.2 years.
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, 2020.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | | | | |
| | Number of RSUs | | Weighted Average Grant Date Fair Value (per unit) |
Balance at December 31, 2019 | | 520,618 |
| | $ | 4.66 |
|
Released | | (1,762 | ) | | $ | 4.73 |
|
Forfeited | | (67,248 | ) | | $ | 4.58 |
|
Balance at March 31, 2020 | | 451,608 |
| | $ | 4.67 |
|
The Company grants RSUs to the non-employee directors as part of their annual compensation. The RSUs are subject to a one year vesting period. During the three months ended March 31, 2020, the Company granted no RSUs to non-employee directors and no RSUs granted to non-employee directors vested. The Company also grants RSUs to employees as part of their annual compensation. The RSUs vest in equal annual installments on each of the first three anniversaries of the grant date. During the three months ended March 31, 2020, the Company granted no RSUs to employees. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. Stock-based compensation expense related to RSUs was $0.3 million during the three months ended March 31, 2020, respectively, and less than $0.1 million for the three months ended March 31, 2019. Stock-based compensation expense 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 $1.3 million as of March 31, 2020 and will be expensed over a weighted average of 2.0 years.
C. Dividends
On November 11, 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 November 1, 2019 and ending January 31, 2020. Dividends totaling $1.4 million were paid on January 31, 2020. No dividends were declared during the three months ended March 31, 2020.
D. Earnings Per Share
The following table shows the Company's basic and diluted earnings per share (“EPS”):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Numerator for basic and diluted earnings per share: | | | |
Loss from continuing operations after preferred dividends and noncontrolling interests | $ | (18,757 | ) | | $ | (15,995 | ) |
Loss Applicable to Common Stockholders | $ | (18,757 | ) | | $ | (15,995 | ) |
Denominator: | | | |
Denominator for basic earnings per share - weighted average shares | 67,069,534 |
| | 67,027,104 |
|
Effect of dilutive securities | | | |
Options | — |
| | — |
|
RSUs | — |
| | — |
|
Denominator for diluted earnings per share - adjusted weighted average shares | 67,069,534 |
| | 67,027,104 |
|
Basic earnings per share: | | | |
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests | $ | (0.28 | ) | | $ | (0.24 | ) |
Loss Applicable to Common Stock, per share | $ | (0.28 | ) | | $ | (0.24 | ) |
Diluted earnings per share: | | | |
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests | $ | (0.28 | ) | | $ | (0.24 | ) |
Loss Applicable to Common Stock, per share | $ | (0.28 | ) | | $ | (0.24 | ) |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
The Company’s dilutive securities are outstanding stock options and RSUs. During the three months ended March 31, 2020, based on the treasury stock method, the Company had 964,335 potentially dilutive securities, which were excluded due to the Company's loss position. During the three months ended March 31, 2019, based on the treasury stock method, the Company had 2,233,692 potentially dilutive securities.
12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
At March 31, 2020, Fortress, through its affiliates, and principals of Fortress, owned 9.0 million shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional 3.6 million shares of the Company’s common stock (Note 11).
Other Affiliated Entities
The Company incurred expenses for services of Ms. Khouri prior to execution of an employment agreement, which will be reimbursed to an affiliate of a member of the Board of Directors, subject to Board approval. The Company accrued $0.2 million in compensation expense for the year ended December 31, 2019, and an additional $0.1 million for the three months ended March 31, 2020.
13. COMMITMENTS AND CONTINGENCIES
Legal Contingencies - 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, 2020, 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.
Commitments - As of March 31, 2020, the Company has additional operating leases that have not yet commenced of $98.0 million. The leases are expected to commence over the next 12 - 24 months with lease terms of approximately 10 - 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 which generally occurs prior to construction.
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.